Saturday, 25 October 2014

Positive Money should study MMT more before commenting on it.

There are two not very clued up paragraphs at the end of this article by Positive Money. I’ve reproduced them below (in green) with comments by me interspersed (in black).
As regards MMT, an additional reason for their intransigence..”
What “intransigence”? MMTers for the most part do no positively OPPOSE the aims of PM. They just aren’t particularly interested. Economics is a big subject. MMT takes an interest in one or two narrow parts of that subject. PM likewise. No harm in that.
Models of public-private sector balances were originally devised for spotting imbalances.[10] In MMT, however, the meaning of imbalances is re-interpreted and includes a tendency to fuse fiscal with monetary functions.
Well PM also advocates “fusing” monetary and fiscal policy!! That is, PM advocates that when stimulus is needed, the state should simply print more base money and spend it (and/or cut taxes). MMTers if anything agree rather than DISAGREE with that!!
MMT contends that sovereign debt poses no problem because it equals private fortunes (strangely enough, not asking whose).
MMTers have never said that government can go mad and run up ever expanding and ludicrously large amounts of debt. If any government were to do that, interest rates would rise too far. What MMTers do say is that as long as the private sector is happy to hold debt at a relatively low interest rate, there is no harm in expanding the debt. And the rise in debt over the last few years has certainly not lead to any big rise in interest rates. Indeed rates are currently at a record low.
Warren Mosler, a leading MMTer, takes that a bit further and advocates that government should aim for a permanent zero rate of interest on the debt, which comes the same thing as saying that the only liability issued by the government / central bank machine should be base money. Milton Friedman also advocated that idea, and I agree with it.

Moreover, government expenditure (public-sector expenditure) is identified with sovereign-money creation, while private payments to the public sector (taxes) are reinterpreted as the deletion of sovereign money, analogous to paying back credit to banks.If public debt and public expenditure equal sovereign-money creation, and if a sovereign government allegedly can create as much of it as it deems decent, then it seems to follow that a sovereign government is always solvent and need not default. Deficit spending and sovereign debt thus appear to be monetarily and financially irrelevant and economically only beneficial, while monetary reform, again, appears to be irrelevant and unnecessary.
The statement that a monetarily sovereign government (that’s one that issues its own currency) needn’t ever default is correct. If it issues too much base / sovereign money and/or debt, the result will be excess inflation and/or an excessive rise in interest rates. But such a government needn’t ever default.
The idea that MMTers claim that deficit spending can only ever be beneficial is pure nonsense. The average fifteen year old who has never studied economics knows that Robert Mugabe printed and spend far too much (i.e. ran an excessive deficit) with the result being rampant inflation. However, MMTers DO CLAIM that deficits over the last 5 years or so have been deficient which has led to an unnecessary amount of austerity.
As to the idea that MMTers think that monetary reform is irrelevant and unnecessary, to repeat, that is not a point which many MMTers specifically make. To repeat, monetary reform is just one of the many areas of economics that MMTers do not take much interest in. Likewise (to repeat) there are many areas of economics which Positive Money takes no interest in.


  1. This post comparing MMT and Positive Money reminded me of my post linking GDP, the tax rate and the money supply, Mapping Stimulus to GDP. It seems to me that the mechanics of the formula developed there-in supports the MMT position. I do not know how it would relate to Positive Money theory.

    To briefly describe the theory, an initial injection of new money can be expected to increase GDP and then the injection is recovered to government by taxation. The ultimate amount of GDP increase can be predicted based on the tax rate.

    1. Whence the assumption in your 2nd para that "the injection is recovered"? If stimulus continues to be needed, the injection can be left in place, or even augmented. On the other hand if the private sector has a fit if Alan Greenspan's "irrational exuberance", then "recovery" would clearly be needed.

      Re your last sentence, yes, the effect on GDP will be related (all else equal) to the size of the injection and the size or speed at which the injection is recovered.

    2. I see that the link was scrubbed automatically of linking information, making my post hard to find. The link is

      A base case for fiat money can be established. The base case is a one time injection that is recovered slowly by taxing each subsequent transaction.A single base injection will generate additional GDP, the actual amount of additional GDP is limited by the tax rate per transaction.


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