Home > Uncategorized > MMT has become part of the mainstream conversation, but . . .

MMT has become part of the mainstream conversation, but . . .

from David Colander

MMT has done what few heterodox economic theories have done; it has become part of the mainstream conversation. It is talked about by pundits and politicians, which means that standard macro economists have felt compelled to respond to its arguments. That’s an enormous accomplishment that will, I hope, lead to improvements in macroeconomic theory and policy. Its creators deserve to be congratulated. But I am not too hopeful. MMT is more of a marketing success than an intellectual success that has caused standard economists to rethink their theory or policy views, and I suspect that, once MMT’s political usefulness to progressive politicians diminishes, standard economists will push MMT back into the heterodox wilderness, and settle back into their unwarranted complacency.

Since MMT is not a precisely spelled out formal theory, but more a narrative about the nature and development of money and government finance, let me start by summarizing how my interpretation of it used in this article. What I mean by MMT are the set of shared ideas about monetary and fiscal policy attributed to economists such as Randall Wray (2014) and Stephanie Kelton (2001). The ideas that I will focus my discussion on can be summarized in three distinct and separable propositions.

  • Idea 1: The way to understand the role of money in the economy is to think of money first as credit – money is an abstract accounting system of interpersonal obligations. Physical money plays only a secondary role in that accounting system. MMT holds that in the historical development of money, abstract money credit preceded the development of physical money rather than physical money preceding credit, as it does in most standard histories of money.
  • Idea 2: Government spending, taxing, and monetary policy should be thought of in Abba Lerner’s functional finance framework, in which the policies are judged by their effects on the economy, rather than in a sound finance framework in which government faces a budget constraint, and taxes (either current or future with bond finance) are thought of as paying for government spending.
  • Idea 3: The above two ideas are a useful guide to real world U. S. policy thinking. They emphasize that economist’s focus on the need for balanced budgets is misguided and that the supposed financing constraints that require government to pay for new programs with taxes or debt are largely illusory.

I largely agree with the first two but largely disagree with the third.    read more 

  1. lobdillj
    October 24, 2019 at 11:59 pm

    I don’t understand what David is referring to in his three ideas. I don’t see that they have any bearing on the validity of MMT.
    Standard monetary theory ignores that money is created out of thin air (never mind who does it or what that necessarily implies). It presumes money does not have to be created. It presumes that it is borrowed from a creditor who is the owner and who could spend it instead of lending it, but chooses to lend it instead–at interest. And following the previous history of its ownership one never comes to a past transaction in which the money is born. It always exists, and has an owner. This is where MMT disagrees with standard money theory.

  2. October 25, 2019 at 12:22 am

    From Colander’s full article ” Balancing the budget, limiting government
    debt and restricting monetary expansion, can be understood as guidelines that would have
    been integrated into a social contract that implicitly developed among various competing
    groups. ” and ” They are not rules that follow from economic theory; rather, they
    are rules that evolved to govern the competition of competing political interests.”

    For “political interests”, substitute “elites”. Just how do these arbitrary fiscal anchors help the poor and unemployed?

    You know who likes lackluster economic growth? The rich. Jeff Spross
    http://www.theweek.com/articles/580975/know-who-likes-lackluster-economic-growth-rich

    “Elites obviously don’t want to completely tank the economy. But it certainly works for them if it stays modestly stagnant, maximizing the growth of the pie while minimizing worker bargaining power.”

  3. John Hermann
    October 25, 2019 at 6:09 am

    There are two types of money – horizontal money (money created by commercial banking institutions) and vertical money (money created by monetary sovereign governments). On the whole, orthodox economists do not understand money. In particular, they do not understand that only monetary sovereign governments can create net financial assets for the non-bank private sector (what I like to describe as the real economy). Commercial banking institutions do not, and cannot, create net financial assets. Another thing that most economists do not understand is that deficit spending by a monetary sovereign government always injects net financial assets into the real economy. As a corollary to this statement, it may be said that the volume of so-called federal government debt (aka federal Treasury securities on issue) is equal to the net money supply. To destroy that “debt” is to destroy the money supply.

