Samstag, 12. April 2014

MMT: Modern Monetary Theory - or Monstrous Mental Twisting?

Some 400 - 500 years ago, Nicolaus Copernicus and Johannes Kepler revolutionized astronomy by replacing the geocentric model (geocentrism or Ptolemaic system - Wikipedia) by heliocentrism (heliocentricism).
These days, a clique of economists is trying to turn back the hands of time and obfuscate the understanding of the relationship between money and the real economy.

In preaching their self-referential chartalist money-money-merry-go-round they employ brainwashing techniques in lieu of sound arguments.
The name of this monetary creationism is "Modern Monetary Theory" (MMT).
list of and hyperlinks to MMT-publications as of July 2013 can be found here.]

To prove this, let me start out with the 1998 paper "Can Taxes and Bonds Finance Government Spending?" by Stephanie Kelton (then: Stephanie Bell) (also available here). 

I found this paper because it was mentioned in a 2012 article by Scott Fullwiler "Modern Monetary Theory — A Primer on the Operational Realities of the Monetary System".
Here is the context in which Fullwiler refers to the paper (layout changed, emphases added):
"Particularly where the operational realities of the Treasury’s actions are concerned, blog posts by MMT’ers can be met with dissenting comments. A good deal of this is because the MMT understanding of the operational realities of the monetary system is completely counter to that of the neoclassical economics that most learn. But another reason is that a number of people appear to confuse the MMT description of the operational realities of the monetary system with procedures self-imposed by existing laws and/or regulations.
A case in point is a paper by Stephanie Kelton titled "Can Taxes and Bonds Finance Government Spending?" This paper is a classic in the MMT literature first published in 1998. The main points of Kelton’s paper are entirely related to operational realities of the existing monetary system:
(1) Given the accounting logic of the Fed’s balance sheet, changes to the Treasury’s account affect the quantity of reserve balances circulating — that is, government spending creates reserve balances, taxes and bond sales destroy them;
(2) Given the tactical logic of the Fed’s operations to achieve an interest rate target, flows to/from the Treasury’s account must be offset;
(3) Consistent with the tactical logic of the Fed’s operations, calls/adds to/from the Treasury’s tax and loan system are universally understood to be monetary operations to minimize the influence of flows to/from the Treasury’s account on the Fed’s operations — essentially reducing the complexity of the Fed’s daily operations, particularly given the Treasury’s assumed superior ability to forecast its own account balance;
(4) Bond sales are much like calls from the tax and loan accounts — monetary operations — since if the Treasury doesn’t sell bonds, the Fed must to be able to hit its fed funds rate target;
(5) Given the hierarchy of money, it is not the Treasury that needs the reserve balances to spend — indeed, as Kelton put it, the very act of paying taxes (when the taxpayer’s bank settles with the Treasury) or purchasing a Treasury security is also the "destruction" of reserve balances, while
(6) the act of government spending is the creation of reserve balances."
Actually, it shouldn't really matter whether we look at what Fullwiler calls "operational realities" with or without self-imposed restrictions. Because, according to Fullwiler, operational restrictions don't really change much (emphasis added):
"Having said that, MMT’ers are keenly aware that governments can and do write laws that their treasuries’ operations be legally bound in certain ways. For instance, the Fed is constrained by law to only purchase Treasury securities in the "open market," is thereby forbidden from directly lending or providing overdrafts to the Treasury. In other words, "specific" cases can and do differ from the "general" case MMT’ers describe for a sovereign currency issuer under flexible exchange rates in the sense that self-imposed constraints specify particular operations. But, this does not mean that the operational function of the Treasury’s bond sales to aid the Fed has changed — to the contrary, with or without legal prohibition of overdrafts for the Treasury’s account, either the Fed or Treasury must offset flows to/from the Treasury’s account to achieve the Fed’s target rate (with the caveat that interest on reserve balances can potentially eliminate this necessity)."

Now let us take a look at Stephanie Kelton's paper and find out whether or not her claims make sense - with or without legal restrictions for the government and the Fed (or, since MMT equates both institutions: for the government).
The abstract describes what her paper is supposed to demonstrate (emphasis added):

"After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of  high-powered money. The analysis carries significant implications for fiscal as well as monetary policy."
 To those with eyes to see, the swindle is laid open already on p. 2/3 of the 24 text-pages of the paper. There, the author informs us (emphasis added):
"In Section 5, the complexities of reserve accounting are carefully considered, and newly-created money is revealed as the source of all government finance."

Even before reading any further, I had annotated this phrase (in German) with something like:
"That could be true when taken literally. Namely, if taxes have to be paid [using bank reserves, i. e. base money/high powered money (HPM)] into the government account with the Fed. And when you
a) identify (as MMT'ers do) the central bank (CB) and government and
b) equate the deposition of money into a government account at the central bank with a destruction of money.
Then, by definition, government spending must come from "newly created" money.
But calling this money "newly created"  is meaningless."

For the sake of argument we may concede proposition a).

Proposition b) will sound logical to many, but actually is not.
If it does sound reasonable to anybody, that's because we are used to the (correct) idea that whenever credit is being paid back, money gets destroyed: Bank money, if the credit came from a commercial bank, and base money, if a commercial bank redeems its credit borrowed from the CB.
Obviously, Kelton (and MMT in general) extends this nexus to ALL payments to the CB and tacitly assume money must of needs be getting destroyed by any such transfers.
Whoever equates a tax-payment (or payment for a bond-purchase) to the government with the amortization of a credit granted by the CB, has not understood (or refuses to understand) the rationale behind credit creation. [Which Stephanie Kelton doesn't even admit can exist. For her, money can only be created by government spending.]

I have described the rationale behind the credit creation of money in my blog post "Time to say goodbye: To slipshod definitions of "money" in economics!". Extract:

"Credits are handed out by (central and commercial) banks.
The borrowers are the "first receivers" of this money, which, if it were not lent out, would either not exist at all or lie idle in the bank vaults. ..... .
It is hopefully undisputed that people who take credit from banks do this because they want to spend the money. So the "first receivers" are also the "first shoppers".
 ... the term "first shopper" is derived from the idea that any economy is essentially a barter: "I work for you only if (or because) you work (now or later, or have been working) for me." .....
Within this framework, the "first shopper" is one who enjoys the fruit of other people's labor without having given his own in exchange. He has given money all right, but none of the subsequent holders of his money can hold him liable for it: money is NOT an IOU from a buyer to a vendor.
And of course it is not an IOU at all for the vendor (the "2nd, 3rd etc. receiver"). .....
Obviously, a system like this can only work if there is a built-in mechanism that coerces the first shopper to give back the advance that he was granted (in terms of the real economy, i. e. not "money" from the bank, but "stuff" from the economy as a whole). There must be a quasi-automatic mechanism which constrains (or induces) the "first money receiver" = "first shopper" to kind of "put back in the common pot something of equal value as what he was permitted to take out". .....
This "return-mechanism" is the credit creation of money itself. Since the first receiver has to pay his credit back, the "whole circle" is not complete unless he himself has sold something in order to get hold of money in order to amortize his credit.
Parguez/Seccareccia describe this "monetary circuit" in their aforementioned paper on p. 104/419."

