Friday, 16 April 2010

A primer on Modern Monetary Theory (MMT)

Modern Monetary Theory (MMT) is an attempt to explain how 'money' comes about in a way that is different to classical economic theory. If true it shows that the way the government runs the financial part of the economy is inefficient and that we actually have much more flexibility to get us out of the current recession than we are using. Scary stuff.

Economies out there like Japan and the US are not behaving as classical money theory suggests they should. Our own government has issued £375 billion of new currency and nothing much happened. The data is suggesting strongly that we don't understand what is happening. Perhaps MMT explains it. At the moment I don't know.

Please read:
Deficit spending 101 – Part 1

Deficit spending 101 – Part 2

Deficit spending 101 – Part 3
Then read:
Will we really pay higher taxes?

Will we really pay higher interest rates?
Then read:
Fiscal sustainability 101 – Part 1

Fiscal sustainability 101 – Part 2

Fiscal sustainability 101 – Part 3
Then read:
Functional finance and modern monetary theory 


Some more stuff here:


The good Professor Scott with a primer on the operational realities of the monetary system
My own How the government's super platinum credit card works


An interview with Professor Bill Mitchell in the Harvard Review, gives an excellent overview of MMT


Tom Hickey said...

I found a reference to MMT in a comment somwhere about a year ago. At first, I was tempted to blow it off as ridiculous, but references were provided and I checked it out. It blew my socks off. Suddenly the sclaes were lifted from my eyes and I began to see. I gradually becamse accustomed to the light as a continue to study this, and now I am convinced it is the holy grail of finance, macro, and political economy.

These are the chief bloggers on MMT:

Marshal Auerback

Scott Fulwiler

Bill Mitchell"

Warren Mosler


L. Randall Wray

There are also a number of working papers by these and others writing in the field that are available (free) at

The Levy Institute

and the

Center for Full Employment and Price Stability

The "bible" of monetary economics is Wynne Godley and Marc Lavoie, Monetary Economics (2007)

Neil Wilson said...

That would be Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth

Lord Keynes said...

Nice collection of links - Neo-chartalism and MMT are indeed insightful perspectives on modern monetary systems.
I have a great deal of sympathy with the approach, but under the present system of liberalised capital accounts, countries with current account deficits might be limited in how far they can run their economies along MMT lines.

Maybe I am wrong - I would like to think so, but I suspect you need a return to discretionary capital controls and an completely new and reformed IMF that actually steps in and rescues countries facing Forex shortages with US dollars or special drawing rights given without any strings attached (that is, no brutal deflationary policies).
In such a world, MMT would be easy to implement.

Tom Hickey said...

Lord Keynes, you may want to bookmark Warren Mosler's site, The Center of the Universe, or subscribe to the RRS feed. Warren is an expert on international finance from the MMT perspective, and there are a number of excellent commentators there as well. These are the kinds of things that come up, and questions/objections are welcomed.

Musgrave said...

Neil Wilson says “Our own government has issued £275 billion of new currency and nothing much happened. The data is suggesting strongly that we don't understand what is happening. Perhaps MMT explains it. At the moment I don't know.” I suggest the explanation is roughly as follows.

Most if not all of that £275bn is just quantitative easing, described by Mish as “quantitative nothingness”. Why should QE have much of an effect? Darned if I know. Reason is thus.

Owners of bonds regard those bonds as part of their SAVINGS. If those bonds are converted to cash, they are not going to run out and spend the cash on wine, women and song. The cash will just be plonked in banks, and/or will push up the price of other assets.

Doubtless QE has a finite effect, but it won’t be a big effect.

Another point is that the UK is a very small part of the world economy, thus there is a limit to how much stimulus it can effect without its balance of payments turning into a disaster zone. Plus UK inflation at the time of writing is too high. The US is in a totally different position: US inflation is well below UK inflation, plus the US is bigger chunk of the world economy. The US could perfectly well effect far more stimulus (MMT style or non-MMT style) and millions of jobless folk would find work.

Tom Hickey said...

The idea is that QE will "stimulate spending" by injecting greater liquidity. I also doubt very much that the central bankers think that the ex-bond holders are going to spend on "wine, women and song."

What they are hoping is that the liquidity will flow to propping up sagging asset prices, especially housing. Housing is key in a developed economy, and housing values and new construction are economically determinative.

