Home > Uncategorized > MMT and the deficit myth

MMT and the deficit myth

from Lars Syll

What Modern Monetary Theory (MMT) does is more or less what Knut Wicksell tried to do more than a hundred years ago, when he in 1898 wrote on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise). The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​

In the mainstream economist’s world, we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

Contrary to mainstream theory, finance in the world of MMT — and people like Keynes and Minsky — precedes investment and saving. What is ‘forgotten’ in mainstream theory, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies​ and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough.

All real economic activities depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channelling money/savings/credit — are more or less left in the dark in modern mainstream formalizations of economic theory.

  1. September 15, 2021 at 7:55 am

    And so, we may be in need of an economic and monetary theory centred on finance, interest rates, credit risk, and the like, and its consequences for the real economy.

  2. Ikonoclast
    September 15, 2021 at 8:37 am

    Debts Ode by MMT.

    MMT, just a bit o’ pump primin’
    Can already see, it’s just a-rhymin’
    Wit’ Abbe Lerner and his line dance
    That’s the one called functional finance.
    State money theory, early term of “artilism”
    George Knapp originally called it Chartalism.
    Is it so modern, now let us see,
    Better read some history.
    Not much need to rack our brains
    Just sit down and read some Keynes.
    The State comes in first of all, therefore,
    As the first authority of law,
    Enforces payment of the thing
    Specified in all contracting.
    I mean Specie-Fied! A monetary pun!
    What a minute man, I ain’t done.
    It’s Specie Fide, as Specie True,
    By Fiat Fide’d and made to do.
    State claims the right to name the thing,
    And anytime re-edit its definitioning.
    This right is claimed by all modern states
    Has been so claimed, as Keynes relates,
    To count the credits and arrears
    In this manner for… four thousand years.

    “The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contracts. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time – when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern states and has been so claimed for some four thousand years at least – Keynes.

  3. September 15, 2021 at 12:31 pm

    Lars says “In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.”

    Words, words!​ Currencies no longer have intrinsic value (as gold and silver) because they never had it! I linguistic terms, gold and silver were mere tokens of the real value, which is arguably that of people and the rest of nature rather than the things we buy. So Kelton’s MMT pitch seeing debits as Wicksell’s credit is magnificent, but it still accepts controlling inflation by pricing – rather than by writing off our credit when we’ve spent it instead of circulating and hoarding it as shares of other people’ debt. What we spend writes off our supplier’s debts; we write off our own debts by supplying the not yet/no longer capable and earning our own keep.

    Kelton mentions finance, employment, resources and technology but never the need to assist nature regenerate or recycle the resources we’ve borrowed from it. States haven’t kept up with supermarkets in this respect. The national accounts need to record not just transaction prices but what they have been spent on, so that information can be used to “restock the shelves” and adjust prices to reflect resource scarcity – rather than vendor’s wishful thinking. Honourable governments, like companies, need to do what is needed while trying to live within the budget of what nature is actually regenerating; but giving credit when necessary to its own workers and suppliers, no taxation is needed: their spending will write off the resultant token debts in national accounts.

  4. September 15, 2021 at 1:06 pm

    What is not clear to me is what happens when money leaves the system as with China having piles to finance its Belt and Road Initiative. Also as the above comment suggests, there are questions as to how to deal with externalities which may (will) come back to bite and don’t fit neatly in the circle of MMT finance.

  5. Ikonoclast
    September 15, 2021 at 11:48 pm

    MMT advocates large increases in fiscal expenditure and a rejection of monetarist prescriptions. I am in significantly in favor of such MMT-style policies, as far as they go. I also have a few reservations and I prefer the Keynesian counter-cyclical fiscal spending model. I also note that real resource costs count environmentally and thermoeconomically / biophysical ly. This indicates there must be a shift in utilization of real resources from the private to the state sector, to increase the scope of democratic socialist or even of mixed economy governance in its ability to address both social welfare concerns and environmental sustainability concerns. I finally note that there is little, if anything, that is truly new about MMT. I jokingly referred to that issue above with a very bad, intended humorous poem about the thinking that prefigured MMT, from Knapp to Keynes to Lerner.

