Category Archives: MMT

Hamilton Holden Hutley Hound MMT

In April 2020 the Economic Society of Australia (ESA) held a webinar about the Australian Government’s fiscal response to the COVID Crisis. It included economists Steven Hamilton, Richard Holden, and Nicki Hutley facilitated by Shane Wright. Towards the end of the webinar, there was a Q&A, and questions were asked about Modern Monetary Theory.

As you will see we get the usual misinformation that its printing money; that QE is printing money; that it is printing money indefinitely and; there’s a Debt to GDP ratio limit (per Reinhart & Rogoff); as well as worry about the credit rating agencies; and the hyperinflation argument.


Nicki Hutley

Stephen and Richard will answer this question far far more theoretically than I will.
You know I’m following the debate interestingly and I love reading Krugman who’s just so into this and he’s very animated at the moment.

I like to call it magical monetary thinking. There are certain assumptions that you need to have for MMT to hold true; and one of them, obviously, if you look at Japan you could say well 200 percent Debt to GDP you know not not harming them.

There are a few things and there’s the Rogoff and Reinhardt study that sort of says when you get to a certain level of Debt to GDP it has an impact on your long-term growth for a start.

There’s also this assumption that everybody will that there won’t be some confidence effect, that rating agencies won’t come in and increase the price of your debt – that you can just keep wearing down the debt through growth and because growth is higher than the level of the interest rate and that is not always true. It might hold true for a while but it won’t hold true permanently. It’s a bit magical thinking to believe that we could suddenly, suddenly the world is completely different from everything that economic theorists have have held true for a long time.

[I’m] not saying that these theories don’t change over time but I’m certainly not convinced.

Steve Hamilton

Here’s all I’ll say as far as I can tell I had to ask someone what MMT was not that long ago.
to be honest with you as far as I can tell it’s a combination of two things. A set of things that almost every economist agrees with and then a set of things that almost every economist thinks are totally insane.

Right! So if we deal with the first group first it’s not news that there’s a thing called the inflation tax; like yeah of course we can fund anything we want by printing money that’s not news; you could do that but you’ll pay for it in inflation.

I think there is a set of MMT proponents that sort of it’s have it’s essentially an empirical question there’s a set of MMT proponents that think you can do it without an inflationary consequence and I think to me at some point inflation has to bind right otherwise you just print in infinite, infinite amounts of money and and we have to agree that some point inflation is going to bite.

So I kind of think we don’t need to think about MMT so much we can just say yes it makes sense the Reserve Bank uh is is is is doing its darnedest to keep buying bonds through QE right and in the short run we can get away with this printing money to pay for these kinds of assets without sparking inflation and I 100 per cent agree we should do that; but to do that infinitely and forever, I don’t know. I suspect Richard has a similar view.

Richard Holden

Let’s be clear QE is not MMT. And you know Phil (Lowe) was at pains to make that point yesterday that they’re buying on the secondary market they’re not just printing money they’re buying bonds. Right Japan issues bonds okay. The MMT folks say you don’t need to issue bonds you can just print money.

I think the way to think about that is the government’s balance sheets got a balance. What’s on the asset side the present discounted value of all future tax revenue that they can collect. What’s on the liability side? There’s bonds and there’s money. Okay now you can always issue more liabilities to cover liabilities but what happens if people think the market thinks you’re not being able to cover that at some point on the asset side with future tax revenues?

Well, the price of money falls – so what does that mean, it means inflation goes up right!? So that’s what’s sometimes known as the fiscal theory of the price level.


And the empirical evidence none of these MMT folks like it when you say Weimar Germany or Venezuela or Zimbabwe but you know try try France in 1981 under the Mitterand government that try
to put their feet their sort of toe in the water on this and inflation started getting out of control very quickly and had to reverse course or Germany under Gerhard Schroeder in 1998 same sort of thing

so um I think as Steve said the idea that
deficits that we can’t have like you know 80 per cent or 90 to use the Reinhardt Rogoff number Net Debt to GDP and some; there’s some magic number in which case it all falls apart that’s clearly wrong the idea that we can’t have a strong fiscal response is silly.

