When US Democratic Senator Joe Manchin announced that he would not support US President Joe Biden’s Build Back Better Act – effectively dooming the president’s signature legislative initiative – he cited America’s “staggering debt.” His concerns echoed those of Biden’s Republican opponents, who insist that all that spending would expand the deficit and leave future generations groaning under the weight of a heavy tax burden.
But would it? Proponents of Modern Monetary Theory would beg to differ.
The Build Back Better Act’s detractors subscribe to the conventional Ricardian assumption that, over time, a government must balance its budget, just like a private firm. But MMT holds that, as long as debt is denominated in a country’s own currency, its government cannot default. Excessive government spending can fuel inflation, but as long as prices are stable, governments can spend away, using fiscal deficits – rather than tax revenues – to support employment and finance public goods.
While MMT is not new, it has been gaining traction in recent years. And a significant share of its following nowadays comes across almost as zealots, unwilling to brook any dissent. Meanwhile, mainstream economists largely regard MMT as tantamount to professional heresy, with some avoiding so much as uttering its name.
Needless to say, the rigid stances of MMT’s devotees and detractors have not lent themselves to productive discussion. This is a serious loss for policymakers, because MMT includes both problematic propositions and perfectly reasonable – even highly useful – positions.
In the latter category, the idea that stands out is essentially functional finance theory. Proposed by Abba Lerner in 1943, FFT holds that, because governments borrowing in their own currency can always print money to service their debts, but still face inflation risks, they should aim to balance supply and demand at full employment, rather than fret about balancing the budget. In Lerner’s view, well-targeted deficit spending is an effective way for governments to “maintain prosperity.”
FFT supports the case for Build Back Better, which includes spending on goods like education, infrastructure, and the green transition. The Biden administration claims that the act would be financed entirely with tax revenues. But even if that turned out not to be the case, as his detractors predict, wouldn’t inadequate infrastructure, depleted human capital, and a planet ravaged by climate change hurt future generations more?
To be sure, US policymakers broadly recognise the importance of such investments, especially in infrastructure; the US Congress recently passed, with bipartisan support, a $1 trillion spending plan that aims to advance objectives like overhauling the electricity grid, upgrading railways, and expanding access to high-speed internet. But even some Democrats demanded that the new funds contained in the package be entirely offset by new tax revenue – a development that highlights enduring resistance to the logic of MMT (or FFT).
And yet, as the Wall Street Journal’s James Mackintosh recently argued, this may be largely a “rhetorical” issue. After all, he notes, “the infrastructure act is, in fact, debt-financed anyway.” And it may well be that many of Build Back Better’s supporters are not convinced by Biden’s claims that tax revenues will offset the new spending, but are not that concerned about it.
But MMT and FFT are not synonymous. MMT includes two additional propositions that, in my view, are unsound. The first is that monetary policy should be conducted in such a way that it facilitates fiscal-policy decisions, such as by maintaining a constant (very low) interest rate.
This expresses a crucial feature of post-Keynesian economics: interest rates, rather than money supply, are the key variables. This defies conventional economic thinking, which focuses on the interaction of stock and flow variables and the role of expectations. More important, if interest rates are held constant, and prices start to rise, inflation could snowball. MMT proponents would advocate tax hikes as a way to manage aggregate demand and control inflation. But, given what we know about asset dynamics, this would be a hard sell.
MMT’s second problematic proposition – that governments should provide a job guarantee in order to maintain full employment, while mitigating inflationary pressures – is even harder to defend. It simply moves too far in the direction of socialist labour allocation, and enables governments to wield excessive control over workers’ wages.
When I explained MMT to former Japanese Prime Minister Shinzo Abe, he compared it to preparing fugu. If done correctly, the puffer fish is a sublime delicacy. But if the chef makes even a minor mistake, the diner could suffer a rapid and painful death.
It is an apt metaphor. If policymakers adopt the positive elements of MMT – essentially, FFT – they will gain new options for bolstering prosperity for current and future generations. But one wrong cut, and the results could be fatal.
Koichi Hamada, Professor Emeritus of Economics at Yale, was a special adviser to Japan’s prime minister. This content is © Project Syndicate, 2022, and is here with permission.
