Sunday, July 5, 2020

Magical monetary theory full review

I read Stephanie Kelton's book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy,” and wrote this review for the Wall Street Journal. Now that 30 days have passed I can post the whole thing. 

I approached this task with an open mind. What I had heard of MMT has some overlap with fiscal theory of the price level, on which I work, and I hoped to see some commonality.

I was disappointed.

The review:

Modern monetary theory, known as MMT, erupted suddenly into the public consciousness when it won the attention of high-profile politicians including Bernie Sanders and Alexandria Ocasio-Cortez and their media admirers. Its central proposition states that the U.S. federal government can and should freely print money to finance a massive spending agenda, with no concern about debt and deficits.

What is MMT? Its advocates have told us in essays, blog posts, videos and tweets what MMT says about this and that, but what is its logic and evidence? As a monetary theorist who is also skeptical of conventional wisdom, I looked forward to a definitive exposition from Stephanie Kelton’s “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.”

Ms. Kelton, a professor of economics at Stony Brook University and senior economic adviser to Bernie Sanders’s presidential campaign, starts with a few correct observations. But when the implications don’t lead to her desired conclusions, her logic, facts and language turn into pretzels.

True, the federal government can spend any amount by simply printing up the needed money (in reality, creating bank reserves). True, our government need never default since it can always print dollars to repay Treasury bonds. But if the government prints up and spends, say, $10 trillion, will that not lead to inflation? Ms. Kelton acknowledges the possibility: “If the government tries to spend too much in an economy that’s already running at full speed, inflation will accelerate.”

So how do we determine if the economy is running at full speed, or full of “slack,” with unemployed people and idle businesses that extra money might put to work without inflation? Ms. Kelton disdains the Federal Reserve’s noninflationary or “natural” unemployment rate measure of slack as a “doctrine that relies on human suffering to fight inflation.” Even the recent 3.5% unemployment is heartlessly too high for her.

“MMT urges us to think of slack more broadly.” OK, but how? She offers only one vaguely concrete suggestion: When evaluating spending bills, “careful analysis of the economy’s . . . slack would guide lawmakers. . . . If the CBO [Congressional Budget Office] and other independent analysts concluded it would risk pushing inflation above some desired inflation rate, then lawmakers could begin to assemble a venue of options to identify the most effective ways to mitigate that risk.” She doesn’t otherwise define slack or even offer a conceptual basis for its measurement. She just supposes that the CBO will somehow figure it out. She doesn't mention that the CBO now calculates a measure, potential GDP, which does not reveal perpetual slack. And she later excoriates the CBO for its deficit hawkishness.

Really her answer is: Don’t worry about it. She simply asserts that “there is always slack in the form of unemployed resources, including labor.”

We’re not talking about a little slack either. Ms. Kelton’s “people’s economy” starts with the full Green New Deal and moves on to a federal job for anyone, free health care, free child care, the immediate cancelation of student debt, free college, “affordable housing for all our people,” national high-speed rail, “expanded Social Security,” “a more robust public retirement system,” “middle-class tax cuts,” and more. How much does this add up to? $20 trillion? $50 trillion? She offers no numbers. How is it vaguely plausible that the U.S. has this much productive capacity lying around going to waste?

In a book about money, the inflation of the 1970s and its defeat are astonishingly absent. History starts with Franklin Roosevelt—a hero for enacting the New Deal but a villain for paying for it with payroll taxes rather than fresh dollars. Ms. Kelton praises John F. Kennedy, too. He “pressured unions and private industry, urging them to keep wage and price increases to a minimum to avoid driving inflation higher. It worked. The economy grew, unemployment fell sharply and inflation remained below 1.5 percent for the first half of the decade.”

The second half of that decade—Lyndon Johnson’s Great Society and Vietnam War spending, inflation’s breakout, Richard Nixon’s [1971] disastrous price controls—is AWOL. Did we not try MMT once and see the inflation? Did not every committee of worthies always see slack in the economy? Did not the 1970s see stagflation, refuting Ms. Kelton’s assertion that inflation comes only when there is no “slack”? Don’t look for answers in “The Deficit Myth.”

Victory over inflation under Ronald Reagan and Margaret Thatcher goes likewise unmentioned. History starts up again when Ms. Kelton excoriates Thatcher for saying that government spending has to be paid for with taxes. She insinuates, outrageously, that Thatcher deliberately lied on this point in order to “discourage the British people from demanding more from their government.”

