Tag Archives: Warren Mosler

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.

Mosler’s Modern Money White Paper Remixed

Ahead of the Sustainable Prosperity Conference in Adelaide (Jan 10-12), it is worth looking at what Modern Money is again.

This is a remix of the Modern Money White Paper by Warren Mosler. The original can be found here.

Modern Money White Paper

The purpose of this white paper is to publicly present the fundamentals of MMT.

What is MMT?

MMT began largely a description of monetary operations, which are best thought of as debits and credits to accounts kept by banks, businesses, and individuals.

Warren Mosler independently originated what has been popularized as MMT in 1992.  And while subsequent research has revealed writings of authors who had similar thoughts on some of MMT’s understanding and insights, including Abba Lerner, George Knapp, Mitchell Innes, Adam Smith, and former NY Fed Chief Beardsley Ruml, MMT is unique in its analysis of monetary economies, and therefore best considered as its own school of thought.

https://www.scribd.com/document/35432615/Soft-Currency-Economics

http://moslereconomics.com/mandatory-readings/what-is-money/

What’s different about MMT?

MMT Alone Recognizes that the Australian Government and its Agents are the Only Supplier of That Which it Demands for Payment of Taxes

That is, the currency itself is a simple public monopoly.

The Australian government levies taxes, payable in Australian dollars.

The Australian dollars to pay those taxes can only originate from the Australian government and its agents.

The Australian dollars to purchase Australian Treasury securities can only originate from the Australian government and its agents.

The economy has to sell goods and services to the Australian government or borrow from the Australian government, or it will not be able to pay its taxes or purchase Australian Treasury securities.

Ramifications:

  1. The Australian government and its agents, from inception, necessarily spend or lend first; only after that can taxes be paid or state securities purchased.

This is in direct contrast to the rhetoric that states the Australian government must tax to get Australian dollars to spend, and what it doesn’t tax it must borrow from the likes of China, and leaves the debt to our grandchildren.

MMT thus recognizes that it’s not the Australian government that needs to get dollars to spend.  Instead, the driving force is that taxpayers need the Australian government’s dollars to be able to pay taxes and purchase Australian Treasury securities.

  1. Crowding out private spending or private borrowing, driving up interest rates, federal funding requirements and solvency issues are not applicable for a government that spends first and then borrows.   

http://moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/

How Are You Going to Pay for It?

The Australian government, for all practical purposes, spends as follows:

After spending is authorized by Parliament, the Treasury instructs the RBA to credit the recipient’s account (change the number to a higher number) on the RBA’s books.  

For MMT, the Money Story Begins with a State that Desires to Provision Itself: 

  1. The state imposes tax requirements in the form of financial obligations.
  2. Consequently, goods and services are offered for sale to get the funds required to pay the taxes.

MMT recognizes that taxation, by design, is the cause of unemployment, defined as people seeking paid work. 

  1. The state can then buy those goods and services.
  2. Taxes can then be paid.
  3. If people, on average, want to earn more than just enough to pay taxes, goods and services will be offered for sale in sufficient quantity to obtain those extra dollars.
  4. State spending in excess of taxes — deficit spending — provides those dollars to be saved.
  5. The public debt equals the dollars spent by the state that haven’t yet been used to pay taxes.
  6. After the state has spent those extra dollars, Treasury bills, notes, and bonds can then be purchased, which deplete the accounts containing the dollars the state has already spent.
  7. Payments by the Australian government are added to exchange settlement accounts of member banks.
  8. When securities are purchased, the RBA debits exchange settlement accounts and credits securities accounts.
  9. When interest on the public debt is paid, the RBA credits reserve accounts.

How is the Public Debt Repaid?

When Australian Government Securities mature, the RBA debits the securities accounts and credits the appropriate exchange settlement (reserve) accounts. Interest on the public debt accrues to the securities accounts and the RBA credits exchange settlement (reserve) accounts to pay that interest.

There are no taxpayers or grandchildren in sight when that happens.

 What is the Relevance of MMT Today?  

The MMT understandings put policy options on the table that were not previously considered viable.

Interest Rates

MMT recognizes that a positive policy rate results in a payment of interest that can be understood as “basic income for those who already have money.”

MMT recognizes that with the government a net payer of interest, higher interest rates can impart an expansionary, inflationary (and regressive) bias through two types of channels — interest income channels and forward pricing channels.  This means that what’s called “tightening” by increasing rates may increase total spending and foster price increases, contrary to the advertised intended effects of reducing demand and bringing down inflation.  Likewise, lowering rates removes interest income from the economy which works to reduce demand and bring down inflation, again contrary to advertised intended effects.

