MODERN MONETARY THEORY –HOW LONG UNTIL

ECONOMISTS GET IT?

 

Ted Trainer

10.4.2020

 

Modern Monetary Theory shows that conventional economics is based on some totally mistaken assumptions which are yielding policies condemning most of the world’s people to immense and avoidable burdens.

Everybody knows that governments are like households in that they can go into debt but should avoid this if they can, that budget surpluses are desirable, that often governments must borrow and pay back with interest, that there are many things they don’t have enough money to do such as build better infrastructure and spend more on the environment, that they can only spend what taxes and government businesses bring in, that if debt is big then public assets have to be sold to pay it off, sometimes governments have to borrow money and pay it back with large amounts of interest, sometimes governments must inflict savage austerity on their people in order to divert scarce funds to paying back loans, some degree of unemployment is normal and there is a “natural rate”, governments should not resort to printing money or there will be big trouble. But Modern Monetary Theorists know that all these beliefs are wrong.

So what is it?  At the core of MMT is the fact that national governments can create all the money they want; they don’t have to raise money by borrowing or taxing. This means they can ignore the capital markets, avoid borrowing and having to worry about being in debt, or inflict austerity on their citizens in order to balance budgets, and can spend what they like to build or solve problems. 

Consider:

Jane made clothes and Fred next door was a farmer, but both were very poor, actually with no money at all. Jane really wanted to get some vegies to eat. Fred next door had plenty of vegies on his farm, but really needed a new pair of trousers.  But neither of them had any money so could not buy what they wanted from each other. A conventional economist aware of the situation said too bad Jane, without money to pay for vegies you will have to go hungry.  But another onlooker, Alf, had an idea.  He got a piece of paper and wrote $1 on it, lent it to Fred and said “Here, use this money I have just created to buy a pair of trousers from Jane, then she can use it to buy some vegies from you.”

Alf had created a form of money, an unusual form, but it did the trick. It enabled economic transactions to take place. By the way, Fred paid his debt by giving the “money” back to Alf, who tore it up.

Lots of people in alternative currency schemes have been doing this for ages. In a LETS system people who have no normal money can trade with each other simply by writing IOUs, which are tallied at a central agency so that anyone can see whether the goods and services he has bought from members in the system are about equal to those he has sold to them.  The money here takes the form of bits of paper exchanged, or electronic records, and participants create as much of it as they want whenever they want.

Town councils have often done this kind of thing. For instance, paying the workers building the new swimming pool with a special currency printed for the purpose, and telling people they can pay their rates with it, meaning that in time the Council will get it all back, and again could burn it if they wished. But why not spend it again on some other socially desirable purpose? 

Hasn’t the council got something for nothing? If so, who cares? It is more appropriate to say the council has enabled its workers to build an asset for the town by enabling them to put some available but unused productive resources to work.

You might be more comfortable if the kind of money the town or nation created was separate from mainstream currency, only useful for paying for things bought from people who could then spend it within the town or country. This would get around confusions to do with whether the created money could be used to pay for imports from a country that couldn’t use the currency, except to buy exports from it. Many such currencies are in use for trading within a particular region or group, like LETS.

The point is that money should be seen as merely a device that enables transactions, and bookkeeping, that is, keeping track of who owes what to whom. It is created out of nothing; somebody has to create it, right?  There is far more money circulating in the Australian economy now than there was in 1930 … where did it come from?

So a country’s government can create money, spend it into circulation to pay for some public work, or just give it to various people, thereby enabling more economic activity and reducing unemployment. They can print and spend or give as much as they like (… but there are limits to sensible spending; below.). They do not have to borrow it, or sell public assets to get money.  Such governments can never “run out of money.” The constraints on economic activity are set by resource availability, not by the availability of money. Nor do governments have to attract foreign investors to come in and build things, nor does the country have to export frantically to accumulate funds needed to do things, or sell off national assets to pay debt, or inflict austerity to divert scarce funds to paying interest. Above all governments can throw off their fear of what the global capital markets will do to them if they adopt policies foreign investors don’t like.  They can tell the credit rating agencies to go jump.

