On money printing and bond issuance – Part 1

There are continual Twitter type debates and Op Ed/Blog-type articles going on about whether MMT says this, or that, or something else. The critics are refining their attacks by hammering on about “printing money” and hyperinflation, and, more recently that MMT ignores ‘power’ (whatever that is). The latter leads them to conclude that MMT is thus a naive approach and is inapplicable to a political agenda aiming at changing things for the better. These debates (if you can call them that) are also a very American-centric sort of to and fro, which exemplifies the tendency of the US to think the world and all ideas stop at its borders. In this two-part series, I seek to clarify some of the points that are raised (not for the first time) (-:, which, in turn, demonstrates how poorly constructed these attacks. I know it is often said that attackers haven’t read the literature. But in these situations it is a fact. In part 2 tomorrow, I will also touch on why I think some MMTers are becoming defensive in the wake of these attacks. So, in Part 1 I consider the ‘money printing’ story. Specifically, is MMT just about ‘printing money’? The answer is obvious – profoundly no, but we need to understand where these types of allegations come from (which swamp!).

As an aside, I was in the US (San Francisco) in July 1995 at the time that the Srebrenica massacre was unfolding before our eyes.

The world press (and Australian headlines) were all about the disaster unfolding in Bosnia. But not the US press. I recall seeing it mentioned in a small column in the major newspaper on something like page 3 or 4 or something. The front page had a story about some animal rescue by a cop in Berkeley if I recall correctly.

That taught me a lot about US eccentricity.

I am from a very open country with respect to news and information – we have to be that way because we are so remote in distance. The electronic age has certainly closed the distance but the legacy of our isolation remains – we absorb all information and have access to it from all over the world on a daily basis.

So when US commentators (with PhDs) start batting on about something and it is clear they haven’t read more than a few US articles then it reinforces my view that they should get out more.

There are now seemingly two strands of criticism shortcuts coming against MMT.

First, we just talk about printing money and as everybody knows that leads to hyperinflation and therefore point proven – MMT is nuts and should be declared “clear danger to the economy of the United States”, which was the wording of the Congressional bill that proposed the US legislature should condemn our work.

Second, some progressives, who think they have the edge on understanding Capitalism, but have spent decades now (as a group) discussing identity-type issues independent of economic class (capital and labour), are now claiming MMT economists are to be ignored because we have no understanding or analysis of power.

Remember back on March 6, 2019, we read the headline – Larry Summers: Modern Monetary Theory is ‘grotesque’.

He was joining the gang of senior New Keynesians (mainstreamers) which included Kenneth Rogoff, Paul Krugman and a host of other financial market types like Larry Fink and central bankers like Jerome Powell and Haruhiko Kuroda, in the ridiculous ‘money printing’ narrative designed to discredit our work and maintain their elevated position in the hierarchy of public economics.

In that March 6 interview with Yahoo Finance, Summers spouted:

So I believe MMT is very much misguided, the premise that somehow you can always print enough money to cover all of your debts.

He elaborated that “MMT was to blame for hyperinflation in Latin American countries”.

The ‘print money’ story is now the short of Pavlov-shortcut – they think it is so clever – just say it and that absolves them from actually understanding what the body of work we have created is about.

They are used to treating the public with contempt because they have been part of a cult of sociopaths for decades now, and, as the movie = the Inside Job showed, they have also made a lot of money masquerading as experts while really just being tools of capital greed.

That movie reported a number of disgusting examples of the way in which the mainstream economists misused their academic positions to do paid-for work for business interests while purporting to be publishing independent academic research.

On Larry Summers, it presented the 2005 example when he confronted the then IMF chief economist at the Jackson Hole meeting, who was presenting a paper about the increasing risk of a financial meltdown and said “the basic, slightly Luddite premise of this paper to be largely misguided.” He went on to praise the growth of derivative financial instruments as positive “financial innovation”.

As the Atlantic story – The Comprehensive Case Against Larry Summers (September 13, 2013) argued:

Summers helped midwife a major series of policy errors dating back 20 years that led directly to what many economists now believe was the worst financial crisis ever

The article documents a series of blunders that Summers has made over the course of his career, for which he has continually “denied making any mistakes”.

On the other tack, we are getting a ragbag of progressives, Marxists, ‘sound-finance socialists’ and more – coming out banging on about how their irrelevance is really a sign that they are the only ones with the correct progressive take on capitalism and money.

We are bombarded with articles, Op Eds, conference papers from them telling us that they alone understand ‘power’ and that MMT economists are either hopelessly naive or conspirators with the Wall Street bankers to ensure the US remains the hegemon in the world.

In the last few months, I have been accused of being a fascist, an anti-semite, stupid, and a Wall Street sympathiser sometimes all in the one sentence almost – it seems.

Similar accusative labels are being place on my US colleagues and then some.

You couldn’t write this sort of stuff if you tried. But somehow they come up with it.

