Monday, 1 September 2014

MMT for beginners.

At least this is my version of MMT. Hopefully other MMTers will agree.
1. Private sector spending varies with the stock of what MMTers call “Private Sector Net Financial Assets” (PSNFA): that’s the stock of base money plus national debt.
I.e. in plain English, the more money (or near money, which is what government debt is) that people hold, the more they tend to spend.
2. If aggregate spending, i.e. aggregate demand is inadequate, the state should spend more (and/or cut taxes). I.e. the state should “net spend”. The state can do that (as pointed out by Keynes) either by spending borrowed money or by spending freshly created money.
4. Borrowing money when you can print the stuff is pointless. Only a lunatic would do that. Ergo the government should simply print money and spend it (and/or cut taxes) when AD is insufficient. Certainly Warren Mosler (leading MMTer)  advocated that government should borrow nothing, as did Milton Friedman in a 1948 paper. Personally I agree with them.
5. Most so called “professional” economists are lunatics.
6. The reason Keynes emphasised borrowing rather than printing money so as to fund government spending was that he was a clever man who was surrounded by people who, relatively speaking, were Neanderthals. That’s “Neanderthal” as in “go ballistic whenever the words “print” and “money” appear in the same sentence”.
7. Where the state creates new money and spends it, the effect comes via two channels. First, the fact of spending (e.g. on roads, education or whatever) employs more people (on repairing / building roads, in schools, etc). Second, the increased stock of base money / PSNFA in private hands increases private sector spending.
8. If the state funds the extra spending via borrowing, the net effect per dollar spent is significantly reduced, which is an additional reason for thinking that borrowing money when you can print the stuff is a sign of lunacy.
9. If the state prints and spends too much, the private sector will end up with an excess stock of base money, and excess AD and excess inflation will ensue. The best cure for that is to cut down on the amount of money printing, or even reverse it: e.g. raise taxes and "unprint" the money collected. But an additional possible tool is for the state to borrow back some of that money.  Borrowing (to repeat) is pointless. Though in emergencies, that borrowing is probably justified so as to damp down AD. However, the long term aim should be zero government borrowing.
10. One of the many defects in the latter borrowing is that the interest is funded by ordinary taxpayers and ends up in the pockets of those with an excess stock of money, the rich. And that’s a third reason for thinking that government borrowing is lunacy (except as stated above as an emergency measure for damping down AD).
11. A state which issues its own money (e.g. the US, Japan, UK, etc) can pay any rate of interest it likes on its debt. If the existing rate is a bit on the high side, all such a state has to do is print money and buy back the debt (or cease rolling it over). That equals QE. As to any excess stimulatory or inflationary effect that has, that can be negated by increased taxes or reduced government spending. However, the NET EFFECT on AD is zero (assuming the latter “negating” effect exactly equals the stimulatory effect). Thus there needn’t be any effect on numbers employed or GDP from the latter “interest reducing” exercise (at least in the case of a closed economy).
In the case of an OPEN economy, i.e. where some government debt is in the hands of foreigners, the latter debt reduction exercise will obviously result in funds being withdrawn from the country in question, which will reduce the value of its currency on forex markets, which will hit living standards in the country in question.
12. The above is all way beyond the comprehension of most so called “professional” economists, but it should be within the grasp of the average intelligent fifteen year old. Certainly there isn't a cat in Hell’s chance of Rogoff or Reinhart ever understanding the above.
13. Forget all about “monetary policy”, “fiscal policy”, “fiscal consolidation” etc. That’s all boll*cks.
14. David Hume spelled out the REAL REASON for government borrowing over 200 years go: as he pointed out, borrowing enables incumbent politicians to ingratiate themselves with voters. That is (as pointed out above) cutting government debt in an open economy involves a finite but temporary standard of living hit.  Conversely, increased borrowing temporarily increases living standards, and thus the number of votes that incumbent politicians get.


  1. "1. Private sector spending varies with the stock of what MMTers call “Private Sector Net Financial Assets” (PSNFA): that’s the stock of base money plus national debt."

    I think this is fine for beginners if the central bank buys only government securities. But is there are MBS, gold etc then this is not correct. But it is close :)

  2. 8. If the state funds the extra spending via borrowing, the net effect per dollar spent is significantly reduced...

    This could be phrased as "borrowing reduces the fiscal multiplier". My reading of MMT does not jibe with this. Borrowing is a reserve drain, which removes reserves in order to support the yield curve away from zero (at least in regimes where there is no interest paid on reserves).

    The effect on the economy is just whatever effect non-zero interest rates have on the economy. (Wray, Mosler & Mitchell have non-standard views on the effect of interest rates on the economy, but I believe that there is no "official MMT" position on that issue.) The MMT position is that there is no need for non-zero interest rates, partly because interest rate policy is not seen as useful for business cycle stabilisation.

  3. “Interest rate policy is not seen as useful for business cycle stabilisation…”. I agree with that, only I’d word it a bit more strongly. I listed a whole string of problems with interest rate adjustment in section 1.19 of my MPRA paper (see top of left hand column).

  4. "8. If the state funds the extra spending via borrowing, the net effect per dollar spent is significantly reduced"

    This is false according to MMT (Bill Mitchell).
    "The expansionary impact of deficit spending on aggregate demand is lower when the government matches the deficit with debt-issuance ... False.
    See answer to question 2 in:

    1. Hi KK,

      Bill gives two reasons for thinking QE doesn’t have much effect at this site, which is one of the links he gives at the site you directed me to:

      One is that QE cuts interest rates, which means more income for borrowers and less for savers. Those two effects more or less cancel out according to Bill. I suggest that borrowers or the less well-off have a higher propensity to spend a small increase in income than the better off, thus QE will actually have a finite stimulatory effect there.

      Second, he says that QE increases bank reserves, but that does not increase bank’s capacity to lend. I’ll buy that.

      But as far as I can see he has missed out what might be called the “portfolio” effect. That is, if someone has their preferred mixture of liquid and illiquid assets, and some of the less liquid assets are turned into cash, they’ll then try to restore their preferred mix buy buying various illiquid assets, including houses and other real physical assets. And that will boost demand a bit.

      However I agree with his general point that QE doesn’t have HUGE effect. I.e. there isn't a HUGE difference between funding a deficit via borrowing rather than printing money.

  5. I'd lump in the objections to point 8 along with 2 and 4 to just say in general that the economic effects derive from the spending and whether debt is issued or not is a footnote.

    An important footnote though, given structural dependencies on treasuries in the financial system it would be pretty disruptive if the supply of them was abruptly shut off.

    Also, I can't believe no one has weighed in on point 3 yet.

    1. I like the joke about point 3. I realized long ago that I'll never make it as a proof reader.


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