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Great Leap Forward

Paul Krugman Still Gets it Wrong: Modern Money Theory

On Monday, Paul Krugman tried yet again to spell-out where he disagrees with “modern money theory” (MMT)—the approach that I adopt. (http://krugman.blogs.nytimes.com/2011/08/15/mmt-again/) And, again, he gets it wrong. He continues to make two kinds of errors: errors of attribution, and errors in his understanding of money and finance. I don’t normally like to include long quotes followed by critiques, but I think in this case it will be useful. Sorry, this is going to be a bit long and wonkish.

Before proceeding, let me say that I appreciate the role that Krugman plays. Like many of you, I enjoy reading his blogs and more often than not, I agree with him. He is almost the lone, sane, voice in a position of authority who argues against the standard deficit hyperventilation that is driving the nation into a great depression. I mean no disrespect in the following critique. And I am glad that he is writing about MMT—most of those within the Beltway simply ignore it. But there are two reasons to respond to his critique: first, there is some hope that he might change his mind and embrace MMT. That would allow him to mount a much more powerful attack on the deficit hysterians. Second, he is misleading his many readers—by misstating what MMT believes, and by his own misunderstanding of monetary operations.

Ok, on to his critique and my responses.

Krugman: In a way, I really should not spend time debating the Modern Monetary Theory guys. They’re on my side in current policy debates…

Wray: Yes, we often do agree with him on current policy; we need more stimulus, not less. And I often agree with his political musings—although that has nothing to do with MMT. (As I have argued on this blog, MMT is also perfectly consistent with Austrian politics, Bushonomics, Reaganomics, or Ron Paulism. And that is because MMT is not a policy proposal. MMTers do have policy proposals, of course, but Krugman’s complaints do not address them. And in any case, the policy proposals are idiosyncratic—each MMTer has her own preferred policies. More on that at the end of this blog.)

In his previous post, commentators criticized him for his apparent lack of familiarity with MMT—he was attributing ideas to us that we do not hold. (My colleague, Bill Black, takes apart that post: http://neweconomicperspectives.blogspot.com/2011/08/anti-mmt-types-memes-migrate-to-stage.html)

For example, he has many times claimed that we argue “deficits never matter”—a false claim that we have countered on many occasions. (Here is one of my responses: http://www.newdeal20.org/2010/07/20/deficits-do-matter-but-not-the-way-you-think-15355/. ) Hence, in Monday’s post he assured readers he has read some MMT literature:

Krugman: First of all, yes, I have read various MMT manifestos — this one is fairly clear as they go. I do dislike the style — the claims that fundamental principles of logic lead to a worldview that only fools would fail to understand has a sort of eerie resemblance to John Galt’s speech in Atlas Shrugged — but that shouldn’t matter.

Wray: In case the link above does not work, this is the piece he refers to: (http://pragcap.com/resources/understanding-modern-monetary-system) Now let me say that this is a fine summary. (I do not like the seashells example, which perpetrates a dangerously wrong view of the origins of money, but that is a topic for another day.) Still, Krugman seems to believe that MMT resides only in blogs. Now, the blogosphere has played a huge role in dissemination of MMT, and as I argued on Monday, discussions on blogs have helped us to clarify, tighten, and frame the arguments. (See here: http://www.huffingtonpost.com/l-randall-wray/paul-krugman-modern-money-theory_b_926757.html) Further, many bloggers have adopted MMT and have even gone so far as to create their own MMT blog sites.

That is all great! But if Krugman really wants to understand and to debate MMT, he really needs to look to the academic literature. (Some citations are provided below.) After all, he is an academic economist who should be able to read the professional economics journals and books that have published work in this area. I certainly would not want to criticize Krugman’s academic research—let us say, the work that got him his Nobel Prize—based on some blogger’s interpretation of that work. It is just too silly to imagine. But that is apparently the level of analysis that Krugman has done to discover that MMT is wrong.

Let us move on to what he thinks is wrong with our analysis.

Krugman: …I do get the premise that modern governments able to issue fiat money can’t go bankrupt, never mind whether investors are willing to buy their bonds. And it sounds right if you look at it from a certain angle. But it isn’t. Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues.

Wray: Here he has painted an unrealistic scenario. It is certainly possible that government ex ante constructs a budget that is projected to generate spending equal to 27% of GDP with a tax law expected to generate an amount equal to 17%. It expects to have an ex post deficit of 10% of GDP. But there can be many slips ‘twixt lip and cup’. At least some spending will be endogenously determined (for example, unemployment benefits will depend on unemployment outcomes); some tax revenue will be endogenously determined (income tax receipts depend of course on economic performance); and GDP itself is endogenously determined. So the resulting deficit could end up much smaller or much larger than 10% of GDP.

