Just a thread for people’s opinion on Modern Monetary Theory. Modern Monetary Theory (MMT) is a heterodox economic theory purporting to describe how money really works.
Unfortunately it appears Cecil never did a column, but I did find one previous debate thread dedicated to MMT, [THREAD=623087]MMT Economics[/THREAD] from 2011. In my opinion, that thread was a pile-on against MMT.
At SmartAleq’s recommendation I’ve been reading Professor Wray’s 52-blog-post series (MMT Primer | New Economic Perspectives). I will finish the last post tonight before getting into my own opinion. My primary concern, going into and coming out of the series, is inflation.
I clicked and read a little, assuming that’s the same primer linked last week. It seemed like a long boring recitation of the obvious. It even explains the obvious point that many overlook — that the purpose of taxes is to sop up spending power to avoid inflation.
But I’m with Max: Will printing money lead to escalating inflation? IIRC the MMTers’ answer is “Maybe not. And we’ll turn off the printing presses if it becomes an issue.” I’m not going to wade through a long sophomoric tutorial if that’s all they have for the punchline.
One of the main assertions of Modern Monetary Theory is that money is itself a form of debt. Professor Wray relies heavily on accounting terminology such as credits and debits, and from what I can tell the logic goes like this:
[ul][li]“It is a fundamental principle of accounting that for every financial asset there is an equal and offsetting financial liability.” MMP Blog #2.[/li][li]People accept money because the government promises to accept it as payment for taxes. MMP #8.[/li][li]Therefore, when the Government issues money it is really issuing an IOU note: this note can be redeemed for $1 in tax liability. Money is the government’s debt. MMP Blog #2 and #52.[/ul][/li]Professor Wray tortures himself to explain how even fiat money is the government’s debt; you can pay the government and in return the government only promises to reduce your tax liability. But if it were really true that liabilities are always the inverse of assets, then for every dollar ever issued there is exactly one dollar of tax liability. At the time that the government prints new currency, or pays a contractor in new currency, it does not necessarily increase the population’s tax liabilities by the same amount. So the “accounting identity” falls apart.
The problem, of course, is that there is not an equal and offsetting financial liability for every financial asset. The real accounting equation is this: Equity = Assets - Liabilities
See that left side of the equation? The equation isn’t assets=liabilities*-1. There is a third term, “equity”, which is normally used to represent what isn’t an asset or a liability. For example, funds put in by the owner or some outside source (donors). Unlike liabilities, equity does not necessarily mean the entity owes someone back. If you had to fit printing new money somewhere into the accounting equation, it makes the most sense to put it in as equity. Printing money is adding nominal monetary value without creating a liability; it is not a debt, it is equity.
The rest of Modern Monetary Theory does not break down as a result of this insight, and honestly I don’t see the big deal or relevance to anything even if money was debt. I don’t understand why money-as-debt was part of the primer at all.
When it comes to refuting what is essentially chartalism, I need only point to scrips, virtual currencies, game money (be it board games or video games). I believe for the first two hundred years or so after coinage was introduced, most ancient Greek city states minted coins while Greek society, rather than government, enforced the use of real wealth to sponsor public works.
But these are exceptions to the rule. Most of the time, I will concede that taxes are a factor in assigning value to money. But so is the government’s promise to enforce monetary contracts. Far more important in my opinion is the question of whether people already accept the money: if people will take it, it has value. The inertia is the most important element, in my opinion.
Another important factor is the sheer threat of persecution/execution, a la Kublai Khan:
“With these pieces of paper, made as I have described, he causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends. And nobody, however important he may think himself, dares to refuse them on pain of death. And indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan’s dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold. And all the while they are so light that ten bezants’ worth does not weigh one golden bezant.”
Not sure what I was thinking. It should read “equal” instead of “inverse” and “*-1” shouldn’t be there.
*But if it were really true that liabilities are always the equal [DEL]inverse[/DEL] of assets[…]
The equation isn’t assets=liabilities [DEL]-1[/DEL][…]
~Max
Professor Wray claims that the monetary economy is zero-sum. If you add up the monetary balances of each sector, the sum is zero of whatever currency is used.
This of course fails to recognize that very function of government that Modern Monetary Theory puts so much emphasis on, the ability of the government to create money ex nihilo. Let’s say we have an initial economy today, Thursday, and it just so happens that the above equation holds true. Friday morning the Government will print $1,000.00 but it does not distribute the money to the private sector until Saturday. Let’s look at the change on the government’s balance sheet. Assume nobody does trade on Friday, therefore:
Private[SUB]F[/SUB] = Private[SUB]T[/SUB]
Govt[SUB]F[/SUB] = Govt[SUB]T[/SUB] + 1000
Foreign[SUB]F[/SUB] = Foreign[SUB]T[/SUB]
And therefore on Friday, the relation has been broken:
Private[SUB]F[/SUB] + Govt[SUB]F[/SUB] + Foreign[SUB]F[/SUB] =? 0
Private[SUB]T[/SUB] + Govt[SUB]T[/SUB] + 1000 + Foreign[SUB]T[/SUB] =? 0
1000 =/= 0
~Max
A business’s “things of value” have claims on that value…internally from the owners of the business, and externally in the form of taxes, rent, utility bills, etc.
Right, same equation. I would use stockholders’ equity instead of owner’s equity though, as the U.S. is nominally “owned” by the entire citizenry. However we do not issue dividends, so the only claim that the “stockholders” (citizens) have on the nation is their indirect say in how it operates and theoretically a small slice of the pie should the U.S. government liquidate. If the U.S. government actually liquidates, I doubt the citizens at large will see a cent of equity.
These affect equity but I wouldn’t say they create claims on it unless the government liquidates with unpaid bills (taxes are an asset for govt and do not create a claim).