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How to discuss MMT without discussing it – BIS style

On October 13, 2019, the Bank of International Settlements published a paper – Exiting low inflation traps by “consensus”: nominal wages and price stability – (which was based on a speech one of the authors was to make in late November at a conference in Colombia). The reason I cite this paper is because it talks about Modern Monetary Theory (MMT) – in pejorative terms, without really knowing what MMT is. But the most interesting aspect of it was the admission that the mainstream theory that they use to set up the ‘straw person’ they tear down cannot explain real world events. The BIS unwittingly admits that the mainstream macroeconomics really is adrift and the analytical frameworks that arise from it (DSGE etc) are incapable of explaining real world developments. So I thought that was worth documenting.

How to discuss MMT without discussing it – BIS style

The paper is about how nations that are trapped in what they call “the low inflation trap” (who would have thought!) can escape that state and push up inflation rates to the levels targetted by central banks.

If you think about it, the logic demonstrates how far removed from anything reasonable the mainstream narrative has become.

We have a situation these days, where central banks set some arbitrary level of inflation that that defines their policy target.

Then because governments run such contractionary fiscal stances, which combine with the institutional realities that governments set in place through legislation and regulation to suppress the capacity of workers to enjoy real wage rises (such as, attacks on trade unions), to suppress any inflationary pressures, the central banks start getting antsy that their ‘targets’ are not being met.

What they should be railing against is the labour wastage that all this is causing, the rising poverty rates, the precarious work, the ‘gig’ economy, the lack of action on climate change, the degraded public services and infrastructure, and all the rest of it.

But all they seem to want is to meet their inflation target.

And when you think that the austerity and real resource wastage is justified by the mainstream because they claim that fiscal policy excesses have cause inflationary biases which have to be rooted out of the system.

But now they want inflation rates to rise.

A very confused lot operating within a very confused and defunct paradigm.

The BIS paper is another input into the dialogue that is recognising that the mainstream reliance on monetary policy as the counter-stabilising policy tool has not worked – as was obvious to anyone who understands the way the system operates from day one.

But the resistance to recognising paradigmic failure is intense among mainstream economists so they have had to work out a way to save face while slowly jettisoning their rigid views about monetary and fiscal policy.

Some refuse to acknowledge failure.

The BIS paper, though, reflects the shift going on in the profession, that is motivated by a desire to stay on the right line of history.

An unkind rendering of what is going on is summarised by the ‘rats deserting the sinking ship’ syndrome.

The basic contention of the BIS paper is that:

As of today, monetary policy has been more or less left to stabilise inflation on its own. Central banks have put in place an extremely accommodative stance for an extended period of time. As political economy conditions evolve, this role should be progressively substituted by rebalancing the macro policy mix with a more expansionary fiscal policy. More importantly, social partners and governments control an extremely powerful lever, ie the setting of wages at least in the public sector and potentially in the private sector, to re-anchor inflation expectations near 2%.

Which, of course, represents a major shift from the New Keynesian consensus that has dominated economic policy over the last 30 or 40 years.

Effectively, the BIS is now advocating pushing up business costs via money wage increases so that firms then pass the increasing costs on via price rises so that the inflation rate rises to their target levels.

They also claim this process is “less uncertain than alternatives … reversible … [and] … seems preferable to … modern monetary theory (MMT) that has been proposed recently.”

Okay, so what is this MMT “that has been proposed recently”?

The BIS writes that:

Given the likely side effects of keeping low interest rates for too long on financial stability, and the chances that these effects will have diminishing returns, some old and new proposals to lift inflation have emerged.

That is the case, for example, with modern monetary theory.

Well, as one of the original developers, this doesn’t resonate at all.

Our work has never been about developing policies “to lift inflation”.

Even the underpinning or implicit motivation in that ambition is antithetical to our work. The BIS is clearly stuck in paradigm that privileges the idea an inflation target above the current low inflation rates is the major aim of policy and anything that can be brought to bear now that forces a convergence between these targets and the actual rate are to be entertained.

