MMT

I’m not dismissing MMT as an academic theory to aid understanding of how government spending/borrowing works. My view is that MMT is used to justify public policy rather than as a neutral position to approach public policy.

My view is that MMT is used to justify public policy

Politicians will use anything to justify the crap they come up with.

My view is that MMT is used to justify public policy rather than as a neutral position to approach public policy.

MMT follows policy decision. It happens good or bad every time the UK government decides to spend.

Simple as that.

It’s neutral in the sense that lack of money can’t technically be used to justify not doing something.

Thread  resurrection I know, but this is something that seems to be perenially relevant and especially pervading the current election situation.

I have some knowledge of MMT, but have some questions, and here seems to be the best place:

1: I don’t quite get one of the fundamental principals of MMT ie Taxation being a motivation for people to earn that currency. I listen to experts saying that sanctions for not paying taxes results in people working for wages so they can pay the taxes. In my experience, people’s motivation to work and earn money is so that they can buy nice stuff, and the tax is just an undesirable side-product of those earnings. How is my thinking flawed?

2: Why do politicians not embrace MMT? In my way of thinking, it’s either because:

a: they don’t understand that that’s how things work

b: they get it, but fear that it will put voters off

c: they get it, but are stealthily using it for nefarious purposes

Any clarification welcome

thanks

Actually I think question 2 has been answered as I work my way through this thread  thanks @rone @dazh and @nickc and others for the info on this thread.

Any help with question 1 welcomed 🙂

2: Why do politicians not embrace MMT? In my way of thinking, it’s either because:

a: they don’t understand that that’s how things work

b: they get it, but fear that it will put voters off

c: they get it, but are stealthily using it for nefarious purposes

d: its a fringe theory rubbished by most mainstream economists and not a model of how the world works that is generally considered accurate.

d: its a fringe theory rubbished by most mainstream economists and not a model of how the world works that is generally considered accurate.

And from the election thread…

There’s nothing Reeves could say to convince you short of totally signing up to your somewhat esoteric economic theory.

Yes it’s so fringe and esoteric that every western economy uses the model described by MMT. Fiat money has been around since 1971 and is now an almost universal standard for countries which have a sovereign currency. The economists and politicians who still push the neo-classical view do so because they have a vested interest in its continuity. The politicians are in hock to the top 1% who benefit from the illusion of austerity, the economists mostly because it’s hard to accept that your 30-40 year career was based on a fallacy. If the general public ever do begin to understand the reality of where money comes from (and where it goes) there’ll be a revolution in very short order.

1: I don’t quite get one of the fundamental principals of MMT ie Taxation being a motivation for people to earn that currency. I listen to experts saying that sanctions for not paying taxes results in people working for wages so they can pay the taxes. In my experience, people’s motivation to work and earn money is so that they can buy nice stuff, and the tax is just an undesirable side-product of those earnings. How is my thinking flawed?

2: Why do politicians not embrace MMT? In my way of thinking, it’s either because:

a: they don’t understand that that’s how things work

b: they get it, but fear that it will put voters off

c: they get it, but are stealthily using it for nefarious purposes

1) Its an interesting question, because I know people who cut their hours to stay under the 40% threshold. they obviously earn less  overall now, but decided that the stress of working 5 days wasn’t worth 4.5 days pay.

Hypothesis:

But for the other 90%, people work enough to get by. At the lower end that’s 60h weeks and 2 jobs.  At the middle it’s a 37.5h week and choosing jobs that you find least stressful but still pay the mortgage.  If you put income tax up, those in the middle would probably go out and find better jobs.

Same logic if you put up corporation tax:

– might get passed on to employees as lower pay rises -> same result

– might drive “efficiencies”, i.e. productivity goes up

etc

Same with VAT or any other sales tax:

– people need to work more to afford to live so take 2nd jobs (or ask for more remuneration which means those companies need to invest in productivity)

If people work more/harder then productivity goes up.

More productivity means more goods and services

Which means price deflation on those goods and services.

If you’ve got deflation you can create more money to counter it, and the circle is complete (more tax, more spending and people working more productively) or the system reaches a new equilibrium.

