MMT – lacks a political economy?

There was a ‘Guest Editorial’ published on the UK site Renewal last week – Modern money and the escape from austerity – by one Joe Guinan, who lists himself as a Senior Fellow at The Democracy Collaborative and Executive Director of the Next System Project. He is a journalist by background. Renewal is a “A quarterly journal of politics and ideas, committed to exploring and expanding the progressive potential of social democracy”, so it would seem to be wanting to head in the right direction, which reflects my values. The article’s central message is that “Modern monetary theory destroys the intellectual basis for austerity but needs a more robust political economy”. It is a serious embrace with our ideas and it is welcome that Modern Monetary Theory (MMT) is entering the progressive debate in a thoughtful manner and being advanced by others than the small core of original developers (including myself) who, in turn, built the ideas on the back of others long gone. The problem is that I don’t necessarily agree with many of the propositions advanced in the article. Here are a few reasons why.

I should note that the author does not directly refer to any of my own work in his piece and while I am not precious about that I have always been reluctant to discuss attacks on MMT that are based on a very partial reading of the literature.

Further, some of the author’s main assertions reflect the fact that he hasn’t read some of my work – especially in the area of the Phillips curve and buffer stocks – or has chosen to ignore it in putting his article together.

In terms of the economics, the article correctly notes the historical significance of August 1971 for the operation and understanding of monetary systems.

Most people are unaware that a major historical event occurred in 1971, when President Nixon abandoned gold convertibility and ended the system of fixed exchange rates. Under that system, which had endured for about 80 years (with breaks for war), currencies were convertible into gold, exchange rates were fixed, and governments could expand their spending only by increasing taxes or borrowing from the private sector.

After 1971, most governments issued their own currencies by legislative fiat; the currencies were not convertible into anything of value, and were floated and traded freely in foreign currency markets.

A flexible exchange rate releases monetary policy from defending a fixed parity against a foreign currency. Fiscal and monetary policy can then concentrate on ensuring domestic spending is sufficient to maintain high levels of employment. A consequence of this is that governments that issue their own currencies no longer have to ‘fund’ their spending.

They never need to ‘finance’ their spending through taxes or selling debt to the private sector. The reality is that currency-issuing governments such as those of Australia, Britain, Japan and the US can never run out of money. These governments always have the capacity to spend in their own currencies.

Most of the analysis appearing in current macroeconomics textbooks, which filters into the public debate and underpins the cult of austerity, is derived from ‘gold standard’ logic and does not apply to modern fiat monetary system.

Economic policy ideas that dominate the current debate are artefacts from the old system, which was abandoned in 1971. Students of macroeconomics are misled very early in their studies.

Their textbooks typically use the flawed analogy between the household budget and the sovereign government ‘budget’ to argue that the same principles that constrain the former apply similarly to the government. The analogy is false at the most elemental level.

The government issues the currency, which the households use. As a consequence, households have to seek funds before they can spend.

Fiscal surpluses do not give a government any greater future spending capacity and fiscal deficits do not limit that capacity.

Once you appreciate that historical event, then the foundations of MMT are within your grasp and firmly embedded in a real historical context.

Within that context, Joe Guinan correctly notes that:

The difficulty lies in the fact that we have yet to comprehend this fully – and to demand that it is used properly.

The ‘we’ should be defined to include most of the citizens who vote but exclude, for example, central bank officials who have a complete comprehension of the opportunities presenting a currency-issuing government.

When the German Bundesbank chief told the audience in Frankfurt during a 2012 speech – Money Creation and Responsibility that:

… the fact that central banks can create money out of thin air … many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too – or even nightmarish …

He was revealing his understanding as a central banker of the unlimited capacity of the currency issuer to create create as much money as they like. But his ideological bias, like most of those in the know, leads him to declare such a capacity taboo. Why? Because he erroneously believes that exploiting such a capacity will lead to accelerating inflation.

But you can see the debate should never be about the capacity of the currency issuer (post 1971) to create spending power for the government without the need to raise tax revenue or borrow from the non-government sector – that fact is taken as given by central bankers and most treasury officials.

A legitimate debate, implied by the reference to the capacity being “nightmarish” (according to Weidmann’s blurred vision), is that using that currency-issuing capacity will have consequences – including increasing aggregate spending, stimulating output and employment, reducing unemployment, increasing imports, and, perhaps stimulating an inflationary spiral.

Whether the government spending increase has real effects (on output, employment etc) or nominal effects (on the price level) depends on the circumstances that the particular economy finds itself in. There may be no price effects or large price effects.

The debate then should never be about the government running out of money but whether it is desirable to spend more or less at any given time according to the motivation to achieve national goals.

But it is true, as Joe Guinan notes that:

Few matters of economic importance are as woefully misunderstood as modern money. It can seem a fiendishly complicated subject, even to economists.

The vast majority of economists do not understand the full significance of August 1971 and the lazy ones just reiterated ideologically-loaded textbooks, which have little relation to reality, to their students as if they were educators.

All they succeed in doing is to indoctrinate the students with their neo-liberal propaganda. And they might not even do that, given how turned off most students are after studying economics for any time.

The motivating claim by the Article is that:

Money, it is argued, is by its very nature political – who has it, how much, and at what price.

And that is correct but as you will see not a compelling part of the development of MMT as a ‘theory’ of how the monetary system operates.

Joe Guinan notes that the “crisis is being used to shrink the state, while virtually the entire mainstream left has been rendered powerless, caught in the grip of widely held but erroneous beliefs concerning money and finance”.

Yes, the ideological attacks on government activity and economic involvement as a threat to the neo-liberal mantra that self-regulating markets deliver the best outcomes, are just disguising the ‘political’ nature of what underlies the so-called economic debate.

We recall the predictions about an inflationary Armageddon where governments would run out of money and the poor would lose all incentives to seek work as a result of the pitiful welfare cheques that they received, became a regular occurrence in 2009 and after as government stimulus packages were introduced as a desperate measure against the likely collapse of the world monetary system.

The public was told that the ‘excessive’ deficits would lead to a massive rise in interest rates, which would make homemortgage commitments intolerable. The daily narrative had the US or the UK morphing into Greece.

None of these predictions have come to fruition. If the medical profession had displayed incompetence of this magnitude then authorities would have withdrawn their certificates to practice and large damages claims would have been awarded against them.

But an extremely biased, neo-liberal media, failed to bring these economic zealots to account and the public were increasingly persuaded that the crisis was not one of excessive private debt driven by massive market failure, but was rather a sovereign debt crisis brought on by profligate government spending.

At that point, the attack on government fiscal activism became almost manic in its intensity and the politicians bought into the fray. Why was there so much resistance to abandoning the failed economic theories? The mainstream economics paradigm is more than a set of theories.

Mark Blyth in his 2013 book – Austerity: The History of a Dangerous Idea – (page 100) notes that these mainstream economic theories:

… enshrine different distributions of wealth and power and are power resources for actors whose claims to authority and income depend upon their credibility …

Which explains, in part, why there was such resistance to abandoning them, even though it was clear that they were bereft of any evidential standing.

So I don’t dispute the political nature of austerity. That is its central motivation and intent. The ruling hegemony which now includes financial capital (replacing the dominance of industrial capital) uses austerity for its own purposes – and will, as we say in 2008, exploit the currency-issuing capacity of government if that also serves them well.