  4. Yok
    October 25, 2019 at 4:31 pm

    David. Your three statement of MMT – they’re your statements of MMT. But I have to say I agree with the statements. Even no. 3. “the economists focus on the need for balanced budgets IS misguided.” After all, the economy expands, the population grows and you need more money unless you want continuous deflation. The fact that the deficit has expanded almost continuously for 200 years under strong economic growth proves, to me, compatibility. I think they would say the amount, or the degree of growth of deficit IS an item of concern. I believe they would say all deficit growth should be justified in some way; investment for future economic growth, national defense in case of attack, natural disaster. Yes, THOSE CONSTRAINTS ARE ILLUSORY. THE REAL CONSTRAINT IS CREATING SOMETHING OF VALUE FOR THE RESOURCES YOU HAVE UTILIZED.

  5. Ed Zimmer
    October 25, 2019 at 4:48 pm

    MMT in a nutshell: GDP is the measure of our productive economy. GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending, because ALL spending is someone else’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries to household bank accounts). All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends ONLY on currency-users perception), there are no limits other than that perception.

    This says that a monetary sovereign can maintain a healthy economy for its populace
    just by circulating tokens (so long as they don’t promote disbelief among its users
    – which promotion of disbelief seems to be the main contribution of economists).

  6. David Colander
    October 25, 2019 at 10:15 pm

    My article was focused on the historical foundations of monetary theory and how MMT fit into that history. My first point was that MMT is historically important because it sees money as an accounting entry first. Accounting entries can be created at will, and that is a better way to teach students about money. Functional finance is also a better way to teach the pure theory of fiscal policy. My second point was that the first two points do not imply anything specific about policy–that a sound finance approach can be justified within a functional finance and an MMT framework. It just requires different reasoning that accepts that money is a creature of society, and that society generally requires a set of social rules. We should be debating about the best social contract, not about abstract monetary of fiscal theory. Social contract theory involves a normative debate.

    • October 31, 2019 at 5:35 pm

      “Its insight [i.e. the credit theory of money] is that money is part of the foundation of the
      economy, and that money is based on trust. In our politically divisive times, trust in
      government is hard to come by”. [Collander, 2 paras short of conclusion].

      From this David draws the inference that “An important goal of any policy should be to encourage people to trust the government and believe that it will make reasonable decisions on spending and taxes”. I don’t agree.

      Governments are untrustworthy because “absolute power corrupts absolutely”. That to me is why governments shouldn’t be trusted, and why vital issues about how to interpret money [as an advance of credit which when spent is recorded in our and our supplier’s accounts along with information relevant to resource use about what it has been spent on] should be agreed on beforehand and written into constitutional law which politicians cannot get at. Only when that issue has been stabilised can we engage in normative discussion about how best (at a given time) to repay the debts resulting from our spending, i.e. organise the doing of what needs doing, like planting the seeds of next year’s harvest.

      • Craig
        October 31, 2019 at 6:51 pm

        Dave,

        Even a sovereign government and money system based on grace?

      • Ken Zimmerman
        November 1, 2019 at 8:58 am

        Dave, I disagree. David Colander is correct to recommend people trust the government. But that trust is conditional. The government must be popularly elected and must behave democratically. And citizens must hold the government to these standards. Harshly, if necessary. The problem today is too many citizens no longer meet this responsibility. Governments created money over 5,000 YA. And made it functional for over that entire period. Why should “Johnny come lately” private profit interests oversee money? I agree, as you say we can “engage in normative discussion about how best (at a given time) to repay the debts resulting from our spending.” If there are debts. It my view, these discussions should be organized by government. Again, unfortunately, we may find public participation is lacking.

  7. Arturo Hermann
    October 25, 2019 at 10:25 pm

    The paper contains interesting aspects but seems to overlook the following significant element: namely, that the prerogative of the public sector (including for that purpose central banks) of creating “ex-nihilo” new purchasing power has constituted a paramount way for creating new effective demand (channelled in public and private investments, and in public and private consumption).
    As an example, for how many years ordinary waged and salaried people should save to buy a new car? But with the money provided by a loan they can buy the car right now, with all the multiplying effects on the economic systems. As a result (in the link below), the ratio of private debt on GDP is enormously increased across virtually all OECD Countries in the latest decades.
    For these reasons, credit creation (and public spending) play an irreplaceable role in creating and maintaining effective demand. But, for this role to be effective, it is fairly obvious, but perhaps a bit overlooked, that the process of debt repayment should be slow and imperfect in various degrees, according to circumstances.
    The policy of quantitative easing is one effective way to reinforce these effects. And it is interesting to note that such policy tends to become more and more an ordinary matter.

    https://www.wsws.org/en/articles/2019/10/19/pers-o19.html

    Such policy, however, at least in the present time, is likely to favor the more powerful borrowers (in general represented by big corporations), because they are likely to be granted lower interest rates and better repayment/consolidation terms. This process can increase, also through the process of “credit rationing”, the concentration of economic power in few global players.