    I am concerned about inflation, especially asset inflation relative to wage inflation (or wage deflation these days) and I am concenred about the conventional measures of inflation. It seems to me there is no objective way to measure inflation, at least not in the current, conventional manner. The RBA (Reserve Bank Australia) site tells us:

    “In Australia, the CPI is calculated by the Australian Bureau of Statistics (ABS) and published once a quarter. To calculate the CPI, the ABS collects prices for thousands of items, which are grouped into 87 categories (or expenditure classes) and 11 groups. Every quarter, the ABS calculates the price changes of each item from the previous quarter and aggregates them to work out the inflation rate for the entire CPI basket.”

    Then, after a simplistic box calculation which elides many factors, the RBA tells us:

    “In deciding which goods and services to include in the CPI basket and what their weights should be, the ABS uses information about how much – and on what – households in Australia spend their income. If households spend more of their income on one item, that item will have a larger weight in the CPI. For example, the ABS included smart phones in the CPI to reflect consumers taking advantage of advances in technology. Data on household spending across all items is only available approximately every five years or so.”

    As we go on in this abbreviated public information document (for sure it’s not a treatise on inflation measurement) we learn that there are a number of limitations to official inflation measurement. The online RBA document mentions directly or indirectly issues of;

    (a) Broad sampling difficulties;
    (b) Sampling limitations (time and region influenced);
    (c) Basket choice (and by implication lack of tailored baskets for different groups like pensioners);
    (d) Quality and quantity changes and use of or lack of use of hedonic adjustments;
    (e) Substitution bias.

    There is also the fundamental problem that the numéraire (the Aussie dollar in our case) is not an objective measure of any fundamental and objective real dimension. It is an unreliable, subjective measuring stick. Its own value changes, against everything, and chain-weighted inflation measuring techniques are used, partially used or not used depending on the philosophy of the measuring agency. Arguments around this issue can be found in the Capital as Power (CasP) literature.

    If one looks at the history of inflation measuring, one sees measuring agencies change inflation measuring methods over time and governments also at times selectively include or exclude items (goods and services) according to whether they want a particular item to influence or not influence an inflation measure, be it headline, trimmed mean, underlying etc. All of this opens inflation measuring to neoliberal rigging and such governments and their plutocratic handlers have many incentives to massage such figures and to ignore certain kinds of inflation, like asset inflation. Also long time series of inflation are compromised by the changing of measures, baskets and methods.

    Given the above, my question is this. How reliable are neoliberal, conventional paradigm, inflation measures for developing heterodox macro critiques and prescriptions for alternatives? If people make posts advocating MMT approaches, in a broad heterodox economics blog, they need to answer relevant and percipient questions. (I hope my questions are relevant and percipient.) Otherwise, one can ask, what are we doing here? People come to heterodox economics blogs to escape not only stultifying orthodoxy but also to escape arguments from authority and to engage in real argument, not more doctrine even if it is an alternative doctrine.

  6. Ken Zimmerman
    September 19, 2021 at 10:29 am

    Overview, David Graeber’s Debt: The First 5,000 Years.

    In the third edition of the college-level textbook Macroeconomics, the economists Andrew Abel and future Federal Reserve Chairman Ben Bernanke blithely assert that “since the earliest times almost all societies … have used money.” They say that money arises from the inefficiency of barter—of trading one good for another—because “finding someone who has the item you want and is willing to exchange that item for something you have is both difficult and time-consuming.”

    The evolution from barter to money is an old story in economics, repeated down the centuries in one form or another, to the point that even children are aware of it. It also happens to be only that: a story, and one with precious little evidence to back it up outside the heads of those who tell it.

    While some economists imagine primordial villages and basic agricultural systems where birds are exchanged for flowers to illustrate the history of money, Abel and Bernanke come up with something much more immediate: The economist is hungry.

    Barter systems would indeed make it difficult for an economist to eat lunch. Would a restaurateur exchange his goods for a lecture on monetary policy? Perhaps not, and the meal goes unsold and the economist goes hungry. Thankfully, the economist has students to whom he can sell his knowledge for dollars, which then function as a medium of exchange with which he can purchase his meal. The restaurateur is paid, the economist is satiated, while the students have learned something worthwhile.