2) All of the above except a?

a) Hunt isn’t an idiot. He probably knows more economic theories than the rest of us have forgotten.

b) The “current account” model is easy to grasp and probably covers 90% of the cause and effects anyway.  Even MMT explains you can’t spend money without taxes, just with extra steps.  You could write MMT the other way round to the way it’s commonly stated and say “If you don’t balance the books you’ll have some combination of inflation and/or high interest rates”

c) They’re using lots of models to do lots of things with lots of small levers (thousands of departments schemes, initiatives etc) as well as the big one (tax).

Yes it’s so fringe and esoteric that every western economy uses the model described by MMT

they all have a fiat currency, I agree, but claiming that’s the model described by MMT is misleading. MMT is one interpretation of how an economy with FIAT works. Flat earthers have a model of how the world works. Just because we all live on the earth doesn’t mean the flat-earth model is anything other than fringe and esoteric

MMT is one interpretation of how an economy with FIAT works.

No it’s not, it’s a simple description of the facts. MMT is an explanation of how fiat currencies impact the operation of govt finances and spending in the economy. You can’t run a fiat currency without deficits, ‘debt’ and taxes*. It’s a simple accounting model where the govt creates money at one end, and removes it at the other, with the surplus representing the money active in the economy. All the rest of it like govt borrowing, bonds etc are just mechanisms to obscure the reality towards enriching a small number of people at the cost of everyone else.

*Well you could, but it would result in deflation, depression and economic collapse which no sane govt would want.

Where MMT differs from classical economics is the recognition that govt spending and the monetary system can be used for the benefit of everyone in society, rather than private investment and competition being the only drivers of wealth and productivity.

MMT is one interpretation of how an economy with FIAT works.

Will help with that.

It’s the only one. Ground up. No neoclassical system has ever modeled the government finances accurately. There is an assumption there is a competing description. There isn’t. There’s just what many economists believe happens.

If you want the regular classical interpretation – you can call on one of Biden’s senior advisors. I’m guessing most economists don’t know. Poor fella.

From the film:

I think the film Finding the Money might help. Came out in the USA recently.

But UK to follow shortly.

Flat earthers have a model of how the world works. Just because we all live on the earth doesn’t mean the flat-earth model is anything other than fringe and esoteric

That’s a bit disingenuous because the financial model most understand to be correct is actually the flat-earth theory because it assumes right at the start the government can’t create its own currency. You’d have to be bordering on crackers to believe that. Many do.

I always say to people where do you think central bank money comes from then? (reserves.) Who has the power to underpin our financial system? The government and central bank!

Why is it difficult for some to accept MMT when they have bought into FIAT?

The FIAT banking system literally magics more money out of thin air (by lending more than is received) every time a deposit in made into an account somewhere.

Is it because somewhere along the line it democratises the money supply and removes the power from those hoarding wealth?

Why is fiat capitalised? It is not an acronym, it is a word. In Latin.

It’s the only one.

This really isn’t true.

“The FIAT banking system literally magics more money out of thin air (by lending more than is received) every time a deposit in made into an account somewhere.”

I believe that MMT folks pooh pooh the status of bank lending according to the fractional reserve principle as not really being newly created money – only money created by the central bank is that.

But economists have several definitions of money depending on what they want to know about.

Why is it difficult for some to accept MMT when they have bought into FIAT?

Not sure if it’s just confusion, but fiat is just the legal tender we use, i.e. money, MMT is more of an economic theory, so more akin to Keynesian than fiat, both models would use fiat, infact MMT can’t really work unless it is in a fiat system.

As for MMT, it’s been talked to death on here, in model form it looks good, but real world is where it could fall apart, nobody has used it, even those countries who have fiat and have been politically and financially volatile in the last few decades, reality is it’s all about the worlds confidence in the currency involved, outside the $, i don’t see any working well with MMT, without some serious risks involved for countries who attempt it.

Fiat is more than the tender used, it’s the means of supporting the value of that currency. Previously there was a physical thing (gold) that underpinned the value inherent in the tender (commodity currency). Now it has value by dint of how it is loaned out by the bank on receipt of a deposit.

Somewhere online there is a youtube video explaining it better than I can remember. One like this one https://www.youtube.com/watch?v=U8Yn5jT8Hyc&pp=ygUUZmlhdCBtb25leSBleHBsYWluZWQ%3D

Why is fiat capitalised? It is not an acronym, it is a word. In Latin.

Haven’t you seen the badges? Fabbrica Italiana Automobili di Torino.

Now let me sit on that SEAT over there.

