Four (4) Simple Facts that Prove Modern Monetary Theory (MMT)

Four (4) Simple Facts that Prove Modern Monetary Theory (MMT)

  1. Only the Gov can create ($, £, zł, ¥, etc.) ‘reserves’;
  2. It can create them endlessly;
  3. Only the Gov can destroy reserves from taxation (or convert them to other Gov token via bond sales); and
  4. 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.

A Progressive Job Guarantee and a Progressive Green New Deal **

When it comes to the systemic change progressives envision to meet the challenge of the climate crisis, whatever name we give to that set of policy options, you can be sure less progressives policy options will be wheeled out under the same name. When it comes to the Job Guarantee (JG) and the Green New Deal (GND) this is already happening.
 
 
MMT can help you distinguish a progressive Job Guarantee from a neoliberal Job Guarantee, and MMT can help you distinguish a progressive Green New Deal from a neoliberal Green New Deal.
 
 
The Job Guarantee will be a necessary, but far from sufficient, part of the Green New Deal. It is necessary because it puts the “justice” into “transition”. Although we can expect the JG it will be a minor player in terms of the number of job opportunities that will be created by the socio-economic shift, the JG will ensure the right to work, and will act as a macroeconomic price stabiliser.
 
 
Here are some of the characteristics you can look for in a progressive Job Guarantee. Consider it a red flag if any are missing, or skewed towards the neoliberal alternative.
 
 
A universal offer
A JG is available to any willing worker. It won’t be a “Just Transition” only for workers left stranded by the waning of the fossil fuel industry.
 
 
Permanent and federally funded
The JG is a permanent feature of the social safety net, and does not displace Newstart and other payments – people can opt into either one.
 
 
Locally administered
The JG is administered by local governments, registered non-profits, social enterprises and cooperatives. In this way, the JG creates meaningful jobs where the unemployed live (it doesn’t expect people to “move to where the jobs are”), and local communities are empowered to decide their own needs, which will expand the definition of paid work. The JG is an investment in individuals and regions.
 
 
Socially inclusive minimum wage
A JG is paid at the full minimum wage, with benefits such as sick leave and holiday leave calculated pro-rata based on the time worked. It includes all the protections enjoyed by other workers, such as safety and protection against unfair dismissal.
 
Voluntary participation
By retaining other benefit options (such as Newstart, DSP, Youth Allowance, etc.) people have a choice between the existing social safety net and enrolling in the JG, and can switch at any time without penalty.
 
 
Flexible and accessible
The JG offers options to those exercising their right to work, including work that is appropriate for the education, skill level and experience of individuals; part-time and flexible work arrangements for students and carers; sensitivity to the needs of at-risk youth, people who have recently left prison, or people with disabilities; on-the-job training and apprenticeship opportunities.
 
 
Within the Green New Deal, a progressive Job Guarantee is linked to sustainability measures such as designing activities that pollute less and use fewer exhaustible resources; including activities that perform environmental and regenerative services; and the benefit of localism (less dislocation, meeting community needs).
 
 
I believe shortening the working week should be evaluated in terms of human health and happiness, not ecological limits. This is to avoid the trap of arguing “climate change is taking our jobs” which is akin to the spurious argument that, “robots are taking our jobs”.
 
 
Currently, there is no shortage of stuff to be done, there is simply a shortage of paid stuff to be done, that is, of jobs. Shortening the working week for ecological considerations can only be effective if you are also monitoring and measuring the impact of human activity in leisure time, and supporting carbon-neutral or regenerative leisure-time options.
 
 
Here are some of the characteristics you can look for in a progressive Green New Deal. Consider it a red flag if any are missing, or skewed towards the neoliberal alternative.
 
 
– It puts government at the centre, particularly the federal government for nationalised solutions, and the local government for local decision-making. A GND will not obscure the role of government. MMT helps you to understand that the macroeconomic policy settings are crucial to achieving local goals. Too often, the new economy is held out as being a local solution. It can only be that if the aggregate solution allows it to be.
 