Which makes it all the more surprising that considerable hostility to MMT comes from the so-called progressive left. Joe Guinan is also perplexed:

The notion of a revenue-constrained government budget in a monetarily sovereign state may be a useful fiction for conservatives and rentier capitalists, but it should not have gone unchallenged by the left.

I have had many conversations with so-called progressive politicians, leaders of community organisations etc and it becomes very frustrating when they start talking about ‘increasing taxes on the high income earners’ to pay for more public infrastructure, or express worries about the government ‘running out of money’.

The worst is when they claim that austerity is necessary but that they would do impose it more gradually – aka British Labour Party, Australian Labor Party, US Democrats and more.

When one tries to explain MMT to a progressive person of this bent they just look at you as if you are speaking in a foreign language, one they haven’t mastered, and, typically, revert to form – ‘how can the government pay for it?’, no ‘that is impossible’ etc

Revert to form = utter mindless neo-liberal phrases they do not understand fully but think are correct because everyone considers them to be true. All but those marginalised MMT types! After all, that is why they are marginalised, n’est-ce pas?

We (Louisa Connors and myself) outlined the progressive challenge in this paper last year – Framing Modern Monetary Theory

Please read my related blogs – How to discuss Modern Monetary Theory – and then Framing Modern Monetary Theory – for more discussion on this point.

The argument we presented was that MMT has a coherent story to tell about the operations of the macroeconomy and provides new insights into the opportunities available to a government and its citizens concerning full employment, and accessible high quality health, education and other infrastructure.

But MMT has struggled to gain traction in wider economic and political debates due to:

1. An incomplete understanding of key macroeconomic terms amongst economic commentators, especially journalists, and the wider community (lack of education); and

2. The deployment of key macroeconomic terms (incorrectly) in the context of pervasive cultural metaphors to support policy interventions that effectively benefit a privileged few at the expense of the majority.

That worked provided a conceptual basis for understanding how the language we use constrains our thinking and examine some of the key metaphors used to reinforce the flawed message of orthodox economics.

We also examine the key ideas of modern monetary theory – an apolitical model of macroeconomic operations – and propose effective ways of expressing those key ideas in a progressive social and economic framework.

That is – MMT is a framework for understanding how the monetary system operates and the opportunities it presents. But it is not intended, nor should it, to be a ‘Manifesto’ for a progressive social and economic policy platform.

Manifestos are the domain of politics. Economic theory is to help us understand how things work so we can apply whatever ‘manifesto’ we support to the conduct of politics and policy.

Joe Guinan correctly notes that:

The immediate difficulty we face is the contradiction between our current economic problem, which is that deficits are too small, and political understanding of the problem, which is that deficits are too large.

And, clearly, that lack of understanding – “Widespread economic illiteracy” – allows those who do understand and have power to use the capacity of the currency-issuing government to “to boost the value of financial assets held by banks and creditors, while austerity bites ever deeper into the lives of ordinary people”.

But the two aspects of this – the lack of understanding, on the one hand, and the capturing of the polity by vested interests, on the other hand – are separate even though the latter exploits the former as a strategic tool to further their own interests and entrench their influence on the decision-making apparatus in society.

In this regard, Joe Guinan considers that MMT:

poses a devastating challenge to the reigning orthodoxies. Viewed through the lens of MMT, almost every popular assumption about money and public finances is misguided or outright mistaken – at least in those instances where governments retain a sovereign currency … [but] … To first encounter MMT is akin to falling down the rabbit hole and emerging into a looking glass world in which all hitherto seemingly settled opinion about money and banking turns out to be wrong and exactly the opposite holds true.

That is correct, although I am incapable of knowing what a belief in the mainstream economics ideas feels like in a cognitive sense because I was always a heretic. But the looks of disbelief I get from otherwise sane and caring progressive thinkers when these issues are raised tell me that they don’t want to fall down the “rabbit hole”.

Joe Guinan’s rendition of MMT is acceptable and we can skip that part of the article. Suffice with his overall asssessment:

The overwhelming conclusion of modern monetary theory is that there is no inherent financial limit to the spending of a monetarily sovereign government. Of course, such spending has consequences in the real economy, impacting inflation, interest rates, capital formation, and so on, and sustained over-spending beyond full employment and real production capacity is a certain path to hyperinflation … Today, with 48 million people unemployed across the OECD and so much capital lying idle, we are very far indeed from such a situation …

He then turns his attention to ‘political’ matters – where the “Austerity, the proclaimed need to cut back government spending to balance the budget and pay down the debt – expansion through contraction! – remains the dominant frame of mainstream politics, exerting a powerful hold over social democrats as well as liberals and conservatives in the UK and around the world.”

He acknowledges (as above) that so-called centre-left political parties “are imprisoned within austerity economics, promising at best a kinder, gentler management of public retrenchment and downward mobility”.

But apparently, MMT operates “mostly in descriptive, rather than prescriptive mode” and the claims that it is a progressive left manifesto is misplaced.

Please note: MMT proponents are clear in our serious writing that it is not a political manifesto.

The core MMT proponents hold out that MMT is a body of theory and inferences drawn from that theoretical structure that describes and explains the way the monetary system operates and the consequences that will likely follow different policy choices and non-government behaviours.

Joe Guinan correctly notes that comprehension is one thing but “the point, however, is to change” the system.

In this respect, he asked (by way of criticism because he provides the answer):

What, then, are MMT’s prescriptions?

Answer: none in the way he frames the question.

Is that a problem?

Answer: not in the least. Prescriptions belong in the political space. Theories belong in the knowledge space. Hopefully the latter informs and shapes the former. The problem in this neo-liberal period is the the prescriptions are driven by anti-knowledge – by pure ideology. The prescriptive space has been captured by the elites.

But as a theorist – that is not my problem. My problem is to work things out and to try to educate people in what I have worked out.

The capture of the prescriptive space by the neo-liberals is my problem as a citizen. The two aspects to my being are related but not identical.

Things get a little blurry in Joe Guinan’s article at this point. He thinks that because MMT traces “its lineage to Keynes” (which is an incorrect assertion, in itself) – that it:

… offers a policy framework largely oriented to the abolition of unemployment and the better management of instability in capitalist market economies …

In fact, the abolition of unemployment or the promotion of full employment is not unique to Keynes.

Macroeconomics is the part of economics that studies the economy in aggregate. The aggregates that concern us in this area of study are the level (and growth) in production, the rate of aggregate unemployment, and, the level and rate of change in the overall price level.

A central idea in economics whether it be microeconomics or macroeconomics is efficiency – getting the best out of what you have available. The concept is extremely loaded and is the focus of many disputes – some more arcane than others.

But my profession would be united in saying that developing theories about how efficiency is to be attained at any level is a core activity for an economic theorist.

At the macroeconomic level, the ‘efficiency frontier’ is normally summarised in terms of full employment. That has always been the case even if the jargon has changed over the centuries. There has always been a concern for waste of resources and the losses encountered by dint of having will labour resources idle.

The hot debate that has spanned the years is what do we mean by full employment but it is a fact that full employment is a central focus of macroeconomic theory.

Considering that issue doesn’t amount to a prescriptive preference – unique to me or other MMT theorists or otherwise. Using our macroeconomic resources to the limit is a key part of all macroeconomic theorists. The debate is what that limit actually is.

The neo-liberals also advocate full employment although they use all sorts of conceptual dodges and framing to manipulate the definition so that the level of unemployment that keeps wages growth at levels conducive to profit maximisation is the aim rather than what I would call ‘true’ full employment.