The idea that we can print money not issue bonds um and get away with it indefinitely that really is silly


Holden improves from his piece at The Conversation called “Printing Money is not the solution to all economic ills” and that is a genuine positive as it shows an evolution in his thought. I say he improves because unlike others he recognises that QE is not MMT. Unfortunately they all seem to be a little obsessed with seigniorage.

Please follow the links throughout this post as they correct the misunderstandings these economists have.

In fact, nothing described by any of these economists even resembles MMT. They would all do well to read the Explainer: What is Modern Monetary Theory?

Is Public Debt a Real Issue?

OK I just couldn’t help myself. I have to take issue with one of my favourite Australian economists yet again. A terribly nice guy.

This is a repost of a comment philosopher Tom Hickey wrote at the Economist in 2012.

First some abbreviations that are in use in the comment

NGDP = nominal GDP
MBS = Mortgage Backed Securities
QE = Quantitative Easing
ZIRP = Zero Interest Rate Policy

MMT proponents argue is that there is a difference between money created by fiscal deficits and money created by bank lending. When the government issues currency into non-government it does so through the Treasury directing its bank, the Fed, to credit non-government deposit accounts, e. g., to pay for fighter planes or to pay grannie’s social security. The transmission from reserves to bank deposits is direct and does not depend on bank lending. Moreover, since there is no liability corresponding to the assets created in non-government in crediting these bank accounts, deficit disbursements inject net financial assets into non-government. Conversely, bank lending nets to zero since each asset has a corresponding liability, so non-government net financial assets remain unchanged no matter how much banks lend.

The reason that NGDP targeting will not work is the flawed notion of the transmission mechanism from reserves to spendable bank deposits. When the Fed buys financial assets of whatever type, it simply increases bank reserves. The erroneous presumption about transmission is that that banks lend against reserves or lend out reserves. Neither is the case, as MMT points out. Rather, bank lend against capital based on demand from creditworthy borrowers willing to pay a rate that is profitable enough for the bank to risk it’s capital against. Increasing bank reserves does not spur banking lending and it does not affect the factors banks take into consideration in lending.

From this is simple to see why NGDP through increasing bank reserves, e.g., via QE, will not increase effective demand and spur increased investment to meet it. The transmission mechanism is bank lending, which is in abeyance, and increasing reserves will not increase it as the failure of QE has shown. Unless the Fed would buy real assets like houses instead of financial assets like MBS, it cannot not inject net financial assets into non-government, and there is no reason to expect an increase in effective demand due to increased bank reserves.The US is already at ZIRP and has been for some time. That has done nothing either. MMT predicted the failure of monetary policy — QE1 and QE2, as well as ZIRP, and QE3 will also fail unless the Fed would purchase real assets, which it is not permitted to do under current statute even under emergency powers, at least as I understand it. Time for fiscal policy to step up to the plate.

Now, John Quiggin calls himself an Old Keynesian but I find he is closer to a left-wing New Keynesian

As he said on RT:

…the only difference between the market monetarists and ordinary old keynesians as I see it is that they precisely treat nominal GDP as if it is a policy instrument when of course it is the target.

As we can see there is an immediate contradiction between Hickey’s second paragraph and Quiggin’s view. Perhaps that’s not the transmission mechanism he had in mind. So I asked:

Whilst we could agree with fiscal policy as indicated by Hickey above, how exactly would the monetary policy part work?

Remember the goal of monetary policy is to get you to change your behaviour with existing income contra fiscal policy which does it with additional income.

What we end up with is that monetary policy as conventionally defined cannot do nGDP targeting but fiscal policy can. That raises the question of why you would target nGDP when there are many better targets to use.

Or we could invoke the colloquial version of Goodhart’s Law:

When a measure becomes a target, it ceases to be a good measure

We could continue to discuss how government debt is functionally the net money supply and how debt management is the mechanism by which we adjust rates and more but I feel that avoids the most provocative and productive question.

Would it not be better to target real outcomes & real supports with fiscal policy? Some examples could be any of the Australian Real Progressives goals.

