Why the financial markets are seeking an MMT understanding – Part 1

One of the shifts I have observed in the last year or so in the way that Modern Monetary Theory (MMT) is being discussed in the public domain and the type of speaking invitations I am receiving is a growing interest from large financial market entities, who have not bought into the visceral, knee-jerk attacks from the populist academic type economists (Krugman, Summers, Rogoff, and all the rest that have jumped on their bandwagon). I spoke at a few workshops some years ago where economists from the large investment banks were the main audience and it was clear that they, in the main, appreciated what MMT was about. It is clear the characters that have to deal with putting funds at stake are keen to understand how the monetary system actually operates rather than how the mainstream macroeconomists pretend it operates – a pretense that advances particular ideological interests. What is also coming out more clearly is that the response from the mainstream is revealing a dissonance that they cannot seem to manage in any coherent way. We have seen statements from mainstream macroeconomists dismissing MMT as just ‘printing money’ and proposing Zimbabwe-like disasters. Others claim that they knew MMT all along and so there is nothing new. Others claim that all the insights that MMT holds out come down to whether one thinks monetary policy is less or more effective as a counter stabilisation told than fiscal policy. All statements attempt to simplify our work down to the level of irrelevance or downright crazy. Other interventions, such as the recent statements from the Bank of Japan Governor border on the surreal – ‘we are not doing MMT’ – well one doesn’t ‘do MMT’ anyway. But an MMT understanding provides a remarkably accurate depiction of what has been going down in Japan for nearly 3 decades – a depiction that the mainstream macroeconomists is incapable of providing. It seems that now, the financial markets are starting to get this point and seeking more engagement with MMT (if my invitations are anything to go by). This engagement is not without issues though. This is Part 1 in a two-part series discussing this topic. Part 2 will come tomorrow.

This coming Thursday, I am in Sydney talking with a large investment funds firm about MMT.

I recently did an interview (published June 19, 2019) – MMT – In Conversation with Bill Mitchell – with a firm that provides “educational programs for Australian superannuation funds and insurance companies, with a focus on investment strategy and governance”.

I will follow up with more presentations to that group later in the year.

In September, I will be talking with some of the largest investment funds in Europe and Britain (and the Globe).

I know some of my American MMT colleagues are doing similar presentations.

So it is clear that there is growing interest within the financial market community to learn about MMT and to go to source for the information, which means they will get a reliable understanding.

The Bloomberg article (April 4, 2019) – Wall Street Economists Wade Into the MMT Debate in a Big Way – discusses the way in which “Modern Monetary Theory is getting validation from some Wall Street economists”.

They quote Goldman Sachs chief economist Jan Hatzius, who I met about 13 years ago at one of those functions I referred to in the introduction. He has always understood our approach.

He told Bloomberg that in relation to MMT “we think its proponents make a couple of points that are both correct and important”.

Bloomberg wrote that:

Hatzius also said that in recent decades, it’s been buildups of corporate or household debt rather than public borrowing that triggered financial crises — echoing an MMT argument that when governments run deficits, they’re typically allowing private actors to accumulate assets

You will not find that reasoning in any mainstream macroeconomics paper. More about which later.

This attention within the financial markets is in contrast with the proliferation of ‘cheap’ articles – usually entitled something around ‘Everything you need to know about MMT’ – which then proceed to discuss anything but MMT with quotes from the likes of Larry Summers or some other attention seeker.

So, on the one hand, I think this growing interest is a good sign given that these entities carry influence in the political debate – money talks as they say.

I think there is something to be said for people of influence being educated in a sound MMT understanding – which is not to say I support the sort of influence they exert.

However, on the other hand, I realise their motivation is not purely benign – a thirst for knowledge etc. These entities are about profit making and will seek out anything that helps them achieve those goals.

So for me, as an educator, the challenge is avoiding becoming another paid consultant in that process.

I want them to understand our work but I don’t want to be part of their profit-making process. It is not an easy task.

I often get E-mails from portfolio managers asking me what I think about this or that. I avoid giving any specific commentary that I know will help them determine some particular investment strategy over another.

But I see an advantage in fostering dissonance within the mainstream economics profession – to expose the myths that are pumped out by the dominant paradigm in my profession, which undoubtedly leads to poor policy outcomes that damage the well-being of so many people.

The mainstream economists hold out a vision that they understand how ‘markets’ work and that MMT is some crazy left-wing cult.

My current co-author, Thomas Fazi tweeted recently (June 29, 2019) that:

According to @Investopedia, #MMT is “a radical set of ideas supported by a group of left-wing economists and activists”.

That’s ridiculous. Don’t they know that socialists and radical leftists stand for fiscal prudence, sound money and debt reduction?

But if the ‘markets’ develop a firm MMT understanding then it will further undermine the credibility of the mainstream macroeconomics that is taught in universities around the world and dominates economic policy making.

One way in which this can occur if the large ‘market’ entities start to articulate ideas and briefing notes that expose the myths of mainstream macroeconomics.

That is why I agree to speak to these organisations.

And it is clear that more briefing notes are coming out of these entities that are consistent with that mission.

There are essential MMT insights that the public should grasp, which they will not learn about if they study within a mainstream economics program.