64 Comments
No doubt someone will put me right if I've got this wrong. The idea that a sovereign nation with its own currency can simply print money to fund whatever it wants/needs and never default sounds great, but while that might work for the US, would it work for NZ?
What would happen to our credit rating? Our ability to borrow from abroad?
Yes, the US situation is different because the USD has status as the key international currency and that changes many things.
However, it is also true that a NZ Govt could always use created money to avoid default on its own NZD obligations.
In effect, the use of QE has allowed the 'NZ State' comprising the two separate arms but working in parallel, i.e. the Govt (through Treasury) and the Reserve Bank, to create a situation whereby The Govt (through Treasury) has issued bonds which are now held by the Reserve Bank. So the NZ State has acquired funds held by one arm (treasury) using money created by the other arm. However, we are now seeing the consequences thereof which include strong inflation in our non-tradables (which are 60% of the economy) as well as emerging inflation in tradables.
A fundamental law of economics is that there is 'no free lunch', which is another way of saying that nothing occurs in isolation. The caveat is if the funds created draw on resources that would otherwise lie idle, then money creation can create additional economic output. But a 'caveat on the caveat' is that the labour resource is not homogeneous. Accordingly, some types of skilled labour can already be fully utilised whereas other types lie unused. And there lies a problem.
Yes, if inflation in NZ were to exceed international inflation, then there will inevitably be exchange rate adjustments and there would be a reluctance to invest in NZD. Turkey is the current extreme example thereof.
KeithW
Yes, the US situation is different because the USD has status as the key international currency and that changes many things.
Yes. And in the case of Japan (I know I'm sounding like a broken record or tape on loop).
-- It is a net creditor nation for now (effectively earning more than it spends).
-- It is a "productive nation" in Japan still has an emphasis on making and building things. And no, that doesn't just mean TVs or cars.
-- Japanese firms and h'holds are still paying down debt. So while QE has been raging, nobody is borrowing and the banks have mountains of credit to lend. Compare that to NZ, where the mortgage lending to bid up prices on the existing housing stock is out of control.
Japan is indeed very interesting. Yes, there has been lots of QE in Japan. But as long as the Japanese prefer to pay down debt, then things will play out differently than in countries that like to take on debt. The Japanese propensity to pay down debt rather than take on more debt changes everything in the monetary sphere.
KeithW.
However, we are now seeing the consequences thereof which include strong inflation in our non-tradables (which are 60% of the economy) as well as emerging inflation in tradables.
What is the channel you are seeing between QE and the price of non-tradables? I would wager that such price increases are driven by multiple factors (energy prices, supply chain, increases to minimum wage, a labour market that has moved a fraction in the favour of workers, profiteering etc). The impact of QE would surely be marginal at best? QE just boosted the price of financial assets / shares as investors sought alternative instruments to bonds.
A fundamental law of economics is that there is 'no free lunch', which is another way of saying that nothing occurs in isolation. The caveat is if the funds created draw on resources that would otherwise lie idle, then money creation can create additional economic output.
Yes, real resources are our limiting factor.
... if inflation in NZ were to exceed international inflation, then there will inevitably be exchange rate adjustments and there would be a reluctance to invest in NZD. Turkey is the current extreme example thereof
Turkey is a (USD) dollarised economy - with a strong domestic preference for USD denominated bank accounts and an unfortunate reliance on capital inflows from investors that demand ridiculously high rates and then cash in their gains and swiftly convert back to USD. It's a mess that I cannot see NZ ever getting into.
Jfoe,
The effect of QE has been that the Govt has been able to fund its deficit with Treasury bonds purchased by the RB with created money. If it were not for QE, then those Treasury bonds would have sucked existing money from the financial institutions. So QE has increased the supply of money in circulation.
In relation to a dollarised economy, it is also possible in NZ for any citizen to hold bank accounts in a range of currencies, including the USD, the AUD and others. Currently not many people do so. My own preference right now is to hold money in currencies other than the NZD and I do so as one part of my risk management strategy. If widespread faith is lost in the NZD, then these currencies will be used a lot more.
