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.


In Part 2, I will discuss these matters further.

That is enough for today!

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

This Post Has 19 Comments

  1. A finely-honed diagnosis of the causes and the exact nature of the EU’s – specifically but not exclusively those of the EZ – appalling shortcomings. It covers ground already previously covered by Bill (and Thomas Fazi) but none the worse for that. Indeed the story bears endless repetition, à la “old Chinese proverb” (re constant dripping of water wears-away stone).

    Its bearing on financial markets is (for me anyway) a novel feature and a fascinating one. Looking forward to Part 2.

    ” a counter stabilisation told…” should be “tool” I think.

    “the concept of money is ground in…” should be “grounded”

  2. A question is often asked about why our current crop of politicians are so poor. One answer is that “the best and the brightest”, to use a phrase from the days of JFK, go into finance. That many wish to know more about MMT suggests that there may be something to this answer, glib as it might sound.

    The brighter ones, it seems to me, see that they have a choice — stick with the clearly inadequate dominant narrative and possibly self-destruct when the next crunch comes, which may not be all that far away, or try to see the world the MMT way and survive and possibly survive well. Their financial ceiling may lower and they may have to put up with more, or stricter regulation, but I would have thought that a small price to pay for avoiding self-immolation.

  3. Off topic.
    On another forum site, someone disagreed with me.
    In the course of his/her attack they said 2 crazy things.
    1] That taxation is obviously theft.
    2] That taxes “cause” inflation.
    Go figure.

  4. Bill, do you think the insight these guys gain might actually be used to hurt the bigger picture? As in them using their knowlwdge to basically exploit that there are no “physical” limits to the policy of enriching the rich via QE-programms and the like.

    Altruism is certainly not a character trait that comes to mind when I think of the financial class. As for self preservation, I don’t think that matters much in a branch with a tendency th think three months ahead at best.


  5. Steve. What is that other forum site? I just might want to mix it up with the people there.

  6. Thank you for your commitment to keeping your insights and outreach public, Bill.

    Would you post an outline of what your talks to investment firms looks like? Surely they’re getting something a bit different than what they can google for free.

  7. Interesting dilemma: to educate, or not, the financial elite hoping some MMT ideas will get out and have a positive impact on our societies. It should be an interesting experience.
    In fact the top echelons of the financial elite are well aware of MMT. Jan Hatzius of Goldman Sachs (whom you mention) has clearly been aware of the power of MMT analysis for many years. The same can be said for Paul McCulley formerly of PIMCO. Both spoke at the Levi Institute conference in New York in April 2010 and were positively inclined to substantial federal government fiscal deficits and had no fear large deficits would cause an increase in interest rates or inflation. Hatzius also clearly used sectoral balances in his analysis.
    In subsequent years lower tier financial people did remain clueless for some time and low end profit opportunities could be exploited due to their ignorance. I would say that has not been the case for half a dozen years or so.
    Consequently I do not share HermannTheGerman’s concern that ill could come from the talks you give, Bill. The ill is already out there.
    In fact I think it would be beneficial if low level analysts (newspapers, financial blogs, investment analysts) were more clued in. I attended a conference in Montreal two or three yeas ago where the quite prominent chief economist of an investment management firm, and former provincial finance minster, clearly had no idea how a monetary economy worked and perpetuated the nonsense we commonly see in the media. I was quite stunned at how clueless he was. It would be good if that stopped.
    Still, in my opinion, it is the political sphere that matters by far the most at this stage. Until a political party is prepared to take up an MMT friendly discourse it will be difficult to make much progress. Here in Canada all our political parties are scared witless of anything that smacks of MMT. They even find mainstream deficit analysis worrying (i.e. that a constant ratio of debt, deficit/GDP is OK). At least they have lightened up on the discourse relating to imminent disaster caused by debt/deficits.

  8. Hi Hermann,

    “Altruism is certainly not a character trait that comes to mind when I think of the financial class”

    More like domineering and psychopathic is what Keynes observed.

    Best then (as he suggested) leave them to pursue their money-making lest they turn their energies to wanton cruelty.

  9. It wasn’t so long ago that Warren Mosler made millions of dollars in profit of the back of hapless currency traders that were betting that Italy was going to default on its Lira denominated debt. Enough said. 🙂

  10. Re “taxation is obviously theft” – a view held by ‘small government’ Libertarians.

    But I notice both Bernie Sanders and Elizabeth Warren have their different taxation policies “in order to raise enough money” – which they still think Is necessary, a view consistent with the MS – to fund the GND.

    They do not understand that the government can fund education and certain infrastructure, if the resources are available for sale (in the nation’s currency, *before* raising (or lowering) taxation.

  11. Hi,
    The site is Politics Forum —

    It would be nice to have more MMYers on my side, but there are already some.
    Right now a guy is saying that Japan has not had any inflation for 28 years BECAUSE the yen has been appreciating on the international market. He claims that this has caused a depreciating yen which has offset the inflation that the massive deficits would otherwise have caused. I see it as grasping for straws.
    In a reply he as much as said that he assumed that diluting the currency will always cause inflation, unless there is some other factor that offsets that, like the Petro-dollar, etc.