If spending can be financed by printing money, “why not eliminate taxes altogether?” Ms. Kelton begins consistently. She criticizes Sens. Bernie Sanders and Elizabeth Warren for claiming that they need to raise taxes to pay for spending programs. But then why raise taxes? Taxes exist to decapitate the wealthy, not to fund spending or transfers: “We should tax billionaires to rebalance the distribution of wealth and income and to protect the health of our democracy.”

She offers a second answer, more subtle, and revealingly wrong. She starts well: “Taxes are there to create a demand for government currency.” This is a deep truth, which goes back to Adam Smith. Soaking up extra money with fiscal surpluses [higher taxes or less spending] is, in fact, the ultimate control over inflation. But then arithmetic fails her. To avoid inflation, all the new money must eventually be soaked up in taxes. The new spending, then, is ultimately paid for with those taxes.

What about the debt? Ms. Kelton asserts the government can wipe it out. Again, she starts correctly: The Fed could purchase all of the debt in return for newly created reserves. She continues correctly: The Fed could stop paying interest on reserves. But in conventional thinking, these steps would result in a swift inflation that is equivalent to default. Ms. Kelton asserts instead that these steps “would tend to push prices lower, not higher.” She reasons that not paying interest would reduce bondholders’ income and hence their spending.

 The mistake is easy to spot: People value government debt and reserves as an asset, in a portfolio. If the government stops paying interest, people try to dump the debt in favor of assets that pay a return and to buy goods and services, driving up prices.

What about all the countries that have suffered inflation, devaluation and debt crises even though they print their own currencies? To Ms. Kelton, developing nations suffer a “deficit” of “monetary sovereignty” because they “rely on imports to meet vital social needs,” which requires foreign currency. Why not earn that currency by exporting other goods and services? “Export-led growth . . . rarely succeeds.” China? Japan? Taiwan? South Korea? Her goal posts for “success” must lie far down field.

The problem is that “the rest of the world refuses to accept the currencies of developing countries in payment for crucial imports.” Darn right we do. Her solution: more printed money from Uncle Sam—a “global job guarantee.”

She also advises small and poor countries to cut themselves off from international commerce. They should develop “efficient hydroponic and aquaponics food production” and install “solar and wind farms” rather than import cheap food and oil. They should refuse international investment, with the “classical form of capital controls” under Bretton Woods as an ideal. “We share only one planet,” she writes, yet apparently that planet must have hard national borders.

By weight, however, most of the book is not about monetary theory. It’s rather a recitation of every perceived problem in America: the “good jobs deficit,” the “savings deficit,” the “health-care deficit,” the “infrastructure deficit,” the “democracy deficit” and—of course —the “climate deficit.” None of this is original or relevant. The desire to spend is not evidence of its feasibility.

Much of “The Deficit Myth” is a memoir of Ms. Kelton’s conversion to MMT beliefs and of her time in the hallways of power. She criticizes Democrats, including President Obama and his all-star economic team, for their thick skulls or their timidity to state her truth in public. Republicans, such as former House Speaker Paul Ryan, are just motivated by dark desires to keep the people down and enrich big corporations and wealthy fat cats. President Trump’s tax cuts are a “crime.” How insightful.

In a revealing moment, Ms. Kelton admits that “MMT can be used to defend policies that are traditionally more liberal . . . or more conservative (e.g., military spending or corporate tax cuts).” Well, if so, why fill a book on monetary theory with far-left wish lists? Why insult and annoy any reader to the right of Bernie Sanders’s left pinkie?

Writing the book to “defend” an immense left-wing spending agenda destroys her argument. If you could only feel her singular empathy for the downtrodden, if you could, as she does, view the federal budget as a “moral document,” if you could just close your eyes and need it to be true as much as she does, your “Copernican moment” will arrive, and logic and evidence will no longer trouble you.

That effect is compounded by her refusal to abide by the conventional norms of economic and public-policy discourse. She cites no articles in major peer-reviewed journals, monographs with explicit models and evidence, or any of the other trappings of economic discourse. The rest of us read and compare ideas. Ms. Kelton does not grapple with the vast and deep economic thinking since the 1940s on money, inflation, debts, stimulus and slack measurement. Each item on Ms. Kelton’s well-worn spending wish list has raised many obvious objections. She mentions none.

Skeptics have called it “magical monetary theory.” They’re right.


Update. To "jabmorris" and "rob." How could you possibly know if I have or have not read the book? As a matter of fact, I read every word of it. You offer a false accusation of impropriety, that you could not possibly know anything about, instead of a shred of fact or logic. This seems about par for the course in MMT land.