And, further, the claim that MMT is a set of “proposals” that would impact on the price dynamics in different nations is not remotely descriptive of what our work represents.

This is what the BIS say about MMT:

MMT sees currency as a public monopoly for any government, irrespective of issues of credibility and confidence. Following that reasoning, the sovereign could use money creation to achieve full employment through a straightforward financing of economic activity. The obvious risk of inflation can be addressed subsequently by raising taxes and issuing bonds to remove excess liquidity from the system. The major underlying assumption is that of “seignorage without limits”. A government that issues its own money cannot be forced to default on debt denominated in its own currency. As commentators have pointed out (Summers (2019), Krugman (since 2011, but more recently 2019)), MMT poses significant problems. It would undermine the complex set of institutional and contractual arrangements that have maintained price and financial stability in our societies. Moreover, numerous experiments in the history of hyperinflation in AEs and mostly in developing countries show that, while outright default in a country’s own central bank currency might be avoided, the value of domestic assets including money could be reduced to almost zero.

1. It is fact, that for a currency-issuing government the “currency is a public monopoly”. Only the US government issues US dollars and so on.

2. Whether there is “credibility and confidence” does not alter that fact.

3. Government spending always involves “money creation” – every day, every month, every year. When a government procures a large military contract it is creating ‘money’ (although I prefer not to use that term because it leads to ambiguities).

When a government pays a public sector worker each week it is creating ‘money’.

4. There is an inflation risk involved when any component of aggregate expenditure – household consumption, private business investment, export revenue, and government spending – increases.

There is nothing particularly unique about the inflation risk associated with government spending.

If any component of spending drives total spending growth faster than the productive side of the economy can absorb – which means produce real goods and services in response – then there will be price pressures.

That absorbtion capacity in the economy is not binary – it doesn’t just go from being able to absorb to not being able to absorb.

Different sectors in the economy might reach full capacity at different points in time and depending on how significant they are for movements in the overall price level, demand-pull inflation could start to accelerate before full capacity in all sectors occurs.

So to hold out that there is an “obvious risk of inflation” arising from government spending is a biased rendition of what MMT is about.

5. MMT never says that “issing bonds to remove excess liquidity” would be a possible solution to an accelerating inflation.

It is clear that the BIS authors have not the slightest grasp of what MMT is about.

When they say MMT is “seignorage without limits” they are trying to reduce and absorb our work back into the flawed mainstream framework.

The concept of seignorage goes back to medieval times times and is often tied in with the so-called “Great Debasement”, which referred to the period after the ascension of Henry VIII in 1509 when the silver metal content of the currency (coins) was steadily reduced over the next 50 years to create metal ‘wealth’ for the monarch.

The debasement strategy was also deployed by French monarchs.

The way it worked was outlined in the 1997 paper from the Federal Reserve Bank of Minneapolis – The Debasement Puzzle: An Essay on Medieval Monetary History.

Essentially, valuable metals (silver and gold) were brought to the mints, which were “under direct control of the sovereign” but “run as businesses by private entrepreneurs”, by sellers, and “the mint retained a fraction of the metal – a charge known as seignorage.”

By increasing the so-called “minting volumes”, the sovereign could increase the revenue they personally enjoyed from creating the gap between the cost of producing the coins and their legal tender value.

This process thus describes a situation where “the difference between the value of money and the cost to produce and distribute it” (Source).

The concept of “monetary seigniorage” stems from these early insights applicable to commodity currencies.

The 1992 paper from the Federal Reserve Bank of St. Louis – Seigniorage in the United States: How Much Does the U.S. Government Make from Money Production? – explains how mainstream economists attempt to extend the medieval concept to apply to a fiat monetary economy.

They say:

… the revenue from money creation is called “seigniorage.” Unfortunately, this term has been subject to a variety of interpretations in the literature.

A study this area, quickly concludes that there is no easy translation from the ‘revenue’ sovereigns took as part of the conversion of valuable metals into coins to what might apply to a fiat currency system with private banks creating ‘money’ as credit.