    But the only people who pay Ben Bernanke directly for his thoughts are investors. Students do not. Perhaps instead they borrow money to pay for the lecture, along with other lectures, a place to live, and the associated administrative costs of providing lectures to students. The interest on the debt eats up most of the students’ subsequent income from the job market, leaving them with no chance of ever paying off the principal in a reasonable timeframe. The debt will stick with them forever, even shaving off dollars from their Social Security checks, and make the normal mileposts of adult life—marriage, children—difficult or impossible to achieve. Fed up with their narrowed prospects, they join a group of activists who have taken up space, literally, in the shadow of New York’s financial institutions and they start talking about what they have in common: their debt. And they decide to do something about it.

    Now this story, like the one the economist tells about the origin of money, is a stylized one used to illustrate broader truths about the world. But unlike what economists have said about money, it largely accords with known facts, and for that we have to thank the radical anthropologist David Graeber, who died September 2, 2020 at the age of 59.

     “We owe David so much,” the filmmaker and debt organizer Astra Taylor said, noting immediately how he would have disapproved of using the language of obligation to encapsulate his life’s work.

    Graeber had a long and distinguished career as both an activist and academic when the publication of his magnum opus, Debt: The First 5,000 Years, and his work helping organize Occupy Wall Street in 2011 made him that rare thing: a serious scholar and organizer who garnered respectful profiles in Bloomberg Businessweek and the Financial Times. He spent the last decade-plus at Goldsmiths and the London School of Economics after Yale controversially cut him off from tenure, which he suggested was due to his being “quite active in the Global Justice Movement and other anarchist-inspired projects.”

    “The thing to understand about David is that he really was someone who equally had a foot in social movements and intellectual scholarly production,” Taylor said. “There are people who are known as leftists through their writing and the internet and never do anything that qualifies as organizing.”

    Graeber was a link not just between grassroots movements and the academic world, but between generations of leftist social movements.

    The question Debt sought to ask was one that seemed natural in the wake of a debt crisis that would claim millions of homes and thrust much of the industrialized world into first a sharp economic crisis, then a self-destructive series of austerity measures designed to stem the tide of sovereign debt. What was debt? What was its history, where did it come from, and how did it take such a central role in our personal and economic lives? Why was our language of obligation and morality the same as the one used to describe our credit card bills? Why does the Lord’s Prayer ask God to “forgive us our debts as we also have forgiven our debtors”?

    To even begin to answer this question, Graeber had to start with money and the bad history used to explain it. Generations of archaeologists, anthropologists, and historians had tried to find the origins of money, but economists, especially in their textbooks, resorted to fancy.

    These just-so stories about how money emerged from barter can evoke a kind of childish primitivism  (“You have roosters, but you want roses,” one textbook says) or use imaginary historical examples. Even the stalwart progressive Joseph Stiglitz uses “what appears to be an imaginary New England or Midwestern town,” Graeber writes, to explain how money can replace barter, in the form of farmer Henry selling his firewood to “someone else for money” and then buying shoes from Joshua. 

    Graeber, in contrast, identifies the origin of money as “the most important story ever told” for economists, tracing it back to Adam Smith’s Wealth of Nations and even to Aristotle. This was “the great founding myth of economics,” he writes, that money was not in fact the creation of governments. It followed that economics was its own form of inquiry, separate from other ways of thinking about social life.

    Graeber points out this account “has little to do with anything we observe when we examine how economic life is actually conducted, in real communities and marketplaces, almost anywhere—where one is much more likely to discover everyone in debt to everyone else in a dozen different ways, and that most transactions take place without the use of currency.” 

    Whereas the traditional account puts barter before money and money before debt, Graeber reverses this, noting that barter tends to only emerge in pre-industrialized societies when exchange happens outside of a familiar cultural context.

    In the historical record of ancient societies in Mesopotamia, for example, there are prices of things that may be denominated by “money” (what an economist would call the “unit of account”). But merchants “mostly did much of their dealings on credit,” and “ordinary people buying beer from the ‘ale women’ or local innkeepers  did so by running up a tab, to be settled at harvest time in barley or anything they had on hand.”