Let’s assume that a government wants to build a dam, and that there are lots of unemployed workers and available resources for the job. Now the government creates a lot new money boldly marked DAM MONEY and uses it to pay wages to people working on the dam and suppliers of materials.  Why would anyone accept this strange money? Because the government tells everyone that they can use it to pay their taxes, that’s why. When all the funny money has been returned to the government this way it can be burnt if you like. What the government has done here is simply enable, organise the available labour and resources to be put to work. In an economy that is growing and therefore needs more money put into circulation all the time the government could spend the tax income on something else and leave the money it created in circulation. If so, why create the new money in the first place, why not just create more normal dollars.

In fact governments often do kind of thing. For instance “Quantitative Easing” involves creating massive amounts of money and giving it to various agencies such as banks. Rudd and Swan saved Australia from the GFC by (among other things) giving everyone $900. (The best strategy for getting an economy going is probably to use “helicopter money”, that is just fly around tossing out lots of newly printed notes; people will immediately spend them generating “effective demand” and jobs.)

Yet conventional economists proceed as if it is wrong to do this, or at least as if it is to be avoided if at all possible. Then they insist that if the government wants to build that dam it must go to the capital markets and borrow and someday pay the loan back plus interest. They tell us that Australia has always lacked capital and has always needed foreign investors to bring it in. As a result at present the Australian government has borrowed so much we owe over $550 billion and taxpayers now pay out almost $20 billion every year, about $4,000 per family, in interest on government borrowing, when the government could be printing all the money we need with no interest payments at all.  What a delightful situation … for foreign investors and bankers!

The biggest mistake here is the dominant assumption that governments are like households in that they must balance their budgets and in the long term avoid debt.  But this is totally incorrect. Again unlike households, governments can arrange the production of publicly desirable goods, services and infrastructures by creating sufficient money to put the available resources to work.

Anyway why is it OK for a private bank to create money and put it into circulation (which is what they do every time they make a loan), but not OK for a government to do this? Why do governments go to private banks to get money and pay billions in interest when they have no need to?! Don’t tell me the banks don't create money because they only lend what people have deposited…if so, a) how do you explain growth in the amount of money circulation in the economy over time, and b) how come that at any point in time banks have lent out about ten times as much as they have in deposits? 

And note that the notion of debt is irrelevant here; when governments create money nothing has been borrowed and no debt has been created and nothing has to be paid back.

The standard objection is of course that if a government creates money it will end up with mega inflation, as happened in Weimar Germany and Zimbabwe. This is as silly as saying if the government trebled tax rates it would ruin the economy. Of course it would. But no sane government would create and spend more money than was needed to enable available and unused resources to be put into production. If the money created is just enough to get available resources into production there will be no surplus money pushing up prices. Parliaments can always set limits on the amount to be created. Consider the fact that Quantitative Easing after the GFC did not cause inflation, and the fact that Japan has been doing this kind of thing for ages without inflation.

Consider the massive social damage and misery caused by generations of economists and politicians who have failed to get MMT.  During the Great Depression how many millions endured ten years of poverty because they had no money to produce and sell basic necessities to each other, (… among other things, contributing heavily to the rise of the Nazis.) When MMT is understood it is obvious that the unemployment + under employment rate should be and can easily be reduced to zero. There are always important things to be done so just create and spend enough money to set up enough farms and factories to give jobs to all who want them.

In April 2020 much attention began to be given to the huge debt governments were stacking up in order to deal with the recession/depression being caused by the Covid virus. The Leader of the Australian Federal Opposition said, “We are headed for a trillion dollar debt. It is a bill that will saddle us for a generation.”  No one challenged him.  No one said, ”Look mate you can spend that much and more without increasing debt at all. You don’t have to borrow it…because you can just create it to get your economy going again.”

Because conventional economists do not understand any of this billions of people are forced to suffer “austerity”. Their governments say, “We are so heavily in debt that we have to cut spending on welfare, pensions and benefits and desperately needed projects so we can pay off the debt.” They have no idea that they could so easily set up systems whereby unemployed and poor people could produce and sell to each other most of the basic things they need for at least tolerable lives.