Modern Money’s Job Guarantee

Australian Real Progressives has mentioned this piece previously as a parry and riposte to nominal progressives in this piece but it deserves a full treatment of its own.

Modern Monetary Theory (MMT) is an incredibly complex body of work that studies macroeconomics. At its most elemental level, it says a currency is a social and legal construct. Currency issuers spend via an appropriation bill and are not financially constrained, though they are constrained by real resources. A monopolist of a currency can purchase whatever is for sale in the currency it issues, including idle labour. Thus unemployment is a political choice.

Within the body of work that is MMT it uses a Job Guarantee (JG) as a macroeconomic price anchor and stabiliser which I will explain below.

There have been claims that the Job Guarantee is workfare. It is not. It is a voluntary offer of a job to anyone, anywhere paid at a living wage with access to all the National Employment Standards just like every other worker.

The social policy setting of the JG is the policy manifestation of a technical concept to eliminate the tradeoff between unemployment and inflation. Current orthodox economists identify a link between rising employment and rising inflation and use unemployment to discipline the inflation rate. MMT economists say you can achieve the same end by using a ‘buffer stock of employed’ rather than a ‘buffer stock of unemployed’. This is what the Job Guarantee is.

The reason for the fixed-wage is the anchor. It sets the general price level. All prices within an economy are a function of government spending. The JG chooses to use employment as the anchor for the general price level. In the event of accelerating inflation, the cause of inflation can never be the wages of the JG workers because by definition they are purchased from the bottom and released from the pool when a better offer is made.

The JG is a small part of a broader full-employment agenda. Ideally, you want the pool to be as small as possible. It is not there to replace existing skills-based employment. It is there to sit alongside a national skills development framework to assist those that need it in finding future employment.

It ensures ’loose’ full employment as workers are drawn in and out of the JG pool rather than ending up unemployed. The automatic spending triggered by those entering the JG mean the government’s spending is directed when and where it is needed most – the unemployed.

The advantage workers have particularly those at the bottom who often hold little, if any, bargaining power is that the JG sets the floor for wages. Private employers would be forced to compete with what we as a society determine to be the absolute minimum socially inclusive wage.

A Job Guarantee is designed to create work to suit the individual. It is administered at the local level but funded by the federal government. The workers within this program are free to unionise and advocate whether something should be classed as a JG job. They are free to take part in determining what the living wage should be.

The work would be of public benefit and assist the JG worker in upskilling and finding work in the private or public sector. It is there to enhance the individual’s well-being and provide a public purpose. It is not used as a punitive system of punishment.

In a similar way to how the Commonwealth Employment Service worked, the unemployed person would have a case manager that held their CV and attempted to match that person to a job but rather than having that individual lay idle, they have the opportunity to maintain and enhance their skillset while seeking better employment working actively with their case manager to match them with an appropriate job.

The types of work that can be done are limited only by our imaginations. We could pay musicians to give workshops on band dynamics, pay them to create and assist in the organisation of community festivals, we can have arts programs where artists can paint murals in public spaces and aid others in their own skill development. Surfers could be paid to pass on surf life safety skills and teach others how to identify and avoid rips. They could take part in sand dune rehabilitation. There is massive potential to enlist thousands of unemployed in ecological restoration and plant trees along with other flora to mitigate against climate change while they undergo study in a related area.

Most importantly the JG allows the most disadvantaged in our society an opportunity to engage in paid employment which would lead to recognition in the community and vastly improved self-perceptions and a more prosperous society.

Jengis Osman is a union organiser based in the NT. He is a member of the NT- ALP Left and a research associate at the Centre of Full Employment and Equity. Twitter This first appeared in Challenge Magazine and is giving a fuller treatment on Jengis’s website Fighting Fish.

 

MODERN MONETARY THEORY ENHANCES DEMOCRATIC ACCOUNTABILITY

MODERN MONETARY THEORY (MMT) is a description or if you prefer, a systemic analysis of currency as it presently exists.

It reveals that taxation is important in driving demand for currency among other things, including the creation of unemployment. After all, there is no unemployment in a non-monetary economy.