    “Financial Indicators – Stocks” http://stats.oecd.org/Index.aspx?DataSetCode=FIN_IND_FBS, in OECD.StatExtracts http://stats.oecd.org/

    OECD, National Accounts at a Glance.
    https://data.oecd.org/gga/general-government-debt.htm

    Such figures (including also the ratio of public debt on GDP ) indicate that it is just impossible to repay such debts and that the very issues at stake are the interest payments.
    In this respect, a permanet low (or zero) level of real interest rates would help to switch power and resources from finance to social and productive activities.

  8. Arturo Hermann
    October 26, 2019 at 5:57 pm

    As a complementary comment, one reason why MMT has gained attention in mainstream’s quarters is that the latter preach “sound finance” in theory but do otherwise in policy action. The history of deficit spending in the US (and in other Countries as well) tells us that conservatives have learned the lesson very well, and have most often outstripped progressives in this respect.

    http://www.cbo.gov/sites/default/files/budgetinfographic.pdf

    The supply side oriented Reaganomics is a case in point. It can be interpreted, among other things, as an (illusory) attempt to overcome the psychoanalytic superego through a good binge (to the benefit of the rich, of course).
    The reason for this is that public spending can represent a maternal and protective figure whereas its reduction can be linked to a punitive instance ─ for (chiefly unconscious) greedy and aggressive fantasies ─ of the austerity discipline (for the weakest groups, of course).
    In this respect, MMT’s perspective has the great merit of stressing (i) the institutional character of money and (ii) the circumstance that monetary policy should be geared to the central objectives of full employment and price stabilisation.
    Such course can be fostered by a system of democratic planning coupled with a better collaboration between heterodox theories.

  9. Ken Zimmerman
    October 27, 2019 at 2:12 pm

    The economy is just one aspect of the society. It is fully integrated. When the economy changes many other parts of society change as well. Economists are only pretending when they theorize about the economy in isolation. Economists need to broaden the range of their work in at least two ways. More interdisciplinary studies and data gathering, and acquiring sensitivities to changes in so called “non-economic” parts of society that are all but invisible to economists today.

    It’s usually stated that “The Great Depression” of 1929’s greatest impact was devastation of the U.S. economy. This is incorrect. Surely, it’s important to note that half of the banks failed; unemployment rose to 25% and homelessness increased; housing prices plummeted 30%; international trade collapsed by 65%, and prices fell 10% per year. And, important to note the stock market did not recover for 25 years. But these are just unconnected data points. Data does not integrate. Only humans integrate. So, how did humans integrate these data points? And in what ways did that integration change the everyday lives of Americans during and after the Depression?

    There are at least three such effects. First, it stripped security of every sort from all but the wealthiest Americans. And even the wealthy were not immune from declines in security. This was not just financial security, but also health, housing, schooling, food, and water. In many locales travel declined or stopped altogether. As demand for manufactured products declined, manufacturing plants shut down. Even many small businesses closed. Government operations were severely effected and government efforts to address serious social problems such as poverty, public health, and crime slowed or stopped. Families often disintegrated or became dysfunctional. The incidence of child abandonment, domestic violence, and infant mortality grew.

    Second, the Depression threatened democracy in America in two ways. It first either made money unavailable for elections to be held or made it difficult to impossible for Americans to vote due to the pressures of the changes laid out in the preceding paragraph. Secondly, the Depression gave a distinct advantage in campaigning to the wealthy who, though hurt by the Depression still had more than enough money available to purchase the votes of desperate members of many communities. That so many Americans managed to vote despite these pressures and to vote for a Presidential candidate who promised a “New Deal” is mostly attributable to grassroots work by unions, farm cooperatives, and local civic organizations and churches.

