Saturday, 25 March 2017

OMG: Spanish central bank economist says there’s a “huge fallacy” in MMT.

Miguel Navascués has worked as an economist at Spain’s central bank for 30 years. He has just published an article entitled “The Huge Fallacy Of The Modern Monetary Theory…”. (Incidentally, it was Mike Norman’s MMT site that alerted me to Navascués’s article)

My confidence in Navascués’s professional competence was badly dented very shortly after starting to read the article when I came across this sentence: "It’s difficult to imagine that money issued by a private entity would be as universally well accepted as fiduciary money today."

Er  - actually the majority of money in circulation is issued / printed by private banks, not central banks as the opening sentences of this Bank of England article explains. Indeed 97% is the percentage often quoted as the proportion of money which is privately issued, though that percentage has actually been significantly reduced since the start of QE.

Next, there is this passage (which I’ve put in green italics):

"Another “revolutionary” aspect of the MMT is that instead of the state issuing debt, this will be substituted by the simple flow of money between the Central Bank and the state. The state should not issue debt which becomes a fictitious burden, since its monetarisation would end that. The state has an account in the Central Bank, with a zero interest rate, which it can use to deposit money or take out funds and be in credit or in debt.

This is incredibly bold. Responsable citizens would always prefer the state to issue debt, for transparency reasons. Even if it’s just to watch the trend in the yield curve for different maturities and how it is accepted by creditors. One thing is for the state to have a liquid account with the Central Bank with a zero interest rate, and quite another that it is not transparent and takes money when and whenever it wants."

Now the idea that MMTers advocate that government should be able to “take money when and whenever it wants” is just absurd. MMTers make it perfectly clear that they are aware of the fact that excessive spending (i.e. excessive aggregate demand) leads to excessive inflation. The average ten year old has worked that one out.

Having said that, MMTers are actually a bit vague on EXACTLY what controls should be in place to keep demand as high as is feasible without causing excess inflation. In fact this work by Positive Money, the New Economics Foundation and Prof Richard Werner is much better in that regard. Incidentally the latter PM/NEF work advocates full reserve banking, but don’t be put off by that: the system those three authors advocate for controlling demand is equally suitable under the existing bank system (sometimes called “fractional reserve” banking).

Next, the first para of the above quote from Navascués’s article actually contains a self-contradiction, as follows. As he says, MMTers want to abolish or monetise the national debt (as did Milton Friedman, incidentally). And that is not difficult to do: it simply involves continuing to QE the debt until it’s all gone. As for any inflationary effect of doing that, that is easily dealt with by cutting the deficit or even running a surplus.

At least the latter procedure is “easy” so far as economics goes: in contrast, and as far as politics goes, it might not be so easy. That is the “QE the entire debt” might have to be done over a ten year period so as to avoid excessive tax increases or public spending cuts. But there is no question but that the entire national debt can be abolished / monetised.

The rate of interest the private sector demands for holding state liabilities varies inversely with the size or total stock of those liabilities. For example, if the state wants the private sector to hold an excessive stock, the private sector will do that, but will demand a highish rate of interest for doing so. And what MMTers (and Milton Friedman) want/ed to do was cut the total liabilities to the point where the interest paid is zero: the the only liability is base money.

But having done that, it is then illogical or self-contradictory to say, as Navascués does, that “Responsable citizens would always prefer the state to issue debt, for transparency reasons. Even if it’s just to watch the trend in the yield curve for different maturities and how it is accepted by creditors.”

The whole point of monetising the debt is that there is no interest paid: the “yield curve” vanishes!

The external sector.

Next, Navascués says:

In the first place, there are not just two economic sectors. Apart from the ones mentioned, there is an external sector and whether it is a creditor or debtor is very important for the economy. If the external sector holds our country’s debt, the size of this can influence our creditors’ confidence depending on how we play the “simple” game of putting in and taking out money from the Central Bank to give to the private sector.

Good heavens! So some of the US national debt is held by China and Japan? My guess is the average street sweeper knows that.

But that does not alter my above points about QEing the entire debt. As purchasers of US national debt, the Chinese are investors in the great US of A, just as are USA based pension funds and the like. The Chinese will be influenced by the rate of interest paid on the debt just like pension funds.

There is of course the point that if any given country QEs it’s entire debt, as prescribed above, that will induce internationally mobile investors (like the Chinese) to seek better returns somewhere else in the world.  In contrast, investors who are much more conservative and confine their investments to their own country will be likely to re-invest in the same country if the sell national debt.

So any country which QEs its entire debt will suffer more of a standard of living hit from those “mobile” investors re-allocating their investments than from the above “conservative” lot. But frankly most big investors nowadays are fairly international. For example the average UK based unit trust (“mutual fund” in US parlance) thinks nothing of switching investments from inside the UK to outside the UK or vice-versa. To that extent, Navascués’s “foreign sector” point does not materially affect the argument.

And that’s about as much as I’m prepared to read of Navascués’s article. He is clearly not desperately competent, and I do not have time for that sort of individual.


  1. Ok, so I am an investor in UK bonds.The UK decides to QE all national debt.What can I do?I could sell and take a hit as everyone else is likely doing the same,or I could stick with it since there the possibilty that the currency may well not tank and it may even strengthen,so I might even be better off.I may as well stick with it for the long term on the chance I will make a return because the option of panic selling would be sure fire way for to lose money.
    From the UK point of view we need not pay anymore interest on national debt,once current debts are paid off.What's not to like?...unless you are a seller of bonds or like to buy bonds, either way If you are in that position I don't really have a great worry about your state of finances.Of course some national debt may be of use but generally I think mostly it is not.Maybe we should only sell national debt to nationals?
    Incredible this man thinks private/commercially issed debt is not accepted as national currency,.....we have ignoramuses working for central banks, no wonder we are in the mess we are.

    1. My hunch is there is something to be said for having state liabilities mainly in the form of debt which pays a very low rate of interest, like 0.5% rather than in the form of cash. A merit of that is that if the liabilities are in the form of cash, it's just possible the private sector goes mad and decides to spend it all at once which would result in hyper-inflation, whereas it is more difficult (but not impossible) to spend debt.

  2. In fact Randall Wray's book uses three sectors, government, private sector, and foreign sector. And Bill Mitchell's blogs do, too.

    Of course it doesn't matter how you divide up the non-government sector, it still is true by simple arithmetic that the government deficit (surplus) is exactly offset by the sum the other sectors' surpluses (deficit).

    Some sectors may run deficits while others run surpluses, but if a government sovereign in it's own currency runs a deficit then the arithmetical sum of all the other sectors will be in surplus to the exact same amount as the government's deficit.


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