Four (4) Simple Facts that Prove Modern Monetary Theory (MMT)
- Only the Gov can create ($, £, zł, ¥, etc.) ‘reserves’;
- It can create them endlessly;
- Only the Gov can destroy reserves from taxation (or convert them to other Gov token via bond sales); and
- Banks have to settle in reserves.
These FOUR (4) simple facts are enough to make what MMT says, follow. People seem to far overestimate the extent to which claims about the economy are needed for MMT to be true. Those four facts alone make MMT indisputably true.
Language is powerful. We have come to believe certain things about our government because we have been fed a steady diet of metaphors that embed scary images in our minds. These analogies are all based around the image of an irresponsible person or business that gets into financial trouble, spending more than they earn.
Look at these common phrases and think about how they make you feel:
- Exploding budget deficit
- Mountain of debt
- Mortgaging our future
- Living beyond our means
- Spending is unsustainable
It all just sounds bad, right? These word images make us fearful or angry. But what if the underlying metaphor is actually wrong? Do you or I issue the nation’s currency? Do other nations save and trade in currency that I’ve issued? Of course not!
Our government issues the nation’s currency and is, therefore, nothing like a household or business. When there is a single supplier of something that serves the general public, what does that remind you of?
Think about a public monopoly like a water utility, an analogy first suggested by Warren Mosler and Matthew Forstater.
Picture a water utility that limited the supply of water only to what it measures coming out our drain pipes, keeping the amount flowing in and out of the city’s pipes exactly the same. Would we be happy that it was being responsible, or would we be upset that we didn’t have enough to drink or shower? What if we were saving water by filling up a swimming pool, or we were a beverage business that uses gallons of water every day to brew beer for export? It is completely normal for this city to need more water flowing in that what flows out the drains.
A failure to meet this demand for water that exceeds the amounts flowing out in the drain would cause massive problems for our city. Surely we would hold our public water utility accountable to make sure it is meeting the full demand for its water. It exists to serve all people, businesses and organizations that rely on it. Anything less is a breach of its public duty to service.
As the sole issuer of the Australian Dollar, our nation’s currency, the Australian government is like a public water utility that should always meet the demand for its product.
Now, let’s look at some new word images based on this metaphor and see how they make us feel. Nothing about the actual facts on the ground has changed, but our new perspective leads to a different understanding of the underlying issues at play.
- The government invested more currency into our economy than it taxed out this year (formerly “deficits”)
- Due to higher domestic savings levels and imports, the government increased its flow of currency into the domestic economy to maintain full employment (formerly “higher deficits”)
- Savings of Australian Dollars are at an all-time high – our currency remains in high demand (formerly “national debt reaches $XX trillion”)
- Parliament is studying the real resources needed and the impact on the domestic economy for a planned federal interstate high speed rail investment (formerly “where will the money come from?”)
Any metaphor has its limitations, but I trust you can see the stark comparison between the household budget and the public utility analogies. For those still struggling with the mental leap, let me paint a bit more of the picture.
- The government has a monopoly on the issuance of Australian Dollars – we’d go to jail trying to counterfeit them! In this analogy, they are the public water utility monopoly with an unlimited source of clean water.
- The water is, of course, the currency. Our government can never run out of money since it creates money on-demand, under the authority of Parliament. Money is not scarce!
- We can think of the utility’s pipes and pumping stations as the financial and regulatory systems that provide for the distribution of currency from the government to the households and businesses that need it.
- Drains and sewage pipes are like taxes – they remove currency that has previously been spent into the economy. Note the sequence – spending precedes taxing just like water additions precede drainage!
- Let’s say our water utility gave away free water to households and businesses that stored excess water – maybe to make up for evaporation or just as an incentive to store water for unknown reasons! That’s akin to our government paying interest on government bonds, which are just savings of its currency that has, again, already been spent into the economy.
We could extend this metaphor into other areas. There is a reason, we refer to the supply of currency as liquidity.
By now I hope you can see that this metaphor provides a very different way to describe the responsibility of our government’s fiscal policy. Should the water utility balance its water flows like a household or does it have a responsibility to provide for the needs of the whole city or state, factoring in the demand for water storage and the amount of water leaving in product sales? Does it make any sense to put a “water limit” on how much water the utility provides over and above what flows out the drains?
Yes, this presents a new challenge to government. It is easier to claim “fiscal responsibility” under the household budget metaphor simply by limiting the use of the currency to what we now see are arbitrary and harmful levels. But real fiscal responsibility for the currency issuer involves much more than this. They have a duty to account for imports and savings when determining how much currency the economy needs to maintain full employment and growth. Parliament clearly needs a different method to debate how best to use the currency. Just look at the results of our current model – sluggish growth and frequent periods of high unemployment. What we’ve been doing is simply not working.
We live in an age where our government’s fiscal activity disproportionately harms the weak. Imposing unnecessary austerity has become the norm under the pretence of market discipline, and the suffering that results is very real.
Government should seize this opportunity for reform, ending the harmful artificial budget limitations, and begin using its fiscal power to serve the people’s interest and invest in Australia again.
This has been a remix of Geoff Coventry’s article at Patriotic Millionaires for an Australian audience!
So previously we discussed the weasel word seigniorage and what it means in a free-floating fiat currency exchange system. It also invokes the quantity theory of money which is easily debunked. However MV=PY is an accounting identity, true by definition.
Scott Fullwiler goes into some detail here about Net Financial Assets (NFA) and the quantity theory of money.
What did you think?