Please read my blog – Whatever – its either employment or unemployment buffer stocks – for more discussion on this point.

So the fact that MMT advocates full employment is not a venture into politics. It is stating the obvious concern of economists – that we hate waste and unemployment is waste.

Joe Guinan then steps into the Job Guarantee mine field. He claims that:

… the principal MMT policy proposal, following Minsky, is the job guarantee, by which the government steps in to serve as employer of last resort … The claim is made that, using MMT methods, full employment can be decoupled from economic growth and price instability …

First, the Job Guarantee proposal does not come from Hyman Minsky even though he advocated the policy idea.

Second, the Job Guarantee does not break the link between full employment and economic growth. With an expanding population and labour force, by definition, there has to be economic growth to ensure everyone who wants a job has one.

National accounts measures economic growth in three major ways – how much expenditure there is per period, how much income has been generated, or how much output has been produced. Given the nature of the framework, the different ‘views’ on growth deliver the same result.

If there are more people employed over time as the labour force expands then there will be higher incomes generated, more output produced and more government and private spending. That is, economic growth will expand.

It is false to claim otherwise.

The question that must be answered in relation to other goals such as ensuring human economic activity does not trammel the capacity of the natural environment relates to the composition of that growth. But never think that economic growth can be zero and full employment can still be achieved with a growing population.

Third, to claim the Job Guarantee is the prescriptive component of MMT is to miss its essential role in the theoretical debate. I suspect Joe Guinan hasn’t understood that, given he hasn’t referenced any of the relevant academic work in this regard of which I have been a major contributor.

It is tempting to consider the Job Guarantee to be just a guarantee of jobs for everyone – that is, a government job creation program.

However, that characterisation fails to fully embrace the buffer stock thinking that is unique in MMT and how it fits in with the History of Economic Thought.

Those who haven’t come to MMT from a solid background in macroeconomics can easily just think the JG is a tacked-on ‘leftist’ or ‘social democratic’ policy aimed at providing jobs to those who cannot find them.

So I often get the view expressed in E-mails etc that the Job Guarantee is all very nice but peripheral to the deep financial and monetary insights that MMT provides and should be culled from the writings or de-emphasised so as not to alienate the hard financial market types.

The progressives who support an income guarantee (for example, Basic Income proponents) also play down the importance of the Job Guarantee (an employment guarantee).

The reality is that the Job Guarantee is a central aspect of MMT (that is, theory) because it is much more than a job creation program. It is an essential aspect of the MMT framework for full employment and price stability.

To understand the role that the Job Guarantee plays in MMT and its place in economic theory, one has to grasp the concept of buffer stocks.

I started work on these ideas during my 4th year of undergraduate studies at the University of Melbourne in 1978 but left them simmering until the 1990s because I was doing other work.

My colleague Randy Wray spoke of this work in his keynote speech at a CofFEE Conference in Newcastle in 2012. He said:

And then there was the job guarantee, which I immediately recognized as Minsky’s employer of last resort. I can’t remember what Warren called it but Bill called it BSE, buffer stock employment.

I had never thought of it that way, but Bill’s analogy to commodities price stabilization schemes added an important component that was missing from Minsky: use full employment to stabilize prices. With that we turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand.

The government can thus choose – of all the ‘steady state’ unemployment-stable inflation equilibria (combinations of values) available – one that provides a job for all when the private market fails.

For those well-versed in the history of macroeconomic thought rather than the day-to-day financial market trends, this MMT insight is crucial and relates to the need for an economy to maintain a nominal anchor (that is, maintain price stability).

As I explained in this blog – Modern monetary theory and inflation – Part 1 – that there are two broad ways to control inflation and the use of buffer stocks are involved in each:

  • Unemployment buffer stocks: Under a mainstream NAIRU regime (the current orthodoxy), inflation is controlled using tight monetary and fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable target for policy makers to pursue as a means for inflation proofing.
  • Employment buffer stocks: The government exploits the fiscal power embodied in a fiat-currency issuing national government to introduce full employment based on an employment buffer stock approach. The Job Guarantee is central to MMT and is an example of an employment buffer stock policy approach.

Full employment requires that there are enough jobs created in the economy to absorb the available labour supply. Focusing on some politically acceptable (though perhaps high) unemployment rate is incompatible with sustained full employment.

Under the neo-liberal policy regime, central banks have, increasingly, been given the responsibility by government for managing the price level. In conducting monetary policy to fulfill their major economic objectives, central banks manipulate the interest rate and attempt to manage the state of inflation expectations via aggregate demand impacts.

They now use unemployment as a policy tool rather than a policy target to discipline the inflation generating process. Where negative real effects from the operation of inflation-first monetary policy are acknowledged they are theorised to be necessary for optimal long term growth and employment and small in magnitude.

In MMT, a superior use of the labour slack necessary to generate price stability is to implement an employment program for the otherwise unemployed as an activity floor in the real sector, which both anchors the general price level to the price of employed labour of this (currently unemployed) buffer and can produce useful output with positive supply side effects.

So the Job Guarantee thus works on the ‘buffer stock’ principle.

Please read my blog – MMT is biased towards anti-crony – for more discussion on this point.

Now the question is whether that theoretical positioning of the Job Guarantee is also ‘prescriptive’. The answer is that if we accept that macroeconomics is concerned with ‘efficiency’ that is no waste and price stability, then the application of the buffer stocks principal is essential.

In that context, the Job Guarantee is a superior option whether it accords with your value system or not.

You can argue against it – for example, if you don’t think full employment is desirable. But you are prevented from using arguments relating to the incapacity of governments to afford such a scheme as a defence.

What MMT forces upon the debate is increased transparency. A person who opposes the idea of a Job Guarantee has to argue that the private sector will create sufficient jobs and that cyclical bouts of high unemployment (that might last decades) are better than having everyone employed.

That is a different debate to the simple but erroneous assertion that ‘the government cannot afford it!’.

Joe Guinan says that:

Although individual MMT thinkers express their views on a range of other economic issues, MMT per se often tends toward agnosticism. Given present circumstances, the adoption of even the limited MMT programme indicated above would amount to something of a revolution in economic and political affairs. Still, MMT as a theory has relatively little to say on a number of critical questions – not least among them the matter of what to do about the private banking sector.

So the point is this – MMT per se is a theoretical framework backed by knowledge. It is there to be used either progressively or not. But it is not a prescriptive framework about what should happen.

Nor is it a theory of evolution, nor does it provide any insights into kinetic molecular theory, or, for that matter, any insights on who will win the football match next week, or whenever.

Being prescriptive is not the role of a theoretical framework focused on the monetary system. That role is to be assumed by the activists. MMT aims to educate the activists and provide them with the knowledge necessary to justify a progressive (or otherwise) policy stance in the political fora where such things have to be justified.

As an individual, my prescriptive ‘take homes’ from MMT are fairly clear to regular readers. I hate inequity and want everyone to be able to reach their potential. I don’t want that potential blighted from a young age because of poverty. I understand from MMT that poverty can be largely eliminated and so I prescribe policies that would achieve that.

But I also realise that a right-winger could also think, from their own peculiar values, that poverty was a virtuous state, because it provided and incentive structure for human endeavour and all the rest of the ‘shoelace lifting’ nonsense. In that case, they would use MMT to maintain high unemployment and give tax breaks to the high income earners and maintain as low a deficits as were possible (given the high unemployment) by imposing austerity on low income earners and income support recipients.