When a credit from commercial (and equally a central) bank is being repaid, the money has made a 'round trip' through the economy and served its purpose as a 'voucher' for purchasing power. In a model:
  1. A borrows 1.000,- (of whatever currency) from a bank.
  2. A purchases goods worth 1.000,- from B.
  3. So does B from C, C from D, D from E etc., until eventually Z buys 1.000,- worth from A.
  4. A returns the money to the bank (interest aside; for a discussion on interest I refer to the English text at the end of this blog post of mine). The money is "destroyed" (but of course the bank can produce new money "with the stroke of a pen" by entering a new credit contract with the same or a different borrower). 
  5. Result of this "monetary circuit": Nobody holds any money, but (provided they didn't consume them) everybody possesses the goods they bought from the 'next vendor in line'. And the "first shopper" has also sold goods, which he himself had time to produce while the money was in circulation. But even if he sold goods which he had held in storage: the main thing is that Z, the 'last but one' money-holder, could acquire something from A. A might have preferred to take a vacation rather than work. In this case, the money would have been worthless for Z (assuming here that he could only shop from A). But the fact that A had to return his credit (i. e. that he needed money) forced him to postpone his vacation and produce goods for sale (or give up something of value). 
This "barter logic" of money creation by credit also applies when the CB credits a bank (unless otherwise stated, "bank" will always refer to a commercial bank). Even though banks do not lend out reserves, they do need reserves (and cash) in order to lend (see my previous entry "Banks do not lend reserves (or deposits). But banks need reserves (and deposits) to lend. ....."). So CB-lending is, in its function for the real economy, only an extension of bank lending. The money simply "travels" a longer distance. But its creation injects purchasing power into the real economy, which is removed when the "first shopper" = last money holder has recovered the money (by making his own contribution to the real economy, i. e. the social product) and returns it to the bank to be "destroyed" at the end of the "voyage" (and the commercial bank pays back its credit with the central bank). Here, too, the money has served its purpose as a medium for the exchange of goods, and it must necessarily be destroyed. If not, the "first shopper" (or rather, since we are talking about HPM, the first receiving bank) could spend it again - and this time without making a contribution to the real economy. Which, if it happened on a large scale, would obviously ruin the monetary system, because there would not be enough goods produced to meet demand.

So the credit creation of money connects, in an ingenious way, the micro level of the individual (in his dual role of consumer and producer) with the macro level of the social product. It coerces every little bee (economic agent) to not just eat honey, but also to contribute to nectar collection.

When a citizen pays taxes, things are different. In order to acquire the money, he has already produced something and sold it.  Now, instead of spending all the money for himself, a tax-payer foregoes part of his own purchasing power for the benefit of the government. Giving "money" to the government on the financial level means, that on the level of the real economy the taxpayer cedes the corresponding part of his claim on goods from the common pot (social product) to the government.
This connection is unaffected by how he makes (or is allowed to make) his payment: With bank money to a government account with a bank, or with HPM to a government account with the CB. Either way, there is a momentary demand gap in the real economy, which is later being filled by the government (when it spends the money). Government demand replaces in the real economy what "normally" would have been demand from the citizen himself.
Of course, for as long as this money sits in the government account with the CB, it is ineffective in the real economy. But this is no different from John Doe putting cash under his mattress for a period of time. In both cases, the money is dormant but not dead.
In the transfer of the tax payment to the CB (Fed etc.) the money did NOT get destroyed. Instead, the money as a voucher (token) for purchasing power has been passed on from the taxpayer to the government and is now sitting there on a pile waiting for further utilization.
When the government spends the money, it does NOT create new money: It makes use of the purchasing power it has received.

In a way, this transfer is the same as when old banknotes are being replaced by new ones. The old banknotes are being destroyed, but the purchasing power is NOT destroyed. And, more important: In exchanging the banknotes, the government (remember we had conceded, for the present debate, the identity of CB and government!) does NOT create any new purchasing power. Technically, of course, the "government" must print new money to replace the outworn old ones. But nobody would equate this procedure with government "money printing" in the sense that a government simply "prints and spends", without taxation or bond sales. (Which, of course, would soon lead to hyperinflation.)

The trick in Bell's argument should be immediately evident to everybody when reading the next sentence in her paper (p. 3, emphasis added):
"It is further argued that the proceeds from taxation and bond sales are not even capable of financing government spending since their collection implies their destruction."
[Interestingly, on p. 4 she presents something like a balance sheet showing sources and uses of bank reserves where the "U.S. Treasury Balance at Fed" DOES appear. Which in my opinion runs counter to the assumption that tax deposits at the Fed destroy the deposited money. How can deleted money show up in a balance?]

Obviously, when you define the money that the government has collected as "destroyed", then "newly-created money ... [must logically be] the source of all government ... [spending].
But here "newly created money" is not what the reader will automatically assume it is (and, in my opinion, is deliberately made to think it is!): Money "printed" by the government to create NEW PURCHASING POWER. Instead, government uses the "old" purchasing power which the taxpayers have surrendered to the state.
Under a scenario where the taxpayer (and/or bond buyer) pays 1.000,- of whichever currency  to the government, and government spends 1.000,- (or less), it is a deception of the reader to claim that the government has spent "newly created money".

Of course things are different when the government collects 1.000,- and spends 2.000,-. Then the government is grabbing the citizens purchasing power on the sly by truly shopping with "newly created money".

Imagine the economy producing goods and services at full capacity, the value of which is 5.000,- at the time of government spending. Citizens origininally held 5.000,-, of which they surrendered 1.000,- to the state.
So the citizens have 4.000,- left to spend. Let us assume they do want to spend the whole 4.000,- at the same time when the government wants to spend 2.000,-. Then the market offers goods worth (at the original price) 5.000,- and a demand of 6.000,- money. In the real economy, due to elasticities, it will take a while for prices to rise. But in our model (and sooner or later in the real world) prices will go up. We get a picture of what in a free market must inevitably happen if we conceive 5.000 goods out on the market at an original price of 1,- each.
The market opens up, and in come the citizens with 4.000,- of money (wanting to purchase 4.000 goods) and the government with 2.000,- planning to buy 2.000 goods. So we have an overhang in demand of 20%. This is government "purchasing power" created  ex nihilo through the printing of (truly!) new money. Because this extra 1.000,- of money does not represent purchasing power (PP)  transferred from the citizens to the government, but an excess in demand over supply, prices have to go up accordingly.
Demand and supply can only be balanced if "the market" (i. e. the vendors) will sell the goods for 1,20 each instead of 1,-.
So their 4.000,- will by the citizens only 3.333 goods instead of the expected 4.000. Government will get 2.000,- : 1,20 = 1.667 goods: Less than what it hat planned, but more goods than the citizens had thought they were giving away (and were willing to depart with) when they paid their taxes.
The end effect in this model is the imposition of an unapproved extra taxation of 667,- on the citizens.
[And, incidentally, not just on (income-)taxpayers: This kind of invisible taxation would work like a sales tax and therefore hit every consumer, "official" taxpayer or not. (The ones to suffer most from the invisible taxation in this model would be families, because they have more consumers than taypayers.)]

This model shows, that what really matters is whether the government is paying
  1. with purchasing power surrendered by taxpayers (and/or bond buyers), or
  2. goes shopping with EXTRA money printed above the amount it had collected.
If we prefer to put it in a humorous way:
  • Whether the government spends money it has aroused from slumber in the Fed account (or, in the framework of MMT-thinking, resurrected from the dead),
  • or genuinely "newborn" money.
The alleged discovery of MMT that governments of need can only spend newly created money is one big bogus. No matter what the "operational realities" are that this sect of monetary esoterics makes a big spiel of: What matters in the real economy is purchasing power - and where it comes from: Citizens who have (more or less voluntarily) transferred it to the state, or "counterfeit" money that the government (or a criminal counterfeiter) simply prints and goes shopping with, while the full PP of the citizens is still out on the market as demand.