The FIAT banking system literally magics more money out of thin air (by lending more than is received) every time a deposit in made into an account somewhere.

This doesn’t happen at all, you’re confusing money supply with creating money, and neither are linked to fiat or a gold based currency.

Banks can lend an amount of the money you deposit with them, which is less than the amount you deposited (the rest is held back for liquidity reserves). This can happen regardless of the currency base. This increases money supply (a technical term that confuses lots of people), but does not magic money out of thin air.

“Haven’t you seen the badges? Fabbrica Italiana Automobili di Torino.

Now let me sit on that SEAT over there.”

Ha ha.

The motor company is now called Fiat Automobiles SpA. Along with other companies like BP and IBM it changed its corporate name to reflect the brand name. So Fiat on a car is now just a made up word which confusingly is the same as a real(ish) one. The DVD consortium has declared that the initials have no meaning, it is just a name.

I think this is the marketing/pr folk at work. When something is used as a brand name it loses any meaning it may have generally and simply represents the values of the brand. So the company is named after the brand it sells products under rather than the reverse (which is generally how things start off).

Banks can lend an amount of the money you deposit with them, which is less than the amount you deposited (the rest is held back for liquidity reserves).

The banking system hasn’t worked like this for decades. When a bank makes a loan it doesn’t lend money other people have deposited, it creates a deposit in the customer’s account out of thin air. At the same time they also make a record in their reserve account with the bank of England (think it’s called double accounting). When people repay the loans the money is then destroyed.

Anyway this isn’t really much to do with MMT. MMT talks mostly about how govt creates and spends money, not the money created through bank loans to consumers and businesses. When the govt spends money, it is much the same as a house buyer getting a mortgage, except the mechanism is different. Govts don’t have to apply for a loan to a commercial bank or demonstrate how they’re going to repay it, they just instruct the BoE to create the money and then it is ‘repayed’ when they collect taxes. All the govt money created this way that hasn’t been taxed back is essentially the national ‘debt’, except it’s not really debt as the govt can’t be in debt to itself. It’s only called debt because it’s recorded as a liability in the accounts.

PS if anyone wonders how money is created it’s all here…

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy

The banking system hasn’t worked like this for decades. When a bank makes a loan it doesn’t lend money other people have deposited, it creates a deposit in the customer’s account out of thin air. At the same time they also make a record in their reserve account with the bank of England (think it’s called double accounting). When people repay the loans the money is then destroyed.

That is not correct in the way most people understand money and this sort of nonsense is why people don’t believe in mmt (mmt does not support this lie).

Banks can only lend money they have, either through customer deposits or via other sources of investment (ie selling packaged loans). In fact if banks can’t even lend all the money they do have in deposits, they normally have to hold a reaonable amount (~20%) in highly liquid assets (or cash with the central bank). If banks could just invent money it’d be impossible to go bust. They can create a loan and a deposit simultaneously but as soon as the deposit is withdrawn they have to have liquidity to cover the loan, so this is not a bottomless pit

Source : I’ve worked at a bank for 20 years, and my current role involves liquidity calculations.

Banks can only lend money they have, either through customer deposits or via other sources of investment

Well the Bank of England doc I posted above disagrees with you. You should probably go and tell them they’re wrong.

I think there are some interesting ideas in MMT, but at the same time I suspect there are some key factors missing from the model.

For example, as far as I can tell, if you subscribe to MMT then the Euro as a currency is a bad idea, no question.  If you were to take that argument to it’s logical conclusion then the US would be better off getting rid of the dollar and having each state have it’s own currency.

In fact, it could well be that the divisions should be even smaller.  Iceland has a sovereign currency and a population of 400,000.  Should we be breaking things down where each grouping of 500,000 people gets it’s own currency?

Banks can only lend money they have, either through customer deposits or via other sources of investment (ie selling packaged loans).

I’m sorry this is 100% factually incorrect.

Commercial banks create loans – the loans are basically digital money creation performed under license from the BoE.  Nothing more than key strokes.

They never lend out other customers deposits.

Creating a liability and an asset. This cancels itself out when repaid

From the BoE’s money creation in the modern world doc  (at their website.)

One common misconception is
that banks act simply as intermediaries, lending out the
deposits that savers place with them. In this view deposits
are typically ‘created’ by the saving decisions of households,
and banks then ‘lend out’ those existing deposits to borrowers,
for example to companies looking to finance investment or
individuals wanting to purchase houses.

