The Pdf is from last week and with critiques and tweets about MMT coming from all sorts of quarters this is a good time to republish the essential parts. They simply are MMT in a nutshell. Here goes.
Many of the negative articles I’ve read about MMT use the tried and tested method
of setting up a straw man purely for the purposes of knocking him down. So, to avoid confusion, I will lay out a simple and straightforward description of what MMT is, or at least what I believe the most important elements of MMT are.
1. Money is a creature of the state. Money is effectively an IOU. Anyone can issue money; the trouble is getting it accepted. The ability to impose taxes (or other obligations) makes a country’s ‘money’ valuable.
2. Understanding the monetary environment is vital. The monetary regime under which a country operates matters. Any country that issues debt only in its own currency and has a floating currency can be thought of as being monetarily sovereign. This means it cannot be forced to default on its debt (i.e. the U.S., Japan, and the UK, but not the Eurozone or most emerging markets).
3. An operational description of the monetary system is critical. Understanding that loans create deposits (which in turn create reserves, aka endogenous money) is a much more realistic starting point than the mainstream view that deposits create loans. For example, knowing that government deficit spending creates reserves and drives down interest rates is vital to understanding Japan’s bond market.
4. Functional finance, not sound finance. Fiscal policy is much more potent than monetary policy. Fiscal policy should be aimed at generating full employment while maintaining low inflation (rather than, say, achieving a balanced budget position). A Job Guarantee scheme is an example of a useful policy option to effect this outcome (acting like a buffer stock in a commodity market) in the eyes of MMT.
5. Limits are real resource and ecological limits. If any sector of the economy pushes it beyond the limits of capacity, then inflation will result. If a government spends too much or taxes too little, it can create inflation, but there is nothing unique about the government sector in this regard. These are the limits that matter – people, machines, factories – not ‘financing’ constraints.
6. Private debt matters. Even in a monetarily sovereign state, private debt matters. The private sector cannot print money to repay its debts. As such, it has the potential to create a systemic vulnerability. Think Minsky’s financial instability hypothesis: stability begets instability.
7. Macro accounting (Godley style) keeps us honest. One sector’s debt is another’s asset. So, the government’s debt is the private sector’s asset. Understanding how one sector relates to another using a sectoral balance framework is very helpful, as is understanding the Kalecki profits equation, or the way reserves work in a financial system. Accounting isn’t glamourous and identities shouldn’t be taken as behaviours, but they can help us spot unsustainable situations.
There you have it – my attempt to succinctly describe the core of MMT. Just under 400 words... hopefully short enough to satisfy even the most attention-challenged.
Full Pdf here.
WHY DOES EVERYONE HATE MMT?
Groupthink In Economics
James Montier
Groupthink In Economics
James Montier
Many of the negative articles I’ve read about MMT use the tried and tested method
of setting up a straw man purely for the purposes of knocking him down. So, to avoid confusion, I will lay out a simple and straightforward description of what MMT is, or at least what I believe the most important elements of MMT are.
1. Money is a creature of the state. Money is effectively an IOU. Anyone can issue money; the trouble is getting it accepted. The ability to impose taxes (or other obligations) makes a country’s ‘money’ valuable.
2. Understanding the monetary environment is vital. The monetary regime under which a country operates matters. Any country that issues debt only in its own currency and has a floating currency can be thought of as being monetarily sovereign. This means it cannot be forced to default on its debt (i.e. the U.S., Japan, and the UK, but not the Eurozone or most emerging markets).
3. An operational description of the monetary system is critical. Understanding that loans create deposits (which in turn create reserves, aka endogenous money) is a much more realistic starting point than the mainstream view that deposits create loans. For example, knowing that government deficit spending creates reserves and drives down interest rates is vital to understanding Japan’s bond market.
4. Functional finance, not sound finance. Fiscal policy is much more potent than monetary policy. Fiscal policy should be aimed at generating full employment while maintaining low inflation (rather than, say, achieving a balanced budget position). A Job Guarantee scheme is an example of a useful policy option to effect this outcome (acting like a buffer stock in a commodity market) in the eyes of MMT.
5. Limits are real resource and ecological limits. If any sector of the economy pushes it beyond the limits of capacity, then inflation will result. If a government spends too much or taxes too little, it can create inflation, but there is nothing unique about the government sector in this regard. These are the limits that matter – people, machines, factories – not ‘financing’ constraints.
6. Private debt matters. Even in a monetarily sovereign state, private debt matters. The private sector cannot print money to repay its debts. As such, it has the potential to create a systemic vulnerability. Think Minsky’s financial instability hypothesis: stability begets instability.
7. Macro accounting (Godley style) keeps us honest. One sector’s debt is another’s asset. So, the government’s debt is the private sector’s asset. Understanding how one sector relates to another using a sectoral balance framework is very helpful, as is understanding the Kalecki profits equation, or the way reserves work in a financial system. Accounting isn’t glamourous and identities shouldn’t be taken as behaviours, but they can help us spot unsustainable situations.
There you have it – my attempt to succinctly describe the core of MMT. Just under 400 words... hopefully short enough to satisfy even the most attention-challenged.
Full Pdf here.
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