MMT understands that a permanent 0% policy rate is the base case for analysis for a floating exchange rate policy.

MMT understands that with a permanent 0% policy rate asset prices reflect risk-adjusted valuations, and do not “continuously accelerate” as presumed by the term “asset price inflation.”

The MMT understanding of interest rates is at times in direct conflict with the understandings of central banks and the large majority of academics.  We see those “mainstream” views as at best applicable to fixed exchange rate regimes, but in any case not applicable to today’s floating exchange rate regimes.

http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF

http://moslereconomics.com/wp-content/uploads/2007/12/Exchange-Rate-Policy-and-Full-Employment.htm

Inflation

Only MMT recognizes the source of the price level.  The currency itself is a public monopoly.  Monopolists are necessarily “price setters”.

Therefore:

The price level is necessarily a function of prices paid by the government’s agents when it spends, or collateral demanded when it lends.

In a market economy, the government need only set one price, letting market forces continuously determine all other prices as expressions of relative value, as further influenced by institutional structure.

http://moslereconomics-kg5winhhtut.stackpathdns.com/wp-content/uploads/2018/04/Tcherneva_MonopolyMoney_2002.pdf

http://www.levyinstitute.org/pubs/wp_864.pdf

The Job Guarantee

Residual unemployment is caused by the government not hiring all of those that its tax liabilities have caused to become unemployed.  That is, it’s a case of a monopolist — the government – restricting ‘supply’ which in this case refers to net government spending.

Current policy is to utilize unemployment as a counter-cyclical buffer stock to promote price stability.  Another policy option is for the government to use an employed buffer stock, rather than an unemployed buffer stock, to promote price stability.

The Job Guarantee is a proposal for the Australian Government to use an employed buffer stock policy by funding a full-time job for anyone willing and able to work at a fixed rate of pay.  This wage becomes the numeraire for the currency – the price set by the monopolist that defines the value of the currency while allowing other prices to express relative value as further influenced by the institutional structure.

The Job Guarantee works to fight inflation more effectively than the current policy of using unemployment to fight inflation, as it better facilitates the transition from unemployment to private sector employment, as private employers don’t like to hire the unemployed.

It also provides for a form of full employment, and at the same time is a means to introduce minimum compensation and benefits “from the bottom up,” as private sector employers compete for Job Guarantee workers.

http://moslereconomics-kg5winhhtut.stackpathdns.com/wp-content/uploads/2019/02/Full-Employment-AND-Price-Stability.pdf

“The 7 Deadly Innocent Frauds of Economic Policy”

https://drive.google.com/file/d/0B_uw3TKux24yeDRqVmFjaTdodjFqcV9HTTkyRkZYb2JOa0d3/view


If all this looks familiar, you may remember them from 20 Simple Points to Understand MMT.

20 Simple Points to Understand MMT

The Money Story

1. The state desires to provision itself.

2. The state imposes tax liabilities payable in its currency as the tax credit

3. This results in sellers of goods and services (unemployment) seeking state currency.

4. The state then makes its desired purchases.

5. Taxes are paid and bonds purchased. What Happens to State Spending?

6. After the state spends, the private sector has only two choices

7. Use the money to pay taxes, in which case it’s removed from the economy

8. Don’t use the money to pay taxes, in which case it remains in the economy until it is used to pay taxes

The Public Debt

9. The public debt is the funds spent by the state that have not yet been used to pay taxes

10. It constitutes what is best thought of as the net money supply of the economy

11. A growing economy is expected to include a growing net money supply

Unemployment

12. Taxation, by design, causes unemployment

13. Unemployment is the evidence the state has not spent enough to cover the need to pay taxes and the desire to save

14. If the state doesn’t spend enough to cover the need to pay taxes and desire to save, the evidence is unemployment

Reversing Unemployment

15. Unemployment is the evidence that the state’s tax policy caused more unemployed than the state has hired

16. The state has the option to reduce the tax liabilities or get the unemployed hired through increased public spending

The Job Guarantee

17. Tax liabilities created more unemployed workers than the state wanted to hire

18. Business resists hiring the unemployed and prefers hiring people already working

19. The JG facilitates the transition from unemployment to private sector employment

20. The JG is a superior price anchor vs unemployment

These first appeared on slides presented by

Warren Mosler at the Gower Initiative of Modern Money Studies.