Won't work. Savvy people don't buy into declining housing markets. That liquidity will either just sit waiting on opportunity or flow into some other financial assets. It will just reduce interest payments, possibly cutting further into demand.

Neil Wilson said...

"Owners of bonds regard those bonds as part of their SAVINGS."

I'm sure that's a myth. Bonds are generally held by financial institutions - mostly as backing for pension payments.

I would suggest that when banks hold them as a 'slightly better than cash' option they see them as part of their capital - just like the equivalent cash deposit. And that means they can (and will) lend against them.

Musgrave said...

Neil: I agree that where bonds are held by households, this is usually via institutions like pension schemes. But assets held by the latter are very much SAVINGS, rather than “money to be splurged in the next week”. Thus these bonds in effect held by households ARE savings.

Re turning bonds held by a bank into cash, that would not affect the bank’s capital (as I understand it) but it WOULD boost the bank’s reserves. However, reserves are irrelevant to a bank’s decision to lend, as Bill Mitchell has pointed out dozens of times. Banks lend when they see a profitable lending opportunity. Later on, and if necessary, they borrow reserves from other banks, or if the banking system as a whole is short of reserves, the bank system in effect forces the central bank into issuing more reserves (if the latter wants to maintain control of interest rates).

Much the same point applies to capital, except that coming by extra capital is a slower process than coming by additional reserves. There is a nice example of this taking place at the moment in that banks are in the market for extra capital as a result of the new Basle rules.

Neil Wilson said...

My point is that there is no difference between cash and bonds.

Cash is a stock unless it is currently being used for a transaction.

The idea that because it is cash it somehow must be being spent is a myth.

Daniel said...

Thanks for putting this collection of links together (most of which I've read more than once already)...i was just about to do it myself and now I don't have to! I really like that you presented this as a description, without the policy suggestions attached to it. They need to be decoupled --- for example, Bill Mitchell would find a larger audience for his excellent descriptions of the system if he would clearly delineate that the "full employment" normative theory that he espouses is his own suggestion as to the optimal way to improve the real economy, but that even if one does not agree with that prescription, the description of daily operations of the Fed/Treasury/economy from MMT is accurate (and thousands of macro-econ textbooks are, sadly, not).

Andrew said...

If there is no difference between cash and a bond then there is no difference between cash and a term deposit.

And in reality your cash is your savings.

However is there a difference between being a saver and a spender? Both could have the identical amount of savings.

So the issue here seems related to velocity of money. I think it would be true that if you buy a bond even for a few hours your intention is not to spend but is rather to do the not spending act of saving.

So all of these money forms are savings. But it the intension of the owner that seems the relevant factor.

A pensioner for example can intend to save. And in aggregate regardless of the ability of term deposits to be spent pensioners are savers even if they are spending their savings a little each day.

So a bond holder is a saver not needing the cash.

Anonymous said...

Well Neil!! Its official....The debate about "Money creation and society" will be had in Parliament on November the 20th...perhaps you underestimated the Positive Money Team? Now that Martin Wolf is determined to go down the path of public money creation, also lord adair has admitted its technically the best method of creating money, also mervyn king is said to be supporting PM; will you still hold onto the belief that money must be created as debt?

Neil Wilson said...

Money is always created as debt. That is how it works. We all create debt all the time. You create money as debt every time you pick up a loaf of bread in a supermarket.

You can reduce the amount that private banks lend and do more government spending/tax cuts. But that is just the government doing the 'borrowing' rather than private individuals. It's still debt.

And we can do that in the current system. MMT suggests that we ban certain lending - such as lending for currency settlement. That is so much more effective than the elaborate illusion put forward by PM which tries to do it via the pricing mechanism. That's a 'faith in markets' approach which won't work and will likely tilt the lending market even more towards financial pawnbroking games rather than productive investment.

PM has put forward bills in parliament before. They are very good lobbyists, marketeers and showmen. But just reading what they put forward last time showed that they were systemically naive and pushing an elaborate illusion rather than anything that will actually work to fix the problems we have - lending on the wrong things.

Its very sad that we have to waste so much time on something so elaborate when there is a much simpler solution. But no doubt we'll have to learn the hard way that it doesn't work - just like the austerity illusion.