Tag Archives: Randall Wray

Progressives should not be apprehensive about MMT. Here’s Why!

Often we hear about how Modern Monetary Theory is neither modern nor monetary – I think this is a simplistic view.

We heard it from RBA Governor Phillip Lowe and similar from the former RBA Governor Ian MacFarlane.  MacFarlane certainly has a better grasp of MMT than Phillip Lowe.

I said the following on John Quiggin’s review of the Mitchell, Wray, Watts textbook:

MMT uses the word ‘Modern’ in a polysemic way.  ‘Modern’ is intended as Keynes used the word in A Treatise on Money and since the closing of the gold standard window in 1971.

It is monetary as in it is about how money instruments (currency) shifts real resources (not to be confused with monetary policy) and it is a theory in the scientific use of the word – an evidence-based framework.

Economists often seem unable to break free of jargon or the specialised definitions of their profession. The average person is likely to hear the everyday meaning of words like “government debt”, rather than the economic definition, which in this case would be “net money supply”. We need economists to communicate more directly if they are to enhance our education of economic topics that are constantly misrepresented in the media. For example, people probably think of all the following as “monetary stuff”: my bank deposit; the government securities in my superannuation portfolio (bonds); the (“fiscal”) spending by the government of the day. Yet economists would want to point out important distinctions between these phenomenon. We need simple, clear language to understand these distinctions.

Currently, the Modern Money view is being challenged by other progressives as noted here and parried and riposted here.

It has also been targeted as having an “anti-tax” agenda by some progressives.  Sure they add a minor nuance to it as “movement MMT” but once again I think this is a misunderstanding which once again I hope I have clarified above.

To repeat what I have said previously. Governments can increase spending as much as they like with no need for an offsetting increase in tax revenue or non-fiscal offsets if there is little to no risk of politically unacceptable inflation. This is what these people mean and is perfectly compatible with ‘academic’ MMT and is neither anti-tax nor about weakening workers power, it is about courage, compassion, connection, hope, optimism and empowerment of workers – those currently working and those that are involuntarily not working that desire to do so.

It is a little US-centric but you can see it demonstrated quite successfully by Stephanie Kelton here:

From about the 26th minute

We only need to be better than today’s unemployment policy choice.

There are also many that seem obsessed with taxation revenue instead of building capacity.

“…so it’s usual to speak of public expenditure being paid for by taxes (or, better, tax revenues)…”

To say this is completely misleading to all except but perhaps well-heeled economists. Even as Quiggin wrote and intended to mean “…Taxes are the primary instrument by which resources are transferred from private to public expenditure…” or any other economist that uses a similar phrase.

Saying it is paid by tax revenues gives the wrong impression.

Reframing from money’s ‘how will you pay for it?’ to ‘how will you resource it?’ makes it much clearer and shows money itself is no object [also the title of a Stephanie Kelton presentation].

This itself exposes it is not about an increase in tax revenues but about access to resources and thus resource constraints (inflation) which is detailed informatively by Scott Fullwiler, Nathan Tankus and Rohan Grey at the Financial Times.

Again to repeat myself. MMT’s foundational point is taxes drive the currency. The point about not increasing taxes or tax rates from proponents is that it may not be required to raise them to use particular resources, especially if they are currently idle.

We constantly get comments about revenue/tax revenue as well but revenue raised is  like a budget outcome is determined within the economic system.  We use the fancy word ‘endogenous’ for that.   As Beardsley Ruml wrote many years ago Taxes for Revenue are Obsolete and Tax Policies for Prosperity and he makes a very persuasive case.

Revenue raising evokes false frames for ways thinking about the Australian economy.

 

 

John Quiggin’s Modern Money Evidence Based Framework Review

John Quiggin has very kindly reviewed Macroeconomics by William Mitchell, Randall Wray and Martin Watts, an undergraduate textbook based on Modern Money Theory (or Modern Monetary Theory).  It is a very good review.

Quiggin begins with the headline ‘Modern Monetary Theory: Neither modern, nor monetary, nor (mainly) theoretical?

Perhaps such a headline was designed to be clickbait, as the headline has a more negative tone than the review itself.