But more importantly, it takes three to tango: the sum of the government balance, domestic private sector balance, and foreign (current account) balance must be zero. That is to say, government can achieve that 10% deficit ex post only if the sum of the private and foreign balances equals 10. Now, in his example he has presumed the economy has recovered (that is why the private sector wants to borrow again). At that point it is plausible that private sector desired saving has fallen from current very high levels of almost 9% (the private sector doesn’t want to spend now—it is reducing debt and trying to accumulate saving in the face of an uncertain future). By spending more, the economy will grow faster; that increases government revenue and reduces some of its own spending. The deficit will be reduced pari passu with reduction of private saving—as a percent of a rising GDP.

To get the 10% deficit that he assumes, we would need—say—a 5% private sector surplus (saving) and a foreign sector surplus of 5% (our current account deficit would be 5%). Now, this is possible, but it is unlikely. Our private sector saving rate is normally much below 5% when the economy is growing on trend—typically more like 2% of GDP (and saving was actually negative for almost the whole decade before the global financial crash). If it is 2%, then our current account deficit would have to be 8% to get the 10% budget deficit Krugman assumes. This is within the realm of possibility, but based on historical experience, with domestic saving that low—meaning domestic spending is high—the government budget tends to move toward balance (it went into surplus in the Clinton years). So I think there is a bit of inconsistency in his example.

So I think the whole set-up of his example is wrong-headed. But let us go on with it.

Krugman: …consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds.

Wray: Well, the first scenario is a non-starter. Sovereign US government does not “borrow” its own dollars from “investors”. So what he actually means is that banks and others holding government IOUs (coins, Federal Reserve notes, and bank reserves) willingly exchange them for government IOUs that pay higher interest (Treasuries). OK, that is a quibble, but it helps to resolve his misunderstanding about the second scenario:

Krugman: The second case poses no problem, say the MMTers, or at least no worse problem than the first: the US government can simply issue money, crediting it to banks, to pay its bills. But what happens next? We’re assuming that there are lending opportunities out there, so the banks won’t leave their newly acquired reserves sitting idle; they’ll convert them into currency, which they lend to individuals.

Wray: Oh boy. Three big errors in that short passage. First, as I discussed last week, the sovereign US government always spends via “keystrokes”—what he is calling issuing money and crediting it to banks. But he presents that as an option. It is simply a description—how government spends. Second, he says banks won’t leave the reserves idle, but will convert them to currency.

Reserves are the Fed’s IOU, a number on the liability side of the Fed’s electronic balance sheet; they are simultaneously an asset on the asset side of bank balances. There are only three things banks can do with them: lend them to other banks; buy Treasuries; or convert them to cash (the Fed sends an armored truck to the bank that wants to exchange reserves for cash). He already assumed no one wants to buy bonds. And if the government is running the 10% deficits he presumes, banks are going to get stuffed full of excess reserves—so banks won’t be lending them to one another.

The final option is to convert them to cash. That would be a poor choice for banks, since the Fed pays 25 basis points on reserves and cash earns nothing (and has nonzero storage costs). However, Krugman says they will do this in order to lend cash to individuals. Really? Has he ever borrowed from a bank? If you have ever borrowed—say, for a house or a new car—did the loan officer give you a wheelbarrow filled with cash?

OK so let us presume he did not mean this literally. What could possibly have crossed his mind? There used to be something called the “deposit multiplier” that was taught in the old textbooks. Banks sit around and wait until they have excess reserves, then they make loans by creating demand deposits. So his view must be that because the banks have got excess reserves they now decide to make loans—not by lending “green paper”. But a bank facing a willing and credit worthy borrower will always make the loan even without excess reserves. I will not go into all the wonky stuff, but Krugman simply shows he does not know much about banking.

That is not a criticism. Economists specialize and cannot know every area of economics. After all, his Nobel was not in the area of money and banking. The reality is that excess reserves in the banking system do not encourage banks to lend more to individuals; instead they try to lend reserves to other banks (individuals cannot borrow them) and that pushes the overnight interest rate (called fed funds rate in the US) to the central bank’s support rate (for example, the 25 basis points the Fed now pays). The impact in other words is not on lending but on interest rates.

Krugman: So the government indeed ends up financing itself by printing money, getting the private sector to accept pieces of green paper in return for goods and services. And I think the MMTers agree that this would lead to inflation; I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue. For it is. And in my hypothetical example, it would be quite likely that the money-financed deficit would lead to hyperinflation.

