Wednesday, 18 November 2015

Are Martin Wolf and Adair Turner now MMTers?

In his article in today’s Financial Times, Wolf effectively says in his final para if the private sector hoards more money than usual, that doesn’t matter because the state can simply issue more of the stuff to satisfy the desire of the private sector (or some part of it) to save.

In Modern Monetary Theory phraseology the state can easily satisfy the private sectors “savings desires”. MMTers also have their own phrase for the sum of base money and government debt: they call the pair “Private Sector Net Financial Assets”.

The logic behind that phrase is that money issued by PRIVATE banks is not a form of saving in that for every dollar issued, there is a dollar of debt (as pointed out over and over by Positive Money). In contrast, in the case of central bank issued money (base money), there is no corresponding private sector debt. There is a SORT OF debt in that base money is IN THEORY a debt owed by the state to the private sector. But it’s a strange sort of debt. For example the so called debtor can grab any amount of money it wants off the so called creditor any time via a great system called "taxation". In contrast, you can’t wipe out your mortgage by grabbing money off the bank that granted you the mortgage.

As to government debt, that’s simply a promise by the state to give you some of it’s “funny money”, i.e. base money, at some point in the future. So that’s an equally strange debt.

Adair Turner.

As for Turner, as Bill Mitchell (an MMTer) points out in his blog post today, many of Turner’s proposals in his recently published book are pure MMT. And as Mitchell points out, it would have been nice if Turner had given credit where credit is due.

But of course, MMT ideas also derive to a significant extent from Keynes. For example the MMT “savings desires” point is simply Keynes’s “paradox of thrift” idea. We all stand on the shoulders of giants.


Reverting to the point that it doesn’t matter if hoarded money is not spent or invested, that point is relevant to the full reserve banking argument. Advocates of full reserve (like me) claim that savers’ money which those savers want to be totally safe should be kept in a totally safe manner, e.g. simply lodged at the central bank.

Many of the opponents of FR (e.g. Vickers) object to that non-use of money. Money you might think should always be put to use. Well, as Martin Wolf said (to repeat), it doesn’t matter if hoarded money is not used.

The idea that money should always be used if at all possible is actually an example of the perils of using microeconomic ideas at the macroeconomic level. That is, from the perspective of a microeconomic entity like a household or firm, obviously it makes sense to invest spare money if possible.

In contrast, at the macroeconomic level, if everyone in the country wanted to keep $1,000 in physical cash under their mattress against a rainy day and hardly ever dipped into it, that would be no problem at all. The state would simply crank up the printing press, and distribute the money to everyone.

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