I wrote about this type of input into the debate in this blog posts”

1. The conga line of MMT critics – marching into oblivion (March 7, 2019).

2. Marxists getting all tied up on MMT (May 1, 2019).

One of these self-proclaimed leftists wrote in an article (which is now being touted by our critics as an eternal wisdom) that our approach is “simplistic” and that people who are attracted to our ideas are essentially duped because they are stupid.

He wrote that MMT says that:

… government spending NEVER has to be paid for and can be implemented with a mere stroke of the monetary pen.

All of the MMT authors he cited in his paper are US-based and largely write about US-centric issues.

Most of the MMT literature about small, open economies; development economies; capital flows and constraints; exchange rates and trade were ignored by him – and that was convenient to his purpose.

But his purpose is to claim that:

In particular the MMT advocates’ claim that progressive’s don’t need to discuss how “to pay” for their policies is misleading since, even within the strict confines of MMT theory, progressive policy advocates and politicians cannot avoid trade-offs and assessing priorities of their policies – that is, they cannot avoid discussing the opportunity costs of their projects and yes, even how to “pay for them …

The need to “pay for” our spending is a destructive diversion based on a dangerous misunderstanding of how our economies operate …

… this appearance of liberation and power is an illusion. Worse, it is a dangerous illusion.

The whole MMT journey to date has been to caution readers about the actual nature of constraints on government spending rather than the false constraints taught in economics courses around the world and wheeled out continually by self-serving politicians and lobbyists.

By showing there are no intrinsic financial constraints on such spending, MMT, in no way, is advocating a carte blanche.

Every resource that is currently in productive use cannot be used elsewhere – obviously.

Every idle resource has a number of possible uses – obviously.

We understand perfectly that one we get to full employment that there are likely to be “trade-offs and the need to prioritize spending programs cannot be avoided.”

Trying to suggest that this point is ignored by MMT writers is an absurdity.

MMT is not a regime

There are two responses that I make to these sorts of attacks.

The first is that these critics haven’t even got to first base (using a US-centric metaphor) because they all all start or end by implying that somehow MMT is a policy regime rather than an understanding of the way the monetary system operates.

The first fact that anyone should grasp when trying to work out what MMT is, is to aprpeciate that MMT is not a regime that you ‘apply’ or ‘switch to’ or ‘introduce’.

Rather, it is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.

It helps us better understand the choices available to a currency-issuing government and the consequences of surrendering that currency-issuing capacity (as in the Eurozone).

It lifts the veil imposed by neoliberal ideology and forces the real questions and political choices out in the open.

An MMT understanding means that statements such as the ‘government cannot provide better services because it will run out of money’ are immediately known to be false.

Such an understanding will change the questions we ask of our politicians and the range of acceptable answers that they will be able to give. In this sense, an MMT understanding enhances the quality of our democracies.

In this sense, MMT is agnostic about policy, bar its preference for an employment buffer rather than an unemployment buffer to discipline inflation.

In general, it makes no sense to talk about an “MMT-type prescription” or an “MMT solution”.

To make that MMT understanding operational in a policy context, a value system or ideology must be introduced.

MMT is not intrinsically ‘Left-leaning’.

A Right-leaning person would advocate quite different policy prescriptions to a Left-leaning person even though they both shared the understanding of how the monetary system operates.

In the simplest possible terms, MMT describes and analyses the way in which ‘fiat monetary systems’ operate and the capacities that a government has within that system.

Currency sovereignty requires a government to issue its own currency, floats it on international markets, and only issue liabilities in that currency.

Such a government has a monopoly over currency issuance. Here it is important to note that MMT distinguishes between ‘currency’ and ‘money’, a nuance that escapes most of these critics.

The task of such a government is to provision itself with real resources to deliver its socio-economic program.

It creates a demand for its otherwise worthless currency by requiring all tax liabilities to be extinguished in that currency.

The government spends its currency into existence through the purchase of goods and services from the non-government sector (so-called government spending) which provides the non-sector with the funds necessary to pay its tax obligations.

The consequence of this logical ordering of events (spending to fund taxation) is that currency-issuing governments do not have to ‘fund’ their spending and can never run out of currency.

Saying otherwise is as stupid as saying that a football game has to stop 3 minutes into the second-half because the scoreboard has run out of points to post!

It also means that a currency-issuing government can purchase whatever is available for sale in that currency, including all idle labour.

The appearance of idle labour, for example, is evidence that the government has not spent enough relative to its tax take – so taxes are too high and/or spending is too low.

In turn, this means that the unemployment rate is not a ‘market’ phenomenon or a choice of individuals (the mainstream dogma) but a political choice of government. The ideology of mass unemployment is thus exposed by an MMT understanding.

Further, a currency-issuing government is not like a household, which uses the currency and faces intrinsic and binding financial constraints on its spending.

The household analogy is popular in mainstream macroeconomics but provides us with zero understanding of what the capacities of the issuing government are. Unlike a household, the constraints on government spending are not financial but real – limited by the goods and services that are available for sale.