Adam Triggs, a research fellow at the Brookings Institution and Crawford School of Public Policy at Australian National University (ANU) wrote back in 2019 that MMT ‘looks like a solution in search of a problem’. That is not the case. MMT shows that the new economic consensus on the monetary system is false and it also shows what tools are available in the modern money toolkit.

Triggs proceeds:

‘If its [MMT’s] stated objective is to achieve full employment, then it appears unnecessary.’ 

This simple sentence is misleading in the extreme. MMT is just what exists. It has a preference for sovereign currencies but can explain any monetary system.

The preference for sovereign currency is because it makes available more independent policy space, enhancing democracy. Triggs then defines full employment as an unemployment rate of five per cent. Oh, the horror! This relies on the mythical “non-accelerating inflation rate of unemployment” (NAIRU), which is sometimes transposed with the phrase “natural rate of unemployment”.

MMT defines full employment (as do all good economists) as frictional unemployment which is somewhere between one and three per cent with zero or next to zero underemployment. These are the people that are switching jobs or are ill. After all, there is no natural rate of unemployment, just as there is no natural rate of homelessness, no natural rate of poverty and no natural rate of illiteracy.

MMT shows that all spending is new spending and is effectively financed by “printing” money. However, the term “printing money” is pretty misleading in economic circles.

What economists usually mean, in fancy terms, is quantitative easing (QE) — the swapping of government bonds for cash. A plain and simple financial asset swap. Bonds are first bought with cash and when QE is implemented the bonds are swapped back for cash. The cash comes first. What MMT means is that all spending is new spending whether done electronically with keystrokes or with physical cash. So, no, QE is not MMT and nor did QE produce inflation anywhere as predicted.

Quantitative Easing explained simply.

MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.

Triggs talks about the world lending us our own currency which is just nonsensical. For that to be even plausible, lenders would have to get it from us first — the word “sovereign” does the heavy lifting here. Even then, unless in physical cash, it stays on accounts at the central bank. So how on earth is foreign savings in Australian dollars going to finance anything?

Triggs also delves into some new economic consensus falsehoods about rising inflation, interest rates and depreciating exchange rates — as if we do not have the tools to manage these. We do.

The closest thing to a genuine critique or critical analysis of MMT Triggs offers is an appeal to the authority of some “eminent” new economic consensus economists, including Olivier Blanchard, who is moving closer and closer to MMT.

Triggs tries again in 2020 to say MMT is just a rebranding of orthodox economics — what I have previously called the new economic consensus. This is simple to disprove as orthodox economics believes taxes and/or bonds finance government spending.

Stephanie Kelton, author of the bestseller The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, wrote a detailed operational paper that disproved that. The great irony is she was attempting to prove it.

In his 2020 article Triggs said:

For Kelton, the core propositions of MMT are that government budgets are fundamentally different from household budgets, that budget deficits are not necessarily bad, that governments should spend more when the economy is weak, and that governments should focus more on unemployment than budget deficits. She believes that the main constraint on government spending is inflation, that increasing the deficit need not make future generations poorer and that governments can’t run out of money if they have their own central bank, their own currency and no foreign debt.

If that all sounds right and logical to you, that’s because it is. Most mainstream economists have been making these points for close to one hundred years.

If Triggs accepts all this, he is approaching acceptance of MMT. However, to say most mainstream economists have been making these points for years is mistaken.

To quote the Australian developer of MMT, Bill Mitchell:

It is very strange – if all the major features of MMT were so widely shared and understood – how do we explain statements from politicians, central bankers, private executives, lobbyists, media commentators etcetera, etcetera that appear to not accept or understand the basic MMT claims?

Again, Triggs tries to counter with the inflation and/or hyperinflation argument against MMT — to which I repeat, MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.

Kelton herself reflects on this on Twitter in response to U.S. Senator Mike Braun:

‘If you get hyperinflation, then you didn’t follow the recipe. The recipe clearly defines the limits on spending.’

Kelton’s comment is a great counterpoint to relying on politicians to use the monetary system for anything beyond the public purpose. That is the reason we have democratic accountability and vote every electoral cycle.

This article was originally posted on Independent Australia on the 18th July 2021.
I improved the final paragraph.