They would understand exactly how to achieve those aims. And all the rest of us, who by now had understood MMT would realise what was going on. The resolution would be a political matter as the different ideologies struggled for political supremacy.

The accusation that MMT is agnostic about “what to do about the private banking sector” given that (apparently) “It is this production of bank credit-money that sociologists of finance like Ingham see as giving capitalism its distinctive structural character” is also curious.

First, I disagree that bank credit-money is the defining characteristic of capitalism. I am Marxian in background and the defining character of capitalism is who owns the capital.

Second, it is not bank credit-money that is the problem. I have written about that a lot. For example, please read my blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks – for more discussion on this point.

The point is that the only useful thing a bank should do is to faciliate a payments system and provide loans to credit-worthy customers.

Attention should always be focused on what is a reasonable credit risk. In that regard, the challenge is to regulate and supervise the banks more carefully.

1. banks should only be permitted to lend directly to borrowers. All loans would have to be shown and kept on their balance sheets. This would stop all third-party commission deals which might involve banks acting as ‘brokers’ and on-selling loans or other financial assets for profit. It is in this area of banking that the current financial crisis has emerged and it is costly and difficult to regulate. Banks should go back to what they were.

2. banks should not be allowed to accept any financial asset as collateral to support loans. The collateral should be the estimated value of the income stream on the asset for which the loan is being advanced. This will force banks to appraise the credit risk more fully.

3. banks should be prevented from having ‘off-balance sheet’ assets, such as finance company arms which can evade regulation.

4. banks should never be allowed to trade in credit default insurance. This is related to whom should price risk.

5. banks should be restricted to the facilitation of loans and not engage in any other commercial activity.

Further, I have advocated that government should outlaw all derivative trading that does not directly support the real economy. That would lead to around 96 per cent of all financial market transactions. Most of the financial flows comprise wealth-shuffling speculation transactions which have nothing to do with the facilitation of trade in real goods and services across national boundaries.

Please read my blog – What is Wall Street for? – for more discussion on this point.

Third, if a private bank is failing then it should be nationalised with deposits guaranteed and shareholders left to pick up the losses.

Fourth, my preferred position is no private banks – all nationalised and operating under the rules specified above.

But those policy prescriptions reflect my own values and are informed by MMT. But a person with different values, who also understood MMT, could easily come up with different policy prescriptions.

Finally, Joe Guinan claims that:

At a deeper level, modern monetary theory has a political economy problem. It is a somewhat technocratic theory, implying that if only the monetary and fiscal policy space open to monetarily sovereign governments can be properly grasped by policy-makers and the public then the means to bring about change will be readily available. This is a bit thin.

Thin? Because apparently we ignore the “the political nature of both the origins and functions of the linkage between state spending, taxes and bonds in the capitalist system”.

Not at all. But that is political theory rather than economy theory. None of the original MMT proponents (who remain my friends) are naive at all.

Each one of us knows that the cards are stacked against any government being able to abandon the voluntary (neo-liberal) constraints on their fiscal capacities that became irrelevant after August 1971.

I see my role as an academic to provide the knowledge to expose the arguments that are used to stack the cards and hide the fact that they are being stacked.

That is my role. It is the role of the progressive political scientist to then use the insights that MMT provides to research and advocate for changes to the way policy is formulated and implemented.

Joe Guinan claims that:

… if it is to become more than a counterintuitive abstract theory that can be safely ignored by the powers that be, MMT will need to be articulated to a much broader political audience.

Which is stating the obvious but hardly justifies the claim that MMT is “a bit thin”. MMT is what it is – a theory and explanation of the way the monetary system operates.

The link between MMT and the policy making process are the activists. It is their role to take the knowledge and start influencing the political debate.

As a citizen I might try to do that. But as an academic I have the educative and research role. The two are related but different.


The fact that the social democratic parties have failed to enunciate a progressive agenda is not because MMT has failed. Rather, it is because those political institutions have become infested with neo-liberal ideas as a result of the massive framing efforts made by the right-wing media and think tanks.

The link between MMT and the public debate is also mediated by the available resources and access to popular media. The right wing is funded by the likes of the Koch Brothers.

MMT researchers have sparse funds compared to this and little access to the mainstream media. It is a very tilted playing field.

If the progressives really want to help they could use their capacities to channel funds into our research groups to allow us more scope to build marketing and promulgation arms to our ventures. These capacities are evident in all the right wing think tanks.

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

This Post Has 22 Comments

  1. Another top notch post Bill that goes straight into ‘Favourites’. Thanks for putting it up.

    I’ve argued for a while that MMT informs and that the political people then have to use that information to derive policies and a way of selling them.

    Perhaps it is a sign of our time that people are looking directly to economists and central bankers for deliverance.

    It always reminds me of the Judean Speakers corner scene from the Life of Brian with all the various prophets lined up giving their pitch.

  2. What are you if you neither believe in austerity or the full employment war economy ?
    A Dork perhaps ?

    I am extremely suspicious of the second American materialist revolution of which MMT types are its ulitmate priesthood.
    Need I remind you both Anglo countries are failures also……………
    The Uk has seen a continual decrease in its unemployment these past few years and yet is sinking in the capitalist pit of dispair.
    The reason for this is obvious – its use of capital is meant to serve continual concentration of claims at the top rather then redistribution of capital from the bottom up.
    The jobs in the Uk serve no real purpuse – there function is to merely access purchasing power as consumer soldiers in a country absorbing mainly eurozone mercantile production of dubious real utility in many respects.
    Consumerism is obviously designed to entrap individuals within the capitalist web.
    It does not enrich them , it destroys people in detail – its a modern Somme.
    It esssentially acts as a vampire on peoples lifeforce.

    A return to adequate purchasing power within the village and market town setting is needed – to be not depedent on the Anglo Dutch monetary / oil cartel.
    Essentially a return to Traditionalism but not necessarily in the old ways.

    I am reminded of Ian Banks book Whit where the central character (of a closed sect) travels through the UK capitalist dystopia of 1995 and we see it through her eyes.

    Banks has called it:

    a book about religion and culture written by a dedicated evangelical atheist – I thought I was very kind to them… Essentially, Isis makes the recognition that the value of the Luskentyrian cult is in their community values rather than their religious ones. She recognises that efficiency isn’t everything, that people not profit are what matters

  3. Dear Bill

    Another thing that happened after 1971 is that cross-border financial flows were more and more liberalized. This has the undesirable consequence that exchange-rates don’t just reflect trade flows but can be pushed in the wrong direction through short-term financial flows.

    Suppose that Ruritania has an inflation rate of 10% and Slobodia of 2%. Then the ruri (Ruritania’s currency) should undergo a nominal devaluation with regard to the slobo (Slobodia’s currency) in order to avoid a real upvaluation. However, if the interest rate in Ruritania is also considerably higher than in Slobodia, there will be a short-term financial inflow into Ruritania, which will be push the value of the ruri up rather than down, thus in the wrong direction. As a result, Ruritania’s exchange rate no longer reflects trade flows and Ruritania will become less competitive. Some industry in Ruritania will be bankrupted simply because of the wrong exchange rate, just as a lot of italian and Spanish industry was destroyed by the euro.

    As I see it, at the very least foreigners who buy bonds or shares in a country should be required to hold them for at least 2 years. If they sell them before that, they’ll have to pay a penalty of 40% of the original purchase. That should discourage destabilizing short-term cross-border financial flows. Didn’t Chile adopt such a policy after its disastrous depression of 1982?

