Tuesday, 21 January 2014
Joseph Huber’s criticisms of MMT.
Introduction and Summary.
“Modern Money Theory and New Currency Theory” is the title of a recent work by Joseph Huber. He claims there are fundamental clashes between what he calls “New Currency Theory” (NCT) and MMT. NCT is a set of ideas proposed by organisations like Positive Money, Monetative in Germany and The American Monetary Institute.
Now I’ve been an active supporter of Positive Money and MMT for a few years and have never seen any big conflicts between the two. E.g. you’ll find at least a thousand comments by me on various MMT sites, e.g. Billyblog and Mike Norman.
As to Positive Money, I support them financially. I’ve written several articles for them. Plus I’ve supported them on this blog for a long time (e.g. scroll down the right hand column or Google “Ralphonomics” and “Positive Money”).
Strikes me that what Positive Money & Co have to say and what MMT says are both pretty much correct, but neither lot has given a full description of how best to re-arrange the monetary / banking system and effect stimulus. I.e. the two lots complement each other, rather than clash. Or put another way, if we’re going to use the word mistake, then both have made mistakes of omission rather than commission. Indeed, in the past, I’ve quoted (with approval) passages from an earlier work of Huber’s, “Creating Money”.
But returning to the work of Huber’s under consideration here, the final section is entitled “Are sector-account imbalances…”. That section makes very poor quality criticisms of a point made by MMTers, namely that government debt is a private sector asset.
Anyway, Huber puts the clashes he claims to have found under six headings. These are numbered below and the first is…
1. Dysfunctions of fractional reserve banking and the need for monetary reform.
In this section, Huber claims MMTers have overlooked, and worst still, positively admire the existing banking system. He says for example, “MMTers today express no less admiration for what they see as a smoothly run and benign system…”.
Well this may be news for Huber, but every MMTer (and indeed every intelligent fifteen year old, including those who have never opened a book on economics) is aware that we’ve just had a recession sparked off by irresponsible bank behaviour.
Moreover, Warren Mosler, a leading MMT specifically set out a number of ideas for improving the banking system (not that I endorse all those ideas).
However, there is some of truth in what Huber says: that is, MMTers have not CONCENTRATED on bank reform to the same extent as NCT. But that is not a brilliant criticism of MMT: there are dozens of economic problems which NCT doesn’t address. Indeed, no one and no organisation can address EVERY economic problem.
2. Who has control – central banks or banks? What is the use of interest-rate policy?
This section accuses MMTers of being enthusiastic backers of adjusting demand by adjusting interest rates. Well that’s news to me. Certainly on Mike Norman’s MMT site, the emphasis is very much on adjusting demand simply by creating and spending government / central bank created fiat money (as advocated by Positive Money, and presumably other NCTers). Certainly Roger Erickson, who authors more posts on Mike Norman’s site than anyone else (with the possible exception of Tom Hickey) is constantly advocating the latter “fiat” method of increasing demand.
3. Is the government a creditor or debtor?
The first paragraph of this section reads:
“When a central bank absorbs government IOUs, or any other class of securities, from banks, the central bank in exchange provides reserves to the banks; and when the central bank releases or resells such securities to the banks, it absorbs reserves from them. In the form of repo transactions and outright purchases, this is an established open market practice.”
Well “government IOUs” are not held for the most part by commercial banks. At least according to this source, US banks hold only 2% of US debt, while the proportion in the UK is 11%.
And the next paragraph is:
“This would hardly be worth mentioning if MMT did not link to such open market operations a rather central idea, which is that by issuing government debentures, a government issues its own sovereign money. MMT holds that even the present money and banking system represents a sovereign-currency system, and that government debt should not be seen as debt, at least not in the same way as private debt – which is all the more puzzling as MMT insists on all money being debt.”
“by issuing government debentures, a government issues its own sovereign money..”. What? When government “issues debentures” it actually WITHDRAWS money from the private sector. Normally it then spends that money back into the private sector, in which case there is no net issuance or withdrawal of “sovereign money”.
Huber needs to clarify what he is saying there.
“MMT insists on all money being debt”??? I’ve never come across an MMTer saying anything like that. Clued up MMTers are well aware that commercial bank created money nets to nothing: that is for each dollar of money, there is a dollar of debt. In contrast, for each dollar of CENTRAL BANK created money, there is no private sector debt. That is, as MMTers have pointed out hundreds of times, base money is what MMTers refer to as a form of “private sector net financial asset”.
This section strikes me as a muddle. Thought if Huber really has got something significant to say, he needs to clarify.
4. Do we have a sovereign-currency system or a banking regime?
In this section, Huber makes a possibly valid criticism of MMT. That is he points to two common claims made by MMTers which are mutually exclusive. First there is the claim that government and central bank combined should print and spend money into the economy in a recession (and/or cut taxes). Second there is description of the existing banking system set out by many MMTers which is largely accurate, namely that commercial banks rule the roost in that the central bank has to supply commercial banks with the reserves they need at any given interest rate (if the central bank wants to control interest rates).
The self-contradiction is that a central bank cannot at the same time spew out reserves so as to deal with a recession at the same time as carefully controlling the amount of reserves with a view to controlling interest rates.