MMT uses the word ‘Modern’ in a polysemic way.  ‘Modern’ is intended as Keynes used the word in A Treatise on Money and since the closing of the gold standard window in 1971.

It is monetary as in it is about how money instruments (currency) shifts real resources (not to be confused with monetary policy) and it is a theory in the scientific use of the word – an evidence-based framework.

There are a few minor disputes I have with the review.  The review is very good up until this point:

“The second, which might be called ‘popular MMT’, or, more pejoratively, ‘vulgar MMT’, is a movement in which the statement ‘taxes don’t finance public expenditure’ is interpreted to mean that governments can increase spending as much as they like, with no need for an offsetting increase in tax revenue. This view was presented by pastor Delman Coates, speaking at the Third Modern Monetary Theory conference at Stony Brook University”

I think this is a misunderstanding. Governments can increase spending as much as they like with no need for an offsetting increase in tax revenue or non-fiscal offsets if there is little to no risk of politically unacceptable inflation. This is what these people mean and is perfectly compatible with ‘academic’ MMT.

Which brings us to “Anyone looking for a defence of the claim that we can have a Green New Deal, or some other large-scale expansion of public spending, without any increase in taxation, will be disappointed,” which is fairly reasonable but it depends on what we include in the GND, what we don’t spend on, the use and access to resources we already have. It is a little US-centric but you can see it demonstrated quite successfully by Stephanie Kelton here:

From about the 26th minute

Overall, John Quiggin has presented what I would consider a satisfactory review of the Macroeconomics textbook. As Quiggin suggests some of the positions presented by the text are perfectly aligned within various existing Keynesian paradigms.  However, an issue with mainstream Keynesianism is that it never provides the clarity that MMT has. Even from John Quiggin himself, on MMT and Russia he wrote:

“…so it’s usual to speak of public expenditure being paid for by taxes (or, better, tax revenues)…”

To say this is completely misleading to all except but perhaps well-heeled economists. Even as Quiggin wrote and intended to mean “…Taxes are the primary instrument by which resources are transferred from private to public expenditure…” or any other economist that uses a similar phrase.

Saying it is paid by tax revenues gives the wrong impression.

Reframing from money’s ‘how will you pay for it?’ to ‘how will you resource it?’ makes it much clearer and shows money itself is no object [also the title of a Stephanie Kelton presentation].

This itself exposes it is not about an increase in tax revenues but about access to resources and thus resource constraints (inflation) which is detailed informatively by Scott Fullwiler, Nathan Tankus and Rohan Grey at the Financial Times.

Anyone a little MMT literate will not deny the use of taxes in an MMT frame, its foundational point is taxes drive the currency. The point about not increasing taxes or tax rates from proponents is that it may not be required to raise them to use particular resources, especially if they are currently idle.

I hope this has reconciled the differences between pop-MMT and Academic MMT.  Those that follow Modern Monetary Theory share a view with Joan Robinson about mainstream Keynesianism which she called ‘bastard Keynesianism’.  Modern Money Theory is a coherent attempt at reconciling Keynes view and other ‘modern’ views in the operational macroeconomic paradigm we work in today.

The Value in Understanding Modern Money Theory (MMT)

When we reframe the issue of deficits and debt and look at it from the perspective of how government actions affect the private sector, we get a completely different perspective on the economy. This is what MMT economists try to do—to evaluate government (fiscal and monetary) policy actions based on their impact on the private sector, rather than on some vague metric of what is an acceptable level of deficits and debt.

– L. Randall Wray written testimony to Congress.

Randall Wray demonstrating that MMT differs in many ways from the current mainstream orthodox economics.  Wray has been attempting to educate and demonstrate this to economists and the public alike for decades.

What MMT Is Not… What MMT is…

Normally at Australian real Progressives we remix for an Australian audience but as this is a recent repost from multiplier-effect from L. Randall Wray and Yeva Nersisyan we did not wish anything to be taken out of context as it refers to specific U.S. events. Just replace Fed with RBA, President with Governor-General and the gist remains. We have dealt with most of these misconceptions  previously.

As MMT has been thrust into the spotlight, misrepresentations and misunderstanding have followed. MMT supposedly calls for cranking up the printing press, engaging in helicopter drops of cash or having the Fed finance government spending by engaging in Quantitative Easing.