    Where debt emerged in Sumeria, so did novel forms of social domination, whose eventual effects were so dire as to necessitate harsh management of its lenders. Those early Sumerian loans to peasants quickly led to peonage, with farmers “forced into perpetual service in the lender’s household.” Fields would go unsown or not be harvested as farmers would leave their homes in order to avoid collection. The result was periodic debt amnesties.

    Debt’s deep dive into the whole history of civilization had a paradigm-shifting political point. Graeber wanted to show that “war, conquest and slavery … played a central role in converting human economies into market ones,” and that “historically, impersonal, commercial markets originate in theft.”

    He wanted to show that not only did money not arise from barter but also that states and markets worked hand in hand in its creation. And more than that, he wanted to interrogate an economic and historical worldview that tried to “reduce all human relations to exchange, as if our ties to society, even to the cosmos itself, can be imagined on the terms of a business deal.” 

    He ended Debt with a call for “some kind of Biblical-style Jubilee: one that would affect both international debt and consumer debt.” This would not only 

    “relieve so much genuine human suffering, but also … would be our way of reminding ourselves that money is not ineffable, that paying one’s debts is not the essence of morality, that all these things are human arrangements and that if democracy is to mean anything, it is the ability to all agree to arrange things in a different way.”

    The initial group that Graeber helped organize, Strike Debt, instituted a “rolling jubilee,” buying up medical debt and forgiving it. The group evolved to organize challenges to student loan debt incurred at for-profit colleges and has claimed to have helped eliminate over $1 billion of debt. Its efforts garnered the respectful attention of The New Yorker, which described the jubilee as “one of the few Occupy offshoots that has had a tangible effect on people’s lives.”

    Debt Collective’s work would be echoed directly by the dueling calls from Elizabeth Warren and Bernie Sanders to cancel student loan debt during the 2016 and 2020 presidential campaigns.

    The ideas in Debt also have been picked up by the Keynes-inspired thinkers that make up the school of Modern Monetary Theory, who see the state as a tool to mobilize the economy’s resources for the common good, unlimited by its ability to tax or take on debts and deficits. Alexandria Ocasio-Cortez referenced MMT when it came to funding the Green New Deal, and a leading MMT thinker, Stephanie Kelton, worked with Sanders. One of the brightest stars in the MMT firmament, Nathan Tankus, is an avid reader and admirer of Graeber.

    “If we end up winning the fight over debt, money, and deficits and manage to fundamentally reshape this society it will have been in no small part of because of Graeber’s work,” Tankus said.

    • Craig
      September 19, 2021 at 8:03 pm

      I have dropped Graeber’s name here numerous times. Why? Because the problem in economics is money, private debt and banking. In other words everything surrounding finance. That is the paradigm that hasn’t changed since Sumeria and is begging us to consciously awaken to. What is a debt jubilee? Monetary Gifting. What is a UBI? Monetary Gifting. What are (or should be) fiscal deficits? Monetary Gifting. What is a 50% discount/rebate policy at retail sale? A completely integrated, direct, continuous and virtually universally beneficial Monetary Gift that utilizes and perfectly mimics the debit/credit accounting process of money creation. Direct and Reciprocal Monetary Gifting, the policy essence of the new paradigm that will enable us to rejuvenate economics and effectively confront climate change.

  7. September 19, 2021 at 1:52 pm

    As with my post above, what happens when fiat currency ends up being exchanged for real assets like mined minerals and fiat’s value is diminished by piles of it in the hands of the miners outside of the fiat issuing country and the recipient can find no party to accept? Then the hard assets end up in the hands of the financiers/rentiers. Then what? It seems like we end up with the same results that happened with The Enclosure?

    • Craig
      September 19, 2021 at 8:17 pm

      The obvious answer here is to create a true publicly administered national bank which, aligned with the new monetary and financial paradigm, is free to distribute credit in a socially beneficial way. Private money creation is a monopolistic, problematic business model which is the only business model allowed to extract costs post retail sale thus violating the consumer sanctity of retail sale. A public bank would innovate private money creation out of existence and it would make private money creation the shite picker upper occupation after the creation of the internal combustion engine.