Wray: Quite a mess here. Government finances its spending by keystrokes, that generate demand deposits in the private sector, with banks holding reserves. MMTers agree this COULD lead to inflation—for example, if the spending pushes the economy beyond full employment. Inflation can result even before full employment—for example if bottlenecks in important resources develop. All government spending is financed by what he calls money issue—always—so it is wrong to state this would necessarily lead to inflation.

Finally the “deficit financed by bond issue” is not technically possible. Banks must have the reserves before they can buy the bonds. The government spending must come first, then the bonds can be sold. I suppose, however, that what Krugman has in mind goes back to his scenario in which no one wants to buy the bonds. But why would that be more inflationary. The only reason not to buy the bonds is because banks are happy with their excess reserves that earn 25 basis points.

(You could even argue that if banks and others do buy bonds, that will be more inflationary—because now they will earn higher interest income that could be used to fuel more spending, driving the economy beyond full employment.)

Again, Krugman does not understand the basics of banking. That is not a criticism. But it does mean his critique of MMT is simply wrong.

Returning to his 10% deficits, as we discussed above, that must mean that private savings plus the foreign surplus (our current account deficit) must sum to 10%. Let us again presume that each is saving an amount equal to 5% of GDP. As a result of the government’s spending in excess of taxing, an amount of bank reserves equal to 10% must have been created. Note that the government’s spending has already been “financed” at that point—the reserves are created as the government spends. Selling Treasuries allows banks to substitute low-earning reserves (25 basis points) for higher earning Treasuries (maybe 2%). Krugman assumes they do not want to do that. OK, let us say they are not interested in profits, so they hold the reserves. Is there any problem with government finance of its deficit, due to a “strike” by the “bond vigilantes”? No. Government already spent. If markets don’t want to hold Treasuries, government can just let them hold reserves.

(For the wonkier readers: yes, the Treasury and the Fed have adopted procedures so that Treasuries are sold to special banks, that credit Treasury’s demand deposit. Treasury then moves the deposit to the Fed, which credits the Treasury’s account and debits the special bank’s reserves. To replace the reserves, the bank then sells the Treasuries to the Fed. And there they stay if no “bond vigilantes” want them. Note that these special banks must buy the Treasury issues—that is why they are special. In return, they get to temporarily hold Treasury deposits in special “tax and loan accounts”.)

Krugman: The point is that there are limits to the amount of real resources that you can extract through seigniorage. When people expect inflation, they become reluctant to hold cash, which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.. Do the math, and it becomes clear that any attempt to extract too much from seigniorage — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed. This would not happen, even with the same deficit, if the government can still sell bonds.

Wray: While I do not like his use of “seigniorage” to describe normal government spending operations, I do agree with the general argument. Yes, MMT definitely agrees there are limits to real resources, and trying to go beyond full employment of them will cause inflation. Since government has an infinite number of keystrokes to spend, it can always win any bidding war against private uses for those resources. The result is runaway inflation. We agree.

But selling bonds does not help! Bonds just mop up excess reserves. Even after buying the bonds, banks can continue to lend to borrowers who can continue to borrow and spend in an effort to win the bidding war against the government. Indeed, holding bonds provides good collateral against borrowing! And the bonds pay interest that can be used to raise the bids! So, yes, government spending can be so great it causes inflation—maybe hyperinflation—but that can occur with or without bond sales. Krugman is just wrong on this.

Krugman: The point is that under normal, non-liquidity-trap conditions, the direct effects of the deficit on aggregate demand are by no means the whole story; it matters whether the government can issue bonds or has to rely on the printing press. And while it may literally be true that a government with its own currency can’t go bankrupt, it can destroy that currency if it loses fiscal credibility.

Wray: We agree that government cannot go bankrupt (in its own noncovertible, floating rate currency). We agree that too much spending will cause inflation. We agree government can lose fiscal credibility—if it spends too much, causing inflation. The solution is to restore credibility by cutting spending and/or raising taxes—to lower aggregate demand. In addition there are other things that can be done to fight inflation—industrial policy (increasing resources where bottlenecks occur), incomes policy (wage and price controls, for example), encouraging imports to relieve constraints, and management of buffer stocks (releasing strategic reserves of oil, etc). I suspect Krugman agrees with all of this.

But he is wrong about the “choice” of selling bonds or relying on “the printing press”. There is no such choice. Spending is done by keystrokes; bond sales mop up the resulting reserves. Selling bonds in no way reduces inflationary pressure. (One caveat: in WWII the government had to deal with inflation pressures, and used a combination of rationing and patriotic saving. It convinced the public that it was their patriotic duty to reduce consumption and to save in the form of US war bonds. By reducing private consumption, government attenuated inflation—effectively preventing a bidding war for scarce resources. But by itself, selling bonds will not normally reduce consumption—consumption can still find finance whether banks hold reserves or Treasuries.)