None of this is MMT.

Instead, MMT provides an analysis of fiscal and monetary policy applicable to national governments with sovereign, non-convertible currencies. It concludes that the sovereign currency issuer: i) does not face a “budget constraint” (as conventionally defined); ii) cannot “run out of money”; iii) meets its obligations by paying in its own currency; iv) can set the interest rate on any obligations it issues.

Current procedures adopted by the Treasury, the central bank, and private banks allow government to spend up to the budget approved by Congress and signed by the President. No change of procedures, no money printing, no helicopter drops are required.

In the old days, governments just notched tally sticks, minted coins, or printed paper money when they spent, then collected them in redemption taxes and burned or melted down all the revenue. Today all modern governments use central banks to make and receive all payments through private banks. Government spending is still financed by money creation, and taxes destroy money—but in the form of central bank reserves. Instead of wooden sticks, we use electronic keystrokes, which the government cannot run out of. Bond sales merely swap one government liability for another, while paying off bonds reverses the operation.

Critics make a big deal of the separation of the Treasury (the government’s spending arm) and the Central Bank (the issuer of currency), claiming the latter is independent and may refuse to “finance” Treasury spending. The separation of the Treasury and the Fed does not alter government’s ability to spend. The Fed is a creature of Congress and an agency of the U.S. government. Liabilities of the Fed (notes and reserves) are obligations of the United States just like Treasury securities. Yes, different arms of the government issue these, but it doesn’t change the fact that they are liabilities of the United States.

As MMT explains, since bonds can only be purchased with reserves (the government will take only its obligations in payments to itself), the reserves must be supplied first before bonds can be purchased. It demonstrates how the Fed provides the reserves needed to buy the Treasuries even as it never violates the prohibition against “lending” to the Treasury by buying the bonds directly. The Fed has to ensure that funds to buy the bonds are available to safeguard the payments system, to achieve its interest rate targets and for financial stability considerations.

None of this is optional for the Fed. It cannot refuse to clear government checks. It is the government’s bank, after all, and is focused on the stability in the payments system.

Case in point: the Fed engaged in repo operations last September to add reserves to the system when Treasury bond sales and corporate tax payments left the market without its desired level of liquidity, pushing repo rates above the Fed’s desired levels. Any disturbance in the Treasury market will have ripple effects as many financial institutions have sizable holdings of Treasuries. Indeed, the Fed’s very first intervention during the pandemic was in the form of repo operations, citing “disturbances” in the Treasury market.

Government can make all payments as they come due. Bond vigilantes cannot force default. While their portfolio preferences could affect interest rates and exchange rates, the central bank’s interest rate target is the most important determinant of interest rates on the entire structure of bond rates. Bond vigilantes cannot hold the nation hostage—the central bank can always overrule them. In truth, the only bond vigilante we face is the Fed. And in recent years it has demonstrated a firm commitment to keep rates low. In any event, the Fed is a creature of Congress, and Congress can seize control of interest rates any time it wants.

Finally, even if the Fed abandons low rates, the Treasury can “afford” to make all payments on debt as they come due, no matter how high the Fed pushes rates. Affordability is not the issue. The issue will be over the desirability of making big interest payments to bond holders. If that’s seen as undesirable, Congress can always tax away whatever it deems as excessive.


We hope the Coronavirus will teach us that in normal times we must build up our supplies, our infrastructure and institutions to be able to deal with crises, whatever form they may take. We should not wait for the next national crisis to live up to our means.


In conclusion, MMT rejects the analogy that a sovereign government’s budget is just like a household’s. The difference between households and the sovereign holds true in times of crisis and also in normal times, regardless of the level of interest rates and existing levels of outstanding government bonds (i.e. national debt). The sovereign can never run out of finance. Period.

That doesn’t mean MMT advocates policy to ramp up deficits. For MMT a budget deficit is an outcome, not a goal or even a policy tool to be used in recession. There’s no such thing as “deficit spending” to be used in a downturn or even a crisis. Government uses the same procedures when spending no matter what the budgetary outcome turns out to be. We won’t know until the end of the fiscal year as the outcome will depend on the performance of the economy. And the spending will already have occurred before we even know the end-of-the-year budget balance.

