About MMT


In a Twitter discussion (in Dutch) someone pointed me to a TED Talk by Stephanie Kelton: entitled “The big myth of government deficits”, dated 13 October 2021. I will now quote parts of it, marked by the time in the video, and her initials SK, and then write my own comments underneath.

3:25, SK: “I’m one of a handful of economists who contributed to the body of academic scholarship known as MMT or Modern Money Theory.

A short summary of what Stephanie Kelton said before that point in the talk: the US government financially supported people and companies affected by the Covid crisis, “[...] without raising taxes, or having a prolonged battle over the usual question of how to pay for it.” I agree that that was the right thing to do. Also to “[...] build affordable housing, and fix crumbling infrastructure [...]” is quite OK, even it is with borrowed money. And I’m all for good health care, accessible to everyone who needs it.

A further quote from Stephanie Kelton’s talk, 3:35: “MMT provides an accurate description of how a fiat currency, like the US dollar or the British pound, actually works. It reminds us that we’re no longer on the gold standard, so finding the money to pay for the things we need, is never an issue for countries like the US or the UK.

Before what later became known as the Nixon Shock, in 1971, the United States dollar was directly convertible to gold, at a rate of $35 per troy ounce. Before 1934, that had been $20.67 for a long time. Today, the gold price is around 2,000 dollars per ounce. Quite some inflation. Over eight percent each year on average.

I don’t think whether or not there is a gold standard is really important for government finance, borrowing and money creation. All of those existed before and after the Nixon shock.

4:01, SK: “If we’re going to fix what’s broken in our economy, we have to fix the way we think about the limits on government spending.

So apparently there are still limits, in the view of MMT adherents. Wikipedia: Modern Monetary Theory. Maybe smarter limits than the eurozone’s 60% of GDP for national debt, and 3% of GDP for the annual budget deficit? Might make sense.

4:11, SK: “Let me give you an example of the kind of broken gold standard thinking that still permeates out discourse. Back in 1983, the prime minister of Great Britain, Margaret Thatcher, said these words: «If the state wishes to spend more, it can do so only by borrowing your savings or by taxing you more, and it is no good thinking that someone will pay. That someone else is you. There is no such thing as public money. There is only taxpayer’s money.» Maybe you’ve heard the contemporary version of Thatcher’s dictum. «There is no magic money tree.»

I say: this is not broken thinking. It has nothing to do with the gold standard, abandoned or not. Margaret Thatcher was right, 100%. The only two possibilities in government financing are taxing and borrowing. There is no magic money tree. As we say in Dutch: Het geld groeit me niet m’n rug, no money grows on my back.

5:16, SK: “As individuals, we know that when we borrow money to go to college, start a business or buy a home, we’re personally saddled with that debt. We have to find the money to pay it back. Taking on too much personal debt can lead to all sorts of problems. Even small businesses and large corporations have to walk a fine line when it comes to debt. But the federal government is fundamentally different.

Yes and no. Yes because the government can afford to be in debt permanently, to never fully pay back. That’s actually quite smart: the government borrows money from its citizens (directly or indirectly), instead of taxing them more, the government has the money and can use it, and citizens also still have it in their account and can use it. A kind of doubling of financial resources. Eat your cake and have it too.

However, governments’ (or central banks’) monopoly on money issuing does not make them fundamentally different. Yes, they can do money creation, as can banks, central or non-central, but that is because of the definition of money: money is what banks owe the public (where “the public” means households and companies). If that definition were different (but it shouldn’t be), everybody could create money.

5:57, SK: “As the issuer of the currency, the federal government can never run out of money.

In my view, that’s incorrect. Being the issuer is irrelevant. It would be true if issuing money meant printing dollars, or otherwise creating liabilities at the credit side of the central bank’s balance sheet, without also having an equivalent value at the debit side. But that would be fraud, and it’s not how it’s done. Issuing money, money creation, when done by a bank, always and inevitably involves credit, involves borrowing and debt.

Besides that, the definition of money causes that any government spending, also with amounts it already had, is automatically money creation. And tax paying, and also paying for a government bond by a non-bank investor, means money destruction.

6:05, SK: “It [i.e., the federal government] can afford to buy whatever is available and for sale in its own currency in its own currency. Now that might mean spending on roads and bridges, a military arsenal or hospitals and schools. Finding the votes to pass a spending bill can be hard, but finding the money is never a problem. They just create it.