The 1992 paper confines the concept to “the revenue accruing to the government and, therefore, on the creation of monetary base rather than the creation of deposits by private depository institutions.”

The reason mainstream monetary economists wish to continue using the concept is because it is central to their claims that government deficits are inflationary, especially if there are no bonds issued.

The idea reflects the flawed view that somehow the government is financially constrained in its spending and must impose an ‘inflation tax’ on the non-government sector if it chooses to deficit spend without raising funds from bond sales to the non-government sector.

The ‘tax’ arises because of the alleged link between expansion of the monetary base and the acceleration of prices, all linked causally via the monetary multiplier.

None of the mechanisms that are invoked to support the causal ideation are applicable to a fiat-currency issuing government.

I have written many blog posts that untangle each of the alleged causal steps.

Please go to the blog posts under the category – Debriefing 101 – for more detail.

MMT does not claim that there are limitless opportunities for a currency-issuing government to transfer ‘real’ value (embedded in the goods and services it buys) from the non-government sector to the government sector.

Everytime the government credits a bank account in the non-government sector as part of a procurement contract or a direct employment arrangement it is transferring ‘real’ value.

If the spending pushes up the price of the goods and services being sought for public use then the real value per dollar spent declines.

That is no different to a household buying goods and services as it seeks to transfer ‘real’ value from a shop owner to the household. It can also create a decline in ‘real’ value.

That is the point about there being inflation risk in all spending.

There is a ‘real’ limit to spending. That is core MMT.

The BIS has clearly not understood that and is thus content to produce a gross misrepresentation of what our work is about.

Which is scandalous really given its status as a major public institution funded by national central banks.

The BIS claim that “MMT poses significant problems” follows their reading of two Op Ed articles (Summers and Krugman).

All the alleged problems are related to the erroneous claim that government deficits are inflationary. That is the only card they think they have to play in these situations.

There is a massive dissonance in their paper – they start by acknowledging that the massive expansion of central bank balance sheets following the on-going QE purchases have not created any inflation impetus.

But then move on to criticise MMT as being inflationary – in the sense that they associate MMT with governments spending via central banks buying up the governments’ bonds.

It is a tough gig to make sense of that contradiction.

They rightly acknowledge that a “government that issues its own money cannot be forced to default on debt denominated in its own currency” but still claim that that doesn’t stop hyperinflation.

Well the two are not linked.

Hyperinflation is typically related to supply-side constraints.

In, say, Zimbabwe’s case, Mugabe could have been running fiscal surpluses and the hyperinflation would have occurred.

Please read my blog post – Zimbabwe for hyperventilators 101 (July 29, 2009) – for more discussion on this point.

And if governments choose to run deficits without matching them with bond-issuance, then the inflation risk of the spending does not fall.

The bond purchase decision is rarely a choice between spending the funds on consumption or other goods and services or buying the bond.

It is typically and overwhelmingly a portfolio choice about how best to manage wealth.

So selling bonds does not typically impact on non-government spending although the subsequent interest payments might given they are non-government income.

Hyperinflation would only occur of the government continued to drive spending growth beyond the capacity of the economy to absorb by producing goods and services.

That continued violation of the real constraint would have to be massive and maintained for some time for hyperinflation to arise.

No responsible government acts like that.

I checked the reference list provided at the end of the BIS paper and there is not one source that has been published by an MMT economist mentioned.

Their sole account of the huge body of MMT literature – both academic and Op Ed/Social Media – is the spurious attacks in the media written by Larry Summers and Paul Krugman, who can hardly hold their heads up high in the light of the some of the rubbish they have written and said over the course of their careers.

But the point is often made. If one wants to write a critique of something then it is only reasonable to actually see if what is claimed to be the body of work matches what the authors of that body of work actually write.

The BIS rendition of MMT is thus a massive fail.

But the BIS do trash mainstream macroeconomics – unwittingly

There was something interesting in the paper that they seem to have glossed over or not realised was massive damaging to the macroeconomics that they were using to criticise MMT.

The BIS paper discusses a number of instances where policy makers have been able to alter the course of inflation.