    Finally, women entered the workforce in increasing numbers. Some families maintained a middle-class income by adding an extra wage earner (wives and children). Despite widespread unemployment during the Depression years, the number of married women in the workforce increased. Some people criticized married women for taking jobs when so many men were out of work, though women often took clerical or service industry positions that weren’t seen as socially acceptable for men at the time. Women found work as secretaries, teachers, telephone operators and nurses. But in most cases, employers paid women workers less than their male counterparts. Shows us how amazingly resilient cultural basics are, even in the face of threats to cultural survival like the Great Depression. One aspect of existing culture did change quite a bit, however, the family. Particularly, the role of the father. This period of changed socialization, combined with the events of WWII, in turn set the stage for the women’s-rights movements of the 1960s and 1970s, as well as the broader participation of young adults in political protests during the 1960s.

    Related to but slightly different from the above, I also want to point out that debates among economists about what money is or is not, and how it “ought to be used” are largely unheard and irrelevant to most of the people who use money every day. Bankers listen to economists with one ear, some businesses with half an ear, and the ordinary citizen with no ears. Governments listen to economists when they should definitely not. Paul Krugman published an article a few days ago titled “What Economists (Including Me) Got Wrong About Globalization.” It’s a mea culpa that most of what economists said and wrote about globalization’s impacts on inequality and the middle-class and working-class since the 1990s was wrong. In other words, based on economists’ advice and the willingness of some politicians to use it to battle their enemies and suppress the poor and people of color, the US has devolved into a cultural malaise and conflict from which it may not recover, or at least not without serious negative consequences for the nation. Hooray for economists! Deadlier than climate change, at least for the foreseeable future.

    • Craig
      October 27, 2019 at 5:47 pm

      “Related to but slightly different from the above, I also want to point out that debates among economists about what money is or is not, and how it “ought to be used” are largely unheard and irrelevant to most of the people who use money every day. Bankers listen to economists with one ear, some businesses with half an ear, and the ordinary citizen with no ears. Governments listen to economists when they should definitely not.”

      Defining money is fine. Better is to recognize it as an effective and essential tool, the economy as monetary in nature and to look for ways that it can be utilized to resolve income, revenue and systemic problems.

      Again to paraphrase: “It’s the monetary paradigm, stupid.”

      • Ken Zimmerman
        October 28, 2019 at 12:19 am

        Craig, you are correct that money is just another cultural tool to use in figuring out how to live our lives. So, let’s figure out how to best use it.

      • Craig
        October 28, 2019 at 12:46 am

        Thanks Ken. Correct, and actually my statement that “to look for ways that it can be utilized to resolve income, revenue and systemic problems” was slightly off my real point which is that more of us need to discover the simple and yet economic paradigm changing effects of an accounting and algebraic operation of equal numerical amounts credited to consumers and debited back to enterprise….of a 50% Discount/Rebate monetary policy at the point of retail sale.

        That single policy has so much problem resolving effect, so much integrative economic benefits to both individuals and commercial agents and potential personal, social and systemic psychological up-lift-ness that I am continually amazed that you guys don’t get on the bandwagon with me on it.

  10. Davidson, Paul
    October 30, 2019 at 4:10 pm

    Attached is an article of mine explaining what is wrong with MMT. Paul Davidson Founding Editor, Journal of Post Keynesian Economics author: WHO’S AFRAID OF JOHN MAYNARD KEYNES? CHALLENGING ECONOMIC GOVERNANCE IN AN AGE OF GROWING INEQUALITY [2017]; and THE KEYNES SOLUTION: THE PATH TO GLOBAL ECONOMIC PROSPERITY [2009] phone:(561) 676-1633 Holly Chair of Excellence in Political Economy Emeritus, University of Tennessee https://haslam.utk.edu/experts/paul-davidson?c=10)

    ________________________________

    • Craig
      October 30, 2019 at 5:37 pm

      Keynesianism was a reform and finance’s fall back position to the burgeoning world wide movement of Social Credit before WW II ….which itself was merely a reform albeit a much more focused and effective one than Keynesianism.

      Douglas was a very clear minded individual but he was born before Kuhn’s study of paradigm changes was written and analyzed, and before classical economic ideas regarding equilibrium were recently de-bunked.

      Dominant and rapacious finance capitalism and well intention-ed but reactionary and monetarily ignorant socialism are alike passe’, and the particles of truth within them must be thoroughly integrated into the third-ness greater oneness of the new paradigm of Abundantly Direct and Reciprocal Monetary Gifting and its various policies, regulations and structural changes.

    • Ken Zimmerman
      October 31, 2019 at 2:57 am

      Paul, no article attached. If you’ll send along the name of the article, I’m certain I can locate a copy.