This seems to suggest that governments can obtain funds in three different ways:

  1. Taxing their citizens and companies.
  2. Borrowing on financial markets, by issuing government bonds.
  3. Money creation.

But that’s not true. Money creation is a reality, it happens all the time, but it does not make anybody any richer. Money creation isn’t a willful act, but a side-effect. Created money cannot be used to pay bills. Government financing by money creation essentially, when looking at the bottom line after considering all steps by all parties involved, always means borrowing, so the national debt is expanded by it. It’s not hard to see that, just by doing the math, simple math, only involving addition and subtraction.

6:36, SK: “So here’s how it works. Whenever Congress and the president agree to spend more, the government’s bank, the Federal Reserve, works with the rest of the financial system to get that that money into our accounts.

Yes, by borrowing it, using treasury bills and government bonds. Those can and will be bought by various parties. A large proportion of US national debt is now in the hands of foreign investors, like China and Japan, which may or may not always have intentions that are favourable and beneficial to the US. Will they always be willing to refinance expiring bonds at reasonable interest rates? I think expanding the national debt too much creates risky dependencies.

What is strange is that Japan is one of the biggest creditors to the US, while the Japanese government is the world champion of national debt (click on the arrow twice to change the ordering, largest percentage on top).

6:51, SK: “Everything is done electronically, so there’s no physical printing of money involved.

True, but misleading. It suggests electronic money, created money, would not be real. In fact it is just as real, and of the same nature, as physical dollar bills: because money is: what banks owe the public, where “the public” means: households and companies. “The public” does not include: central banks, non-central banks, and governments (on any level; federal or otherwise).

6:58, SK: “If you got a 1,400-dollar check from the federal government, earlier this year, or if your company received money to help cover payroll and other expenses, then you receive some of the newly minted digital dollars, that were created to support our economy. No taxpayers were involved in that process.

True. Those dollars were created by borrowing them, either from parties on the financial markets, or directly from the central bank, in the US: the Federal Reserve. So Thatcher’s dictum still holds: any money that the government spends, was either borrowed or came from taxes. There are no other possibilities.

1:00, SK: “No taxpayers were involved in that process. It was all done using nothing more than a computer keyboard.

True, but a misleading way to put it, in my view. First, because it is the whole ICT infrastructure, including disks, not just the keyboard. OK, but that was a ‘Pars pro toto’ of course, and as such acceptable. Second, the computer serves to register a financial claim of the owner of the money, on the issuer and creator, just like a physical paper banknote registers such a claim. They’re not principally different, it’s just older and newer technology. And banknotes don’t earn anyone interest, while savings accounts balances and bonds do.

8:39, SK: “Just as a six becomes a nine when we view it from a different angle, a government deficit becomes a financial surplus when we look at it from another perspective. A deficit hawk might look at this picture and see nothing but a sea of worrying red ink. That’s not how I look at it. Here’s what I see. I see what’s happening on the other side of the government’s ledger.

(Great song, by the way. Jimi Hendrix. For the film Easy Rider.)

In fact, it’s somebody else’s ledger. One woman’s expense is another women’s revenue. A company’s debt is a bank’s asset. Etc., etc. But yes, I agree, government spending can be beneficial, even if it is at the cost of a budget deficit, i.e. when more is spent than what is received as taxes. So the national debt increases. And much of what is spent, will soon return to the government as taxes.

1:00, SK: “When the government spends more than it taxes away from us, it makes a financial contribution to some other part of the economy. Their red ink is our black ink. When you look at it this way, it becomes clear that every deficit is good for someone.

True, that can be OK. But essentially what this is, is: stimulating the economy with borrowed money. That’s often beneficial, but if the national debt grows too much, I consider that risky, also because it makes a country depend of foreign parties all over the world.

10:18, SK: “Being responsible shouldn’t mean running the government’s finances like a household.

I do think that’s essentially the same. Except that a household with a mortgage loan eventually needs to pay it off completely, whereas governments (and big companies) can afford to have debts perpetually, if there are assets at the other side of the balance sheet.

10:24, SK: “Instead of trying to keep the deficit in check, Congress should be focused on keeping inflation in check. That’s the real limit on spending.

In Europe, in the eurozone, that is a task of the politically independent European Central Bank, not of any parliament. But OK. I guess inflation should be one of the limits. Rules of thumb like 60 and 3 percent of GDB also make sense, as I see it.

I agree with the rest of Stephanie Kelton’s video. My summary: governments spending and investments are often OK. And the question of how and where to get the resources, like raw materials and skilled workers, is more important than how to find the money.

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