After discussing an Israel case, they write:

This notion of mental and institutional roots of inflation strongly echoes the “low inflation mindset” that the Bank of Japan invokes to explain why Japanese inflation does not respond to slack in the labour market as it would in “orthodox” models of inflation (Kuroda (2018)). The argument runs that the mindset of Japanese households and firms has developed over several years of very low inflation and deflation. This would explain why the qualitative and quantitative (QQE) monetary policy adopted in 2013 succeeded only in lifting Japan out of deflation, but fell short of bringing inflation to its 2% target.

Notice the “this would explain” reference.

The ‘this’ in this case is not a variable that would appear in any New Keynesian macroeconomic model (DSGE or otherwise).

Think about that for a moment.

All the claims in the paper against MMT – which are about how government deficits not matched by bond-issuance would lead to hyperinflation – are based on economic models that do not include variables capturing “the mindset of … households and firms”.

They are based on a priori assumptions of human behaviour that no psychologist or sociologist would recognise.

They are based on frameworks that do not recognise ‘culture’ and ‘practice’ or habits etc, which arguably, drive our individual and collective behaviour significantly.

So in the Japanese case, the mainstream theory (used in the MMT critique by the BIS) always predicts hyperinflation given the scale of the QQE program conducted by the Bank of Japan.

But that hasn’t happened.

And they cannot accept it is because the economic theory is incorrect and inapplicable.

So they have to dodge by claiming some special case mitigates the situation – an ad hoc anomaly.

The import of all that is that their theory cannot be relied on. Every case might become ‘special’.

The whole ‘box-and-dice’ has no applicability and should be disregarded.


The BIS paper is a classic example of ‘straw person’ argument.

But the most interesting aspect of it was the admission that the mainstream theory that they use to set up the ‘straw person’ cannot explain real world events.

I will write more about ‘culture’ in further blog posts.

That is enough for today!

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

This Post Has 16 Comments

  1. Do economists not care that all other disciplines have a HARD rule that you can’t base all your argument on Secondary Sources?

    All other disciplines understand that basing your argument only on secondary sources allows the discipline to wander off into the woods of group think.

    If you view economics as a vast functional conspiracy to help the rich get richer then you can see the for economics the relaxing of the rule against total reliance on secondary sources is not a bug, it is a feature. It allows group think to dominate the discipline. If finding the truth is NOT the goal then facilitating group think is a good thing.

    That finding the truth is not the goal of mainstream economists is obvious to all that have an open mind. The fact that mainstream economists ignore the real world data when testing their theories proves it.

  2. The bond issuance to prevent inflation is classic monetarist thinking. The cannot let It go. They cannot grasp that central banks don’t cause hyperinflations and cannot prevent them.

  3. Couldn’t you sue the BIS for publishing false information? Or can their claims be debunked by an academic paper so they’d have to retract?

  4. Because they are in the group that want the status quo to continue.

    If a governments are stopped from running a deficit, then it can’t spend money on roads, schools and other infrastructure. The group can then privatise these assets – and banks can create their own credit to let investors buy these assets and run them as rent-extracting monopolies.

    Wall Street, Frankfurt and London will be the allocator of real resources. The group want it to be privatised in a way that will generate profits for the new owners, along with interest for the bondholders and the banks that fund it; and also, management fees. Most of all, the privatised enterprises should generate capital gains for the stockholders as they jack up prices for hitherto public services.

    Paying 40% more for energy than in 2015, change energy to any topic you like as the rentier class cash in.

    Bank International Scandals – representing the rentier class and it will not change because foreign policy demands it stays exactly the way it is.

  5. Derek,
    Certainly seems like that. If the BIS and its friends can keep imposing the fallacy that money grows on rich people, then they can keep their influential place in the game. Otherwise, if they can’t be the monopoly suppliers of money, they can try to volunteer themselves as monopoly suppliers of Credibility and Confidence. If they can convince the other players that Credibility and Confidence are good to use as chips in the game, then BIS and its friends can keep on playing.