  1. I still fail to understand why unemployment is the only measurement used to determine whether an economy has slack or not. Surely other factors, such as capacity utilization, GDP per capita, and my favorite (but totally unused) ratios both of money supply to total net assets of a nation and of total net national assets (public and private) to total net national debt (public and private) are more useful measurements of whether there is enough slack to afford expansionary monetary policy.

    More broadly, why don't economists look at debt-to-asset ratios at the macro level? Finding such data is hard (there are a couple of obscure Fed Reserve papers on the topic and that's about it), and such analysis is almost nonexistent. Why is that?

    1. Unemployment is the only relevant measure. Why would anyone care about other factors of capacity utilization. Resources are required to produce wealth. Resources are 2 things --> PEOPLE and DIRT. Dirt is always available. And we haven't run out of people. Why would anybody care about assets. And Federal Debt is largely irrelevant. It can be paid off on Friday by the Fed.

  2. The problem is that “the rest of the world refuses to accept the currencies of developing countries in payment for crucial imports.”

    Is this a joke?

  3. Do you take it to mean MMT is baseless?
    I think MMT has pointed on a very important truth -
    The Government, defined as including the central bank, has infinite money.
    This switches how you think about things.
    For example, what is important is the amount of money in the economy, not the budget.
    The government can put money in the economy with spending and debt payment, and take money from the economy by taxes and taking selling debt.
    The Government can spend in total more than it takes with no issue, as long as there is no inflation.
    Why wouldn't there be inflation? Well, if the economy is growing, then the amount of money in the economy can grow with it.
    If the economy grows by 2%(for example 2% more people), then you can probably increase the money supply in the economy by 2% with no inflation. 2% of all the money in the economy is a lot of money.
    This sounds OK, until you realize that means in a contracting economy you have to suck more money out! But you want government spending in a contraction?
    Well, so far it was assumed the speed of money is constant. it might not be,
    with very complicated consequences.

    1. Its not money created that's important. Its money spent.

    2. "Its not money created that's important. Its money spent."

      But money CANNOT be spent until it has FIRST been created. And money creation is a monopoly of the federal government and its agents (commercial banks).

    3. Money is production used as a method of trade, eg, gold or gold certificates. The Fed does not produce anything valuable on a market. The Fed counterfeits. This counterfeit is used to _steal_ always
      limited production from market-directed investment to
      politics-directed investment. This unsustainable investment booms
      and busts. The bust cant be concretely predicted. And because
      capitalism is more productive than predicted, Fed counterfeiting is occasionally coincidental w/more production. But, in the long run, pproduction will decrease. This is my view of Mises' 1949 _Human Action_.

    4. This is statism, not science.

  4. So, in few words:

    1) She doesn't explain why monetary sovereign nations struggling with poverty and misery do not implement MMT. Besides, realizing that MMT cannot work unless the nation in question is ENTIRELY autarchic, she simply suggests nations to exit international cooperation and division of labor--i.e., the surest recipe for disaster.

    2) She postulates a sort of everlasting slack in input employment. Then the question is: how come private market agents are so dumb they cannot reach full employment, whereas bureaucrats (better if appointed by her and comrade Bernie) would know exactly how to reach it? Where are all these smart guys working right now? I'm sure private hedge funds and investment companies would pay them gold and diamonds!

    3) In the end, the book seems to be a waste of time. You would expect logical reasoning and arguments, but you find only leftist propaganda instead. So far, I've never ever read an article, blog post, essay, whatever, written by MMTers which did not boil down to "government can, via money, defeat economic goods scarcity". Well, the problem is that if economic goods are not scarce, the are not economic either. MMT seems not to be so much about economics; rather, it's about hippie fairy tales.

    1. Sorry, I forgot to sign it. (It seems comment cannot be edited... I'm new here...).

      Fabrizio Ferrari

    2. RE: "... She doesn't explain why monetary sovereign nations struggling with poverty and misery do not implement MMT. ... ..."
      • Largely because they have bought in to the neoliberal nonsense being espoused by the IMF and western economists who push the nations to austerity and borrowing in foreign currencies and

      RE: "...ENTIRELY autarchic ... ..."
      • Why would that be necessary?

      RE: "... how come private market agents are so dumb they cannot reach full employment, whereas bureaucrats (better if appointed by her and comrade Bernie) would know exactly how to reach it? ... ..."
      • Through the implementation of a Job Gty. See Pavlina's book: or a gentleman and a scholar’s blurb for dummies:

      RE: "... defeat economic goods scarcity ... ..."
      • With very few exceptions, capitalist economies from the beginning of time have run with large percentage of their populations unemployed - folks wanting and needing work unable to find it. Resources are not scarce. So putting them to work creates significant incremental wealth.