Let me conclude with the most frustrating aspect of Krugman’s critique—a characteristic he shares with virtually all critics of MMT. They see our explanation of how things actually work in a country that uses a sovereign (government-issued, floating exchange rate) currency as a proposal to change policy. Everything I have said in this post about government finance is a description, not a proposal. The problem is that the critics almost universally have no idea how the government actually spends; they have no understanding of the operational details and coordination between the Fed and the Treasury that allows government to spend, collect taxes, and sell bonds.

Everything I said above describing these operations has been vetted by operations people within Treasury and the Fed. And so all those who immediately jump to accusations of Zimbabwe!, Weimar Germany!, Hyperinflation!, simply display their ignorance of fundamental operating procedures for sovereign currencies.

If government spending “by keystroke” automatically causes hyperinflation, then all the nations of the world that have been spending that way should have hyperinflation all the time. Every nation in the world that issues its own floating exchange rate currency spends by keystrokes. That is the essential “take away” point that every reader should understand. Yes, such governments can cause inflation, and they could probably produce hyperinflation if they tried hard enough. But there is no inevitability about this. Yes, governments need to be constrained. That is what budgeting is all about. But budgeting, itself, will be improved if we actually understand how the government spends—and understand that it is not affordability but rather inflation that is the problem.

Once we get past Krugman’s errors of attribution, we really are left with misunderstandings over banking and government finance. I realize that a lot of the stuff I have summarized here is exceedingly wonky. The operational details are complex. The longish blog that Krugman claims he read (cited above) actually goes through a lot of these details, with appropriate quotes from “insiders” at the Treasury and Fed.

They are presented in much more detail in a lot of academic literature as well as publications available from the Treasury and Fed. Few readers are going to want to go through them—and I rather doubt that even someone like Krugman, who is quite capable of understanding them, is going to do so. But if one wants to criticize academic literature, one actually has to understand it. Krugman has yet to make the effort.

Here is just a small sample of some of the more accessible literature, again from the blog he mentioned. If the links do not work, go directly here: http://pragcap.com/resources/understanding-modern-monetary-system.

And for those interested in my Modern Money Primer, go here: http://neweconomicperspectives.blogspot.com/p/modern-money-primer-under-construction.html.

A) The following are reasonably simple expositions for general audiences.

Understanding Modern Money, By L. Randall Wray

Soft Currency Economics, by Warren Mosler

7 Deadly Innocent Frauds, by Warren Mosler

Interest Rates and Fiscal Sustainability, By Scott Fullwiler

It’s Time to Rein in the Fed, By Scott Fullwiler and L. Randall Wray

9 Myths We Can’t Afford, by L. Randall Wray and Marshall Auerback

MMT and the Operational Realities of Our Monetary System, By Scott Fullwiler

Deficit Spending 101 (part 1), (part 2), (part 3), by Bill Mitchell

Barnaby, Better To Walk Before You Run, By Bill Mitchell

Stock-Flow Consistent Macro Models, By Bill Mitchell

Modern Central Bank Operations – The General Principles, Scott Fullwiler

Sector Financial Balances Model of Aggregate Demand, by Scott Fullwiler

Helicopter Drops Are Fiscal Operations, By Scott Fullwiler

A collection of Essays by Wynne Godley, Wynne Godley

The Financial Instability Hypothesis, Hyman Minsky

The Natural Rate of Interest is Zero, Warren Mosler & Mathew Forstater

The Neo-Chartalist Approach To Money, By Randall Wray

Protecting the Budget From Intergenerational Warriors, By Galbraith, Mosler, Wray

The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus, James Galbraith

B) For the truly masochistic readers with way too much time on their hands, here are additional articles, chapters, policy notes and briefs by Yours Truly, on money, finance (including instability and crises), government budgets, and employer of last resort policy. These include some of my more academic expositions. Probably best to read in reverse chronological order, as my ideas evolved.

“If Free Markets Cannot Efficiently Allocate Credit’, What Monetary Policy Could Move us Closer to Full Employment?”, Review of Political Economy, Vol. 7, no. 2, 1995, pp. 186-211.

“Deficits, Inflation, and Monetary Policy”, Journal of Post Keynesian Economics, Summer 1997, vol 19, no. 4, pp. 553-571.

“A Tribute to Hyman Minsky”, (with Dimitri Papadimitriou), Journal of Economic Issues, June 1997, vol. 31, no. 2.