  6. ‘The right side of history’. Could this be their view of what the right side of history is? If they think that this is what they are doing, they are deluded. What a mess.

    What the BIS is doing with MMT is what economists tried (and mostly succeeded) to do to Keynes’ work. Because Keynes didn’t quite get it right, this strategy worked for many years, though Hicks rejected it toward the end of his life. We have to hope that we don’t have to wait that long this time and that the strategy will backfire sooner rather than later.

    The BIS statement is the biggest load of incoherent bullshit I have read since Ed Davey came out with his permanent surplus crap. And that wasn’t that long ago. Not only don’t the BIS have the slightest grasp of what MMT is about, they don’t seem to have the slightest grasp of how the real system works, unless they are lying, working with an alternative agenda.

  7. Does the world actually need the BIS at this point in time? The original purpose of that institution became obsolete in 1932.
    This recent gibberish just sounds like further attempts to baffle brains with BS; protecting what should have been shut down long ago.

  8. “…MMT poses significant problems. It would undermine the complex set of institutional and contractual arrangements that have maintained price and financial stability in our societies.” Bingo. There, in a nutshell, is the primary source of opposition–indeed, virulent hostility–to MMT. While some who advocate for MMT see it merely as a clearer lens through which to view macroeconomics (and it IS that, to be sure), others (both friends and enemies) grasp intuitively that MMT is much, much more: a lens which not only clarifies but undermines, if we so desire, the entire neoliberal edifice (social, political, economic, intellectual, even spiritual). To view money as merely a vehicle for collective human agency, to be created and spent at will to better the human condition and restore environmental health, is, frankly, MUCH more revolutionary than anything even the great Marx put forward in his communist vision. One would have to go back to the most fundamental insights of the world’s great religious traditions–the brotherhood/sisterhood of all humanity and what the Jains and Schweitzer expanded into reverence for life itself–to point toward the extraordinary possibilities that MMT opens up for the future of our race and planet, possibilities limited only by available resources, political will, and human imagination.

  9. In my opinion the key idea of the paper is to ” anchor inflation expectations near 2%”. The author still operates within a framework of rational expectations and a single agent maximising the flow of discounted utility over time. Only in this framework a rational agent would pay attention to inflationary expectations changing from 1% to 2%. Otherwise, honestly, who cares? But somehow the same rational agent does not care about the estimated increase in global temperature by several degrees over the next few decades and beyond. I haven’t seen too many rational agents abstaining from driving cars, flying planes or running air conditioners. Would they change their consumption patterns based on the change in inflationary expectations?

    Even worse, the population of Australia consisting of identical rational agents maximising their flow of discounted utility over time has elected the “coal-ition” on the promise of strictly maintaining the status quo and digging out even more coal so that the forecast climate change becomes a realised expectation. This clearly demonstrates where we are in terms of “rationality”.

    Obviously the whole thing about inflationary expectations is a red herring. They need to say something dramatic because they think that real interest rates have fallen below the mythical “natural rate of interest”. The story about inflation is about engineering negative real interest rates as negative nominal interest rate would only lead to asset bubbles and so-called capital flight. But the secular stagnation is not about low inflation it is about social distribution of the income. While New Keynesians believe that the problem of the global economy is the real natural rate of interest falling below the zero threshold, rendering monetary policy impotent, we know that the system does not operate that way. It would be insane (unless we believe in the old story of globally falling rate of profit) to say that the marginal efficiency of capital is negative. It is not.

    The current point of effective demand is determined by the fact that the poor have not enough income to spend while the rich have no idea how to spend all their income. Anchoring inflationary expectations at whatever level won’t change this situation in a significant way. Spending more money by the state appears to be one of the possible pathways in restoring a more healthy distribution of income as it will reduce the coercive power of the corporations on the labour market. Obviously there are also other problems, linked with financialisation and globalisation. But this is the one which can be tackled locally.