  5. Well, you don't need a strawman on MMT when you have such a weak proponent as Kelton to stick a spear into.

    The experience of Japan in the Great Depression is that they printed money and sidestepped the entire downturn, alone among developed nations. That is a example of the use of MMT (unfortunately, not to build a better nation but to build a military).

    But in fact, MMT has no programmatic connotations. It is simply printing money to finance government operations, ranging from military to social welfare.

    Today, when the national government borrows money, and the US Federal Reserve builds a balance sheet simultaneously, a balance sheet it may maintain in perpetuity... this looks suspiciously close to MMT, or at least money financed fiscal programs.

    In Japan, in the US, inflation seems the least of our worries.

    What if the truth is something along these lines: The world generates huge gluts of capital. The world's capital markets today are at about $400 trillion and rising with each year. Capital is desperate, seeking a home, and willing to take a loss to find security.

    Under such conditions, a nation like the US can exchange cash for capital and rid itself of national debts.

    1. The notion of fungible "capital" is absurd, and even more absurd is the pure imagination that "capital" grows at a competitive equilibrium.

      Let's say Tesla issues $50 trillion of shares. If they sell them all, they are now worth in excess of $50 trillion, just based on the cash on their balance sheet. The U.S. government has unlimited cash on its balance sheet. It is only limited in its policy by what happens to the private sector and financial systems in response.

      The "programmatic connotation" of MMT, is a response to the ad-hoc design of money based on banking. Banks are private entities which operate on public trust. Governments are public entities operate on public trust.

      Government activity has positive externalities, and supports, enables, and safeguards wealth in the private sector. Any time you can spend to public money to prevent the private sector from self destructing, there is ZERO opportunity cost to do so. Tax base is not the ideal measure of governmental wealth or valuation. Positive externalities and private sector wealth is the measure of public policy.

      Sometimes public efforts decrease the net worth of the private sector, but everyone still gains. If I can visit a public park for free, I have nothing on my balance sheet to show for it. Multiply that by the number of users, and the benefit is great. But only the costs of the park are recorded, the gains are not. This is the logic of MMT, there is no accounting record for the benefit of public activity, so there is no objective measure for fiscal constraint, nor a duty to pay interest on debt. The gains are realized as public benefit, not interest.

    2. Everything here is kind of trash except your response. You defend MMT better then Kelton. Where else are you writing Derek?

    3. Government does indeed have positive externalities. The park example is a good one. However, the single most important externality is government's monopoly on violence. Removing, or at least reducing financial restrictions on government will only increase the risk of tyranny through violence.

  6. Basically, you didn't actually read the book to learn but to justify your praxeological beliefs in the free market system.

    1. Was thinking along similar lines! Reading to criticise and justify the status quo.

    2. The funny part is the entire MMT argument is praxeological. It is all centered on the truism that Governments print their own money and everything is a supposed logical consequence of that. If you actually read Mosler it is basically Austrian economics but with an extra chromosome.

    3. > Governments print their own money

      So there is no important difference between "redeemable in gold" and "federal reserve note?" And the production of goods is irrelevant
      and after, not prior to, "money" printing? How is govt
      counterfeiting different from private counterfeiting? "Good" intentions" is mysticism, not science. Should we return to shaving the edge off
      gold coins as in the classical and medieval eras? Their markets response was price inflation.

      >[Stephanie Kelton] the People’s Economy

      Marx is not a scientist. Why is Kelton? "The people" means not the individual. Economics has been aborted by collectivism, acc/to Ayn Rand. Man, the independent thinker, producing for his own life, is irrelevant and immoral, acc/to mainstreamers, and, as Marx honestly confessed, should be "swept out of the way and made impossible." Wait until Leftists ban fossil fuels. A few barely surviving hunting-gathering tribes won't have any need for a science of economics. They will be too busy gathering firewood. And, of course, the best firewood gatherer will be socially praised and rewarded. But, at least, the 1% won't be paid 1000 times more than average employees even if they are 1000 times more productive. The few survivors can contemplate the glory of the Crucifixion and wait for death.

    4. > FIAT money has no inherent value.

      Gold has no inherent Inherent value is mysticism. Value is the product of mans evaluation of a fact of reality relative to mans life by a rational standard. Values exist only because conditional life exists. Living organisms must act to remain alive. That is valuing. Govt economic controls stop man from valuing. Atlas Shrugs.

    5. > Gold has no inherent Inherent value is mysticism.

      Gold has no inherent value. Inherent value is mysticism.