    Many people object to JG because they assume that those will not be real jobs. They believe that those who hold jobs within the JG program are in fact unproductive employed.

    Regards. James

  4. Very good post Bill. Kid MMT is becoming to be taken more and more seriously everywhere. 🙂

  5. It’s an odd article. He points out well the implications and hints at the possibilities of using MMT and then slags it off because it hasn’t got an anti-banking or political agenda using Warren’s ‘last progressive standing’ article to suggest MMT does see itself as some kind of political movement.
    Shame. I’d be interested in Warren’s view.

  6. James,

    “Many people object to JG because they assume that those will not be real jobs. They believe that those who hold jobs within the JG program are in fact unproductive employed.”

    I get this all of the time too. Then I list off some of the jobs which either add no value to society, or actually subtract from it, despite their activities contributing to GDP:
    * Everyone employed by the tobacco industry
    * Everyone working in misleading advertising (i.e. almost all employed in marketing)
    * Hedge fund managers
    * Most people employed by the FIRE sector
    * All employees of toll road companies (How #$*&ing inefficient can USING A ROAD get wrt pointless employment?)
    *etc. etc. ad nauseum

    After this begins to sink in a little bit, I hit them with the type of jobs the JG could easily involve with little to no skill
    * Restoration of natural environments (some oversight is needed but it’s not skilled work)
    * Providing delivery of goods and minor household tasks/services for the elderly who would then be enabled to stay in their homes
    * After hours school care (would need training and screening but still do-able)

    Not to mention that the JG would likely be supplemented by skills training and further education in certain in-demand or socially important disciplines, it generally puts to rest such vacuous arguments about “non jobs”.

  7. Just to add – the irish 2015 budget was passed today.

    One of the biggest sweets was to the irish construction (local war economy) sector.
    Over 2 billion euros will be spent on social housing in a land full of such things.

    The socialists to the left were unable or unwilling to grasp the nature of the problem in full.
    They want more useless products that will remain empty as the core of the problem is the extraction of purchasing power from the irish people.

    They did make the useful point that land rent (mainly in Dublin) was captured by outside capitalists (sponsered by the FED and other central banks that Bill likes so much) betting that the Irish demonic scarcity engine would continue to purr.
    They perhaps bought apartments at 100,000 when the people of Ireland will now funnel even more money to corporate consumer war economy people at 300,000 or more a pop.
    On top of that the rentiers have seen increased gains in a declining physical economy.
    This means capitalism wins again as it is yet another example of further concentration of wealth claims using the money vortice mechanism.

    If we look at housing rent , repairs and government extraction at current market prices it has risen for each year since the 2009 /10 slump.
    Y2009 to Y2013 (millions of euro) : 14,568

    This in a economy where people cannot afford to buy clothes.
    Expenditure on clothes and shoes have decreased for each year since 2009 -2013 (millions of euro)

    Expenditure on Fuel and power (excluding motor fuels) has increased for each year since Y2009 -Y2013 3,051

    Under such circumstances of extreme housing & private car abundunce and extreme shortage of social goods why is the government encouraging “growth ”
    what is the purpose of growth if is not directed at people ??????
    A truly national policy would ban these conduit growth activities for many decades at least.

    Check out the 2013 irish national accounts Bill.
    They sure are interesting.

  8. Excellent post!
    The ability to uncloak the political motivations behind particular economic policy arguments is of great value to society. The parties claiming the center in our world (were they exist) should take note, as evidence based, transparent government, with public purpose at the fore should become their mantra.

  9. «the system of fixed exchange rates. Under that system, which had endured for about 80 years (with breaks for war), currencies were convertible into gold, exchange rates were fixed, and governments could expand their spending only by increasing taxes or borrowing from the private sector.»

    That is quite hugely wrong: because the fixed exchange rate system did not have *immutable* exchange rates.

    * Exchange rates were not *fixed*, governments could change them whenever they wanted.

    * Currencies are still «convertible into gold», whenever you want, on the gold market.

    Some changes are visible, and they are that in the old regime governments were market-makers for their currencies and gold and published a price for gold in their currency that was changed in practice rarely; in the current regime private companies are market makers for currencies and gold, and they can change the price daily, but big changes are almost as rare as they were.

    But what has really changed is that governments were buyers and sellers of last resort at their published rate between gold and currency, and felt a strong political pressure to “defend” that rate either way, instead of changing it, and they no longer care; that is what matters, not whether the rates were fixed or floating or even whether governments or private businesses make markets in currencies and gold.

    The important bit is that the price of gold has gone from being a fetish to not being a fetish.

    Perhaps this is largely because what matters now is the price of oil, not gold.

    Even if there are rumours that at least the Arab oil producing countries look at the price of oil in gold, not in dollars, as they think it would be otherwise easy for the USA to give them freshly minted dollars in exchange for real oil.

  10. Gotta echo Neil here. Outstanding post, definitely one to save forever.

    I really liked the line;

    “They now use unemployment as a policy tool rather than a policy target to discipline the inflation generating process.”

    So true, so true. Gotta keep some people hungry and fighting for food……… as long as its not ME!!!!

  11. «The fact that the social democratic parties have failed to enunciate a progressive agenda»

    That’s indeed a fact…

    «is not because MMT has failed. Rather, it is because those political institutions have become infested with neo-liberal ideas as a result of the massive framing efforts made by the right-wing media and think tanks.»

    That’s not a fact indeed, it is a delusion. It is mistaking the effects for the cause.

    Those «massive framing efforts» have succeeded to «infest[ed] with neo-liberal ideas the «political institutions» not because they are about «neo-liberal ideas» but because they win election.

    They win elections because those «neo-liberal ideas» are just wiondow dressing, a hypocritical cover for the policies that are about boosting the profits of incumbency, and many voters like that because they think of themselves as incumbents, and of people poorer than themselves as losers who threaten their profits from incumbency.

    That is most of the voters, most of the people who are actually voting, are not socialist or social democratic, they are petty speculators and rentiers, the so-called “conservatory-building classes”.

    I’ll repeat here my “smoking gun quote” from tony Blair:
    «I can vividly recall the exact moment that I knew the last election was lost. I was canvassing in the Midlands on an ordinary suburban estate. I met a man polishing his Ford Sierra, self-employed electrician, Dad always voted Labour. He used to vote Labour, he said, but he bought his own home, he had set up his own business, he was doing quite nicely, so he said I’ve become a Tory. He was not rich but he was doing better than he did, and as far as he was concerned, being better off meant being Tory too.
    In that moment the basis of our failure – the reason why a whole generation has grown up under the Tories – became plain to me. You see, people judge us on their instincts about what they believe our instincts to be. And that man polishing his car was clear: his instincts were to get on in life, and he thought our instincts were to stop him.»

    another one:
    «The problem with Gordon,” a senior minister said to me recently, “is that he doesn’t understand why anyone would ever want to build a conservatory.”
    There is a growing concern in the Government that the Prime Minister is alienating the aspirational middle classes who put Labour into power in 1997 and have kept it there ever since.
    Although Mr Brown talks a lot about aspiration, he means it in the sense that people at the bottom of the pile should be able to get to the middle, rather than that those in the middle should aspire to get a little bit further towards the top.
    His preoccupations with child poverty, Africa and banning plastic bags are all very worthy – but they leave the conservatory-building classes thinking: what about us?
    With the cost of housing, energy, childcare and food going through the roof, people who are relatively well paid can no longer afford to live the way they did even a year ago. As the middle classes book holidays in Torquay rather than Tuscany, drink tap water instead of San Pellegrino and put the conservatory they had been planning to build on hold, they start to question the amount they have to pay to the Government.»
    «Flint, the shadow energy secretary, also holds a position as the party’s champion for the south-east. She writes: “We have to win votes from the Tories as well as from the Liberal Democrats. The collapse of the Liberal Democrat vote alone will not be enough to win in 2015. We have to continue to focus on those voters who supported Labour in 1997 but voted Conservative in 2010.”
    She adds: “We went into the last general election promising a ‘future fair for all’, but too often, when we thought we were talking about fairness, we were actually talking about need.” She claims that for many swing voters in the south-east “fairness is as much about exchange – taking out once you have put in – as it is about need. They want ‘fairness for my family as well.’»