Now that’s a self-contradiction of a sort by MMTers. Alternatively, and to be more charitable, I’d say MMTers are just making the following two points.
1. At the moment, this is how the system works: central banks supply whatever reserves are needed at a given rate of interest, etc, etc.
2. But we’ve got a better idea: let’s have the government / central bank machine deal with recessions by simply printing and spending….etc etc.
But certainly NCTers are ahead of MMTers on the above point: NCTers have thought through the full implications of “lets create fiat money and spend it”, whereas MMTers haven’t.
5. Is MMT a state theory or banking theory of money? Full and partial chartalism.
This section just expands on the above point that NCTers have thought thru all the implications of “lets create fiat money and spend it” whereas MMTers haven’t.
6. Is all money debt? Money may be credited into existence, but does not need to constitute debt.
This section simply spells out in detail the point that money can take the form of debt (as is the case with commercial bank created money). In contrast, in the case of central bank created money, there is no private sector debt. MMT is not mentioned.
Huber’s next and final section is entitled…
Are sector-account imbalances and sound public finances irrelevant?
This section mounts a totally incompetent attack on a point made by MMT, namely that government debt is a private sector asset. And Huber’s first salvo is:
“Interest payments on ever bigger public debt are a drain on tax revenues and curtail a government’s scope of action. Thus, either additional debt will have to be incurred, or ever more public functions will be chronically underfunded.”
Well the big flaw in that argument is that the real or inflation adjusted rate of interest on public debt in most responsibly run countries has been zero or even negative for several years now. (I’m referring to Germany, the US, Japan, the UK, etc).
Of course it’s possible that interest on a country’s debt will rise if that country is seen as being irresponsible. And that lack of trust in a country’s debt could be (first) because the country REALLY IS irresponsible, in which case the solution . . . roll of drums . . . is for the relevant country to behave itself.
A second possibility is that creditors haven’t a clue: that is, they SEE a country as being irresponsible when in fact it’s not. Indeed, a significant proportion of creditors are doubtless as clueless on the relationship between deficits, debts, inflation, unemployment etc as are Pete Peterson, Rogoff, Reinhard, Republicans, the IMF, Huber, UK politicians, and so on.
And the solution in the latter problem is for the relevant country . . . roll of drums again . . . to cease borrowing and print money instead. Indeed Milton Friedman, Warren Mosler and others advocate/d that governments should issue NO DEBT AT ALL: i.e. the only liability they should issue should be money (base money to be exact). So there is nothing devastatingly original or problematic in the idea that governments should ceasing borrowing. (I’d actually put it more strongly and as follows: “what’s the sod*ing point of borrowing money when you can print the stuff?).
Huber’s next complaint is that those holding public debt are far from being a cross section of the population. As he puts it, “the receipt of related interest payments is very unequally distributed.” Well the answer to that is of course that THERE AREN’T ANY INTEREST PAYMENTS in real terms, and for reasons relating to inflation, and referred to above.
Debt held by foreigners.
Huber’s next complaint is that “much of the government debt is held by foreigners.”. Well the first answer to that is that most of the debt owed to foreigners cancels itself out: that is for every $X of country A’s debt held by citizens of country B, there’s a good chance that about $X of country B’s debt is held by citizens of country A. Investors, quite reasonably, like to spread their risks.
But even where a country is a net debtor, if it were to incur no debt and effect stimulus by simply creating new money and spending it (and/or cutting taxes) as advocated by Milton Friedman and others mentioned above, then foreigners would still choose to hold a certain amount of currency instead of debt. Japan is actually very near to doing that in that its debt pays a near zero rate of interest, thus its debt is almost the same thing as currency.
Of course Huber and NCTers might answer that by pointing out that those foreign held currency holdings are still a liability of the country that issues the currency in the sense that the relevant foreigners can demand REAL GOODS AND SERVICES from the debtor country at any time (using their stockpiles of cash).
But against that, the debtor country has in the meantime obtained an interest free loan from creditors: nothing wrong with that! Moreover, if the debtor country REFUSES to issue as much currency (and/or debt) as the private sector wants (both domestic and foreign private sectors), then one gets “paradox of thrift” unemployment (as MMTers have pointed out over and over). That is, if the private sector doesn’t get the stock of currency it wants, it will try to save currency, and that spells recession.
Conclusion: issuing currency and/or debt doubtless has downsides, but NOT ISSUING currency and/or debt in the right amount has even bigger downsides.
Huber’s next criticism of having government / central bank issue money and/or debt is: “Printing money cannot compensate for real-economic deficiencies, but compounds these through inflation, financial asset inflation, and a declining exchange rate of the currency.”
Well did MMTers, or anyone else come to that, ever say that simply printing money DOES COMPENSATE for “real economic deficiencies”? It’s blindingly obvious that money printing does not “compensate”.
But that in no way detracts from the basic point made by MMT, namely that whatever the “deficiencies” of an economy (and no economy will ever be totally free of deficiencies), it’s desirable to print and spend money into the economy in sufficient amounts to bring about the maximum level of employment that possible without exacerbating inflation too much.