  7. "How is it vaguely plausible that the U.S. has this much productive capacity lying around going to waste?"
    The productive capacity of the US economy is huge.

    Did not the 1970s see stagflation, refuting Ms. Kelton’s assertion that inflation comes only when there is no “slack”? Don’t look for answers in “The Deficit Myth.”

    -Oil price surge

    "Export-led growth . . . rarely succeeds.” China? Japan? Taiwan? South Korea? Her goal posts for “success” must lie far down field."

    Good point,but all countries need to develop sufficient industrial capacity.but yes export driven growth goes work.i dont agree with that point by her.

  8. She is not a professor of economics at stony brook university:

    1. Stony Brook lists her as a Professor of Economic and Public Policy, in the College of Arts and Sciences:


  9. Rarely before in the history of policymaking – nay, thought itself – has an attempt to hurriedly justify and rationalize some ostensibly desirable end looked more feeble. Kelton (and Bernie and AOC) are cynically using the public's lack of understanding of basic monetary economics to convince that the fundamental division between the real and nominal is moot. It is an absurd prospect, even in the context of this generally absurd political moment.

  10. Trump knows as well as anyone that too much debt matters.

  11. "If the government stops paying interest, people try to dump the debt in favor of assets that pay a return and to buy goods and services, driving up prices." Umm, no. All assets are held by someone, not paying interest just changes the present value.

    Investments not only have a price, but also a total volume of wealth they hold. When prices go down, the wealth is destroyed, not moved. Interest and returns are not competitive, because the only thing that induces trades is a change in present value, based on different information or difference in time preference.

    There are only two possible inducements to trade: need/want to consume, and information incongruence. The premise of equilibrium rates is the fungibility of all assets once prices are fixed in terms of present value, and every potential investment has a point of saturation in terms of utilizing capital. The more assets you invest, the quicker the investment reaches the saturation point, beyond which the rate of return starts to drop. So capital is allocated to hit the same point of saturation across all potential investments, and they all return the same rate of growth of wealth. The problem with this logic, is that it doesn't recognize that the "capital saturation curve" is rarely smooth. If you fail to change your car's oil, it breaks down rapidly. If you change it twice as often as recommended, it doesn't increase the car's value. Investment level is dictated by a small window of viability, in which it can maintain maximum potential value without excessive costs. Most activities don't scale up or down.

    Investment is done as much to prevent big losses of value due to dereliction, use, or natural decay as it is to increase value through growth. Are people holding high maintenance resources just unlucky?

    Say total wealth in the world is $200 trillion, at a rate of 2% growth. If you 'discover' $200 trillion worth of an asset which depreciates 10% per year, what happens? You need more information. What does it mean that this new asset is worth $200 trillion? Who is the buyer? Do they consume it? It is only worth $200 trillion if the present value of the future consumption it enables is $200 trillion. Does every investment vehicle return -8%, which would be the new average? No, because everyone just keeps whatever assets they had. Nothing about the rest of the economy is changed, except indirectly through increased purchasing power. The people who got the depreciating asset are the lucky ones. This is how money works.

    If you have a chance to gain a profit in terms of depreciating assets, you still take it, you just discount the present value. This is true of money whether it offers interest or no. Interest is irrelevant. You are just promoting the quantity theory of money. QTM is meaningless once you look at actual stock-flow models. There is no potential for price changes without some kind of net flow of money, regardless of the total quantity of money which exists.

    People want more profit, and will accept it even in terms of depreciating assets. Trying to "dump" a depreciating asset, just means pushing the price down even more than its known present value. The reason why money creation does not exacerbate inflation, is that profit increases when you create more money. More goods and services are created.

    When prices drop, it doesn't matter if the current holder experiences the loss or they pass it off on someone else. That's completely irrelevant to the price drop. Ergo, supply and demand is a bad model for trading financial assets.

    Offering returns on bonds, does not make people want to hold more money(as bonds), in any significant way. People already want to hold more money. Everybody wants more money. The only thing offering bonds does, is increase the present value of money by the amount which those who already want to save their money stand to gain from bond interest.

    Get your head out of the sand. This stuff is pretty straightforward.

    1. " The reason why money creation does not exacerbate inflation, is that profit increases when you create more money. More goods and services are created." This seems to me like the dumbest claim ever: you can print new fresh money, not value. They are two different things. Converting money into value is all what economics is about and you don't seem to grasp it properly.

    2. Money, real money, is already value. MMT is Garden Of Eden economics.

    3. "Money, real money, is already value."

      But we've been using FIAT money since 1971 when President Nixon ended the gold standard. FIAT money has no inherent value.