“The Institutional Prerequisites for Successful Capitalism”, (with Dimitri Papadimitriou), Journal of Economic Issues, June 1997, vol. 31, no. 2.

“Kenneth Boulding’s Reconstruction of Macroeconomics”, Review of Social Economy, vol LV, no. 4, Winter 1997, pp. 445-463.

The Economic Contributions of Hyman Minsky: Varieties of Capitalism and Institutional Reform”, (with Dimitri Papadimitriou) Review of Political Economy, vol. 10, no. 2, 1998, pp. 199-225.

“Surplus Mania: A Reality Check”, Policy Notes, 1999/3, Jerome Levy Economics Institute.

“The 1966 Financial Crisis: financial instability or political economy?”, Review of Political Economy, Vol 11, No. 4, 1999, pp. 415-425.

“Can Goldilocks Survive?”, with Wynne Godley, Policy Notes, 1999/4, Jerome Levy Economics Institute.

“Is Goldilocks Doomed?”, with Wynne Godley, March 2000, Journal of Economic Issues.

“Implications of a Budget Surplus at Mid-Year 2000”, Policy Note, Center for Full Employment and Price Stability, 2000/1.

“Can the Expansion be Sustained? A Minskian View”, Policy Notes, 2000/5, Jerome Levy Economics Institute.

“Fiscal policy for the coming recession: large tax cuts are needed to prevent a hard landing”, (with Dimitri Papadimitriou), Jerome Levy Economics Institute, Policy Note 2001/2.

“Are we all Keynesians (Again)?”, Levy Economics Institute Policy Notes 2001/10 (with Dimitri Papadimitriou).

“Demand Constraint and the New Economy” (with Marc-Andre Pigeon), in A Post Keynesian Perspective on Twenty-First Century Economic Problems, edited by Paul Davidson, Edward Elgar Publishing, pp. 158-194, 2002.

“A Monetary and Fiscal Framework for Economic Stability”; Center for Full Employment and Price Stability Policy Note No. 2002/02

“What Happened to Goldilocks?” in Journal of Economic Issues, June 2002, vol 36, No. 2.

“Social Security: Truth or Useful Fictions?”, Center for Full Employment and Price Stability Policy Note No. 2002/04.

“The Demise of the Goldilocks Economy: Causes (!) and Cures (?)”, in The Urgency of Full Employment, Edited by William Mitchell and Ellen Carlson, 2002.

“A Fiscal and Monetary Framework for Economic Stability: A Friedmanian Approach to Restoring Growth”, in Problemas del Desarrollo: Revista Latinamericana de Economia”, 2002.

“The Perfect Fiscal Storm”, Challenge, January-February, vol 46, no 1, 2003, pp. 55-78

“The War on Poverty after 40 Years: A Minskyan Assessment”, (co-authored with Stephanie Bell), Public Policy Brief, Levy Economics Institute of Bard College, No. 78, 2004.

“The War on Poverty Forty Years On” (co-authored with Stephanie Bell), lead article in Challenge, September-October 2004, vol 47, no. 5, pp. 6-29.

The Ownership Society: Social Security Is Only the Beginning . . .” Levy Economics Institute Public Policy Brief No. 82, August 2005

“Neocons and the Ownership Society”, Challenge, 49(1) January-February 2006, pp. 44-73.

“Can Basel II Enhance Financial Stability? A Pessimistic View”, Public Policy Brief No. 84, The Levy Economics Institute of Bard College, 2006.

“Twin Deficits and Sustainability”, Policy Note 2006/3, Levy Economics Institute of Bard College, 2006.

“Extending Minsky’s Classifications of Fragility to Government and the Open Economy”, Levy Economics Institute Working Paper, May 2006

“Keynes’s Approach to Money: An assessment after 70 years”, invited paper for symposium in Atlantic Economic Journal, vol 34, no 2, June 2006, pp. 183-193.

“Banking, Finance, and Money: a Socio-economics Approach”, Levy Economics Institute Working Paper #459, July 2006.

“A teoria do dinheiro de Keynes: uma avaliacao apos 70 annos”, Revista de Economia, vol 32, No 2, Jul/Dec 2006, pp. 43-62.

“Demand Constraints and Big Government”, the Journal of Economic Issues vol xlii, no 1, March 2008, pp. 153-173

“The April AMT Shock”, Policy Note, (with Dimitri Papadimitriou) Levy Economics Institute, January 2007

“Veblen’s Theory of Business Enterprise and Keynes’s Monetary Theory of Production”, Journal of Economic Issues, vol XLI no 2, June 2007, pp. 617-624.