KeithW
Thanks Keith.
I think there are a couple of assumptions there that are with testing.
Firstly, QE clearly meant that financial institutions had more cash to spend. However, they didn’t go out buying second hand cars, or bidding up the price of barrels of oil. They spent the money on new bonds or on other financial instruments and it is these assets that inflated in price.
Secondly, you are making the blanket assumption that an increase to the money supply inevitably leads to inflation, which is by no means true. And, in any case, the extension of credit from private banks to households dwarves the amount of Government spending.
I agree that nothing is simple. Also that there have been other contributory factors for inflation. For example, raising minimum wages has to be inflationary. But note that I am not arguing against those wage increases. Many of the first order effects from QE may well be in asset inflation but then there are the second and third order effects from the additional money that is circulating. Those effcts are very important. Some of the first order effects are also still to be felt - for example the Government has - or did have last time I looked - about $15 billion sitting in its settlement account waiting to be spent.
In terms of the next few months, Omicron is yet another curved ball that Treasury growth forecasts do not take into account. At some stage Omicron is going to get loose in China to further complicate matters.
KeithW
Indeed, there will be a severe exchange rate adjustment at some point with the NZ dollar. We no longer have international tourism, the current government is undermining agriculture, and the covid response has resulted in the loss of 30,000 businesses. It does not appear as if the PM understands the private sector as an important basis for government finance, and some of the more recent hires in Treasury appear to be proponents of MMT. It will eventually add up to double-digit inflation and a downward trajectory for the NZ dollar.
How so? Short-term fluctations in exchange rates are the result of currency trader 'group think' - and the long-term exchange rate is shaped by the desirability of NZ-denominated financial assets and price equivalence - e.g. Chinese electronic goods vis-a-vis NZ milk powder. These fundamentals do not look like changing - in fact, if NZ focuses on building a sustainably thriving economy with higher value, low-resource exports like services, digital etc we should see a strengthening position.
Jfoe,
I see little evidence that 'low resource exports like services, digital etc are increasing". Services in the last two years have crashed (linked to COVID-19). Companies that succeed in the digital space tend to go off-shore very quickly. Identifying specific policies to encourage low resource exports is challenging, particularly given that NZ lacks tier 1 universities to build the expertise levels.
KeithW
Indeed. With some notable exceptions (sale of part of Weta for $2 billion) our sales of services and digital is pretty miserable. My point is that we need to step-up our efforts in this space, or we will be increasingly reliant on Chinese trade, which is politically and economically extremely risky.
Yes, but how do we go about stepping up our efforts? How do we become world leaders in digital from our current position? We do not have the relevant resident expertise (relative to other countries) and we lack the fast moving consumer insights in relation to the big markets, given our isolation from those consumer markets.
KeithW
elmoboy12,
"New Zealand's ratings are underpinned by very high governance standards and a demonstrated commitment to prudent fiscal management, balanced against high levels of household and net external debt. A credible policy framework enhances the economy's resilience to shocks, as evident during the Covid-19 pandemic, where a robust public health and macro-policy response has enabled the country to weather the shock exceptionally well by global standards."
That quote is from Fitch, one of the major credit rating agencies. Criticise the government by all means; there is plenty of material to work with but many countries would our our financial position. Where debt is concerned, the problem lies in private sector debt.
However, we are now seeing the consequences thereof which include strong inflation in our non-tradables (which are 60% of the economy) as well as emerging inflation in tradables.
No. QE in NZ and the world over has only done what it was designed to do: lower long-term interest rates and pump up asset prices. It has not driven more investment in the real economy of goods and services from which CPI is derived. Jfoe is right about the transitory sources of inflation relating to imports and long supply chains affected by COVID.
I suggest you have a look at what has happened to import prices. These comprise only a small proportion of the inflation that has occurred over the last year.
And I never suggested that QE had increased investment. However, it does appear to have influenced consumption.
KeithW
In effect, the use of QE has allowed the 'NZ State' comprising the two separate arms but working in parallel, i.e. the Govt (through Treasury) and the Reserve Bank, to create a situation whereby The Govt (through Treasury) has issued bonds which are now held by the Reserve Bank. So the NZ State has acquired funds held by one arm (treasury) using money created by the other arm. However, we are now seeing the consequences thereof which include strong inflation in our non-tradables (which are 60% of the economy) as well as emerging inflation in tradables.