Not surprisingly, the paper by Stephanie Kelton is pretty much self-referential. It keeps revolving in the sphere of monetary transactions, reserves and interest rates. PP is not even mentioned, and nowhere is her reasoning grounded in any considerations about the real economic effects of monetary transaction.
(This "hermetic" approach to finance etc. may well mirror the perspective of the financial "industry" and central bankers which has lead us into the financial crisis and is heading straight for the next crash.)

So the bottom line is that it simply doesn't matter if we even concede the foregoing proposition b) (that money gets destroyed when booked into a government account with the fed): The relevant alternative is not "dead or dormant" but "collected or simply printed before spending".

Any monetary theory that conceals this reality behind a smokescreen of technical detail and geek-speak is nothing but a shadow show performed in an economic sandbox.

In footnote no. 5 on p. 5 the author claims that "government spending must originally have preceded taxation".
MMT-folks have meanwhile, probably under the impact of outside criticism, changed their tune to "spending or lending". So their new version does at least not logically exclude any more that money could have originated by credit creation.

P. 16 (emphases added):
"Finally, the sale of Treasury securities to the Federal Reserve must be considered. If the Fed purchases newly-issued bonds directly from the Treasury, it will not cause a change in member bank reserves. This, as Figure 1 makes clear, is because both the RHB (U.S. Treasury Balance at Fed ) and the LHB (U.S. Government Securities ) increase by the same amount, leaving total reserves unaffected. Furthermore, since the government’s balance sheet can be considered on a consolidated basis, given by the sum of the Treasury’s and Federal Reserve’s balance sheets with offsetting assets and liabilities simply canceling one another out (Tobin, 1998) the sale of bonds by the Treasury to the Fed is simply an internal accounting operation, providing the government with a self-constructed spendable balance. Although self-imposed constraints may prevent the Treasury from creating all of its deposits in this way, there is no real limit on its ability to do so."
There is no technical limit for government creation of fiat money. This is not a discovery, it is known to everyone even slightly familiar with the meaning of "fiat", since this theoretical boundlessness comes by definition with the term.
Here the author seemingly wants to make the point that a sale of Treasury securities to the Fed does not influence the money supply, because it does not affect member bank reserves.
This is true on first sight, and plain nonsense when looking further.
Of course, such transactions do not immediately increase "member bank reserves", i. e. HPM. But the "U.S. Treasury Balance at Fed" in p. 4 (which by some miracle is composed of destroyed or non-existent money) is increased by this operation, and, what is more important, the bank reserves are not decreased (like they would be in case of direct bond sales to the banks/the public, which is equal to a transfer of purchasing power).
Because in this scenario the spending money for the government is truly newly created ("freshly printed", so to speak), more HPM than normal is "on the jump". And once the government spends from its account with the Fed, bank reserves will go up. How this must in principle entail inflationary consequences I have shown before. The concrete  outcome depends on the given state of the economy and the size of this (momentary) "money printing".
But to pretend, like the author seems to do (or what else does she want to tell the reader in this paragraph?), that this type of money creation will not entail any consequences in the real economy, because "the sale of Treasury securities to the Federal Reserve ..... will not cause a change in member bank reserves" is just absurd. 

Kelton deploys her argument that the government can only spend newly created money in greater detail in section 5 of the paper (p. 17 ff.), and even makes a distinction between an intuitive and a formal proof.
I don't know what point she is trying to make when on p. 19 she says:
"Barring self-imposed constraints, the Treasury could manufacture all of its spending balances by selling bonds directly to the Federal Reserve." Probably this is supposed to be some fantastic discovery. But in reality, this is simply a description (or definition) of a fiat money system. In such a system the government can TECHNICALLY always "print" whatever amount it wants.
Everybody knows that, and this is precisely the reason WHY THERE ARE "SELF-IMPOSED" RESTRICTIONS to begin with!
Of course one can debate about whether, to what extent and in which economic situation more, less or different restrictions can be harmful or beneficial for the real economy.
But to stand like a kid under the Christmas tree shouting "look what I have found: The government is NOT money constrained [like all you blockheads have been thinking]" is simply ridiculous. (Stephanie Kelton does not make this point in this paper, at least not explicitly, but I've seen this kind of Rumpelstiltskin-Dance of joy in papers from other MMT-authors).

On the same p. 19/20 she claims:
"..... bonds need not be issued in order to allow the government to spend in excess of current taxation. This, again, is because the government can always create its own spendable balance internally (on its consolidated balance sheet) by offsetting a Treasury liability against a Federal Reserve asset (e.g., but not necessarily, a Treasury bond). In the absence of bond sales, deficit spending would result in a net increase in aggregate bank reserves."
Here too, I don't understand what she is getting at.
Technically, any government can print money. But this is nothing new, and we certainly don't need a new monetary mystery club to tell us about it. Obviously, when a
Legally, a government can NOT print money, and for good reasons.
Of course, in this case the Treasury is supposed to incur a liability, which is different from just "printing" money (unless the liability is only pro forma and never paid back). So sooner or later the Treasury is be obliged to pay back the money to the CB. This is exactly what is happening right now under the guise of QE, and with a detour through commercial banks. When the extra government demand financed with "printed" money comes at a time of capacity underutilization in the real economy, it should not induce inflation. What happens later, if the economy gets back in full swing, whether the government can then withdraw the money fast enough (and is willing to do it), remains to be seen.
Anyway: The government knows only too well that it can print money, and in times of economic hardship the American and British government obviously make use of this knowledge. So here, too, MMT is not a revelation for anyone even superficially familiar with money creation. Central banks know only too well that they can simply "print". (They also know how to disguise it to the broad public - for a while.)

P. 20/21:
"Federal Reserve notes (and reserves) are booked as liabilities on the Fed’s balance sheet and that these liabilities are extinguished/discharged when they are offered in payment to the State. It must also be recognized that when currency or reserves return to the State, the liabilities of the State are reduced and high-powered money is destroyed."
From a technical viewpoint, payments to the state (to government proper, not loan repayment to the CB) do NOT destroy money. If they did, they would not appear on the balance sheet of the Fed as "U.S. Treasury Balance at Fed" (fig. 1, p. 4).
From a real economic perspective, the fact that bank notes and reserves are entered as "liabilities" into the Fed (or any other) CB balance sheet is utterly meaningless.
When a bank borrows from the central bank, say, 1.000,- in cash, the CB hands out the banknotes and enters a 1.000,- claim against the bank. Due to double bookkeeping, it simultaneously enters 1.000,- on the liability side. But for all practical purposes, this is meaningless. The banknotes have already been transferred to the bank, and if anybody presents them to the CB, the only
The CB owes nothing but the money itself, if the bank presents thek banknotes it has received, all it can get from the CB is other banknotes in exchange. So the term "liability" is meaningless for a CB. Or at any rate is has a completely different meaning than elsewhere in the economy: There it is real (firms have to earn the money that they owe to banks etc.), with the CB "liability" is nothing but an accounting term (and habit).
But while the CB does not have any meaningful liabilities, the government proper certainly does. The CB can trade in money for money. When the government proper pays money, it wants goods and services (directly or, when supporting the needy, indirectly) in exchange. (And that is why it certainly makes sense to differentiate between "government" and CB.)