    More on political consequences:
    «”Political geography concentrates swing voters in certain parts of the country,” says one senior Tory. “There are upper working class and lower middle class voters in constituencies… around big cities who tend to have certain preoccupations – crime, immigration, living standards – and they exercise disproportionate influence relative to their numbers. The squeezed middle are among the most powerful people in Britain.”»
    «He sometimes delivered stark warnings rather than carefully balanced appraisals. And no matter how dire his forebodings, he always believed the situation was retrievable, so long as Labour showed itself to be in touch with the concerns of ordinary families.
    His critics, and he had many, believed his strategy amounted to little more than telling the voters what they wanted to hear. Some questioned how much he knew or cared about the concerns of Labour’s traditional voters, rather than the precious “switchers” who could swing elections.»

    And those switchers are not even remotely socialist or social democratic currently.

    Probably they could be persuaded that being socialist or social democratic is in their best interests, but right now their thinking is mostly “F*CK YOU! I GOT MINE!”.

  12. we might find that involuntary unemployment disappears as involuntary full time employment
    from 18 to 68 {and going up] disappears.
    can you imagine all full time students not needing to work and concentrate on their studies
    not just rich ones?
    or most workers approaching retirement being able to cut down their working week to phase in
    or the majority of people deciding to cut back working hours when their children are young?
    or how about everyone being able to have a sabbatical and not just a small minority?
    or just most people being able to trade leisure for work without poverty?
    Brought to you by an alternative prescription based on the recognition of the nature of state
    monetary power the universal citizens dividend and it does not even need to exclude targeted
    counter cyclical government job and training opportunities.

  13. “Currencies are still «convertible into gold», whenever you want, on the gold market.”

    That’s a mistake in belief I see all the time – based again on taking an individual viewpoint rather than an overall viewpoint of the system.

    Currencies are not *convertible* into gold. You can *exchange* them for gold. And that makes all the difference in the world.

    When you *convert* a liability into gold, you present the liability to the authority that has the corresponding financial asset. That extinguishes the asset and the liability – reducing the amount in circulation – and you get gold in return (if they have any left).

    When you *exchange* a liability for gold all that happens is the names on the items change. There is still the same amount in circulation.

    Conversion is the act of creating a financial asset/liability set or of destroying it.

    That’s how our banking system works. You can *convert* a bank deposit into cash – which causes the bank to destroy its liability to you and destroy an amount of the assets it holds as central bank reserves. Similarly when you pay cash into a bank, or when the government pays somebody the bank is force to create an asset and liability on its books.

    So effectively the banks own liabilities are *pegged* to the state currency, and that makes the banks part of that currency area, but forces them to convert at par to maintain that peg.

    Similarly the National central banks of the Euro states are pegged to the liabilities issued by the ECB which then makes them part of the Euro currency area.

    So you can see the whole monetary system as divided into areas of convertible pegs separated by non-convertible exchanges.

  14. Dear Blissex (at 2014/10/15 at 6:14)

    You said:

    That is quite hugely wrong: because the fixed exchange rate system did not have *immutable* exchange rates.

    * Exchange rates were not *fixed*, governments could change them whenever they wanted.

    * Currencies are still «convertible into gold», whenever you want, on the gold market.

    Whenever you accuse someone of being “hugely wrong” you should be certain of your facts and understandings.

    1. Under the Bretton Woods agreement, the participating governments could note change the exchange rates whenever they wanted. There were formal procedures and IMF approval was necessary, and relatively strict conditions that had to be in evidence before that approval would be granted. The system was biased against discretionary revaluations and devaluations.

    2. Of-course you can buy gold with dollars at the current market price through a gold dealer. But that is not the same as guaranteed convertibility at a fixed US dollar-gold parity by the US government for any currency. After 1971, a central bank could not approach the US federal reserve and demand they swap pesos for gold at the fixed parities.

    best wishes

  15. «Under the Bretton Woods agreement, the participating governments could note change the exchange rates whenever they wanted. There were formal procedures and IMF approval was necessary,»

    Perhaps this comment is based on a misunderstanding of the topic of the post (even if you wrote it), which was not about just «the Bretton Woods agreement», but rather more in general about:

    «the system of fixed exchange rates. Under that system, which had endured for about 80 years»

    In 1971 that agreement had existed for just 27 years, about a third of that period; and for over half of those 27 years the main countries were Article XIV, that is in fact not convertible, as the EEC countries and the UK became article VIII countries in 1961 (entirely coincidentally just after the “dollar shortage” had become a “dollar glut”).

    Your general argument also seems to me to be meant to apply to
    fixed-rate systems in general, as contrasted to floating rates and “fiat” money.

    My core argument is:

    «But what has really changed is that governments were buyers and sellers of last resort at their published rate between gold and currency, and felt a strong political pressure to “defend” that rate either way, instead of changing it»

    and it is that the mostly-fixed regime existed because of the political will of the governments of many countries to fix the price of gold, while the impression I get is that your argument is that it worked the other way round, it was all a misunderstanding where governments somehow were persuaded by “experts” to enter mostly-fixed rates and then were inadvertently forced to fix the price of gold.

    That to me seems “hugely wrong” and don’t say that just to annoy you, but because there is a much bigger point to make if one looks at it from the right point of view, which is that your:

    «the currencies were not convertible into anything of value, and were floated and traded freely in foreign currency markets.»

    statement makes a distinction without a difference. It does not matter whether one uses the verb “exchange” or “convert”, or whether there are treaties involving «IMF approval» for moving the peg during the latter third of the regime of fixed exchange rates.

    What matters is the political will to act as seller or buyer of last restort to target a given price of gold, that is whether governments consider the stability of the price of gold an important political goal.

    So the big deal is not that the fixed exchange rate regime (of which Bretton Woods was the final part) ended, but that the USA and consequently most countries stopped considering the price of gold as an important political goal, which can only be because the constituencies controlling the government benefited from a switch to a different metric overruled those who benefited from a stable price of gold; the end of the fixed rate regime was a consequence of that, as its existence was a consequence.

    BTW on reflection this was obviously not replaced by the price of oil in most countries: it is the *oil producing countries* of course that consider it so.

    What replaced the price of gold as a political fetish in most first-world countries was *the cost of labour*, as proxied by the CPI ex-energy/food.

    The consequence of misunderstanding that then is that this observation is not very useful:

    «Most of the analysis appearing in current macroeconomics textbooks, which filters into the public debate and underpins the cult of austerity, is derived from ‘gold standard’ logic and does not apply to modern fiat monetary system.»