    Unless we clearly demonstrate that the whole pseudo-scientific modelling framework based on rational expectations has very little to do with the reality, New Keynesian sages will keep telling us (and advising the ruling oligarchy) that all we need is to re-tune our expectations by implementing seventeen steps programs and walking backwards whatever pathway was chosen in the 1980s. The seventeen-steps program may be a baby step in the right direction but it is absolutely not enough.

    I suggest a two-step program. Tax the stock of wealth of the rich to force the redistribution of income (this is what Kalecki meant by taxing the capital) and start building a publicly owned infrastructure for storage and transmission of energy based on decentralised solar and wind technology.

  10. by the way bill, if the grapevine hasnt already got this to you,

    richard holden from the conversations has said he would be willing to debate you.

    again more throw away line about mmt in his responses to his latest article, and getting the cart before the horse in his citing of zimbabwe, weimar germany , mitterand in the early 80s etc etc.

  11. Dear Mahaish (at 2019/12/31 at 9:59 am)

    Thanks for your comment and all the best for 2020.

    I would rather sort my sock draw than to ‘debate’ a fraud like Richard Holden. Life is too short to deal with irrelevant characters like him.

    best wishes

  12. dear bill,

    you have a sock draw,


    wish i was that organised,

    my socks seem to be on an adventure to wherever they please,

    merry new year

  13. Bill, I have been following MMT since 2012 or 2013. At that time I thought minimum wages caused unemployment, and MMT helped me see there was much more to the picture, politically speaking.

    It is frustrating, not that there is disagreement, but the absolute failure of people on all sides to really appreciate MMT arguments or perspective.

    I tell people MMT presents a more accurate ontology of finance, that is rooted in nuanced analysis of political realities. What most MMTers call “operational reality”, I prefer to call “political realities”, because you can make any convoluted description of “operations”, you like, but there is always a political reality behind it…

    Mainstream is tied to the neutrality of money and their theory of competitive interest rates. I like to ask people “how much wealth can you store in your garage?” You can fill your house with gold, but the truth is, without large scale coordination of macro resource management, emergency prepping and hoarding is useless. Governments are essential to coordinate resource issues, otherwise people would fight or starve.

    Competitive interest rates theory is wrong for many reasons. Many consumption activities only offer transient benefits, and don’t have long term effects for good or ill. People promoting competitive interest rate theory, often don’t have a good appreciation for how to build a healthy society, and how to properly account for what activities really build wealth. Without government, wealth would be much less stable, and the total wealth capacity would be much smaller. When government refuses to fulfill its accounting role, it puts a downward pressure on all balance sheets, and increases the competitive pressure across the economy. You have done a good job explaining why crowding out is a myth, this is just the specific argument I like to make in that regard.

    But at it’s core, there is a deeper fallacy embedded in the interest rate dogma. Investors and finance people inherently understand, that shares of equity cannot make a financial institution insolvent, and not only that, it’s price adjusts fairly and dynamically according to the changes in value of a private company. But they fail to understand that sovereign debt with sovereign currency can eliminate all solvency risk and runaway loss of control over pricing. Measuring corporate value as a market cap and not by share price helps highlight the actual balance sheet changes, but they fail in applying this same basic logic to sovereign debt and sovereign currency. Furthermore, they fail to understand that all financial operations fundamentally involve exchanges of equal value, and so are not inherently inflationary or deflationary, without considering larger resource issues going on.

    You have been tireless, and do a good job of explaining the basics. I rented the MMT Macroeconomics textbook on amazon, and enjoyed it, but there is still a lot of room for improvement. It reads a little bit like an essay, which is not bad, but I expect it will improve overtime, and offer more depth on specific topics. I would like to see more on banking and international trade specifically, but maybe I will get more out of it by reading through it again.

    It may be a little silly of me to offer my understanding of MMT to one of the original people studying and building up the theory, but I wanted to at least share how it has transformed my understanding of finance, and that I am also equally baffled by the utter failure to understand this by the mainstream.

  14. Great post Bill. The BIS has long be cognizant of mainstream weaknesses but are unfortunately stuck in a Neo-Austrian mindset. But things are absolutely changing, ref recent FT editorials arguing for more activist fiscal policy

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