You're saying that your para above does not thereof tie NZ QE to inflation?
Yes, NZ QE has in my judgement contributed significantly to inflation. But I don't think it has contributed significantly to investment. In fact my networks tell me that investment plans other than in property development and warehousing went back into the freezer and are yet to emerge.
KeithW
Linklater01 - I think MMT has a lot of merit, Japan is a classic example running a internal deficits of 250% of GDP but still being a very successful export nation. I'm coming to the belief that it doesn't really matter where the money comes from it just needs to be not abused !
Banks create money everyday on loans, something like lending $16 for every $1 deposit they have.
In the EU many countries like Greece who created their problem by completely over spending were forced into harsh Austerity, almost punishment for their past behaviour. While their economy needed sorting out such harsh methods caused excessive economic and social hardship for the people of Greece.
I like this example of the smart use of MMT - If say a Government wanted to speed up the conversion away from coal fired electricity to sustainable energy ( Australia an excellent example ) they could legislate to force this to happen. For it to occur power companies would have to raise their prices to pay for the new infrastructure causing a extra cost onto the economy. Under MMT the Government could agree to progressively buy existing coal fired plants to free up Capital for power companies to invest in new clean infrastructure and as they come on line the old plants are retired. The debt held by the Government after complete conversion could be retired i.e. wiped off the books as it is denominated in a country’s own currency.
Makes good sense to me but obviously unconventional.
The days of a fixed monetary system e.g. like the game Monopoly is gone, in that game only 1 person can win, why can't everyone have a shot of winning and have a more comfortable life !
Re Japan, see my comments above. My issue with MMT is that money becomes little more than a plaything. It is no longer a store of value when it is used by central banks to control the economy like a kid playing with its toys. Central bankers are not omnipotent and only "think" they know what they're doing. It's not clear they really understand the trade-offs their action have on people's lives and whether or not it's sustainable socially or economically. They tend to work off the idea that commercial banks are the optimal allocators of credit. This is why NZ and Aust in particular have the stupendous housing bubbles.
Shoreman,
But that's my point, we are not like Japan. They can get away with a debt/GDP ratio of 250%, but that would destroy NZ.
MMP is seductive, but therein lies the danger for all but a few countries. The idea that you can run a deficit of any level while maintaining full employment and then just raise tax levels when inflation appears is just nonsense.
The elephant in the room, inflation.
".... because governments borrowing in their own currency can always print money to service their debts, but still face inflation risks,...."
".... More important, if interest rates are held constant, and prices start to rise, inflation could snowball....."
That's usually left to the next govt to sort out. The previous one having had a ball borrowing to the hilt
"....that governments should provide a job guarantee in order to maintain full employment, while mitigating inflationary pressures – is even harder to defend....."
"....Excessive government spending can fuel inflation, but as long as prices are stable, governments can spend away, using fiscal deficits – rather than tax revenues – to support employment and finance public goods....."
non-stable prices would likely come during or after the event so too late. No doubt MMT will be latched onto by the real/hard socialists
"That's usually left to the next govt to sort out. The previous one having had a ball borrowing to the hilt"
That seems to be the father of NZ's two party system. Labour blows the budget until nz starts feeling a hangover, then National puts us back together again. MMP hasn't solved this funnily enough...
Edit*
Perhaps I should have said one party blows the budget and the other picks up the pieces. However in my lifetime it does seem to be labour blowing the budget on ridiculous things like bridges for cyclists... We borrowed how much from the future under this labour govt and have built seemingly nothing with it? Hence my comment.
Surprised anyone still roles out this old wive's tale - take a look at actual financial data from the last 30 years and a VERY different picture emerges. But of course even a basic understanding of human psychology will tell you how hard it is to change people's opinions (particularly around narratives that favour 'their team') with boring facts and data.
Muldoon's National govt made a mess that Lange's Labour govt had to try and fix.