  12. FYI: When I hit "preview" my comment, which I spent considerable time on, simply disappeared.

    1. I've learned from bitter experience on many sites to copy and save my comments elsewhere before attempting to post, to avoid such aggravating losses.

  13. Fire looked like magic to cavemen. This ends my comprehensive review John’s review.

    1. And, thanks for expressing some of my thoughts so eloquently and pointing out some obvious but predictable misrepresentation.

  14. On the one hand, Kelton's book isn't sufficiently weighty and well thought out to justify review in the Wall Street Journal. On the other hand, it appears from our governments most recent actions that we have already embraced MMT!

  15. If only Venezuela could print all the money they wished with so much slack.... oh, wait....

    Well if only Venezuela had some product to export as source of foreign currency.... oh, wait....

    Well it must be capitalism. Yes, for sure it's capitalism fault.

    Oh, and Venezuela is not real socialism.

    1. Venezuela borrowed in dollars. A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
      a. issues,
      b. borrows in, and
      c. floats
      its own currency, can NEVER run out of cash.

    2. Maybe they borrowed in $ just because nobody trusted their own currency to buy import. Isn't this a matter of fact? But why did nobody accept their currency? Because they did print too much of it?! And why do all countries accept dollars instead? Maybe because its value is stable and not too much of it is printed... When money is Fiat no central bank can run out of it, but can run out of trust and trust cannot be printed...As simple as that, a concept tha MMTers (un)wittengly fail do grab

    3. I would love to see the MMT fans respond to this comment.

    4. "Maybe they borrowed in $ just because nobody trusted their own currency to buy import."

      Or maybe the government got bad advice from bad economists. It wouldn't be the first time.

      Borrowing in USD probably looked feasible when their oil was selling at USD $150/barrel.

    5. You act like theres an ocean of lenders happy to lend money to Venezuela and receive payment with the Venezuelan currency.

    6. Venezuela printed it's own money to buy $US to pay back it's $US debt. That devalued it's currency creating inflation. It's currency does not fulfill the requirements for MMT deficit spending to work.

  16. I haven't read Dr. Kelton's book, so I'm not sure what she says on the topic, but it strikes me that a lot of the confusion about monetary theory is a lack of clarity about what we are talking about when we talk about money. This criticism applies to both conventional views of money and almost all the MMT writers I'm familiar with.

    The conventional definition of money is "a medium of exchange, a unit of account, a store of value." That doesn't tell me what money is, it tells me what money does. "Money is what money does" is the response. If it drives nails, it must be a hammer. The conventional view seems to assume that money is, like gold, a scarce commodity of intrinsic value, with a further implication being that when you exchange goods and services for a commodity of intrinsic value, you are engaging in a barter transaction.

    MMT argues that money is a promissory note, created (like all promises) out of thin air by trusted agents--prototypically governments and banks--and that the constraints and opportunities of a monetary economy where goods and services are exchanged for promises are different than for a barter economy where goods and services are exchanged for other goods and services. The MMT writer who is clearest on this is Eric Tymoigne.

  17. Technical point . Surpluses do not typically reduce the amount of bank reserves or deposits, they reduce the amount of bonds, that said bonds are themselves a financial asset of lower liquidity.

  18. RE: "... Limiting Principale ... the limit is that although you increase real output you will run out of slack ... conventional part of economics for 60 years"
    • Really??? For the last 60 years economists have said that he limit to govt spending is not taxes, or borrowing, but the productive capacity of the economy as measured by inflation???? Really??? Preposterous.

    RE: "... ISLM ... ..."
    • You still believe in ISLM? You and Krugman.

    RE: "... borrow in any amount and won't have to pay it back ... ..."
    • MMT has not said this. MMT states that a monetary sovereign does not NEED to tax or borrow in order to spend. And it can ALWAYS pay back the debt. In fact: The truth is the US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

    RE: "... 1970s inflation ... horribly wrong ..."
    • Inflation is easily managed in these circumstances. For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
    a) Income Taxes,
    b) Sales/VAT Taxes
    c) Asset Value (or Wealth) Taxes
    That'll cool things off pronto.
    • 1970s inflation was hardly "horrible". 13% peak overall, 7% wage inflation. Stagflation was caused by Yom Kippur War and Oil Embargo. Not that big of a mystery.

  19. MMT is Depression Economics. When interest rates are near zero, and the private sector does not want to borrow and spend, then spending can fall, causing incomes to fall. In this case, government is the only entity that can borrow and/or spend.

    Read Paul Krugman "The Return of Depression Economics". Read Richard Koo "The Holy Grail of Macroeconomics". Read Klein and Pettis "Trade Wars Are Class Wars".