P. 21 (emphases mine):
"The destruction of these promises [i. e. when "currency or reserves return to the State"] is no different from the private destruction of a promise once it has been fulfilled. In other words, when an individual takes out a loan, she issues a promise to a bank. Once she ‘makes good’ on that promise (i.e. repays the loan), she may ‘destroy’ that loan debt (liability) by eliminating it from her balance sheet. Likewise, the State, once it fulfills its promise to accept its own money (HPM) at State pay-offices, can eliminate an equivalent number of these liabilities from its balance sheet.

Since MMT equates the government proper and the CB, she must mean that it makes no difference whether taxes are paid into a government account with the CB, or a bank pays back (base) money it had borrowed from the CB.
The reason for (and the fallacy behind) this assumption is that a CB "liability" has the same properties as a government liability (because they both come under the same name).
However, in order to understand the seemingly wrong equalization of a borrower who pays back his credit with a government that receives taxes, one must know that in the warped worldview of MMT a "liability"
Luckily, I had read L. Randall Wray's paper on "Money" (Dec. 2010). There, this leading figure of the MMT school juggles with (at least) THREE (!) different meanings of "IOU". I'm quoting from my blog post on money definition (where I have debunked the idea, probably derived from Alfred Mitchell Innes, of money being an IOU see above):
1.    The common-sense understanding of 'owing someone an object or a payment',

2.    What he calls the "Schumpeterian" (i. e. my "real economy") meaning, that "the producer commands some of society’s means of production at the beginning of the production process before actually contributing to society. The producer’s IOU (held by the bank) represents a social promise that she will temporarily remove commodities on the condition that she will later supply commodities to society."

3.    And finally, he comes up with a very special meaning of "IOU" that hardly any sensible person out on the street would ever guess: Government graciously conceding that it is willing to deign its citizens the great favor of accepting "government" money for payment of their tax dues!

If the government owes me money, I obviously hold an IOU against government. (This IOU is cancelled when the government pays me the money due.)

But if I owe the government tax money, then, in the warped world of MMT theory, I also hold an IOU against the government: The government owes me the favour of accepting the money from me. (This IOU is cancelled when I have paid my taxes: Then the government no longer 'owes me the favor' of accepting money from me.)

And that is how Kelton's seemingly nonsensical equalization of a borrower who repays his loan and the government receiving taxes makes sense (for MMT-folks, that is):
  • When the borrower repays his loan, he is free of debt.
  • When the government accepts a payment from a taxpayer, it has liberated itself from the "debt" of accepting (its own) money!

Of course, this type of debate is more for theologians than for science (it reminds me of Martin Luther's self-contradictory "simul iustus et peccator"): when someone claims that somehow it makes no difference whether the government owes me money or I owe money to the government, that is pretty much the end of any rational discussion. To me, such strategies of argumentation disclose the character of MMT as being a monetary sectarianism.
However, true or false doesn't make any difference in this context. All that Kelton is trying to do here is to prove that money is being destroyed when paid into a government account with the Fed. And, as I have shown above, even if this argument is conceded, it is simply irrelevant. All that counts is whether the government spends this (allegedly) non-existing money, or whether it overspends and gets the difference printed by the Fed. It looks like for Kelton this makes no difference at all (see above). But since her argument on this subject is somewhat opaque to me, I will refrain from over interpreting.

Kelton's conclusion is (p. 24):
"An analysis of reserve accounting reveals that all government spending is financed by the direct creation of HPM".
This conclusion is wrong, when (mistakenly) understood to mean that the government must print MORE money than it has received.
And, if (correctly) understood to mean that money is being destroyed when remitted by taxpayers to a Treasury account with the Fed, it is trivial and meaningless. It does not transport any information about the crucial question (for the real economic effects) whether or not the government spends more than it has previously received.

No doubt all the technical details which Stephanie Kelton has dug out are highly important for the proper functioning of the banking system.

But none of them has any bearing on her argument "that modern governments actually finance all of their spending through the direct creation of high-powered money". (Abstract before p. 1). This is nothing more than a matter of definition:

  • If money paid to the government (proper, excluding the CB) has to pass, sooner or later, through an account with the CB before it can be spent and
  • If you define money as being "destroyed" once it has been deposited onto a Treasury account with the Fed
then any government spending money must by logic be "newly created" (in and by the act of spending).

Whether or not one considers money to be destroyed and newly created is utterly irrelevant for the effects on the real economy. The only difference that carries any weight in the real world is whether the government spends up to the amount of money it had previously collected (by taxes or bond sales to the public), or whether it spends more than this.  

If government overspends in this sense, then the extra money must by necessity come from the Fed printing press. In this case, the effects (inflationary or not) of this extra PP being injected into the economy depend on the state of the economy (under-utilization of capacity or not).

[Plus in the long run it should also make a difference whether the CB simply "donates" the money to the Treasury, or whether it came as a CB-credit (and whether the credit is actually repaid one day, or simply prolongated into eternity).] 


Mathew Forstater and Warren Mosler are two other exponents of MMT (see MMT-bibliography).
Let us take a look at their 2005 paper "The Natural Rate of Interest Is Zero" and see how they present the monetary system (all emphases added).

"Operationally, government spending consists of crediting a member’s bank account at the government’s central bank or paying with actual cash." (p. 536)
Well, I don't think the Treasury actually transfers cash to bank accounts. Instead, the Fed will debit the Treasury account and credit the bank accounts (thereby increasing their bank reserves). But when we remember that both reserves and cash are high powered money (HPM) (= base money, central bank money), and reserves can always be cashed in for cash, then I guess the description of the authors is acceptable.
And one thing the authors "forget" to mention: The central bank (Fed or other) will of course debit the Treasury account! They would probably respond that this doesn't matter, that the central bank is part of the government and that the government cannot debit itself. Nevertheless, the operational reality is that the Fed DOES debit the treasury account when the government (government proper) transfers money to a bank account with the Fed. Whoever withholds this part obviously does not want to discuss it.
"Therefore, unlike currency users, and counter to popular conception, the issuer of a currency is not revenue constrained when it spends. The only constraints are self-imposed (these include no-overdraft provisions, debt ceiling limitations, etc.)." (p. 536)
The authors act like MMT was the first monetary theory in the world to discover that the government (as issuer of a currency) is not money constrained. This is plain nonsense: Everybody only slightly familiar with money creation knows, that TECHNICALLY fiat money can be issued without limits. That is plain simple the definition of "fiat money".
Whoever does say or think that a government is "revenue constrained" means exactly what the authors tout like it were a discovery: That with a fiat currency constraints are legal and regulatory constraints. And of course the question is, whether these are meaningful, or should be abolished, modified or tightened. Nothing more, and no mystery behind it at all.
"Note that if one pays taxes or buys government securities with actual cash, the government shreds it, clearly indicating operationally government has no use for revenue per se." (p. 536)
As we have seen above, it doesn't matter whether or not money that has been paid into a Treasury account with the Fed is shredded (and, in and by government spending, newly created) or not. Effects on the real economy depend on whether the government spends MORE than what it had collected or not.
"When the U.S. government makes payment by check in exchange for goods and services (including labor), or for any other purpose, the check is deposited in a bank account. When the check “clears,” the Fed (i.e., government) credits the bank’s account for the amount of the check. Operationally, “revenue” from taxing or borrowing is not involved in this process, nor does the government “lose” any ability to make future payments per se by this process." (p. 536)
Of course the government can TECHNICALLY print as much money as it wants - as everybody knows. Which is precisely the reason while regulatory restrictions have been introduced. Which actually DO prevent the government from spending as much as it wants.
The statement "... “revenue” from taxing or borrowing is not involved in this process" is subject to the definition of payments received on a Fed Treasury account are "destroyed". Which is meaningless. What DOES matter (i. e. what has effects on the real economy) is, whether or not the money that the government spends has previously been collected from the citizens (by taxation or bond sales) or was just printed (above incoming payments) by the central bank.
"Note that, from inception, and as a point of logic, in order to actually collect taxes, the government, as the monopoly issuer of the currency, must, logically, spend (or lend) first. (p. 537)
Here the authors pay lip service to the fact that money need NOT be brought into circulation by government spending. Instead, this can also happen by government lending. (Remember that MMT equates government proper and central bank, so in this case the CB would be meant).
In his paper "Three difficulties with Neo-Chartalism" (2009) Eladio Febrero explains the functioning of a system where money is created by central bank lending (p. 6/7):