Yes, but remember that the Labour Govt moved to a free-floating currency exchange, which underpins how the economy works today. Muldoon could negotiate variable interest, short-term loans in foreign currencies. Labour passed the Public Finance Act in 1989 to stop this from ever happening again. This Act stipulated also that Govt must must must always run surpluses or balanced budgets to cut debt. Lower govt debt means that households can enjoy cheap credit that is good for house prices.
Regarding exchange rates, I can't recall anything in the PFA that specifies they must be floating - happy to be corrected. Anyway, lower public debt keeps the door open for raising interest rates without bankrupting the govt, so can't see why low public debt is a driver for cheaper finance for housing.
Regarding surpluses or balanced budgets, there is no strict prohibition against deficits, provided the govt balances the books "over a reasonable period of time". There is wiggle room, but the govt is obliged to justify dipping into temporary deficit territory:
See: https://www.treasury.govt.nz/publications/guide/guide-public-finance-ac…
"The second principle requires that each Government maintain debt at prudent levels. In order to achieve this objective a government will need to ensure that operating revenues are greater than operating expenses, on average, over a reasonable period of time. That is, a government cannot borrow to finance operating expenses over time. "
I have often mulled over the possibility of a two currency nation. Treasury could issue a crypto based coin that might be called the "Kiwi" for instance. This would only transacted internally to pay wages, buy groceries and fund major internal projects. The "Kiwi" could be converted back to NZ dollars for all our overseas transactions. One flaw possibly would be how the world values the NZ dollar if it is not being used internally. Any thoughts?
I can't take sovereign issued currencies of any flavour seriously anymore. They are a tool for politicians to steal from savers or current/future tax payers to fund vote buying. We can move to a pair of currencies (as has China) but a bunch of us are turning our backs on govt currency regardless. Politicians (and I throw central bankers in that heap) can't be trusted with money supply.
I find the concept of keeping Interest rates low permanently, dangerous. They seem to reject the role of monetary policy (and its potency) entirely yet overemphasize the role of fiscal policy. Low interest rates over the long term usually indicates a tight monetary policy. https://voxeu.org/article/misdiagnosing-crisis-real-problem-was-nominal
Another thing I don't like is the idea that taxation is the way to control inflation. This was tried in the past under Lyndon Johnson in the US, it caused a budget surplus yet the inflation gathered pace leading Nixon to impose price controls in 1970
It does take a lot of truisms which does make it appealing but it's still not been tried in full form.
https://www.econlib.org/library/Columns/y2021/Sumnermodernmonetarytheor…
I'm more of a fan of NGDP targeting myself. (total sum of GDP without stripping out inflation).
Scott Sumner explains why the current interest-rate-targeting and inflation-targeting regime is inadequate and why the Fed should target nominal gross domestic product (NGDP) instead. Targeting NGDP—the sum of all nominal spending in the economy, or alternatively a nation’s income—would have greatly reduced the severity of the Great Recession and eliminated the need for fiscal stimulus and bailouts. It would also ensure low inflation on average and milder business cycles
https://www.mercatus.org/system/files/Sumner-NGDP-Targeting-sum-v1.pdf
To be fair Keith, MMT economists do not advocate using taxes reactively to control inflation. They would argue that (a) Govt should consider the inflationary risks associated with spending and policy decisions as part of the decision-making process (e.g. spotting that a Govt plan would increase competition for limited resources and making changes to reduce that risk) and (b) that more work should be done to identify the root causes of price increases before central bankers pull the interest rate lever (which can slow the whole economy down and increase unemployment without even tackling the root cause).
It is a much smoother operation.
Interest rate manipulation as the sole means of controlling inflation is by definition clunky and brutalist, with extraordinary collateral damage that accompanies it. I am sure that the smoothness of implementation was a real comfort to the millions of poor folks around the globe made and kept unemployed from interest rate hikes in central banks' absurd pursuit of the mythical NAIRU.
The worst thing about using taxation to control inflation is that tax is political.
Elected governments will be very reluctant to raise taxes when needed, eventually leading to out of control inflation.
This is the beauty of a truly independent reserve bank - it can make tough choices for longer term stability without having to worry about being voted out.