    The money supply fell 33% in the Great Depression. Government spending pulled us out of that Depression. The money supply will fall when people pay back debt or default on debt. Depositors lost money when banks failed. The Fed could have written checks to replace lost deposits without creating inflation.

    Opponents of MMT say that MMT will cause inflation. MMT says that printing too much money will cause inflation. MMT says that taxes must be increased to drain money out of the economy to stop inflation. If you are not willing to raise taxes to stop inflation then you are not doing MMT.

    Of course we cannot depend on politicians to raise taxes to stop inflation. This must be done by automatic stabilizers or by an independent agency. We don't trust politicians to set interest rates at the Fed either.

    Opponents of MMT say that we cannot create enough money to pay for dream programs like the full Green New Deal, a federal job for anyone, free health care, free child care, the immediate cancellation of student debt, free college, “affordable housing for all our people,” national high-speed rail, “expanded Social Security,” “a more robust public retirement system,” “middle-class tax cuts,” and more. Of course it cannot. MMT does not say that it can pay for infinite spending, and Kelton is going too far with this list. So scratch off her list and make your own list. Surely we could pay for infrastructure, vocational education, college education for students who lack family money, and a reduction in the FICA tax on the first $20,000 in income.

    MMT strongly resembles our response to Coronavirus. MMT is Keynesian economics. If you can get the economy rolling by reducing interest rates, then you don't need MMT. But if you are stuck in a recession or depression with low interest rates and low inflation and high unemployment and low capacity utilization, then something like MMT is a good way out.

  20. John-there is a lot of hype on Twitter/Wall Street/financial press about the value of gold increasing as a result of the Federal Reserve Board co-opting the economy and debasing the dollar. Could you do a post on gold as an asset class and where you think reserve currency status is headed? Best, Peter.

  21. John,

    This lack of knowledge is startling.

    "She offers a second answer, more subtle, and revealingly wrong. She starts well: Taxes are there to create a demand for government currency. This is a deep truth, which goes back to Adam Smith. Soaking up extra money with fiscal surpluses [higher taxes or less spending] is, in fact, the ultimate control over inflation."

    Incorrect. Inflation is ultimately a function of the productivity of a nation, not what the prevailing tax rate is or how much a government collects in tax revenue. You can have both high inflation AND high taxes.

    The reason that government needs to create a demand for it's own currency is to keep the competetion (barter, other currencies) from becoming predominant.

    Question: If a government comes buy books or pencils or something else off of me, why would I accept the dollars that they are trying to spend? Answer: Because the very same government also expects me to pay my taxes in those very same dollars.

    It has nothing to do with inflation, it is a network effect. I will use dollars because the government expects me to pay my taxes with dollars and it is a hassle to carry around more than one currency - one to pay taxes with and the other to pay for goods and / or pay back my creditors.

    "But then arithmetic fails her. To avoid inflation, all the new money must eventually be soaked up in taxes. The new spending, then, is ultimately paid for with those taxes."

    Again wrong. To avoid inflation, the newly created money must be directed towards areas that improve the productive capacity of the nation.

    1. Wars - The first order effect is that wars are destructive in nature. Obviously, if your enemy takes more damage than you, both countries become less productive, but your country become relatively more productive than your enemy.

    2. Paying people to not work / crop burning to prop up prices - need I say more?

    MMT advocates could adopt a socialist bent and say that government should be more directly involved in productive enterprise - government owned and run factories. But that runs afoul of Constitutionally limited democracy.

    Apparently no one has ever heard of the "guns and butter" policies of the Johnson / Nixon administrations. To get bills passed in Congress Vietnam War spending was intermixed with other spending. There was no parsing of productive / non-productive enterprises.

    How freaking naive do you have to be to buy any of this crap?

  22. John- What do you make of Ms. Kelton's (and others, to be fair) position that Social Security and Medicare are "insolvent" only because of the 75-year reserve requirements?

    1. Sam,

      I assume you are referring to this:

      "The Greenspan Commission did not target full 75-year solvency, but Congress, in implementing the Commission's proposed changes, added a gradual increase in the age of eligibility for full retirement benefits, raising it incrementally from 65 to 67. This change has the effect of reducing benefits relative to lifetime earnings for nondisabled workers and has been augmenting trust fund surpluses since 2000."
      he 1983 reforms resulted in 75-year projections that foresaw positive trust fund reserves despite annual deficits toward the end of the projection period. Thus, the primary goal—positive reserves throughout the projection period—was met, but the reserves would be declining at the end of the period and exhausted soon after."