"As Bell (2003) states, individual national governments at the EMU cannot make payments by writing checks on accounts at the ECB or national central banks (all together making up the Eurosystem). Furthermore, the Eurosystem is not allowed to purchase government debt directly or indirectly. Thus, public spending now relies on bank credit (newly created money) and / or the sale of bonds in financial markets or through banking intermediation (hoarded money). In this institutional framework, all deficit-spending units, including national treasuries, make payments using money created by private banks. Once states have renounced issuing fiat money they have to borrow from private banks when they spend and are ‘enforced’ to collect taxes (or sell bonds) in order to pay back bank debts. This is the same logic which holds for private firms when they ask for credit today to obtain working capital to meet future demand and which will have to be reimbursed to the bank with debt from future sales proceeds. .....  It is the cancellation of bank debt and not tax settlement that moves all agents in the European economy (national states included), in the last instance, to accept money which, in turn, is the logical consequence of (private) bank credit."

It is of no importance whether or not the actual workings of the American and European system differ: Forstater/Mosler are talking about how money can be brought into circulation in general, and since they themselves admit (in contrast to the former paper by Stephanie Kelton) that this can also happen by government (i. e. CB) LENDING, they would have to give a reason if they think this either does not work or at least is not the case in the US-monetary system.
But they prefer to immediately forget about lending and, like they had never mentioned this alternative before, continue to speak of government SPENDING only (which, of course, does not refer to the CB but to what I call in this context "government proper"):
 "Note that it would be logically impossible for the government to collect more than it spends (or run a budget surplus) unless it had already previously spent more than it collected (past budget deficits). Thus the normal budgetary stance to be expected under these institutional arrangements is a budget deficit." (p. 537)
Logically, when you assume that money can be created by government spending OR lending, it is perfectly feasible for a government to collect more than it SPENDS. If the money has previously be LENT into the economy.

"In a state money system with flexible exchange rates running a budget deficit—in other words, under the “normal” conditions or operations of the specified institutional context—without government intervention either to pay interest on reserves or to offer securities to drain excess reserves to actively support a nonzero, positive interest rate, the natural or normal rate of interest of such a system is zero."
I am not familiar with the scientific debate about the "natural rate of interest". But obviously, if the government can print as much money as it wants, than naturally the (interbank-)interest rates must be somewhere near zero.

It is not the purpose of this text to discuss the impact of interest rates on the real economy. All we need to remember from the text of Forstater/Mosler is how they twist their narrative in order to prove their point - without giving any reason why they tacitly exclude the alternative of credit creation of money. Obviously, it doesn't fit into their "proof".


"MODERN MONEY THEORY: A RESPONSE TO CRITICS" is a paper with 9 (unnumbered) text pages (+ 2 p. bibliography) by Scott Fullwiler, Stephanie Kelton, L. Randall Wray (2012).   (Emphases added)

I'll take a detailed look at this paper, the intentions of which the authors describe thus:
"MMT has always had its critics. Somewhat surprisingly to us, some of the most vocal critics have been heterodox economists, particularly the Post Keynesians. ..... It looks to us as if they have not understood our arguments. Instead of providing a point-by-point response to either of their [Marc Lavoie and Bret Fiebiger; the papers are not listed in the bibliography] papers, we think it will be more useful to briefly lay-out our main argument in a way that should be accessible to PKs. We have been given only 4000 words for this task, hence, we can only hit the main points. More specifically, this response will in turn discuss the role of endogenous money and the circuit for MMT, the MMT understanding of government debt operations, and the links between the MMT approach and heterodoxy in general." (p1)

The starting point for their investigation sounds promising:
"We find the French-Italian PK circuit approach particularly useful for driving home the point that the finance for spending must come from somewhere. ..... when the circuitiste begins with a bank loan to finance purchase of commodities (to be used to produce commodities) all logical problems are resolved." (p. 1)
The assumption here is, of course, that "loans create deposits". Which I have no problems with.
"The fundamental idea is that bank lending is never constrained by the deposits that flow into banks—since banks create deposits when they lend. However, as we know, banks must meet reserve requirements, and banks use reserves for clearing." (p. 2)
Right: This is exactly how I have described the mechanism in my previous entry "Banks do not lend reserves (or deposits). But banks need reserves (and deposits) to lend. .....".
"In the PK literature, it is said that CB policy always “accommodates” the demand for reserves." (p. 2)
I guess that is correct, at least that is what I also read elsewhere. However, one important caveat: Banks need collateral which the CBs will accept. Due to this constraint, banks may not always find it that easy to get as many reserves as they need or would like to have.

The next chapter "MMT—BRINGING THE STATE INTO THE CIRCUIT" starts with a question:
"What extension* does MMT make?" (p. 2)
*[to the "circuit approach". This theory is expounded for instance in the 1999 article "The credit theory of money: the monetary circuit approach" (taken from a book ? and separately accessible
here) by Alain Parguez and Mario Seccareccia. I have not yet read the paper "FRENCH CIRCUIT THEORY" by Claude Gnos (2005)]

1. The money of account, at least today, is virtually always a state money of account—a “dollar” chosen by the authorities.

[seems reasonable]

2. The authorities issue the currency, which consists of notes and coins denominated in that money of account, and the central bank (whether it is legally independent or not) issues bank reserves in the same unit.

[no problem]

3. The authorities impose taxes and other obligations in the same unit, and accept their own liabilities (notes, coins and reserves, together high powered money--HPM), in payments to the state.
No, money is NOT a "liability" of the government (g. proper or CB).

When a CB issues money, it is entered onto the debit side of its books as a liability. However, this is only due to the practice of double-entry accounting.
These days anything the holder can exchange his fiat money for at the CB is other fiat money (other banknotes). That was, of course, different in the olden days, when a banknote often was a claim to a certain amount of gold. Under that monetary regime, "liability" can have real consequences. But in a 100% fiat money system money is not a "liability" in any meaningful way to the CB.
Plus what the government wants and needs is not to redeem its alleged "liabilities", but a share from our purchasing power, to spend for its own purposes.
Besides: It is mighty strange that MMT'ers refer to CB-accounting habits when it comes to "liabilities", but deny (and don't even mention) the fact that CBs also (and for a much better reason) credit and debit theTreasury account. So at least on paper the money is NOT destroyed when deposited in the Treasury account. Looks like they select the facts and invent definitions according to how they can use them in their peculiar monetary theology.

