To Get The Very Basics Of Modern Monetary Theory Wrong

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Modern Monetary Theory is an oddity. In one sense it’s simply a statement of the blindingly obvious – governments create modern money so they can’t run out of it. As long as they can afford the paper and the ink – something Zimbabwe famously proved it is possible for a government to fail at, their last run of hundred trillion $Zim notes wasn’t worth enough to buy the ink for the next – then they can always print more. Shouting that modern money is made on computers doesn’t change this – a government could conceivably run out of computers or, as Venezuela’s having a damn good go at, the electricity to run them.

In another sense MMT is truly weird for there’s a belief that the above simplicity means that the wilder dreams of social democracy can be brought about just by said printing more money. This isn’t remotely true.

It thus rather helps to understand the basics, something that the Senior Lecturer of Practice in International Political Economy at Islington Technical College doesn’t quite manage:

There is something elegantly simple and radical about what is called modern monetary theory, even if nothing it has to say is modern, theoretical or in some ways much to do with money. What MMT says, as far as I am concerned, is as follows. First, in a country with a fiat currency, which means that there is no asset backing to the money in circulation, which money does as a result only get value as a consequence of a government’s promise to pay, there is, at least in theory, no limit to the amount of money that a government can create.

Sigh.

Bitcoin is fiat money. There is no government promise to pay. Bitcoin has value. Therefore fiat currency does not depend upon the government promise to pay.

What does it depend upon then? General acceptance that it is a thing of value. That other people will accept it as having value. Fiat money works because we believe it works.

Which is what gives us our limit on how much can be issued – no more than maintains the belief in its value.

There are, of course, other errors:

Third, to prevent this new money creating excess inflation a government has to tax to withdraw currency from circulation. This is the primary fiscal purpose of taxation, although tax also has other, as significant, purposes as noted below.

That’s not a fiscal purpose, that’s a monetary one.

fiscal
/ˈfɪsk(ə)l/
adjective
1.
relating to government revenue, especially taxes.
“monetary and fiscal policy”

Fiscal means gaining the revenue which can be spent. Monetary would be the description for taxation to maintain the value of money.

Fourth, the government does not need to borrow if it runs a deficit. Firstly that is because it can, at least in theory, simply run an overdraft at its central bank, on which no interest may be charged. This negates the need for borrowing.

This is also known as the monetisation of fiscal policy and has a pretty terrible track record. Zimbabwe and Venezuela only being two examples that come to mind.

Seventh, the realisation that a government that only borrows in its own currency cannot, as a result of this understanding, ever default on its own debt because it can always issue the instruction to its central bank that the payment of that debt be settled, is also of considerable advantage.

And that’s the sort of error which not understanding that first basic point leads to. If money creation destroys belief in the value of money then the country will run out of money. Vide Venezuela and Zimbabwe.

And that’s it. That is modern monetary theory in a nutshell. In essence: the sectoral balances balance. Government debt is private wealth. If you want government created money the government has to run a deficit.

And that’s so barkingly mad that it’s verging upon the insane. For what is it that we’re repeatedly told about money creation? That the banking system creates 97% of it, the central bank only 3%.

We can even show this simply.


source: tradingeconomics.com

The German money supply is increasing.


source: tradingeconomics.com

The German government is running a budget surplus. Therefore it is not necessary to run a budget deficit to increase the money supply, is it?

If you want to claim the euro, then New Zealand:


source: tradingeconomics.com

And:


source: tradingeconomics.com

This particular explanation of Modern Monetary Theory therefore rather fails as a scientific theory, doesn’t it? You know, inconvenient facts doing that to a hypothesis.

Perhaps this expansion of the universities wasn’t a good idea after all?