“Minsky’s Approach to Employment and Poverty”, Working Paper #515, Levy Economics Institute, September 2007; also forthcoming in volume edited by Dimitri Papadimitriou.

“The Continuing Legacy of John Maynard Keynes”, Working Paper #514, Levy Economics Institute, September 2007.

“Lessons from the Subprime Meltdown”, Challenge, March-April, 2008, pp. 40-68.

“Financial Markets Meltdown: what can we learn from Minsky?”, Levy Economics Institute, Public Policy Brief, No. 94, April 2008.

“Financiarización y burbuja especulativa en materias primas,” Ola Financiera, Vol. 1, No. 3 (May–August) 2009

The Rise and Fall of Money Manager Capitalism: A Minskian Approach,” Cambridge Journal of Economics, Vol. 33, No. 4 (July) 2009

“Minsky, the Global Financial Crisis, and the Prospects before Us,” Development, Vol. 52, No. 3 (September) 2009

“An Alternative View of Finance, Saving, Deficits, and Liquidity,” International Journal of Political Economy, Vol. 38, No. 4 (Winter 2009–10)

“Alternative Approaches to Money,” Theoretical Inquiries in Law, Vol. 11, No. 1 (January) 2010

“Minsky, the global money-manager crisis, and the return of big government”, in Macroeconomic Theory and its Failings: alternative perspectives on the global financial crisis, edited by Steven Kates, Edward Elgar 2010.

Review Article: “This Time is Different: Eight Centuries of Financial Folly”, Challenge, Jan-Feb Vol 54, no 1, 2011, pp. 113-120 (co-authored with Yeva Nersisyan).

“Money manager capitalism and the global financial crisis”, Soundings: a journal of politics and culture, issue 45, pp 76-88.

“Finansiell Instabilitet”, SocialistiskDebatt, No 4/08 p. 13-19.

“The global financial crisis and the shift to shadow banking” (co-authored with Yeva Nersisyan), Intervention: European Journal of Economics and Economic Policies, vol 7 no 2, 2010, pp 377-400. Republished by K Suguna Nagaraj, Publications Department, Institute of Public Enterprise, Osmania University Campus, Hyderabad, Andhra Pradesh, India, in a forthcoming book on the global financial crisis.

“La crisi financier actual y sus secuelas” Rojo-Amate: Revista de politica, economia y cultura (Mexico City), August 2010.

Ανταγωνιστικότητα με εργασιακό Μεσαίωνα: «Η Ελλάδα έχει ξεκινήσει μια κούρσα προς τα κάτω” article in ENET Ελευθεροτυπία 14 august 2010 . http://www.enet.gr/?i=issue.el.home&date=14/08/2010&id=192887

“The Development and Reform of the Modern International Financial System”, in Post Keynesian Foundations in the Analysis of International Economics, edited by Johan Deprez and John Harvey, Routledge, 1999, pp. 171-200

“Money, Credit and Finance”, in Encyclopedia of Political Economy, edited by Phillip O’Hara, Routledge, 2000

“Monetary Theory of Production”, with Johan Deprez, in Encyclopedia of Political Economy, edited by Phillip O’Hara, Routledge, 2000

“Financial Instability”, in An Encyclopedia of Macroeconomics, edited by Howard Vane and Brian Snowdon, Edward Elgar publishing, 2003.

Functional Finance and US Government Budget Surpluses in the New Millennium”, in Reinventing Functional Finance: Transformational Growth and Full Employment, edited by Edward Nell and Mat Forstater, Edward Elgar, Cheltenham, UK, 2003

“What a long, strange trip it’s been: can we muddle through without fiscal policy?”, co-authored with Stephanie Kelton, in Post-Keynesian Principles of Economic Policy, edited by Claude Gnos and Louis-Phillippe Rochon, Edward Elgar, 2006, pp. 101-119.

The Continuing Legacy of John Maynard Keynes”, in Keynes for the twenty-first century: The Continuing Relevance of The General Theory, Edited by Mathew Forstater and L. Randall Wray, Palgrave, April 2008.

Lessons from the Subprime Meltdown,” in N. B. Rapoport, J. D. Van Niel, and B. G. Dharan, eds., Enron and other Corporate Fiascos: The Corporate Scandal Reader, 2nd ed., Foundation Press, 2009

“Money Manager Capitalism and the Global financial Collapse,” in E. Hein, T. Niechoj, and E. Stockhammer, eds., Macroeconomic Policies on Shaky Foundations: Whither Mainstream Economics? Metropolis-Verlag, 2009

“Minsky, the global money-manager crisis, and the return of big government”, in Macroeconomic Theory and its Failings: alternative perspectives on the global financial crisis, edited by Steven Kates, Edward Elgar 2010.