The core MMT developers argue that all currency-issuing governments enjoy monetary sovereignty as outlined above. We should not conflate the capacity to purchase available goods and services with some ability to provision an economy with adequate real resources.

Issuing one’s own currency doesn’t make a nation ‘rich’. A nation with limited access to real resources either locally or through trade will still remain materially poor even though it is sovereign in its own currency.

Sovereignty means the government can use its currency capacity to ensure the resources that are available are always fully employed in one way or another.

I emphasised this point again when I spoke to a great group in Sydney at the weekend.

The Money Printing story

Now lets look at this ‘money printing’ story a bit more closely.

The accusations are based on the flawed mainstream macroeconomics framework taught in most universities that juxtapose various ‘financing’ options for government spending and then makes deductions as to the consequences of those options.

Mainstream economists have crudely characterised or framed MMT within their own conceptual structure (typically the so-called ‘government budget constraint’ (GBC) framework) and imputed their own language when discussing MMT.

This is where the ‘printing money’ story comes from.

Mainstream economics starts with the flawed analogy between the household and the sovereign government such that any excess in government spending over taxation receipts has to be ‘financed’ in two ways: (a) by borrowing from the public; and/or (b) by ‘printing money’.

This framing therefore has three quite separate cases in relation to government spending:

1. Governments raise taxes which permit them to spend up to that level.

2. If governments want to spend beyond that level they have to find extra money:

(a) They can borrow the money from the non-government sector (issue debt) which pushes up interest rates (via the defunct loanable funds theory).

(b) They can instruct the central bank to ‘print money’ and put it into circulation which is inflationary (via the defunct Quantity Theory of Money).

So there are three types of government spending with different impacts depending on the type chosen.

This characterisation is not remotely representative of what happens in the real world in terms of the operations that define transactions between the government and non-government sector.

The GBC framework entered the mainstream literature in the 1960s when it was claimed that government’s had the same constraints as households. This was part of an emerging neoliberal push to reduce the scope for government intervention and laid the foundations of Monetarism.

The basic analogy is flawed at its most elemental level. Households must work out the financing before it can spend – it has to earn income, run down savings, sell assets or borrow.

The household cannot spend first.

A currency-issuing government can (must) spend first and ultimately does not have to worry about financing such expenditure.

The mainstream economists see that MMT statement and try to understand it within the flawed GBC framework.

So they interpret fiscal deficits as being typically damaging because they either drive up interest rates and ‘crowd out’ private spending that is sensitive to increases in interest rates or they become inflationary, depending on whether 2(a) or 2(b) is chosen.

And they might read somewhere that MMT economists point out that no debt needs to be issued to accompany a fiscal deficit and they frame that – because they construct everything fiscal within the GBC framework – as being about ‘printing money’.

Then, the GBC logic is applied and so MMT becomes a policy idea that wants the government to vicariously print money which automatically causes accelerating inflation because there will be “too much money chasing too few goods”!

Of course, reality is quite different to the way the GBC framework depicts the fiscal options.

There is only one type of government spending – where the relevant government body instructs a banker (usually a central banker) to credit some bank accounts. In some cases, cheques may be sent out but that practice is rapidly declining as the digital world expands its reach.

The inflation risk is embedded in the spending – how it impacts in goods and services markets.

And that risk isn’t particular to public spending. All spending carries the risk of setting of inflation.

In practice, many inflationary episodes have nothing to do with ‘spending’ surges. They arise from supply shocks or corrupt behaviour or cartel behaviour.

Issuing bonds to accompany fiscal deficits does not reduce the inflation risk. The bond purchases reflect an asset portfolio change – the funds were not being spent anyway.

If the bond holders subsequently use the income flows from the interest earned to increase, say, their consumption spending, then the government deficit will likely fall anyway due to the higher level of economic activity and rising tax flows.

If the higher level of activity threatens to push the economy beyond the inflation barrier then there are a series of choices the government can make, including reducing its deficit.

The conclusions are that:

1. Fiscal deficits that are not accompanied by corresponding monetary operations (debt-issuance) put downward pressure on interest rates contrary to the myths that appear in macroeconomic textbooks about ‘crowding out’.

2. The ‘penalty’ for not borrowing is that the interest rate will fall to the bottom of the ‘corridor’ prevailing in the country which may be zero if the central bank does not offer a return on reserves.

3. Government debt-issuance is a ‘monetary policy’ operation rather than being intrinsic to fiscal policy, although in a modern monetary paradigm the distinctions between monetary and fiscal policy as traditionally defined are moot.

4. Governments do not spend by ‘printing money’. They spend by creating deposits in the private banking system usually facilitated through the central bank.

5. Outstanding public debt is just past fiscal deficits that have not yet been taxed away. The reality is that the government borrows back some of the non-interest bearing currency it previously spent into existence. In return, it provides an interest-bearing financial asset.

Conclusion

A lot of issues covered today. Tomorrow, I will consider some of the implications of the ‘money printing’ story and discuss why the preferred MMT position is not to issue debt at all.

I will also consider the ‘power’ allegations.

That is enough for today!

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