First, the concept of money is ground in the legal structure of a nation.

I will be releasing a new video in the coming week as part of the – MMTed – initiative, where we delve into the most basic and fundamental aggregation in the monetary system – the relationship between the Government and Non-government sector.

What is the challenge for a currency-issuing government?

The question facing such a government is how to provision itself so that it can introduce socio-economic policies that will achieve its goal of advancing the well-being of the local population.

The task of provisioning is relatively easy to understand.

All the essential productive resources such as people, buildings, transport equipment, port equipment, telecommunications, skills, are currently located in and owned by the non-government sector.

The task for government is to transfer those resources into the public or government sector so that they can be deployed to produce goods and services that advance the mission of the government and the nation.

It can do that by force (slavery, internment camps) but no-one in their right mind would endorse that.

So it has to do that using its currency capacity and this is the beginning of the money story or the currency story.

The question then is why would the non-government sector use the otherwise ‘worthless’ currency of the government?

Well the legal structure legislated by the government decrees that the non-government has to extinguish their tax obligations using that currency, and they cannot do that until the government spends it into existence.

That is a basic insight – we pay taxes but they do not fund government spending.

See this blog post – Taxpayers do not fund anything (April 19, 2010).

Understanding this is important because it changes the narrative about what we can expect our governments to be able to achieve on our behalf.

We immediately perceive that the ideas that mainstream economics pump out that our governments are financially constrained are false and if this new awareness becomes the norm, then our democracies become enriched – politicians have to defend their positions more transparently and their ideologies (who they want to transfer riches to) become more exposed and obvious.

Further, an MMT understanding allows us to identify risk more clearly in relation to the plethora of financial assets that are available. We understand that debt liabilities issued by currency-issuing governments carry zero credit risk – it is highly unlikely that any such government would default for political purposes.

They certainly have no financial reason for ever defaulting – unless they have borrowed in foreign currencies. An MMT understanding makes it clear that governments should never engage in such borrowing.

This, in turn, exposes the flawed nature of many so-called research papers coming out of the academy that seek to show that public debt is dangerous because some governments have defaulted.

These papers never work with consistent samples – they blur governments that borrow in foreign currency, with governments that peg their currencies or operate under gold standards, with governments that do neither.

Mainstream economics doesn’t teach us to appreciate the fundamental incommensurate nature of such comparisons. And, as a result, the research results produced are largely just fake knowledge – meaningless drivel.

Clearly, the financial market players will benefit from appreciating these differences.

This also allows the debate about the Eurozone, for example, to be seen in greater clarity.

It is quite obvious what has been going on despite the political statements that the European Commission might make. The latter clearly has an interest in spinning whatever is going as being consistent with the legal structures defined by the Treaties.

It also wants the fiscal rules specified under Stability and Growth Pact and subsequent iterations (Fiscal Compact, etc) to have operational meaning in its dealings with the 19 Member States. These rules are a principle coercive weapon to enforce the neoliberal, corporatist ideology that the European Commission exemplifies.

The problem it faces is that its flawed architecture – not replacing the surrender of fiscal sovereignty at the Member State level with a properly designed European-wide fiscal capacity – has left the monetary system vulnerable.

That vulnerability was exposed during the GFC.

The solution they have stumbled into – as mass unemployment and increased poverty rates threatened the very existence of the system – is to turn a blind eye to the ECB funding fiscal deficits (in violation of the no bailout clause in the legal structure).

So we have this curious position where the ECB is keeping the system afloat by becoming a fiscal agent at the system-wide level – which is the role played by a currency-issuing government but having to inflict conditionality on the Member States it keeps solvent – in the form of enforcing the Commission’s fiscal rules.

The system carries on with devastating real impacts on well-being.

In effect, the ECB has become the fiscal authority that the Delors Commission denied was necessary and subsequent dealings between the Member States (particularly the rivalry between France and Germany) have refused to create.

But an MMT understanding shows that trying to marry this fiscal capacity with fiscal rules that restrict it will deliver outcomes that are far removed from anything that is reasonable – especially from a progressive perspective.

This sort of insight is crucial for appraising risk among competing financial assets.

In Part 2, I will focus on some specific matters that mainstream macroeconomics gets wrong and has consistently done so and which an MMT understanding gets right.

These are issues that bear directly on the viability of the financial system and the clarity of understanding of what the dynamics of financial system are likely to be.

For example, we will learn how to understand how fiscal deficits impact on the non-government sector and expand the net financial assets in that sector and how fiscal surpluses do exactly the opposite.

An MMT understanding does not lead to conclusions that deficits from currency-issuing, national government do not matter. This is one of those popularised myths that the attackers are propagating because they think it will finish MMT off forever.

The smartest operators in the financial markets are those who know otherwise.

Only the less educated financial market players have bought the spin from the mainstream economists that ranges from deficits are typically not desirable to they should be avoided at all costs.

Financial market operators should never be joining lobbies that proclaim the deficits are bad and should be avoided. Quite the contrary.

We will also discuss how misunderstandings engendered by mainstream macroeconomics has led investors down dead-ends into loss-making positions.

And more.

Conclusion

In Part 2, I will discuss these matters further.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.