Yet again all commentators so far (except one) have failed to appreciate that commercial banks print far more money than central banks have ever done. Banks do not lend money people deposit with them.They create, by keyboard entry, ever single loan they make, therefore adding to the money in circulation.
So if it is fine for commercial banks to create money for the benefit of their shareholders (dividends on profits, which you'll note are rapidly rising) how come it apparently is not fine for a country's central bank to create money for infrastructure, hospitals, schools, state housing etc that benefits citizens?
An if money creation is the source of inflation (which most people appear to think is the case) what role does commercial bank money creation play? After all, both increase the money supply.
The charge that our Reserve Bank is the cause of current inflation is only true to the extent that money went into buying up government bonds from the commercial banks. They held the $55 billion it created in the past 20 months in their reserves and went on a splurge of money creation themselves (over $90billion in 12 months) for loans on mostly existing residential housing.
Had that Reserve Bank money gone direct to the government for spending on those things of benefit to citizens the picture would be very different.
Finally, as to interest rates going up to rein in inflation, that bears some more critical thinking also. As almost every business operates on borrowed money the cost of those interest rate rises feeds directly into the prices they charge (they are a cost to business), resulting in them increasing their prices.
An if money creation is the source of inflation (which most people appear to think is the case) what role does commercial bank money creation play?
In NZ it creates house price inflation. Do you think the average NZ house price would be over $1 million dollars without the enormous ammount of credit that banks have extended to this sector?
This is not the worst 'bad faith' take on MMT that I have read in the last year. At least there is a recognition that MMT is built on the solid foundations of Lerner and Keynes (not some new thing dreamt up by loonies). The three main errors in analysis are depressingly common though...
1. MMT is not 'something you implement' - it is just a framework to understand how Govt fiat money works. Anyone who understands central bank operations will comfirm that the framework is accurate (the functional finance bit referenced in the article). Govt spends new money into the economy, and taxes it back out again (destroying it). Govt money that is left in the economy (spent but not taxed back yet) collects in settlement reserve accounts and is generally swapped for Govt bonds. These Govt bonds play an important role in the economy (providing rock solid safe assets for pension funds etc) - but they are not required to 'finance' Govt spending.
2. MMT does seek to reduce the role of monetary policy and most MMT economists push for a permanent low interest rate of 1% to 2% (a small amount of interest paid on settlement reserves). However, this does not prevent controls being placed on the supply of credit from private banks to counter debt-fuelled asset booms (e.g. a higher lending rate for property purchases). MMT economists do not say that taxes are the main tool to counter inflation risks. The emphasis is on identifying Government spending that increases the risk of inflation. For example, if there is a private sector housing boom and Govt decides to spend $5 billion on building new state houses, then, guess what... the private / public competition for limited resources is likely to cause inflation in the cost of building materials, skilled labour etc. However, if Govt decided to spend $5bn on hiring some surplus workers to build new energy infrastructure to make electricity greener / cheaper, then that spending could actually be deflationary in the medium-term.
3. The 'job guarantee' is not a nice to have 'socialist labour allocation' proposal at all. In mainstream economics, the risk of wage inflation is managed by keeping a proportion of of the workforce unemployed and desperate for work (Philips Curve / NAIRU). MMT argues that a job guarantee is a more elegant solution - ending involuntary employment and providing transition (holding) jobs during downturns in the economy. This is not 'socialist' - it is just common sense. Why would any society stop people that cannot find work being paid to do positive things in their communities - there are loads of things that need doing. The job guarantee would also set the floor for wages (replacing the minimum wage).
Keynes advocacy of deficit spending by Government was in a specific situation where there was high unemployment and there was a need to break out of the debilitating depression. Keynes was famous for changing his prescriptions when the situation changed. One of the famous quotes from when he changed his mind on a specific topic, and for which he was criticised, was along the lines: 'When the facts change, I change too. What do you do, Sir?'. I often ponder on what Keynes would be saying if he were with us now.