    • John Hermann
      October 31, 2019 at 5:18 am

      I could not find anything about your article on MMT in this link Paul.

  11. John Hermann
    October 31, 2019 at 5:33 am

    I suspect this is the correct link to Paul’s criticism of MMT: http://www.paecon.net/PAEReview/issue89/whole89.pdf

    Note that Paul’s criticism has been countered in a very recent article by L Randall Wray: https://neweconomicperspectives.org/2011/12/mmt-doubly-retrospective-analysis.html

  12. John Hermann
    October 31, 2019 at 5:38 am

    Oops, my mistake …. here is the correct item by L, Randall Wray which responds to Paul’s criticism of MMT: http://neweconomicperspectives.org/2019/10/mmt-report-from-the-front-part2.html

    • Ken Zimmerman
      October 31, 2019 at 9:41 am

      I’ve read both http://www.paecon.net/PAEReview/issue89/whole89.pdf and Wray’s article explaining MMT. Paul Davidson writes in conclusion, “In sum, MMT cannot be a theory of money operating in modern-market oriented economies for it fails to provide money with the property of contractual liquidity or the explanation of why other financial assets have some degree of liquidity because of the existence of orderly financial markets.” My issue about this statement is relatively simple. Why does Paul choose to make money a prisoner of financial markets by insisting money must be contractually liquid to facilitate these markets? Financialization is, in my view one of the worst of Sapiens’ inventions. Creating debt, obligations, wild enthusiasm for profit, and trading where none should exist. If we want to reform economics and the economy, I suggest we begin by ridding ourselves of financialized economies.

      • lobdillj
        October 31, 2019 at 11:04 am

        Great idea, Ken. We need to inoculate our economies against the predation of financial markets.

    • October 31, 2019 at 12:05 pm

      Having done my best to clarify what MMT academics are arguing for (without much success), I read what Wray has to say about its critics with disgust. He doesn’t answer them but rubbishes them and attacks them ad hominem, treating MMT as if it were his company’s personal trademark rather than the developing understanding in the public domain. This comes out particularly when he criticises Anne Mayhew for accepting his textbook rather than obscure academic papers as an authoritative source, and in his rubbishing of the intuititive Toporowski, who dared to point out that “The originators of the Theory are not amateurs, but a hedge fund manager and men and women with PhD’s in Economics who offer to the ‘plain man’ the ideas of Beslay” [Berthold Brecht’s fictitious advocate of paying the military].

      So Toporowski doesn’t pay Wray the respect of quoting any of his group’s papers. As an intuitive myself, that may be because he tends to see meanings rather than who wrote what.

  13. Craig
    October 31, 2019 at 6:47 pm

    MMT, which as far as it goes I am happy to philosophically align with, is just a tweaking of Keynesianiam. It’s about additional money in the system. Good. The problem with it is it’s both indirect in its effect on the individual, and again, merely tweaks the nature of the current monetary paradigm of Debt Only. It’s Keynesianism +. That’s all.

    Directness is an aspect of every historical paradigm change. For instance going from an ephemeral nomadic relationship with the land to a direct and more abundant one via agriculture, from a false abstract spiritual concept of earthly significance to a direct experiential observation of its position in space, from absolution only via the structural monopoly sacraments of the church to having a direct and personal relationship with god.

    Heed the signatures of historical paradigm changes and the underlying concept from which those signatures come and you can stop being a blind man describing an elephant, an erudite but paradigmatic dunce.

    “It’s the monetary paradigm, stupid.” that we need to focus on….not just another tweak that parades itself as a paradigm change but will not stop the 5000 year old pattern of economic, social, political and civilizational collapse.

  14. Arturo Hermann
    October 31, 2019 at 9:31 pm

    Perhaps it can be pertinent to report here these remarks as they are largely related to the broader MMT’s perspective.

    https://rwer.wordpress.com/2019/10/16/some-constructive-remarks-on-wrays-alternative-paths-to-mmt/

  15. November 6, 2019 at 11:09 am

    Still trying to find out what MMT is all about, I found some serious criticism by Joseph Huber, originator with James Robertson of the sovereign money argument, “Creating New Money” (2000) with seigniorage on public spending.

    https://sovereignmoney.site/modern-money-theory-revisited

    • November 6, 2019 at 2:02 pm

      From RWER (2014) a usefully more analytic version this:

      http://www.paecon.net/PAEReview/issue66/Huber66.pdf.