Sorry there are many many misunderstanding about money that are believed to be fact.

Just think about for one second – there has to be a source of reserves (base money). As an individual you can’t create money. That is the task of the BoE and commercial banking system.

For example, as far as I can tell, if you subscribe to MMT then the Euro as a currency is a bad idea, no question.  If you were to take that argument to it’s logical conclusion then the US would be better off getting rid of the dollar and having each state have it’s own currency.

This is resolved easily enough.

States are currency users – the federal government is a currency issuer. States aren’t countries either.

There is no contradiction really.

If you look at it from our point of view moving to the Euro would take away the sovereignty of the pound – which means we can mechanically control how we finance things. During COVID the ECB did grant special spending powers to individual countries to perform their own finance operations. So they moved closer to fiat sovereignty for that period as I understood it.

States are currency users – the federal government is a currency issuer.

But according to MMT the individual states would be better off as currency issuers, wouldn’t they?

But according to MMT the individual states would be better off as currency issuers, wouldn’t they?

This is where things go a bit off topic from what MMT says.

MMT says nothing about policy choice – MMT describes the current fiat systems in economies with central banks.

That’s it.

People, like they do then add their prescriptions to it.

MMT doesn’t say anything about States or what is best in that regard.

MMT is a framework for analysis.

Brass tacks. The originator of MMT (Warren Mosler) says this in his original white paper.

MMT alone recognizes that the US Government and its agents, including its regulated commercial banks, are the sole supplier of that which it demands for payment of taxes

That is, the currency itself is a simple public monopoly.  

The US government levies taxes payable in US dollars.

The US dollars to pay those taxes or purchase US Treasury securities can only originate from US Government and its agents.

This is in direct contrast with mainstream economic models and the rhetoric that states the US government must tax to get US dollars to spend, and what it doesn’t tax it must borrow from the likes of China and leave the debt to our grandchildren.  

MMT therefore recognizes that it’s not the US government that needs to get dollars to spend, but instead, the driving force is that taxpayers need the US government’s dollars to be able to pay taxes and purchase US Treasury securities. 

Stephan Kelton unintentionally discovered the MMT process when she looked into government financing and discovered what she expected to happen (tax and spend)  was in fact the other way around (spend and tax) and she produced a peer reviewed paper about this process.

Is that not effectively monetary exchange (a domestic version of foreign exchange) rather than monetary policy that is being described?

(The bold bit that was)

MMT says nothing about policy choice – MMT describes the current fiat systems in economies with central banks.

That’s it.

OK, but surely there must be an economy that is too small for MMT?  And likewise an economy that is too large for MMT?

I’m wondering because the Eurozone has a lot of countries that don’t have their own central bank.  Many MMT proponents say that this shows that the Euro is not a good thing because those countries can’t use MMT.

However, I don’t see many of those same proponents saying the individual states in the US should create their own central banks and currencies.

If banks could just invent money it’d be impossible to go bust. They can create a loan and a deposit simultaneously but as soon as the deposit is withdrawn they have to have liquidity to cover the loan, so this is not a bottomless pit

You have it back to front – if they lent out customers money they would go broke because of lack of liquidity. This is very reason they don’t do what you believe they do.

Commercial banks such as yours have accounts at the BoE where there is complex interplay of accounts that keep liquidity flowing through the system.

The loan liquidity that the commercial bank creates out of thin air is propped up by the central bank.

(Apologies to Daz he’s probably posted the same BoE article. But I cut this out.)

Commercial banks create money, in the form of bank deposits,
by making new loans. When a bank makes a loan, for example
to someone taking out a mortgage to buy a house, it does not
typically do so by giving them thousands of pounds worth of
banknotes. Instead, it credits their bank account with a bank
deposit of the size of the mortgage. At that moment, new
money is created

None of this remotely controversial – it’s just the system is technically ahead of most folk’s understanding. Many still think we’re on the gold standard.

Many MMT proponents say that this shows that the Euro is not a good thing because those countries can’t use MMT.

Yes of course – MMT doesn’t describe their system because the the bond issuance is different. And the ECB has the power but they do have individual banking demands.

But I’m guessing it would be fundamentally impractical to carve up every system, and not forgetting the USD is a reserve system holding together the entire globe.