4. The authorities issue HPM denominated in the same unit when they spend. (all p. 2)
No. Let us assume that we visit a state art gallery and pay entrance fees with banknotes. Then in theory the gallery could store the money in a strongbox and, at the end of the month, pay the wages of the employees with it. This is no different from John Doe putting banknotes under his mattress for a while and then spending them.
In both cases, the money lies idle for a while (it is not effective in the real economy), but it is not destroyed: It waiting to be used.
Of course, this is not the way the gallery does operate in reality (but it is neither technically nor economically impossible). Instead, the money would get deposited in a bank, and let's assume even in a central bank. But where is the difference? Either way, at the end of the month the government uses this money to pay the employees with the entrance fees collected from the gallery visitors.
The government does not accept the money in order to fulfill its liabilities. It wants our money (taxes, entrance fees, loans etc.), because by transferring it to the government we surrender the corresponding part of our purchasing power to the state. Instead of us going on a second annual trip abroad, we send some government employee on vacation. ;-)
If we both would go, i. e. if the government would not take some of my purchasing power away from me, but simply print extra money and pay its employee with it, then there would be too much money (i. e. too much demand), and vacation (etc.) prices would inflate.
However, as I've said before, my rebuttal of MMT money magic does not depend on whether or not money at the government account with the CB is dead or dormant. All that matters is whether the state spends more than what he has collected. Only in this case the CB would have to create fresh money over and beyond the amount formerly in the economy.

5. "The authorities sell other types of (generally longer term) liabilities denominated in the same unit, accepting their own HPM IOUs in payment for them." (p. 3)

Money is NOT a government IOU. Hard to tell which signification MMT-folks are referring to when they employ the same term "IOU" for three different sets of facts. I guess what they mean here (cf. my discussion of Randall Wray's paper on "Money" above) is that the government honors its promise to accept its own money for payments. In this case, like I've said before, the limits of a rational discourse have been transcended.

"... recognizing that banks use HPM for clearing (more specifically, the reserve balance portion of HPM), the circuit should also begin with HPM. ..... Now, the question is, where does the HPM come from? ..... Now there are two obvious ways HPM can get into the economy: state spending and state lending. Banks cannot get hold of HPM for clearing (or, to meet reserve requirements) unless the state lends or has spent HPM into existence." (p. 3)
No problem for me here. At least these MMT-authors, in contrast to Forstater/Mosler (see above) never forget (in the abstract parts of their discussion) the alternative of money creation by lending, instead of (or in addition to) money creation by government spending.

"..... we recognize that in developed countries today there is a division of responsibilities between the Treasury and the Central Bank, and that the Central Bank is in many nations nominally independent of the State. ..... But as a first approximation, we prefer to consolidate treasury and central bank operations; we then separate them for further analysis. There are two reasons for this—simplicity and generality." (p. 3)
"For the purposes of the simplest or most general explication, it is convenient to consolidate the treasury and central bank accounts into a “government account”. (p. 4)
Simplicity? Looks more like brainwashing to me, when MMT (in general, not just here) equates government proper and CBs as "government". Because this assumption is the necessary precondition for their claim (central in their argumentation, even though it is completely irrelevant in reality) that the money gets "destroyed" once it is booked into the CB-Treasury account.

"In the case of government, its borrowing is a substitution of its HPM liabilities for bills and bonds liabilities." (p. 4) 
Wrong. HPM-"liabilities" are meaningless; because the holder has no actual claim (other than, if they are worn out, an exchange of his banknotes). Bills and bonds liabilities have to be met with HPM. And HPM is purchasing power. Bills and bonds are not. So the government borrows purchasing power from the citizens and at maturity returns this purchasing power to the bondholders. The only relevant question is, where the government gets the money from: Taxes and new bonds, or CB money printing ABOVE THE AMOUNT THAT PREVIOUSLY CIRCULATING IN THE ECONOMY:
Of course, this can happen (and, with the momentary Fed policy of "quantitative easing" (QE) actually does happen). But it is not the "general case" (as the authors would say), i. e. the standard procedure of CBs.

" ...the appropriate general case is the one that makes the fewest assumptions while enabling analysis or understanding of the fundamental or “true” nature of the object of inquiry." (p. 5)

This is precisely my problem with MMT: that they are looking for (what they think is) the "true" nature of things. Instead of investigating into the real nature and relationships of things.

"Beginning with the simple or general case, consider a consolidated government (central bank plus treasury) running a deficit. The basic transactions could be listed as the following:" 
The authors are analysing the case when government (proper) spending is financed by CB money "printing".

"1A. The government’s spending credits bank accounts with reserve balances (HPM). These accounts are liabilities of the government/central bank."
Liabilities on paper only, not in any meaningful way - see above.

"2A. Banks credit the deposit accounts of the spending recipients. So, overall, the increased reserve balances have raised bank assets while the increased deposits have increased bank liabilities by the same amount. Further, because spending to the private sector is greater than taxes drawn from the private sector, the private sector’s net financial wealth has increased. The change to the government’s financial position is necessarily the opposite — its net financial wealth has been reduced (i.e., the equity on the liability/equity side of the government/central bank balance sheet has been reduced). This is the basic Godley sectoral balance identity many are familiar with." (p. 5)
a) Some decades ago, before we changed apartments (and I threw the money away), I was a super-moneyed man. I held hundreds of billions of net financial wealth which the German government had showered upon its citizens. Of course, that was back in 1923, and with all those billions you could probably by a loaf of bread or so.
b) The alleged reduction of government net wealth is completely irrelevant. Because the authors have started this model with government self-created wealth: By a stroke of the pen, the money was there. And if you assume that this is possible (and in fact, it TECHNICALLY IS possible!), then the government can by the same operation always restore its wealth. (As probably happened in the German hyperinflation of 1923).

(To be fair, MMT'ers are aware of inflationary risks; cf. their aforementioned bibliography. Nevertheless, I am very much bewildered as to why they do not discuss this danger in their basic presentations of their system. Obviously, they are playing political games here: Trying to convince the broader public that the government is not money constrained - and discussing inflation only in specialized papers. Which does not prevent them from complaining "misunderstandings" when people understand them exactly the way they themselves want to be understood - in the POLITICAL section of the debate.)

"..... the government is not constrained in its spending by its ability to acquire HPM since the spending creates HPM as in 1A and 2A." (p. 5)

The authors mystify trivial facts: The government does not "acquire" HPM, but certainly it can (technically) simply "print" money. That comes with the definition of "fiat" money.

Finally, there is some solid information on the facts of the American monetary system and government spending:
"... now consider how operations are really done in the US—where the Treasury really does  hold accounts in both private banks and the Fed, but can write checks only on its account at the Fed. Further, the Fed is prohibited from buying Treasuries directly from the Treasury (and is not supposed to allow overdrafts on the Treasury’s account) and thus the Treasury must have a positive balance in its account at the Fed before it spends. Therefore, prior to spending, the Treasury must replenish its own account at the Fed either via balances collected from tax (and other) revenues or debt issuance to “the open market”. (p. 6)

But the authors strongly dislike this system (obviously, because it keeps government from spending at ease):
"(Pause for just one moment to ponder that: the Treasury cannot issue IOUs directly to the government’s own bank — the Fed — but must instead issue them to any other bank to obtain deposits that are then transferred to its own bank. This is a self-imposed constraint. Imagine imposing such a constraint on a private firm: it can issue an IOU to anyone except its own bank. Clearly this self-imposed constraint is anything but “natural” and cannot be useful for describing a general case for government debt operations.) (p. 6)
The idea does not dawn on the MMT financial wizards that maybe these "self-imposed constraints" exist for good reasons. After all, the institutions embody the experience of generations and the reasoning of a vast amount of experts.
What would happen if the Treasury could simply issue IOUs (guess in this case the term stands for bonds) to the CB?
The CB would (have to) create EXTRA MONEY ABOVE THE AMOUNT THAT WAS PREVIOUSLY IN THE ECONOMY and credit the Treasury account. Treasury would spend, and the money would go to the banks, increasing their reserves. For good. (Unless those were later recollected.)
If the Treasury is obliged to sell the bonds to the banks, then it is drawing in RESERVES WHICH ARE ALREADY IN THE ECONOMY.
As a result, in the US case there are at least six transactions related to deficit operations, rather than three in the general case." (p. 6)
I am not really sure, what the authors want to prove by outlining the technical details of Treasury bond sales in cooperation with the Fed adjusting its base money supply accordingly.