    • John Hermann
      November 6, 2019 at 3:54 pm

      Huber has some serious misunderstandings of what MMT is all about.

      • Craig
        November 7, 2019 at 1:07 am

        Even though its advocates are not generally aware of it, MMT is really all about how we can have direct monetary distributism. It’s just that they haven’t cognited on the pivotal-ly powerful point of a reciprocal accounting/algebraic monetary operation at the point of retail sale that simultaneously resolves the two deepest and most chronic problems of modern profit making economic systems in other words:

        #1 individual and systemic monetary austerity and

        #2 “uncontrollably” chronic inflation.

      • Craig
        November 7, 2019 at 1:28 am

        Unfortunately virtually all economists and economic pundits are afflicted by the obsessive dualism and their hide bound cultural allegiances to either a hopelessly monetarily unstable corporate and financial capitalism or the politically unworkable and equally hide bound socialist idea that re-distributive taxation can alone resolve the above problems.

        Integrative thirdness greater oneness is probably the key signature of both wisdom and resolving paradigmatic thinking.

    • November 6, 2019 at 9:34 pm

      Easily said. Give us an example.

  16. John Hermann
    November 7, 2019 at 7:48 am

    In my opinion Huber’s primary criticism of MMT is unjustified and the assertions and arguments he has given in this regard are flawed. To critique Huber’s paper in detail would require considerable effort, however I would like to draw attention here to one section where his assertions are incorrect and
    misleading. Let me quote the section:

    “ Don’t let yourself be fooled. The biggest part of government expenditure is funded by taxes. Tax revenues represent transfers of already existing money. The money that serves for paying taxes is neither extinguished upon paying taxes, nor is it created or re-created when government spends its tax revenues. In actual fact, this is all about simple circulation of existing money. “

    Firstly, the matching of government spending to taxing plus borrowing is a convention which governments adopt in order to manage aggregate demand and inflation, leaving the tuning required for ensuring net growth in the money supply without undue inflation/deflation to the nation’s central bank (CB), which it accomplishes endogenously via open market operations. But this division of responsibility is only a convention; there is no necessity to do it this way.

    Secondly, the MMT position is that the government injects new money into the real economy when it spends, and withdraws money from the real economy when it taxes, implying that Treasury’s account with the CB is not composed of money at all and is therefore merely an operating account. Moreover, federal deficit spending entails the creation of net financial assets for the non-government sectors, which they require in order to save, invest and spend, and for the economy as a whole to function healthily. Those net financial assets are a form of money (narrow and/or broad) and their aggregate over time equals the net money supply. Putting it a little differently, to destroy federal Treasury securities amounts to destroying the money supply. The good news is that it is not going to happen anytime soon.

    In order to make sense of this, one should distinguish between narrow state fiat money (currency and reserves) and bank deposit money. At a technical level there can be no doubt that new bank deposit money is created in an account of the payee (the money supply temporarily expands) whenever a sovereign government spends, and that the money supply is temporarily reduced when a sovereign government taxes the non-bank sector.

    The credits within Treasury’s CB account do not form part of the money supply or indeed any measure of money (this is something that Huber does not appreciate, along with many other economists who wrongly imagine that they understand the monetary aspects of macroeconomics). However the manner in which the central government’s various fiscal operations accommodate the flow of state fiat money is less transparent. Is there an argument for regarding the credits in Treasury’s CB account as a form of state fiat money?

    In my view, one of the characteristics of an entity which is entitled to be called “money” is that it is used by a set of marketplace players (traders) and may be transferred and loaned between those players. For example, the credits that banks maintain within their CB accounts (reserves, or exchange settlement funds) can be regarded as a form of money because – apart from satisfying the usual criteria of medium of exchange, store of value, and unit of account – they may be freely loaned between those players and directly transferred between their CB accounts. These forms of money are also acceptable to the central government for the payment of government taxes.

    However the credits held in Treasury’s CB account are not loaned to others. Treasury borrows from, but has no incentive to lend to, financial markets (i.e. it sells bonds but has no interest in buying bonds). And unlike commercial banks, Treasury offers no depository facilities. These features distinguish the operations of Treasury from those of banks, and is grounded in the fact that Treasury is not in competition with other institutions holding CB accounts. Its CB account is not associated with profit making activity, and serves a very different (public) purpose. There are other reasons for regarding Treasury’s CB account as an operating account but NOT a transaction account, which I will be happy to expound on if anyone is interested.