    Because the current «cult of austerity» is derived from “wage-level standard” logic, which is not so different from the “gold standard”.

    Because the «modern fiat monetary system” looks to me, as a matter of *political will*, a fixed exchange rate regime, where the exchange rate is fixed not against gold but against labour. The use of logic «derived from ‘gold standard’ logic» is not a silly mistake that Economists make, it is intentional to support the “wage-level standard” logic.

    There was no magic about using the price of gold as a political fetish between the 1880s and the 1970s, even if Bretton Woods for the latter part of that period made it look a bit more magic; just as there is no magic now about using the price of labor as a policy fetish.

    For example I rather disagree with you that MMT only works outside gold-convertible regimes; it works in exactly the same way in all regimes.

    Money works in exactly the same way regardless of whether there is a gold standard or not. Goldbugs who think that gold convertibility changes how money works are rather deluded too; because gold is a “fiat currency” too, that is gold is “money” (in an official sense) only if there is a political will to make it so. Otherwise gold has little to recommend for it against cowry shells or silver or opium or …

    What changes is how policy is driven by specific political goals, whether they be to target the price of gold or the price of labor or rather full employment.

    That is a political choice on how to constrain policy; MMT continues to apply regardless of that, except that certain choices are *voluntarily* excluded.
    Regimes are just consequences of that political will.

  16. As to the specifics of the Bretton Wood era of the fixed exchange rate system some quotes from what seems to me a fairly balanced summary (with many little known details, and some omissions):

    «there was much common ground among all the participating governments at Bretton Woods. All agreed that the monetary chaos of the interwar period had yielded several valuable lessons. All were determined to avoid repeating what they perceived to be the errors of the past. [ … ] the interwar period had conclusively demonstrated the fundamental disadvantages of unrestrained flexibility of *exchange rates. The floating rates of the 1930s were seen as having discouraged trade and investment and to have encouraged destabilizing speculation and competitive depreciations.»

    That to me supports my contention that what matters is the political will, the first-world countries did not stumble into fixed exchange rates because they did not understand how the monetary system works (probably most of their experts did not, but that was not the reason anyhow).

    «Yet in an era of more activist economic policy, governments were at the same time reluctant to return to permanently fixed rates on the model of the classical *gold standard of the nineteenth century. Policy-makers understandably wished to retain the right to revise currency values on occasion as circumstances warranted.»

    That seems to me to support my impression that even the Bretton Woods system was in principle designed to be flexible, even if I am not sure that the fixed rates of the previous 60 years or so were less flexible.

    «What emerged was the ‘pegged rate’ or ‘adjustable peg’ currency regime, also known as the par value system. Members were obligated to declare a par value (a ‘peg’) for their national money and to intervene in currency markets to limit exchange rate fluctuations within maximum margins (a ‘band’) one per cent above or below parity; but they also retained the right, whenever necessary and in accordance with agreed procedures, to alter their par value to correct a ‘fundamental disequilibrium’ in their *balance of payments.»

    Which means to me «whenever they wanted» because given the political will to maintain a fixed price of gold, they would want that to change only when necessary.

    «The pegged rate regime was manifestly biased against frequent changes of currency values, since states had to demonstrate the existence of a fundamental disequilibrium before they could alter their par values;»

    Sure, most rates were pretty constant as I wrote in «published a price for gold in their currency that was changed in practice rarely».

    «the ambiguity of the key notion of fundamental disequilibrium. How could governments be expected to change their exchange rates if they could not even tell when a fundamental disequilibrium existed? And if they were inhibited from repegging rates, then how would international payments equilibrium be maintained? In practice, governments began to go to enormous lengths to avoid the “defeat” of an altered par value.»

    The way I read it is that the rates were fixed because there was a strong political will to keep them fixed, not because they could not be changed as per my point that « felt a strong political pressure to “defend” that rate either way, instead of changing it, and they no longer care».

    But also:

    «Second, convertibility obligations could be deferred if a member so chose during a postwar ‘transitional period.’ Members deferring their convertibility obligations were known as Article XIV countries; members accepting them had so-called Article VIII status.»

    Now someone has put online a very relevant quote from a Department of State bulletin of March 3rd, 1961:
    «Ten members of the International Monetary Fund today [February 15] announced the formal convertibility of their currencies within the meaning of the articles of agreement of the Fund. The 10 are the United Kingdom, the 6 members of the European Economic Community-that is, Belgium, France, Germany, Italy, Luxembourg, and the Netherlands-together with Sweden, Ireland, and Peru. These actions are heartily welcomed by the United States. They represent the culmination of the efforts of the 10 countries to achieve one of the major objectives set forth in the Fund articles. They constitute further evidence that the system of monetary cooperation embodied in the Fund is working successfully. Most of these countries announced the convertibility of their currencies for nonresidents some 2 years ago.»

    That’s pretty amazing! The major economies of the world were Article XIV until 1971, and accepted full formal convertibility only for the last 10 years of the system’s 27 year history. It must be a coincidence 🙂 that up to about 1959 the system had a dollar “shortage”, and after 1960 had a dollar “glut”.

  17. Mostly agree on the theoretical statements in your last comment, Blissex, though “hugely wrong” before was imho misplaced. All money is “fiat” money, credit money underneath. I think this needs to be emphasized more often, too. But bad theories of money enshrined in institutions could and did constrain spending as Bill said.

    There is a difference between Neil’s “convert” and his “exchange”. But fundamentally it is all “convert”, because Neil’s “exchange” is built out of multiple “converts”. “Convert” here means paying a price for a commodity in terms of the seller’s own direct liabilities. So buying gold from a bank with your bank account is “convert”, the financial asset disappears. Buying it from the bank with dollar bills is less direct, and is “exchange”, because the financial asset remains, now in the bank’s hands.

    I don’t think that the idea of wage-level standard logic replacing gold-standard logic, or even Bill’s “the level of unemployment that keeps wages growth at levels conducive to profit maximisation is the aim” really hold water. Indeed, the JG incorporates “wage-level standard” logic, and the free lunch of full employment usually leads to more wealth for all. No. Poverty, unemployment, misery and degradation of the lesser people is a good in and of itself to the ruling class. It is the aim, not a side effect. Those who think of themselves as “the masters of mankind” have always derived as much, perhaps even more, pleasure from dictating “nothing for other people” as from taking “all for ourselves”.

  18. «So you can see the whole monetary system as divided into areas of convertible pegs separated by non-convertible exchanges.»

    While this is a very interesting approach for looking at things I think it is misapplied here, in part because this seems a classic example of distinction without a difference:

    «Currencies are not *convertible* into gold. You can *exchange* them for gold. And that makes all the difference in the world.»

    Because this is based on a very strange misperception:

    «When you *convert* a liability into gold, you present the liability to the authority that has the corresponding financial asset. That extinguishes the asset and the liability – reducing the amount in circulation – and you get gold in return (if they have any left).»

    I think this is a misremembering of how a gold-money (fixed-rate to gold) system works. In it the only “money” is physical gold, and the unit of currency is the gram of gold, not the dollar or whatever else, which are just ways to express the same. The paper that circulates is just gold certificates of deposit, whether dollars or livres, in 1-to-1 correspondence with physical gold.

    Your argument instead seems instead based on the notion that while a gold certificate of deposit is “money” the gold that one gets after conversion is not “money”, it is just a commodity; that is gold certificates of deposit are liquid (“money”), but gold is illiquid (“not money”).

