MMT

[dre]

MMT is a relatively new school of macro-economic thought. Basically it puts forth the proposition that a government in the global fiat empire can ONLY be limited by resources and labor and that "money/currency" is essentially irrelevant.

Interestingly, central MMT points regarding interest rates and solvency made over many years have been confirmed very publicly by the U.S. debate over the extension of the debt ceiling. High-profile people such as Alan Greenspan and Warren Buffett have noted that solvency cannot be at risk for a country that controls its own free-floating fiat currency. The dark view that bond vigilantes are imminently threatening to cause a steep rise in U.S. interest rates was exploded by the precipitous DROP in U.S. interest rates immediately after the U.S. debt downgrade by Standard and Poors. Of course, Japan has had 0-2% interest rates for twenty years despite deficits and debt far higher than most other countries but, being on the other side of the world, it could be ignored.

So then why reduce deficits in the face of high unemployment as so many governments, including ours, say is so imperative? There is no risk of insolvency or high interest rates. Deficit hawks now say, as one did to me a month or so ago, the danger is inflation. Well, perhaps, one day, but not now -- maybe not for many years. Why prepare for inflation now when the current danger is unemployment and deflation? A possible explanation comes from Paul Krugman (a non-MMTer) in a recent blog post: ''what we're seeing in practice is that defending the interests of a small wealthy slice of the population takes priority over a possible recovery strategy.'' While this may help explain why the Harper Conservatives and their corporate backers are not interested, it does not explain lack of interest by others.

How does this differ from the dominant New Keynesian paradigm?

Well, the New Keynesian paradigm is built upon a series of false premises that affect policy prescriptions. False premise number 1: government has to borrow to fund spending. False premise number 2: there’s a fixed supply of savings available at any point in time. False premise number 3: the government, by borrowing from that fixed supply of savings, denies private sector borrowers those funds, and competition for those funds drives up interest rates.

MMT says the following:

There is no finite pool of savings in the economy. Savings is a function of national income. When you have rising national income, you have rising savings. So if government spending stimulates economic activity, and thereby GDP and national income, savings will rise simultaneously. That’s the first part of the story.

The second part of the story is that private sector borrowing is not dependent upon a fixed supply of savings. The concept of a bank in the New Keynesian model is that the bank sits there waiting for depositors to come with their savings, and only once the bank attracts those deposits is it in a position to lend. In other words, the New Keynesian conception is that banks are constrained by their existing reserves. In reality, however, banks always have the capacity to create loans for credit-worthy borrowers because they can always get more reserves. Banks can get reserves from a number of sources, but at the end of the evening the banks know they can cover their reserves by borrowing from the central bank. So the conception of banking in MMT is much different from the stylized treatment in New Keynesian economics.

The third story is what happens when the government runs a budget deficit. What happens in the money market is as follows: the US government buys something from the private sector. They pay the manufacturer, who then pays the workers. A whole range of transactions follows from that initial government purchase. All of those transactions work their way through the system and find their way to the reserves of the banks each day. Typically—though not at the present because we are in an extraordinary situation where the central bank is paying interest on reserves—those reserves would just sit there and earn zero interest for the banks. And so typically, as I’ve explained before, banks try to get rid of those reserves, driving down the interest rate in the interbank market in the process. What you can understand from that is that budget deficits, independent of any monetary operations, drive interest rates down, not up. This is the complete opposite of what orthodox economists claim is the case, and it’s confirmed by the present combination of record low interest rates and very large budget defecits.

http://hir.harvard.edu/debt-deficits-and-modern-monetary-theory

Edited November 28, 2011 by dre

[Michael Hardner]

There weren't any replies to this but it seems interesting to me.

Does MMT mean that government prints money without borrowing it ? Fill in the gaps for me.

[dre]

There weren't any replies to this but it seems interesting to me.

Does MMT mean that government prints money without borrowing it ? Fill in the gaps for me.

It could mean that... As it points out, no government with a free floating fiat currency needs to borrow to fund itself.

MMT is not really a "theory" about what might happen in a fiat system, its a study of what HAS happened, and it points out a number of places where traditional economic theory has been proven wrong... Like the idea that defecit spending would be constrained by interest rates for example. This simply has not happened, and in fact it turns out that the opposite has happened.

It also does make some policy prescriptions though, and the general idea I get from them is what I stated above. Currency value is almost completely irrelevent, and the only real boundary to government spending is natural resources. So the government should dump new money into the system until theres full employment. A miner for example should not stop working if theres still lots of ore in the ground, just because there is a shortage of "bits of metal and paper" (currency). The miner should only stop working if theres no more ore left, or nobody will buy ore, and no expected future demand.

To be totally honest with you though Im the wrong person to answer your questions. Iv only spent a little bit of time reading about MMT, and the article I linked to is probably the best way for you to learn the basics.

MMT observations prove some of the points I have been making in other threads. Theres no reason for a government with a free floating fiat currency to "borrow" in the traditional sense. Why would it pay interest to bankers on money that it creates itself? Beyond that though MMT assumes a fiat money system... so its not necessarily something I endorse or agree with. Its just a different way of looking at the mousetrap.