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.
Money printing.
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.
>What? When government “issues debentures” it actually
ReplyDelete>WITHDRAWS money from the private sector.
Yes, it does. Huber says this But some MMTlers denie it. For example Mosler says it's just a transaction from one form of desposit to another, both essentially government debt. That is the reason Mosler and othe MMTlers don't believe in quantitative easing.
Yes, it does. Huber says this, but some MMTlers deny it. For example Mosler says it's just a transaction from one form of deposit to another, both essentially government debt. That is the reason Mosler and other MMTlers don't believe in quantitative easing. (They may be right in there doubt about QE, but the reasen QE doesn't work might be an other: You can't pull a string, you can't force the banks to lend more an increase the money supply with QE. Government has to spend, for example for a job guarantee).
ReplyDeleteComing (very) late to this, but it's just what I have been looking for. Good piece of work Ralph.
ReplyDeleteDo you happen to know if Bill Mitchell or Randall Wray have directly addressed Huber's paper?
Thank you.
Now that's a point. I just done some Googling and cannot see that Bill has dealt with Huber's points. So I sent Bill an email.
DeleteI second your comment (even veeeery late).
DeleteI'm familiar with MMT - momentarily reading Mitchell's Reclaiming the State, which takes MMT in focus again (for me).
I got to this blog entry via google search "stützel godley", and entered https://www.sovereignmoney.eu/41-sector-balances-accurate-or-simplistic/
Here I came accross "NCT" the first time. In search of its meaning I googled "mmt nct"...
(to be precise: I use startpage - ralphonomics listed third).
Many thanks to Ralph for this differentiated comment on YAMT (Yet Another Monetary Theory ;-)) vs. MMT.
To Huber's article: I cannot extract from it whether NCT is linked to Huber's "Vollgeld" or not. But I judge his Vollgeld as not a road out of the current crisis.
Regards,
Rob