    To summarise, when central government spends, deposit money is created by the payee’s bank and matching new reserves are created in that bank’s CB account. Banking reserves are not transferred, because the definition of reserves excludes Treasury deposits.

    • November 7, 2019 at 12:14 pm

      Thank you for taking the trouble to respond at such length. I’m inclined to the view that you and Huber are arguing at cross purposes: that you are looking at money from a banking operations perspective and he as money being that which has already been earned in the real world terms which the neo-classical economics of trading has so neglected.

      Huber is thinking of circulation in terms of the Ponzi scheme scam which Adam Smith (advocate of mass production) had condemned in WN (apparently not realising the banks were at it), which you hide by focussing on government rather than the fact that 90-odd percent of money creation is by commercial banks. Huber’s argument is, “Follow the money”: the proof of the pudding is in the eating. But that is not to discount what I take to be your MMT argument that money is in fact extinguished and recreated, contrary to what Huber says. My problem with your argument is that as of now it should not only be applied to the government but to banks, and that logically it applies just as well to our own personal or a business’s credit, which needs to be earned by our earning our keep by doing (a) what is necessary and/or (b) what is worth doing.

      Let me remind you of my own position. Firstly, agreeing with the Biblical conclusion that “Love of money is the root of all evil” I would like to see the term ‘money’ theoretically eliminated in favour of credit capped by credit-worthiness (initially potential and eventually as earned). In practice the term ‘money’ can be trivialised by its definition as cash recorded as an advance of credit on its withdrawal from an ATM.

      Secondly, I agree with John Ruskin, who was pilloried for seeing the truth, beautifully expressed in the Preface to his “The Crown of Wild Olive” (1866), about what industrialisation was really doing to our world. “It has not been without displeased surprise that I have found myself unable, as yet, by any repetition, or illustration, to force this plain thought into my readers’ heads, – that the wealth of nations, as of men, consists in substance, not in ciphers; and that the real good of all work, and all commerce, depends on the final worth of the thing you make by it, or get by it”. Read what Ruskin says here and weep for our part in the environmental crisis we have brought upon our world.

      https://ebooks.adelaide.edu.au/r/ruskin/john/crown/complete.html

      • John Hermann
        November 8, 2019 at 3:01 am

        Thanks for your responding comments. I have a few more comments to add to what you have said:

        (a) The creator and issuer of money has no need to store or save that money, and in practice does not do so. This has been repeatedly emphasized by Stephanie Kelton and other MMT economists. Ir is a quite general statement, and seems to be a blind spot for Huber and many of the other economists who mistakenly believe that they understand money.

        (b) The idea that money must be “earned in real world terms” can lead one astray in regard to the mechanics of money creation, destruction and transfer. MMT accepts Knapp’s State Theory of Money, which founded the Chartalist school of monetary theory. This school argues that money’s value derives from its issuance by an institutional form of government rather than spontaneously through relations of exchange. And it rejects the view that money developed from barter.

        (c) Money is created and destroyed by the central government (assuming it is a monetary sovereign) in a never-ending dynamical process. Deposit money is also created by banks when they both lend and spend to the non-bank sector and is also destroyed from the financial system when bank retail loans are repaid. This is also a never-ending dynamical process. The big difference between government money and bank money is that the central government creates net financial assets for the non-government sectors when it deficit spends, whereas commercial banks do not (and cannot ever) create net financial assets.

    • Craig
      November 7, 2019 at 4:42 pm

      As I said it’s all about the distribution of money. All MMT advocates need to do is cognite on how to best directly, reciprocally and ethically distribute money so as to resolve the economy’s problems of individual income scarcity, systemic austerity and creeping chronic inflation.

      To wit a universal dividend for one’s entire adult life, the 50% discount/rebate policy at the point of retail sale, ending virtual monopoly private for profit creation of money/credit with a publicly administered non-profit national banking and financial system and then regulating the economy so as to guide and foster the systemic and personal effects of the concept of the new monetary paradigm of gifting, and the natural philosophical concept behind even the new monetary paradigm itself, the pinnacle concept of wisdom, namely grace.

      It’s the monetary paradigm and wisdom as opposed to folly, stupid.

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