I think it’s more a case of the Euro is a step too far for us – and you genuinely lose control rather than let everyone have their own currency.

It’s the currency control that’s important.

Sates in the USA operate their own taxation for funding purposes just like our district councils do.

The system we have has many flaws but the simple point of logic is the government can buy whatever is available rather than can’t afford it.

That’s all we really need in this debate especially during a general election where MPs go on and on about lack of money.

But I’m guessing it would be fundamentally impractical to carve up every system, and not forgetting the USD is a reserve system holding together the entire globe.

I think that’s the key issue.  MMT primarily concerns the US dollar.  If another currency became the world’s reserve currency then it would probably do a good job of describing that currency as well.

How it describes countries other than the US is still questionable.

So far only Sri Lanka has openly cited MMT as a justification for it’s economic policy and that doesn’t seem to be working very well so far.

Is that not effectively monetary exchange (a domestic version of foreign exchange) rather than monetary policy that is being described?

(The bold bit that was)

I’m not sure I follow.

But it’s the analysis of both fiscal and monetary operations.

That is only the 1st paragraph of the doc.

This really isn’t true

Still waiting for the other accurate model.

Please don’t say fractional reserve. Even the BoE article we keep putting up makes a nonsense of that. There is no liquidity ratio any more.

How it describes countries other than the US is still questionable.

Not really it describes economies with a central bank and fiat systems.

The Sri Lanka job was nothing to do with MMT. It was someone saying they tried MMT and it failed. Simply made up stuff

Like all damaged economies they had lots of foreign debt and many issues.

It’s pretty clear you dont ‘print’ or issue money just to get yourself out of trouble if there are structural problems with your economy.

https://gimms.org.uk/2022/05/15/reblog-no-mmt-didnt-wreck-sri-lanka/

The UK has a system described by MMT but if you buy the wrong things and make poor decisions – don’t blame MMT blame the policy makers!

MMT is not a fix – it is a way of understanding things to make better decisions. Those better decisions are down to your policy makers.

I’ve said before all you have to take away is the government does not have to functionally borrow to spend

That’s it.

The Sri Lanka job was nothing to do with MMT. It was someone saying they tried MMT and it failed. Simply made up stuff

Like all damaged economies they had lots of foreign debt and many issues.

But isn’t this just the ‘no true Scotsman’ fallacy.

All countries have issues to a greater or lesser extent.  But it seems clear that if you just print money then no matter how solid the economy eventually your currency is going to transition from being a ‘proper’ currency where MMT applies to a ‘dodgy’ currency where MMT no longer applies.

The question is where exactly is this transition point?  At what point can you just print money as and when it’s needed and at what point can’t you do so?

The point is when that printing of money starts to produce undesirable effects , typically excessive inflation levels.

That of course is a totally subjective, indefinite answer but that’s the reality.

I’ve said this before but I still think it comes down to this. MMT is a much better, more real model of how these things work than the one we normally work with. However, that doesn’t necessarily matter at all . The status quo has real power despite how wildly flawed and divorced from reality it is, and the people with the most power and money and influence- whether investors, institutions, governments, etc- have a huge vested interest in making it continue to work.

Frankly the accuracy and validity and reality of the economic model is almost certainly far less important than the size of the thumb of the scales, if the richest and most influential people and organisations and governments all benefitted from building an economy based on Pogs it’d probably do better than a perfect economic model that made them feel less powerful. And there would still be billions of people fighting and dying of starvation in the hope that one day they’ll have a big enough pile of Pogs to stop.

In the meantime people can keep getting rich trading in things that don’t exist, real costs like entire nations being drowned by the sea can be ignored because they’re not in the spreadsheet (and because we didn’t put them in the spreadsheet in 1611), and all the other obviously batshit insane nonsense that we have to pretend is sensible because the entire world economy and everything about it is dependant on enough people believing fairies are real.

In a lot of ways it’s just a confidence trick, in other ways it’s an abuser’s threat of making things worse if you try and fix anything. But most of all it’s just the thing that sort of works (or at least, that doesn’t work but which we have the capacity to fake it so that it seems to), which benefits the people who have the most influence and destroys the people with least.

We’ll keep pretending it works while we burn the world in order to keep faking it and the fairy-wing trading empires will continue to thrive as long as nobody ever asks to see a fairy.