Thursday, 5 March 2020

MMT in six hundred words.

Scott Fulwiller produced a paper which I gather Stephanie Kelton recommended to Larry Summers as an introduction to MMT. The title of the paper is "The Debt Ratio and Sustainable Macroeconomic Policy." Only trouble is that the paper is about 30,000 words.

Here’s my (perhaps cheeky) 600 word introduction.

1. Base money (i.e. state / central bank issued money) is a net asset as viewed by the non –bank private sector, and indeed as viewed by the private sector as a whole. It is also a very liquid asset: that is, it is most certainly a form of money. That’s as distinct from commercial bank issued money which is very definitely not a net asset for the non-bank private sector private sector: reason is that for every dollar of such money, there is a dollar of debt owed by non-bank entities to banks.

2. The typical household’s weekly spending varies with its stock of money: to illustrate, it’s pretty obvious that where a household comes by a thousand dollar windfall, e.g. a lottery win, the household’s weekly spending is likely to rise.

3. Ergo, to escape a recession, all the state needs to do is to create and spend more base money into the private sector, as indeed recommended by Keynes in the early 1930s. That works for two reasons, first the mere fact of spending that money will raise employment, e.g. spending more on schools causes more teachers to be employed. Second, there is the delayed effect of that spending raising households’ stock of money.

4. Note that while the conventional wisdom has it that only commercial banks can get their hands on base money (ignoring central bank issued paper money, e.g. $100 bills), that bit of conventional wisdom is not entirely correct. That is, when the state creates and spends more on the above mentioned schools for example, money flows into the bank accounts of teachers (and others), who deposit the money at their commercial banks,  and relevant commercial banks deposit that money at the central bank. Thus IN EFFECT teachers (and indeed butchers, bakers and candle stick makers) all possess or have control over sums of money lodged at the central bank (with relevant commercial banks acting as go-betweens between households and the central bank.

5. The arguments for government borrowing are far from clear. Milton Friedman and Warren Mosler (founder of MMT) advocated a “zero government borrowing” regime. While having the central bank (or Treasury) raise interest rates in an emergency, i.e. so as to cool down given a bout of irrational exuberance is clearly a useful tool to have in reserve, there is basically no point in the state (i.e. central bank and government) spending so much base money into the private sector, that the state then has to borrow some of that money back so as to cool things down.

Therein lies the logic of the MMT “permanent zero interest rate” idea: that is, the aim should be for the state to spend just enough base money into the private sector to bring about full employment without excess inflation, but no so much that the state has to borrow some of that money back at interest so as to cool things down. Apart from anything else, the latter borrowing involves collecting tax off the population as a whole, including the less well off, so as to fund interest paid to those who hoard money.

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