KeithW
Keynes never actually said that. What he did hold to, though, was what we can do, we can afford. I'd wager he'd be rolling in his grave at a number of things, including:
- John Hicks' misrepresentation of his work and what the fallacy of loanable funds has done to macroeconomics
- the travesty that the IMF, World Bank, and WTO have wrought on nations struggling with sovereign debt issues as compared to Keynes' bancor proposal
- neoclassical macro's general obsession with equilibrium, broken models, ignoring ridiculous assumptions, and having no regard to the real world.
What impact did removing the gold standard have on our way of living, managing economies & the likes of MMT? Was it a flawed concept that the likes of MMT are eventually finding justification in? Seems like we're justifying any need to pay the debt back, like we can make it dissapear, ignore it or make it suit our ideas.
The removal of the gold standard made it much easier for banks to go about their credit creation. One point that the MMTers cannot counter is that the value of the purchasing power of currencies has deteriorated over time, particularly for the 'little guy.' There is very little or no incentive for people to save in cash anymore. But you know what the irony is? The banks' marketing are still pushing the virtues of saving to young people while at the same time they're directly contributing the destruction of its purchasing power and value.
I think your argument is with the proponents of sovereign fiat currencies - a much wider group than MMT economists.
Also worth noting that governments basically suspended the gold standard at will and used legal workarounds to avoid the constraints the gold standard created all the time.
Finally - real saving rates have dipped below zero for a year or two of the last 20 and are comfortably over inflation on any medium-term measure. Why should people expect their savings to appreciate much more than inflation?
I think Keynes may deny such a claim.....there is a world of difference between short term stimulus and permanent funding....especially when all and sundry decide they can fund whatever they desire (they cant, but who is going to successfully convince them of such?)...as the informed proponents declare, MMT is a description of the workings of government finances...nothing more.
You can be sure we will make as big (possibly bigger and faster) a hash of things under an MMT set of beliefs as we are currently.....greed is almost impossible to control, certainly for any significant period of time.
We may bemoan (with cause) the outcomes of the current settings, but a country with a permanent trade deficit that produces virtually none of its necessities is in no position to fuck around with monetary pipe dreams.
Yes, and I suspect downstream of these unchartered waters there is a large waterfall of lost confidence in sovereign currency.
Some of us have already gone over, like in that Star Wars scene: "Republic credits are no good out here, I need something more real"
MMT = Pump it till you break it.
Just remember the OECD, IMF and 10 countries held a simulation of a catastrophic cyber attack on the financial system in December. The simulated result was literally such that a new system would rise like a phoenix from the ashes.
I just remember Event 201 was the pandemic simulation 3 months before we actually got one, and the twin towers attack was also simulated shortly before the actual event. Hmmmm.....
MMT proponents would advocate tax hikes as a way to manage aggregate demand and control inflation. But, given what we know about asset dynamics, this would be a hard sell.
MMT’s second problematic proposition – that governments should provide a job guarantee in order to maintain full employment, while mitigating inflationary pressures – is even harder to defend. It simply moves too far in the direction of socialist labour allocation, and enables governments to wield excessive control over workers’ wages.
The author at least deserves some kudos for a genuine attempt to engage with MMT, when most of the mainstream is still in trying to pretend it doesn't exist.
However:
- MMT does not mandate ad-hoc tax hikes as the sole inflation-fighting tool. While taxes can be calibrated and applied in a more targeted way with much less collateral damage than mainstream-advocated interest rate hikes (think the US recessions from Volcker), they are only one tool for inflation - and 'final solution' one at that. MMT instead pushes for a surgical approach that aims to identify and target inflation at the root source and cause(s). This could be through competition law, relieving a supply constraint, economic regulation, or other means specific to the context. NZ's inflated housing bubble, and last year's absurd, Kafka-esque exchange between the Minister of Finance and RBNZ over whether RBNZ was taking account of it in setting interest rates, illustrates in a particular sector how wedded we are to the mainstream approach at the expense of the former.
- On fugu the puffer fish: whether something is politically hard may have no bearing on its substantive merits and whether it is the right thing to do - even if it doesn't happen overnight. At the very least, a community-administered, state-funded job guarantee would provide employment and replace the moral and economic disgrace that is the mainstream's enforced unemployment regime via the mythical NAIRU.
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