Most likely, they are trying to prove that the Fed creates money anyway, no matter whether the Treasury sells the bonds directly to the Fed or to banks.

However, in the end (under normal circumstances) the Fed does NOT create money above the amount which had previously been 'out there'. And only THIS it what counts, not whether the Fed TEMPORARILY increases the supply of HPM (i. e. for the banks: reserves).
Let me demonstrate this with a model that gives a step-by-step tangible description of what the authors present on a rather abstract level.

As the authors state that the monetary operations of the Fed to mitigate reserve effects at times of government bond auctions need not be equal in size to the amount of bonds sold:

"Note that the point here is not that the Fed necessarily engages in operations that are equal to or greater than the auction, but that the operations ensure that sufficient balances circulate such that the auction settles without the effective federal funds rate for the day moving above the target rate."
However, this does not logically exclude that they can be equal. So we construct a model where Fed reserve purchases and bond sales are equally high.

(1B, p.6): "The Fed undertakes repurchase agreement operations with primary dealers (in which the Fed purchases Treasury securities from primary dealers with a promise to buy them back on a specific date) to ensure sufficient reserve balances are circulating for settlement of the Treasury’s auction (which will debit reserve balances in bank accounts as the Treasury’s account is credited) while also achieving the Fed’s target rate."

Model: CB (Fed or other) purchases 1.000,- (of whatever currency) from banks (who promise to buy the bonds back later - "repo" sale)

Result: Bank reserves +1.000,-. Assumption for our model: "normal" level of reserves = 10.000,-. New total reserve level 11.000,-.

(2B, p. 7) "The Treasury’s auction settles as Treasury securities are exchanged for reserve balances, so bank reserve accounts are debited to credit the Treasury’s account, and dealer accounts at banks are debited."
Model: Banks purchase 1.000,- worth of bonds from the government and transfer 1.000,- HPM from their reserve accounts with the CB (Fed) to the Treasury account with the CB.
Result: Reserves ./. 1.000,-; total bank reserves back down to 10.000,-.
(Note that procedures in step 1 and 2 have offset each other, as far as bank reserves go. However, the extra 1.000,- HPM created by the CB in step 1 is still out on the market: Only now on the government account. (MMT'ers will of course say that this money has been destroyed. But this is irrelevant for the effect on the real economy. Whether the extra 1.000,- are dead or dormant in the Treasury account, they can now be spent by the government. Which - regardless whether the constraints are technical or self-imposed - the government could not do before.)
(3B, p. 7) "The Treasury adds balances credited to its account from the auction settlement to tax and loan accounts. This credits the reserve accounts of the banks holding the credited tax and loan accounts."

Model: Treasury transfers 1.000,- into accounts with the banks. On the reserve level this means 1.000,- are transferred from Treasury account with CB to bank accounts with CB.
Result: Reserves + 1.000,-; total bank reserves back up again to 11.000,-.

(4B, p. 7) "The Fed’s repurchase agreement is reversed, as ..... primary dealer purchase Treasury securities back from the Fed."

Model: Banks (are obliged to) buy 1.000,- of (old) bonds back from Fed; money is taken from their reserve accounts with Fed.

Result: Reserves ./. 1.000,-; total bank reserves back down again to 10.000,-.

(5B, p. 7) "Prior to spending, the Treasury calls in balances from its tax and loan accounts at banks."

Model: 1.000,- HPM ("reserves") transferred from bank accounts with Fed to Treasury account with Fed.

Result: Reserves ./. 1.000,-; total bank reserves down  to 9.000,-.

(Note: Reserves have now fallen below their initial level of 10.000,-!)

(6B, p. 7) "Treasury deficit spends by debiting its account at the Fed, resulting in a credit to bank reserve accounts at the Fed and the bank accounts of spending recipients. This increases the net financial wealth of the private sector."

Model: Government spends 1.000,-; this spending increases bank reserves by 1.000,-.
Saying that government "deficit spends" is deceiving for anybody not familiar with MMT double Dutch. What they mean is that the money is newly created because in their world view the proceeds from the bond sales in Step 2 have been destroyed when booked into Treasury account. Under this definition the money that the government spends is, of course, newly created. What this MMT Mumble Jumble intentionally conceals is the fact that THERE IS NO MORE MONEY IN THE ECONOMY NOW THAN THERE WAS BEFORE.
In fact, as we see from the result in step 5, the government has taken out 1.000,- from the reserves in the economy. It is THIS money that the government now spends.
In terms of the real economy, this is logical and necessary: Government is spending a 1.000,- share of the 10.000,- reserves (= HPM = purchasing power) that the banks and/or citizens have surrendered (with bond sales: temporarily, with taxation: for good) to the state.

Result: Reserves + 1.000,-; total bank reserves back up again to 10.000,-.

The Reserves are now back at their initial level (i. e. prior to government bond sales and government spending the proceeds) of 10.000,-! Government could go and has gone shopping without extra money created by Fed.
This is not surprising at all if we conceive of government income as a share taken out of the citizens' purchasing power.
But for any normal reader who does not analyze the MMT-esotericist presentation of purely technical and transitory procedures it must look like government spending (and only being able to spend) EXTRA money "printed" by the Fed.
This, of course, is precisely the impression that the high priests of MMT want to convey to their believers and to an unsuspecting public.
It is the indispensable mindset behind the idea that government is not spending constrained, which they tout as their big discovery.

And which is true - on a technical level. And at the moment even true at a factual level: When the Fed purchases the government bonds for good from the banks, as it does at the moment (up to a certain amount) by its so-called QE, then obviously the HPM supply (i. e. from a bank perspective: reserve supplies) must necessarily go up.

But under normal circumstances the "self-imposed restrictions" exist for a good reason.

The rest of the paper is just more of the same. With the exception of the subheading on p. 9 which I wholeheartedly subscribe to:

On closer investigation, Modern Monetary Theory has turned out to be nothing but a modern monetary trickery: an insult to the intellect.

It is of absolutely no relevance at all how the monetary system started out, at the time of Adam and Eve, the American Revolution, the War of Secession, in 1934 or whenever, and whether it started with government spending or "government" (i. e. CB) lending.

All that matters to the realities at any given point in time is
a) whether extra base money should be injected into the economy or not.
b) If yes, whether that should be done by government spending (i. e. by the CB "printing" more money than previously in the economy and simply "donating" the money to the government)
c) (and)/or by CB lending.
d) If by lending: to the private sector - and/or to government?