“Transformation of the financial system: Financialisation, concentration and the shift to shadow banking” (co-authored with Yeva Nersisyan) in Minsky, Crisis and Development, edited by Daniela Tavasci and Jan Toporowski, Palgrave Macmillan, 2010, 32-49.

“Keynes’s approach to money: what can be recovered?” in Keynes’s General Theory after Seventy Years, ediged by Robert Dimand, Robert Mundell, and Alessandro Vercelli, Palgrave Macmillan 2010 pp. 222-240.

“Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment” (with É. Tymoigne), in G. Fontana and M. Setterfield, eds., Macroeconomic theory and Macroeconomic Pedagogy, Palgrave Macmillan, 2009; second edition paper 2010.

“Excessive Bank Lending in China: a modern money perspective” (co-authored with Xinhua Liu), forthcoming in International Journal of Political Economy, 2011.

Forthcoming (2011):

Forthcoming: “The financial crisis viewed through the theory of social costs”, contribution to The Social Costs as Cause and Effects of Contemporary Crises edited by Wolfram Elsner, Routledge.

Forthcoming: “Minsky’s money manager capitalism and the global financial crisis” in an Italian-edited volume.

Forthcoming: “A Minskian road to financial reform”, in a volume edited by Martin Wolfson and Gerald Epstein.

Forthcoming: “The dismal state of macroeconomics”, in a volume edited by John Davis.

Forthcoming: “Minsky’s money manager capitalism: Assessment and reform”, in a volume edited by Steven Fazzari and Mark Setterfield.

Forthcoming: “Money in Finance”, for an encyclopedia.

Forthcoming: “Money”, in a volume edited by Geoffrey Harcourt and Peter Kriesler.

Forthcoming: “Financial Keynesianism and market instability”, in a volume edited by Cristina Marcuzzo.

Forthcoming: “Does Excessive Sovereign Debt Really Hurt Growth?” (co-authored with Yeva Nersisyan) in French language.

Forthcoming: “Money”, for a volume edited by John King.

Forthcoming: “Minsky Crisis” for a Palgrave Macmillan reference volume.

Forthcoming: “What should the financial system do?”, for a volume edited by Steve Kates.

Forthcoming: “Keynes’s approach to money after 75 years: money as a monopoly”, in a volume edited by Tom Cates.

3,329 Responses to “Paul Krugman Still Gets it Wrong: Modern Money Theory”

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pauldocAugust 16th, 2011 at 6:09 pm

Well, trying to be positive here, maybe reading the academic literature will be what converts Krugman.

The thing is Krugman is so influential. Over here in the UK people who could barely name another economist have at least heard of him.I agree MMT is expanding rapidly, but If Krugman came over, that would be the tipping point.

Can't you, Warren, and Jamie meet up with him and hammer it out over some beers?

Tom HickeyAugust 16th, 2011 at 11:31 pm

Excellent response, Randy. There is no longer any excuse for an academic to criticize MMT without doing the requisite research and citing sources in advancing objections.

JKHAugust 17th, 2011 at 1:02 am

Krugman’s example about cash is what’s wrong with mainstream monetarism. It doesn’t work on earth. It only works on Mars.

On Mars, banks create demand for cash by forcing their customers to take it. Everybody knows that. But on earth, customers are the source of their own demand for cash.

Krugman should understand this well known difference between banking on the two planets.

This is not a criticism.

Paolo BarnardAugust 17th, 2011 at 5:02 am

Does anyone truly believe that Mr.Krugman would preserve his front row seat at the NYT if he ever embraced MMT for real? If your answer is Yes, he still would, then you haven't understood who's ruling this country and most of the rest of the world. And you haven't understood that it’s precisely because it’s these guys that rule the world that a Nobel prize can venture as far as Mr. Krugman, but never even remotely close to Randall Wray. My personal guess is that in the very unlikely event that Mr. Krugman committed top columnist suicide by marrying into MMT, the next day he'd find the NYT suddenly filled with some very stiff faced folks that will have a hard time telling him when his next op-ed is due. Seriously: MMT is a revolutionary, life and nation saving real possibility. Expect a very bitter fight. Paolo, Italy

mphippAugust 17th, 2011 at 2:17 pm

Could you please describe MMT in the interpretation and workings of a Failed Banking Institution 2008 and it's takeover by the FDIC . What happens or should happen with the money/ loans that now have been re-distributed to a non-bank (Rialto/Lennar) for collection for all or some portion of the loan based on a personal guarantee's, even though (Rialto /Lennar) only put up .08 on the loan dollar value and the FDIC put up or guaranteed .20 on the loan dollar value and precluded any opportunity for other parties in participation.. Additionally the FDIC gave this .20 dollar advance on a 0 interest no recourse , 7 basis year program. Does MMT have any definitional standing in this above proposed transaction?

