Modern Monetary Theory in no way endorses “monetisation.” To the extent monetization is simply a name for quantitative easing (roughly, RBA purchases of long-term bonds), we either oppose it or find it only mildly effective and sometimes propose alternatives.
Whether it comes from Catallaxy, Rabobank or Saul Eslake, these ideas run rampant amongst the economics community. Allow me to repeat, Modern Monetary Theory in no way endorses “monetisation.” At best we only find it mildly effective and have proposed other ways of achieving the same goal.
An example of an early MMT work that specifically criticizes even the use of the word monetisation is Warren Mosler’s Soft Currency Economics II, a paperback that is not too expensive at used book sites.
First, we believe that entities other than Canberra choose the form of Australian government liabilities through their investment, saving, financial-trading, and other choices.
Regardless of the public’s choice of assets, our central bank, the RBA, buys and sells assets to get its chosen interest rate(s). Of course, interest rates other than the cash rate are determined by other actors. The action of “the markets” (including huge banks) for bonds and other debt securities most closely approximate an uncoordinated supply-demand process. Unless, of course, market manipulation dominates there.
Critics across the spectrum have been gathering that the unique idea of MMT (perhaps because of its name) involves attempts to “pump money” into the system. This process would then likely generate inflation but would allow higher federal spending without tax increases.
In fact, as former Bernie Sanders aide and MMTer Stephanie Kelton puts it in her terrific new popular book (for example, on p. 36), you might as well think of bonds and money as “yellow dollars” or “green dollars”—more or less the same, except one pays interest.
Another place to find a good critique of the idea that deficits “pump money” into the economy is The Scourge of Monetarism by Nicholas Kaldor. In the writings in that 1980s book, Kaldor sought to dissuade British policymakers from an earlier round of fiscal austerity.
What MMT does is explain how the federal spending process works always. It does not call for a change in a method of financing. Moreover, the always-existing method of increasing spending does not require tax increases unless there is a macroeconomic need for them—say to dampen aggregate spending and cool down the economy. Hence, there is nothing magical about the number zero for the federal deficit or deficit increases. The federal government indeed never “pays for” new spending the way households or Australian States or local councils do. Hence, worries about higher deficits as such should not slow our crises responses ever.
This is a remix of Greg Hannsgen, Ph. D, UMKC graduate, Levy Economics Institute Research Associate post. The original can be seen here.