All of these questions [as well as the idea of government as an employer of last resort or job guarantee program (cf. introduction p. 1)] can be debated (and have been debated in the past, long before MMT appeared on the scene) without reference to any "Ptolemaic" MMT monetary astronomy.
The Fed had no problem to institute its post-crisis monetary policy of quantitative easing without recurring to the theoretical framework of MMT.
And lo and behold: Back in 1923 the German government printed money without ever having heard of MMT. And so did the Roman emperors 2000 years ago, and many other currency issuers in history. Mostly with not-so-nice consequences, but maybe in some cases the outcome may have been benign.
What QE will bring us in the long run remains yet to be seen. At the moment, it appears to have created new housing bubbles in some areas (especially in big cities). Or, to put it polemically: Government adding to private sector financial wealth has diminished the value of already existing private financial wealth when it comes to buying apartments in New York, London, Berlin etc.


Last, we look at Scott Fullwilers paper "Modern Monetary Theory—A Primer on the Operational Realities of the Monetary System" from Aug. 2012.

"While there is over 20 years of MMT literature published in books, refereed journals, and in working papers available all over cyberspace (though most can be found at CFEPS, CofFEE, the Levy Institute, and MoslerEconomics) it’s only recently that we began blogging, and it is clear that many commenters on MMT-related posts are largely unaware that this extensive literature exists and serves as the basis for our blog posts that are by necessity less detailed." (p. 1)
There is no need to wade through all of MMT literature in order to understand what the whole construct hinges upon. Namely the two assumptions
  1. that money is destroyed when deposited into the government account at the CB and
  2. that it matters whether HPM is considered destroyed or not when booked into that account.
Proposition 1. is wrong.
But even if it were true, proposition 2. would be wrong.

Under normal circumstances, government spending is NOT paid for with newly "printed" CB money, but with money taken out of circulation. (See my model above, which simply traces the 6-step operational procedures involved in the sale of government bonds and CB mitigation of reserve effects that the authors themselves have laid out and which I have only translated into a tangible example.)

Of course, there is a reason why MMT tries to frame people's minds in their direction.
It permits MMT'ers to 'discover' that (in my words):
'no matter what, whenever government spends money, it is newly created money anyway. So why don't these fools just print and spend a little more and create jobs, build bridges and roads and all the good stuff we all would like to have*? If problems arise we, the true money experts, know how to deal with them. It's all a matter of the CB setting the base interest rate right. Follow our lead, and we will take you to the land of economic rapture, bliss and felicity.'
*[but nobody wants to pay for!]

"... a number of people appear to confuse the MMT description of the operational realities of the monetary system with procedures self-imposed by existing laws and/or regulations." (p. 3)
That may be true. But most certainly a lot (if not all) MMTers don't bother to ask whether or not (or to what extent) these regulations reflect a long monetary experience of society and have been introduced for a reason.

"The overarching point here is to recognize who sits at the top of the hierarchy of money for a given monetary regime. Since under flexible exchange rates it is the currency issuing government, self-imposed constraints are simply that—self-imposed and not operational. For MMT’ers, concerns that a nation cannot "afford" to put idle capacity to use through tax cuts or appropriately targeted spending (i.e., NOT bailouts of the financial system or pet political projects—MMT’ers dislike those as much as anyone) are akin to a person with his/her shoes tied together concerned that he/she can’t run. Indeed, it is the very fact that such self-imposed constraints can be and have been disregarded in the past when it has been deemed desirable (e.g., the law requiring that the Fed only purchase Treasury obligations in the open market has been periodically relaxed) that demonstrates who is in charge—as Marshall Auerback recently put it, particularly where fiscal actions, such as military appropriations in a time of war, are deemed important, "we don’t go to China to give them a line-item veto for what we can and can’t spend. We just spend the money."
Yeap - government CAN do that. Technically. Nobody needs MMT to unearth this wisdom; this is exactly what the American (and Japanese, and British) governments are practicing right now in reality: "deficit spending" in the sense that they borrow newly printed money from their CBs instead of (or in addition to) borrowing already existing HPM (and purchasing power) from the financial markets.

At the moment, we do not see any broad inflation (however, there very likely are asset bubbles!). Why this is so can easily be explained with other economic models than MMT 'geocentricism' (or rather: 'monetary creationism').
"if ... [the sovereign-currency issuer] pretends that its self-imposed constraints are of the same character as operational constraints on households or state governments, the result can be involuntary unemployment, retirees below the poverty line, military defeat, and so forth. In other words, while the ability to "just spend the money" is recognized in times of war or when a financial bailout is deemed necessary (by politicians, at least), MMT’ers want it to be just as obvious when the issue at hand is involuntary unemployment, crumbling infrastructure, children or retirees living below the poverty line, a major city devastated by natural disaster, and so forth. Please note that this is not to say that such a government should always spend simply because it can operationally—that would be ridiculous—but, rather, that there is no such thing as it not being able to "afford" to put idle capacity to work; the appropriate constraint to consider is whether there is idle capacity in the first place, while also recognizing the obvious point that not all fiscal actions are equally efficient."
(p. 4, emphasis in the original). 
Waging a war comes with reducing consumption: It's all about building tanks instead of cars. So this is a very fine counter-example against MMT, because reducing consumption of the citizens and increasing consumption of government is precisely what money printing is supposed to do and actually achieves in times of war.
And that "deficit spending" in the abovementioned sense (= printing extra money for government to spend) can put idle capacity at work, is no secret to people outside the MMT world. The question is, for how long you can do this and what (possibly unwanted) side effects you get.

"... the national debt for a sovereign currency issuer under flexible exchange rates is a policy variable — not a market-set rate — or at the very least could be if the government so desires."
Obviously not: If the government just prints the money instead of borrowing it in the financial markets, then by logic the interest is not a market-set rate.

However, if the government spends extra printed money inflationary consequences may ensue (depending on the state of the real economy). And if that happens the CB will have to raise the interest rate, if it wants to fight inflation.
So in the end it is NOT the government (CB included) that determines the interest rate, but the market. As we would expect in a market economy.


Short of creationism and other such esoteric "knowledge", Modern Monetary Theory is the most esoteric contemporaneous concoction in the field of economics that I have so far come across.
I cannot identify any ardent desire to gain economic knowledge through unbiased research. Instead, the relationship between the world of money and the real economy is obfuscated by an ideological and fairytale-style distortion of how the whole system (monetary system + real economy) actually works.
The political intention behind this procedure may well be benevolent. But even the best intentions do not justify an obscuring of facts and the propagation of an ideology in the guise of scientific research.
Textstand vom 03.05.2018

5 Kommentare:

  1. Bravo! Kelton did a talk at my school recently, and everyone loved it. It drives me mad how people will ignore common sense if you promise them a miracle cure.

  2. Thanks for your comment!
    Actually, I'm quite surprised you even found my blog post in the United States. Because it comes from Germany, and search engines seem to have a regional bias, i. e. normally any search would be more likely to show results from one's own area and country.

    So, besides of course being pleased that you agree with me, it also tells me that my blog post can actually be found in the US too. (Sometimes at least, and maybe only by using a combination of keywords peculiar to this text.)

  3. What a bs article. If it wasn't so long i would even criticize It. This is just a mountain of madness.

  4. @ Kristjan: Your highly sophisticated contribution is highly appreciated!

    @ Anonymous: BTW, I do not live all that far from the town after which your school is ultimately named. ;-)

    @ all:
    If anyone is looking for some SOUND information on the monetary system in general (and the US-system in particular) I recommend the paper "Understanding the Modern Monetary System" by Cullen O. Roche, which I am reading right now (

    O. Roche has also written a lenghty criticism of MMT, which I myself however have not read yet (