  12. Hi, Neil,
    I know that.
    Theft is defined as the “unlawful” taking of something. Taxes are by definition lawful.
    Libertarians want to redefine “theft”.
    I ask them if making a father pay child support or alimony is theft? And if making someone who damages another or fails to fulfill a contract pay (after he loses in court) is theft. They never have replied at all.
    If one is allowed to change the definitions of words to suit your argument then you can win all arguments. Just like if you can use false assumptions to prove a point you can prove anything is true. Economists do the latter all the time. Their whole set of proofs starts with some false assumptions.

  13. Keith Newman said:-
    Tuesday, July 2, 2019 at 7:48
    “… I was quite stunned at how clueless he was”.

    My own experience (in trying to engage with politicians) has been closely similar, and I was equally aghast! And think of Bill’s dialogue of the deaf with our very own UK shadow Chancellor John McDonnell.

    However, I think we have to come to terms with the fact that the human mind’s default option is “the household budget analogy”. It serves as an all-purpose reflex, enabling any actual *thinking* to be completely avoided. Most people, it seems, avoid *thinking* most of the time: intuitively they seem to feel that life is simpler and easier that way.

    Also most people are not at ease when asked to handle abstract concepts, and in self-defence resort automatically to “handy” analogies instead. Hence the household budget, the Swabian hausfrau, etc. And politicians as a species seem to me to be especially prone to that – maybe because sheer facility (aka bullshit) is too often rewarded in politics above careful thoughtfulness and sober-minded reflection?

    Those habits aren’t going to disappear: they’re endemic! (I don’t know about you but I’d hesitate to declare myself immune from them).

  14. Typo 🙂

    “Others claim that all the insights that MMT holds out come down to whether one **things** monetary policy is less or more effective as a counter stabilisation told than fiscal policy. “

  15. @Steve_American

    You might want to inquire of the “taxation is theft” crowd how a demand by the sovereign for currency which it issues (and over which it exercises a monopoly) constitutes theft?

    It’s a logical impossibility.

  16. Dear Andrew Leith (at 2019/07/03 at 12:27 pm)

    Thanks for the sub-editing duties here and elsewhere. Very appreciated.

    I did go to primary school but in those days I didn’t type as fast!

    best wishes

  17. I have been Facebook messaging Jim Chalmers MP, the new Shadow Treasurer, for several months about MMT and Job Guarantee. His initial response, back in September 2018 was:

    Really nice to hear from you, thanks for getting in touch. People raise MMT from time to time and I find the conversation interesting, and I try not to dismiss any genuinely-held ideas, but I’m not convinced. Richard Holden is an economist I have a great deal of respect for and his views aren’t a bad summary of mine, at https://theconversation.com/printing-more-money-isnt-the-answer-to-all-economic-ills-71334 . Job Guarantee also very interesting and I’m following the debate in the US fairly closely.
    Thanks again,

    In later correspondence, Jim said he’d “Check out” Bill’s work. Sadly, I’ve heard nothing from him for some time. I’ve just shared the links to Bill’s two blogs with Jim. Hopefully, he’ll read the blog and get back to me. 🙂

  18. If you can use false assumptions to prove a point you can prove anything is true. Economists do the latter all the time. Their whole set of proofs starts with some false assumptions

    The logical concern is the use of inconsistent assumptions; such as private savings good + public debt bad.

    The use of untrue assumptions, the investigation of the logical consequences of a proposition which happens not to attain in current reality, is perfectly respectable. The extreme example is proof by contradiction, a line of argument in which a proposition is assumed false in order to show it is in fact true.

  19. Bill, I notice that you’re aware of the language which came from Thomas Kuhn’s Structure of Scientific Revolutions – it’s two associated key concepts of paradigm shift and incommensurate language. You use the word incommensurate above. It appears to me that the difficulty MMT has in breaking through the “Conventional Wisdom” of only using monetary policy and repudiating fiscal policy to regulate the macro economy got set for reasons I’ve forgotten by Milton Friedman in the 70s? Further reflection suggests to me that the paradigm shift demanded by MMT has an encompassing scale that Galileo had with the church in his time and what the global heating paradigm has today. While “paradigm shift” are only two little words what they imply are massive changes to people’s authority, influence and standing in the polity! They have massive “skin” in the game and they don’t want the game to stop!! Bugger the general well being!!
    Another perspective which strikes me as similar to the difficulties you have encountered comes from my (loose) association with the school of political economy in the University of Sydney with which I’m an alumni though not in economics; actually in chemistry and physics. Several decades ago there was an enormous stoush between the political economists and the “mathematical” economists in the uni.
    So I infer there has to be something people closely tied to the existing paradigm has to lose should MMT gain traction. What do I think that might be? Well the dominant conservative interests in the polity have this objective:
    “Corey Robin (author of The Reactionary Mind), who is on the left, argues that behind the facade of [political economic] pragmatism there has remained an unchanging conservative objective: ‘the maintenance of **private regimes of power** ‘ (my emphasis) – usually social and economic hierarchies – against threats from more egalitarian forces.”
    Well MMT is for the “betterment” of the people (the political economy polity) generally so they would see any stimulus given to stop the macro economy going into funks, as horrors of horror **diluting** the value of their monetary wealth!
    Yes, no?

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