Wed, 14 Nov 2018
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The facts of Modern Monetary Theory

Independent Australia
14 Sep 2018, 12:52 GMT+10

There are several misconceptions and misunderstandings as to the true meaning of Modern Monetary Theory, writes John Doyle.

 

FROM WIKIPEDIA:

'MMT is a macroeconomic theory that describes and analyses modern economies in which the national currency is fiat money established and created by a [Monetary] Sovereign Government.'

This definition is not the one insisted on by established political parties. They have engineered a scam - "The Great Deficit Scam" - designed to keep an unwitting public misinformed as to the true nature of macroeconomic facts that MMT broadcasts. It can sound plausible and many have bought it.

 

As Marshall McLuhan said:

"Only small secrets need to be protected. The big ones are protected by public incredulity."

Like this one.

These false precepts can be summarised as follows, with a brief response in parentheses.

(Here, I should point readers to this booklet by Warren Mosler - Seven Deadly Innocent Frauds. It explains MMT in detail beyond the scope of this article.)

The Federal Government has no money of its own, by design. (It creates the money supply by spending it into existence.) The Federal Government spends the proceeds from federal taxes. (It extinguishes all federal tax payments.) The Federal Government lives beyond its means when it deficit spends. (Federal deficit spending supplies currency to the non-government area.) The Federal Government must borrow to fund deficit spending. (The Government has no need to borrow, or save, its own money.) The national debt, (Government Debt) is a real debt spend which has to be repaid. (The national debt is investor savings held in the Central Bank.) Social security and all welfare, has to be funded from taxation. (No, it all comes from deficit spending.) Monetary policy should be the main tool for managing the economy via interest rates. (Fiscal policy is also important, possibly more so.)

All the current political parties agree on these points. Left side parties want more deficit spending to benefit the poorer sectors of the community while the Right wing wants to favour the richest cohort, letting it "trickle down" from there. It really is quite evil as the whole idea of government is to look out for the whole population, which is most certainly not happening.

 

MMT misunderstandings

You might have heard it said that MMT is a bizarre, radical theory. It is not, neither is it a Right-wing, or Left-wing plot to serve entrenched political ends. It is not a new way, or a progressive way to redesign the economy. It is not a proposal for something that does not currently exist and which we need to implement.

 

Ellis Winningham writes:

'MMT is currency analysis: it hyper-accurately describes how currencies operate.' It is here and now.

It simply looks at sovereign currencies such as the U.S., NZ and Australian Dollars, Yen, the Euro or the Pound Sterling as they actually are today. It explains how currency comes into existence and how it is used throughout the economy. It codifies these into a factual set of rules which are not subject to opinion. MMT does not need to be implemented because it is not a system. It merely describes what already exists.

As Professor Bill Mitchell says, "we live in an MMT world". Whether we recognise that or not, it is a statement of fact, just as 11=2, a modern piano has 88 keys, and the Pope is Catholic. Simply factual.

So the Federal Government is the monopoly sovereign issuer of its currency, by law and the Constitution (clause 51). No denying it. It is operationally impossible for the Government to spend tax proceeds. It must first issue money into the economy so we can earn it and pay up. It does not borrow to fund spending, although it acts as if it were true by issuing bonds to match deficits. It's a voluntary act by government, a part of the scam. Treasury bonds are investor savings accounts that pay interest. The national debt is the sum total of all the currency ever issued from day one, less what has been extinguished by taxation - MMT fact.

The Federal Budget Deficit will equal, to the cent, the non-government sector surplus. Conversely, the Federal Sector Budget Surplus will also equal, to the cent, the non-government debt. Federal deficits are income for the non-government sector. A federal surplus, in conjunction with a current account trade deficit, will result in a recession. It has happened frequently. That, too, is MMT fact.

Where did these erroneous concepts arise? After WW2, governments funded largely by the Marshall Plan put in place policies of enlightenment, partly to counter the spread of communism and from a genuine post-war belief in helping all sections of society. Support for welfare and full employment were supported by both Left and Right politicians such as Menzies. Recovering economies had space for all to have a job.

This lasted until the early 1970s when a change in thinking via the oil shocks combined with economies reaching capacity and peaking oil consumption took hold. Milton Friedman and Friedrich Hayek became the voices for Neoliberal ideals that carried weight throughout academia. They were taken up by politicians and eventually the general public bought into it. Economic mainstream professionals totally sold out and have been defending it ever since.

But there were dissenting voices from Central Bankers, such as Beardsley Ruml, chairman of the Reserve Bank of New York.

In 1963, the Reserve Bank of Chicago published a booklet on Modern Money Mechanics, a less ambiguous title than using "Theory". The idea that currency was a creature of law dated back to 1905, but these were largely ignored until recently.

 

Alan Greenspan had this comment in 1997:

"A government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like ones we have today, can produce such claims without limit." Few noticed.

One of the main contributions of MMT has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Not only can they issue their own currency to pay public debts denominated in their own unit of account, but also any self-imposed constraint on their budgetary can be bypassed by changing rules. As such, this type of government is not financially constrained in any way that non-sovereign units (such as Greece, Kansas) are, so that it can concentrate on issues such as full employment and price stability.

 

The main points:

Neoliberals, (the mainstream), say we, the people, must serve the economy. We should sacrifice for it. MMT reminds us that we are the economy. We create it and it is there to serve us. The Federal Government is different from every other form of governance. It can never run out of the money it creates as long as there are enough resources available to buy. Federal taxes do not fund any spending. Spending in excess of tax receipts is not a problem.

John Doyle is a retired architect and builder. Now, after 60 years, he is following economics.

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