MMT recognizes that the constraint faced by government is resource availability. Below full employment government spending creates “free lunches” as it utilizes resources which would otherwise be left idle. Unemployment is evidence that the country is living below its means. A country lives beyond its means only when it goes beyond full employment, when more government spending competes for resources already in use. Full employment means that the nation is living up to its means.

The most important lesson we must learn from this crisis is that the ability of the government to run deficits is not limited to times of crisis. Indeed, it was a policy error to keep the economy below full employment before this crisis hit in the belief that government spending was limited by financial constraints. Ironically, the real limits faced by government before the pandemic hit were far less constraining than the limits faced after the virus had brought a huge part of our productive capacity to a halt!

We hope the Coronavirus will teach us that in normal times we must build up our supplies, our infrastructure and institutions to be able to deal with crises, whatever form they may take. We should not wait for the next national crisis to live up to our means.

Repost: Five (5) Things To Read To Understand Modern Money (MMT)

This is a repost of the original Five (5) Things To Read To Understand Modern Money (MMT) that has since been treated and edited and appears on RealProgressivesUSA.com

There is ‘much ado’ in the media, from business and economic commentators, about Modern Monetary Theory. Everyone from Adam Triggs to John Quiggin to Michael Pascoe and Richard Holden and even Andrew Leigh seem to have something to say.

Anyone that wishes to comment on Modern Monetary Theory is best advised to go to a primary source of the Modern Money developers. These include Australia’s own Bill Mitchell and Martin Watts, as well as many scholars from the University of Missouri-Kansas City, Bard College in New York, and other institutions. The full list has grown to be quite long, and this could never do a comprehensive list justice, but those that should be viewed as a primary source include Warren Mosler, Randall Wray, Stephanie Kelton, Pavlina Tcherneva, Mat Forstater, Scott Fullwiler, Fadhel Kaboub, Rohan Grey, Raul Carrillo, and Nathan Tankus.

A number of simple articles and social media threads are out there to clear up some perceived confusion about Modern Money. None of the commentary below is intended to replace over 25 years of academic work, which can be found at the scholarly institutions.

The first is 20 Simple Points to Understand Modern Monetary Theory by Warren Mosler. Mosler has published several books, explaining these further in mostly simple terms, but grasping the full intent of these points is essential to understanding how today’s Modern Money works.

Next, Scott Fullwiler elaborates on the differences between currency creation and the expenditure of currency. This nuance is frequently overlooked in discussions of Modern Money. Fullwiler shows the effect on central banks and the interest rates determined by central banks.

Thirdly, there are a number of Frequently Asked Questions that I have researched. They are questions commonly asked by those who are discovering Modern Monetary Theory for the first time. These include links to the Modern Money scholars’ accessible works, and links to financial commentary in the media for further reading, on any particular question that anyone may desire to delve.

Rohan Grey continues this list, with mischaracterizations and misconceptions of Modern Monetary Theory. Grey dives deep into how Modern Monetary Theory is applicable to ALL countries, its relationship to the role of institutions, and how it affects economic behaviour and its relationship to the law.

Fifth and finally Raul Carrillo addresses some other typical criticisms of Modern Monetary Theory. Carrillo demonstrates that Modern Monetary Theory is rooted in legal, sociological, anthropological, historical, and cultural foundations. Modern Money can offer insights into what we generally deem to be beyond monetary & fiscal policy. Ideas about labour, banking, development, ecology, inequality, trade & payments have consistently been part of Modern Money thought.

These simple references are to allay any source of confusion, with what media commentators are calling Modern Monetary Theory compared to actual Modern Monetary Theory. It is a comprehensive body of knowledge that is a synthesis of chartalism, credit money, Godley’s stock-flow consistency, functional finance, endogenous money, Minsky’s financial instability hypothesis and the work of Marx, Keynes, Kalecki, Veblen and post-Keynesian and institutional thought.

The textbook Macroeconomics by Mitchell, Watts, and Wray is for those who would like a more scholarly introduction. It is the textbook of the future.