  8. Gerald Holtham
    September 20, 2021 at 5:20 pm

    The debate over the origin of money is rather mystifying. Substitute for barter or issued by kings and demanded back in taxes? It’s a bit like debating whether knitting or weaving came first. Who cares? What has it got to do with whether or how much we should knit or weave now? The uses and pathologies of money as a social institution are not clarified by studying ancient history but by examining its current role and functions.
    In what sense does gold have intrinsic value? It has value because people accept it in exchange for things they really need. In that sense it does not differ from fiat money. The reason that goldbugs think it has intrinsic value is that it is costly to find and mine. Ordinary citizens find fiat money equally hard to come by too. Only governments can issue the stuff. Goldbugs and crypto enthusiasts just don’t like or trust governments. The answer, in my view, lies in appropriate social and political institutions that encourage the government to act responsibly in the social interest. Where they do, as in Sweden for example, inflation is moderate and employment high; where they don’t, as in Argentina for example, rapid inflation is endemic and employment fluctuates.

    While the financial system is central and intrinsic to the operation of a modern capitalist economy. It does not follow that reforming the monetary system solves all social problems. The distribution of power in society stems from several sources and those fundamentals can be very stubborn. Argentina has had numerous currency reforms and changed the name of the currency too, even linking it to the US dollar. All these things turn out to be what the Marxists call epiphenomena. They don’t change the lousy socio-political system and you end up back where you started. Deep socio-political problems rarely yield to a technical economic “fix”.

    • Craig
      September 20, 2021 at 6:48 pm

      “It does not follow that reforming the monetary system solves all social problems.”

      That’s correct, but the 50% discount/rebate policy at retail sale does solve the 3 major ECONOMIC problems of price and asset inflation, individual monetary scarcity and systemic monetary austerity.

      “All these things turn out to be what the Marxists call epiphenomena. They don’t change the lousy socio-political system and you end up back where you started. Deep socio-political problems rarely yield to a technical economic “fix”.”

      Correct again except an actual paradigm change is neither an epiphenomenon nor a technical fix. Why? Because it is a fundamental, conceptually oppositional, temporal universe reality inverting, innovative and strategically focused and implemented phenomenon that changes AN ENTIRE PATTERN. That doesn’t mean it doesn’t require additional regulation to prevent gaming and unethical attempts to destabilize it. It does, but eventually everything adapts to a new paradigm, not the other way around.

    • Meta Capitalism
      September 22, 2021 at 12:26 am

      Well said Gerald.

  9. Gerald Holtham
    September 21, 2021 at 7:01 pm

    If you think a particular measure is self-evidently in the public interest but it never happens in any country you have to ask why. Is it blocked by vested interest, are people invincibly stupid, or is there a glitch in the idea?

    • Craig
      September 22, 2021 at 1:10 am

      “Is it 1) blocked by vested interest, 2) are people invincibly stupid, or 3) is there a glitch in the idea?”

      1) Yes, 2) most are not conscious of the issue let alone its solution and 3) if it mimics the money creation process so as to be very quickly integrate-able and implement-able, if it resolves all of the major problems economists are interested in resolving (chronic scarcity of individual demand, chronic idiotic systemic austerity when deficits are called for and chronic price and asset inflation) and some they’re not currently even thinking about (re-industrializing western economies and mostly getting rid of expensive and energy intensive supply chains), if it enables huge progress toward the resolution of economic externalities (confronting climate change) and if it fits and reflects all of the mental and temporal signatures of historical paradigm changes…my question to you is…why isn’t your and everyone else on this blog’s hair on fire to make it a reality???

  10. Gerald Holtham
    September 22, 2021 at 7:35 pm


    • Craig
      September 22, 2021 at 9:35 pm

      There is no “if” about a 50% discount at retail sale IMMDIATELY doubling the purchasing power of everyone and IMMEDIATELY not only ending price and asset inflation, but almost miraculously, integrating BENEFICIAL price deflation into profit making economic systems. These will be empirical realities the moment that policy is implemented.

      Will you need to implement a few more policies and regulations to enable huge payroll and income tax cuts, the end of fiscal austerity, re-industrialization and ecologically sane industrial policy? Yes, but there can be no doubting the IMMEDIATE AND BENEFICIAL effects of the 50% discount/rebate policy. That policy is too simple for the intellectual vanities of the erudite, and too empirically beneficial not to be a paradigm change.

      Just look at it. Take a vacation from orthodoxies and abstraction and let yourself see it.

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