 
– It makes explicit the political dimensions of money. (Of course, it will not be distracted by political questions of affordability.) Money is seen as a public resource that can be mobilised for the public good. The politicisation of money is not silenced, that is, not de-politicised.
 
 
– It takes its cue from functional finance and includes progressive goals, such as the inclusion of Aboriginal communities; protection of all people from economic harm during transitions, such as workers conditions in supply chains for renewable technology; and protection of ecosystems. It seeks to measure local living standards and track policy impacts. It is not framed around meaningless goals such as increasing the GDP, or irrelevant goals such as maximum efficiency.
 
 
– It tells a story of abundance that is realistic, and not about climate denial.  It details how to have both human flourishing and care for the planet. It decouples a vision of abundance from old understandings about unlimited growth.
 
 
– It views “climate change as a public infrastructure challenge” rather than “a private market failure” to be dealt with by carbon pricing etc.
 
 
– It takes a regulation-based approach to a rapid reduction in carbon emissions.
 
 
– It recommends government investment in areas that are showing inflation, because demand is outstripping supply, such as, healthcare, education, housing, transport, and energy.
 
 
– It will include healthy fiscal policy design such as countercyclical measures and the management of credit expansion for policy objectives.
 
 
– It locks the financial sector out of the social and resources transitioning process.
 
 
– It entails rethinking fiscal and monetary policy – zero official interest rates, and an explicit reliance on fiscal policy for stabilisation, supported by the JG.
 
 
– It ends tax incentives driving speculative property investments.
 
 
– It increases and extends the state pension and phases out compulsory, tax-advantaged superannuation.
 
 
– It promotes a public banking option, or at the very least, a re-regulated banking system.
 
 
– It is unafraid to use capital controls to meet counter-productive capital responses, such as: if you tax oil, capital will sell it elsewhere; if you increase demand for raw materials, capital will bid up the prices of commodities, and rush materials to market in the most wasteful, energy-intensive way; if you require millions of square miles for solar panels and wind farms, capital will bid up the price of land.
 
 
– It delineates the role of fiscal (financial) aid to developing countries.
 
Conversely, a neoliberal approach to the climate crisis is built upon “market-based solutions”.
 
Climate change is regarded as a negative externality, which is easily fixed using a market-based approach. It re-orients a GND towards financial rather than environmental and social goals, that is, it financialises and privatises nature. You’ll recognise a market-based approach is in action when you hear a discourse of “cost versus benefits”, describing ecosystems as “services”, describing species in terms of the “goods” they provide, and referencing “natural capital”.
 
Market-based solutions objectify and commodify nature via mechanisms such as “value demonstration” and “payments for ecosystem services” (PES). This equates value with usefulness to humans and assumes that the value is equivalent to what people are prepared to pay. (How much are you willing to pay to have more butterflies?) Amongst other problems, “value demonstration” doesn’t take into account the ability to pay; the difference between ecosystem integrity versus public anthropomorphising; the selective extinction of unattractive species; and variations between individual preferences and community preferences.
 
Rather than straightforward government appropriations, market-based solutions require “indirect” financing of a GND, via mechanisms such as subsidised loans, equity stakes, carbon markets, carbon offsetting, and market trading.
 
Indirect financing creates longer and more complex chains of decision making; does not provide enough leverage over companies; reduces political oversight to lobbying private executives, and “pounding the table for returns”; allows multi-national companies to hoard intellectual property and keep species-saving research to themselves and sets us up to abandon valuable green projects because they fail the narrow test of profitability.
 
Inadequate solutions call for “net-zero emissions”. This does not mean reducing the amount of carbon pumped into the atmosphere. It means using technology and other instruments to offset or capture the same amount of carbon our society is creating. As long as we do enough offsetting and enough carbon capturing, our emissions can be allowed to keep on growing.
 
 
** These points have been taken from the writings of Mathew Forstater, Steven Hail, Bill Mitchell, Nathan Tankus and other MMT-oriented economists. Pardon my lack of quoting and footnotes.

Language is Power!

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!

 

Seigniorage and a Buffer Stock of Net Financial Assets

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?