    But in a gold based system if you want to buy a car you can buy it either with a bundle of gold certificates of deposit, or with the same amount in gold bars or gold coins. The car dealer accepts payment in all three. Many shops had gold scales because paying in physical gold (or silver) was common (for non trivial sums). Indeed in a gold-money system physical gold is slightly more liquid than gold certificates of deposit, as the latter can attract some doubt (would you accept at face value a gold certificate of deposit from the Central Bank of Poyais?).

    So when one “redeems” a gold certificate of deposit called “dollar banknote” for physical gold, no financial asset is created or destroyed: the quantity of money, which is the quantity of physical gold, remains the same, and the gold certificate of deposit itself is not therefore a financial asset, just a receipt for one.

    The condition «(if they have any left)» confirms to me that the argument is based on a misperception: in a gold-money system that that condition is always true, or else it is not a gold-money system.

    If the possibility arises that the total weight of gold on outstanding gold certificates is greater than the available physical quantity of gold then it is a debt-money system in effect, as in the case of the “dollar overhang” issue starting in the 1960s.

    «When you *exchange* a liability for gold all that happens is the names on the items change. There is still the same amount of money in circulation.»

    The same logic: just as in a gold-money system the quantity of gold is not affected by transactions, in a debt-money system the quantity of debt is not affected by transactions either (only by lending or repayment).

    But with an important difference: in a gold-money system transactions involving gold certificates of deposit do not affect the liquidity profiles of either transactor; in a debt-money system the liquidity profiles do change unless it is an exchange of an IOU for an IOU from the same source, which is sort of pointless.

    So in a gold-money system holding dollars, francs or gold bars is equally liquid; but in a debt-money system they have somewhat different liquidities, for example depending on where one lives.

    But that is a rather minor difference compared to the decision to hold the price of gold constant versus not holding it constant, because it constrains government policy in very different ways.

    «Conversion is the act of creating a financial asset/liability set or of destroying it.»
    That’s how our banking system works.»

    That’s a strange use of “conversion” and is not how our banking system works, this seems to me a misperception of what MMT says. In our banking system financial asset/liability sets are created by lending, and destroyed by repayment; they are *exchanged* by conversion, and the purpose of conversion is the trade liquidity.

    Consider someone who wants to buy a car: they have to give to the vendor an IOU (else it is barter). Except that personal IOUs (checks drawn on oneself) don’t enjoy much acceptance for various reasons. So the buyer goes to a bank and gives the bank her personal IOU, and the bank gives her a checkbook of their own IOUs (to the same amount). The car dealer accepts the checks because trusts the bank’s IOUs to be accepted by other vendors, so he can use the bank’s IOUs to buy cars from the manufacturer and buy work from her employees.

    The key now that in every subsequent transaction, there is no creation or destruction of assets or liabilities except when a new IOU comes in existence or is paid off. They are just traded on as long as they are “acceptable” (liquid).

    So this is a big difference: in a gold-money system everybody accepts only one type of money, grams of gold or 1-to-1 substitutes; but in a debt-money system there are as many types of “money” as there are persons issuing “IOUs”.

    The IOUs are all denominated in the same unit, “dollars”, but they have different levels of acceptance, and therefore they are different “currencies”.

    The “conversion” that you refer to is about not the pegging, but the degree of acceptance, and central bank IOUs tend to have the greatest degree of acceptance, bank IOUs have a much lower degree of acceptance, and individual IOUs have an even lower one (and usually only banks or friends will accept them).

    «So effectively the banks own liabilities are *pegged* to the state currency, and that makes the banks part of that currency area, but forces them to convert at par to maintain that peg.»

    That’s not pegging, it is just expressing them in the same theoretical unit. The conversion is also usually not at par, because different debtor’s IOUs have different levels of acceptance.

    So there are different discount rates for personal IOUs, bank IOUs and central banks IOUs, and the gaps can be pretty wide during times of crisis, but are not insignificant even during good times.

    The gaps can even invert: a personal IOU can have a much lower discount rate than a central bank IOU in some uncommon but important circumstances.

    That seems to me rather distant from the notion of “convertible pegs” and “non convertible exchanges”.

  19. «All money is “fiat” money, credit money underneath.»

    Sort of, but if this statement has some inspiration it is based on a the idea that money is fundamentally based on belief, on creditworthiness. But there are two very different types of this, and here is a distinction with a really significant difference.

    The distinction is between “fiat” acceptance and “fiat” issuance, and I’ll use the example of gold and personal IOUs to illustrate.

    What “money” is accepted by vendors as payment depends on belief, on creditworthyness both for gold and for personal IOUs:

    * whether a vendor of a bread accepts gold in payment depends on her belief of how creditworthy is that *gold* as payment to other vendors, for example to buy the flour to make the bread;
    * whether a vendor of bread accepts a personal IOU that says “30 minutes of babysitting on Saturday night” depends on how creditworthy is that *issuer* as to whether the issuer of the IOU will turn up Saturday night for 30 minutes as owed.

    Now the creditworthyness of the gold versus the babysitter is a matter of some difference as between a physical quantity versus personal quality; but both are ultimately based on the future ability of the gold to deliver the flour and the future ability of the personal IOU to deliver the babysitting.

    But the big difference between commodity-money and debt-money is that “fiat” issuance costs nothing for debt-money, but costs more or less the purchasing value for commodity-money. That is “seignorage” is rather easy with debt-money but is harder for commodity-money.

    Now seignorage for commodity-money has happened nearly as frequently as for debt-money, by the simple device of debasing the coinage; but this works only when there is an element of debt-money mixed in the coinage (the front value detaching from the commodity value).

    That is however still a big difference at least conceptually, between physical limits on issuance (non-“fiat” money) and purely legal ones (“fiat” money), which is different even if related to acceptance.

    «But bad theories of money enshrined in institutions could and did constrain spending as Bill said.»

    I don’t dispute that the spending was constrained, or that bad theories of money were used as figleaves, or that they were enshrined in institutions; I dispute that fixed rates happened *because* “bad theories of money” were “enshrined in institutions”; I think that the causality went the other way round.

    Because pretty soon as political will changed, the regime was completely rewritten. A few years after the “dollar shortage” became a “dollar glut” Nixon without permission from the IMF or following any exacting procedures described in any treaty just canceled abruptly that regime; after a period of confusion the political priority switched from exchange rates to wage rates, for political reasons, not because “[new] bad theories of money” were “enshrined in [new] institutions”. Except perhaps as the mechanics to support the new political choice.

    My argument is that nobody at a political level cares about theories of money per se, they care a lot about the politics of who gains and loses… And therefore which political metric matters.

    So fixed exchange rates, and in particular Bretton Woods, were political choices, fixing the price of gold was the goal, not a mistaken consequence arising out of a misunderstanding of how money works, and if that constrained spending, that was considered an acceptable price to pay for the sake of having fixed rates.

    Similarly now with the consequences of fixing the exchange rate of wages via CPI targeting, or sometimes even the CPI pretense is dropped and it is made clear that policy targets wage stability directly.

  20. Great stuff, Bill. It is a lot like being dropped down the rabbit hole once you “get it” but once you do get it, you cannot unget it. I wish it was easier to sell to progressives though because the enormous power for good a fiat currency brings should be unleashed. It’s to cry over when I see politicians who I’m reasonably sure want to do good arguing with rightists over the right way to do the wrong thing.

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