About four billion people in the Third World are forced to endure poverty despite having land, forests, water and climates that they could be using to produce for themselves basic necessities, because conventional economists conceive “development” in terms of growing the GDP, the volume of business turnover. Thus it requires investment of capital and thus must involve attracting foreign investment and borrowing, which inevitably means massive debt and being forced to accept IMF Structural Adjustment Packages in order to earn to pay off the debt … packages which divert their resources to whatever uses the investors think will maximize their global profits.  If development was understood in terms of arranging for available resources to go into the production of simple goods to meet basic needs, then it would be seen that this is an organizational not a financial problem and that it would require hardly any capital to be borrowed. (Even if the currency is not ”sovereign”, i.e., is “pegged to the dollar”, a government can create a separate currency for use in a “needs-driven-sector” set up separately from the normal “profit-driven” sector.” 

So how come we have been operating with such an absurd and socially devastating approach to national finance?  Because for centuries it has been a bonanza for the owners of capital, that’s why. Banks do not want you to understand that your government does not need to go to them and borrow money to build infrastructures, etc. They want governments to believe it is necessary to borrow from the banks and repay with interest! They make zillions because capitalist ideology has taught everyone, via their loyal servants the conventional economists, that a great deal of capital investment is required and if you want capital to invest you must borrow it from people who have capital, and pay interest.

And consider the disaster if it was realised that without debt the resource wealth flows from of the Third World soils to rich world corporations and supermarkets would cease; poor countries would no longer have to see their wealth flow out to pay off debt. (Of course it can make sense for them to borrow small amounts of foreign currencies to pay for crucial imports for appropriate development. TSW: Development.)

As Marx and Polanyi and many others have stressed, money should not be treated as a commodity, as something that can be hired and used for a fee. If you allow that then people with a lot of money get richer and richer, and people who can only hire/borrow it get poorer. And you end up with a bloated financial sector recently making 40% of US profits by lending and raking in interest payments. Michael Hudson’s works on the history of debt show how this arrangement destroys entire empires, and how the ancient rulers realized this and periodically cancelled debts. He argues this is the only way out of the present situation where debt is far higher than before the GFC.

However in a sane economy MMT would have been long forgotten.  This is because it is about getting additional money into the economy, and a sane economy would not only have no growth, it would have “de-grown” to be a small “steady-state” economy. 

But MMT can play a vital role in the transition to a sane economy, because it reveals to governments that they have the power to take away from the capitalist class decisions about what is to be developed. In the present economy what is developed by capitalists is never what is most needed, it is always only what those with capital think will make more profit for themselves than any other possible investment.

Therefore from here on governments will be free to create as much money as is needed to establish local and highly self-sufficient and self-governing local economies in which people can apply local resources to meeting local needs, with only a low need for imports from the international economy (…paid for by a tiny export capacity.) These economies will have a sufficient and stable amount of money to enable their stable amount of day to day economic activity.

Shifting to such economies along with a willingness to live simply is the only way global sustainability can be achieved, because it cannot be achieved unless there is very large scale degrowth down to far lower per capita levels of consumption and GDP, and this can only be done in Simpler Way settlements.  (TSW: Limits, and TSW: The Alternative Society.)  People living in the Dancing Rabbit eco-village in Missouri have higher than average US quality of life on per capita resource use rates that are around 10% of the national averages. (Lockyer, 2017.)

 

 

For a more detailed account see Williams, S., and S. Alexander, (2020) “MMT, Post-Growth Economics, and Avoiding Collapse”, Simplicity Institute. http://samuelalexander.info/publications/

For the heavy academic account see Mitchell, W., (2016), Modern Monetary Theory and Practice: An Introductory Text, Create Space Independent Publishing Platform, 364 pp.

Aust.Fed. Govt., (undated), Budget Paper No.1: Budget Strategy and Outlook 2018-2020. Statement 6:Debt Statement, Assets and Liabilities.

https://budget.gov.au/2019-20/content/bp1/download/bp1_bs6.pdf