      "Because the 75-year projection period is a moving window, subsequent annual reports would eventually project a depletion of reserves even if the underlying assumptions did not change. The 1983 reform, in other words, did not achieve what today is called a sustainable solvency, which aims for steady, rather than declining, reserves at the end of the projection period."

      And so, the 75 year reserve requirement is somewhat arbitrary because at the beginning of this year looking 75 years forward Social Security could be projected to be "solvent", but at the beginning of next year looking forward 75 years, Social Security could be projected to be "insolvent".

      When people talk about the future "solvency" of Social Security, they are comparing total revenue (from Social Security taxes and interest receipts) to total expenditures. What they are really looking at is a projection of cash flow, not "solvency" per se.

      The Social Security "Trust" when facing a cash flow crisis could conceivably sell off government bonds that it owns prior to maturity and raise cash in that manner.

      Presuming that there could come a point where the Social Security "Trust" has no bonds left to sell and is still short on cash flow (Social Security taxes are not sufficient to cover benefits), this would be the point at which Social Security is "insolvent" so to speak.

      At that point, the federal government would have several options (not all are listed here):
      1. Cut benefits
      2. Raise taxes
      3. Cut other spending and divert other tax revenue to fill the hole in Social Security
      4. Borrow from the general fund to pay Social Security benefits

      Any of these choices would be a source of political as much as economic debate.

      Social Security and Medicare are not thought to be "insolvent" because of the arbitrary 75 year look ahead window. They are thought to be "insolvent" because these entities are projected to face a cash flow crisis and cannot issues liabilities of their own - any funding shortfalls would need to be addressed directly by the Congress.

  23. Kelton's work is a popularization of years and years of scholarship by people like Mosler, Mitchell and Wray. If the author of the review is serious about falsifying MMT he's going to have to do the serious heavy lifting of reading the corpus and responding to its claims in a comprehensive way.
    The primary purpose of Kelton's work, as I see it, is to normalize some fundamental concepts about fiat monetary operations that are widely misunderstood in the public discourse, mostly due to the pernicious "household budget fallacy"

  24. Responding to some of the comments asking why developing and emerging economies don’t implement MMT, the obvious answer is that they haven’t earned monetary sovereignty. “Earned” is the critical word here. Dr. Kelton touches on some valid points about the scope for fiscal expansion in monetarily sovereign economies, but perhaps overlooks how that sovereignty is hard earned and easily lost. MMT has some valid points, but it is a tool that should be judiciously used and never abused by whose who have earned it — lest it be revoked. It is real, but more fragile and tenuous than some arguments assume.

  25. Thanks. Much needed review of this book. I kind of suspected that we could not solve all our problems just handling some small pieces of paper or some numbers in some computer mainframe at banks or government. They are indeed important and the way you manage them can make big differences, but they are just one of the many ingredient that make up an economy. Value is not there. Is labour and things.
    And I am also impressed that the review goes beyond the strictly economics criticism. In fact this book is just a new entry in a long tradition of books where economics are just an excuse for something else. This book is about emotions! Do you hate the current state of things? Do you feel sorrow and rage when you consider poverty? Do you feel injustice when you think of the rich capitalists? If yes, this book is for you! You can overlook the economics talk. It is there just to give a scientific appearance to argument. Just let your rage soar to the knowledge that if the powerful only wished it, there would be no poverty.
    Brace yourself. Kelton ideas will win. The zeitgeist, the "spirit of time" is going in that direction.

  26. MMT theory is money printer go brrr meme in response to critics

  27. It is criminal that this woman was given a PhD in economics and a professorship. Now let me lay down some Berkeley critical thinking:

    Without the slightest hint of irony she explains what happens when you use printing to cover expenses, the rejection of the currency as a means of settling international trade. This happens in developing economies because it is more expedient to pay off your political opponents/allies than it is to enrich the country through legitimate economic practices such as in Botswana, the most successful sub Saharan country. Instead you get Zimbabwe where every veteran gets 50,000 USD for shooting up the Rhodesians.

    The result of this is that the Pula is useful for importing the many things Botswana needs while the Zimbabwe Dollar is barely accepting even in domestic transactions, let alone the ludicrous idea of foreign exchange.

    What she is promoting is literally the known policy of failed third world states. Again, whoever approved her PhD should be executed for crimes against economics.

  28. Ms. Kelton sounds like an ideologically-driven loon. What I’m missing here is a recognition of the importance of credit restraints. Unrestrained children are incorrigible and unrestrained politicians are profligate spenders of OPM. Fiat currency regimes always end in economic tears.


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