L. Randall WrayAugust 17th, 2011 at 5:52 pm

I'd be happy to buy Krugman a beer any time to discuss MMT!

For those who do not know, Krugman's Nobel was not for anything related to his discussion of MMT. And I am no expert on his areas of expertise, but I do have colleagues including heterodox ones who believe that work was pretty good. However most of his columns are on politics or macroeconomics; there was a very nice piece on him about a year ago in which he explained that it was his politics that caused him to move toward a Keynesian macro view.

Paolo is probably right that no one could retain a job at any of the corporate media outlets while expousing MMT. A real shame. This will have to be a "bottom up" movement.

L. Randall WrayAugust 17th, 2011 at 5:52 pm

The MMT view on bailing out failing and fraudulent financial institutions is that of course this can always be "afforded". The cost is that crooks remain in charge, and they continue their frauds and rake in all the income and wealth. That is the problem–not the "costs" of the bailout. The "cost" was in the speculative boom that indebted households, and now forces them out of their homes. It is the rising poverty, homelessness, helplessness. The effects will be felt for literally generations–just as the 1930s affected generations. This is the biggest scandal in human history; and it continues.

morganwarstlerAugust 17th, 2011 at 7:24 pm

Randy, you are a dirty hippie. I can't believe I had to read through ALL OF THIS to get to the part where you are exposed as worthless:

"Wray: We agree that government cannot go bankrupt (in its own noncovertible, floating rate currency). We agree that too much spending will cause inflation. We agree government can lose fiscal credibility—if it spends too much, causing inflation. The solution is to restore credibility by cutting spending and/or raising taxes—to lower aggregate demand. In addition there are other things that can be done to fight inflation—industrial policy (increasing resources where bottlenecks occur), incomes policy (wage and price controls, for example), encouraging imports to relieve constraints, and management of buffer stocks (releasing strategic reserves of oil, etc). I suspect Krugman agrees with all of this."

The GOVERNMENT cannot raise taxes. In theory sure, but in practice – my guys Team Tea Party we have systematically made it harder and harder for the government to increase taxes.

So MMT is left with advocating cuts BEFORE unemployment falls at all if balancing the budget matters to you.

The problem MMT has is that you are a bunch of folks who have no hard assets, and no real power and you think by DESCRIBING the situation, teaching people how money works…

This will change WHO HAS the hard assets and the power. It won't.

"Democracy" is a idea, not a fact.

When we became a Democracy (1913) we did so in name only.

The government is not going to print money to help the bottom 8% who don't have jobs, because the government has to ASK PERMISSION from the guys who:

1. own 200M guns.
2. own the hard assets.
3. have money saved up.
4. VOTE every time all the time.

To make MMT work, you have to SERVE THEM. And that's not what you really want to do deep down, huh?

daveAugust 17th, 2011 at 8:36 pm

"Selling bonds in no way reduces inflationary pressure." Prof. Wray, I get that investors always have a choice of which asset to purchase; however, it seems investors have a preference for the guaranteed return of treasuries. In their absence, investors would be forced to purchase other assets (rather than accepting no yield on cash) –which would include commodities and passive investments in commodities thus driving up their price and creating cost push inflation–It's debatable but IMO likely QEII caused this very phenomenon. Significant inflation, actually. In this respect bonds are deflationary because they allow investors to acquire a guaranteed return from pieces of paper rather than chasing yield on real resources. If you have an alternative perspective to that specific scenario I would be interested in it–I'm one of those wonky readers with too much time on their hands. :)

Winslow R.August 17th, 2011 at 8:56 pm

Morgan, I have heard your theory repeated. I'd like to expand your thinking, so I have a new theory.

You and your tea party friends don't really like oligarchs and you'd like to believe you own America. You may own hard assets, guns, money, and vote regularly, but you'll find you don't own the system.

In current reality, the oligarchs are busy investing in China, India, Brazil, Russia, anywhere but America.

When the global financial system comes crashing down, the oligarchs will coming rushing back to America to the system that they own and will find the hard asset economy in shambles.

They will seize the tea party's hard assets through policy driven bankruptcy. Sure there will be protests, but the seizure will be complete.

The global system will complete its collapse and the oligarchs will start fighting amongst themselves, internationally of course, resulting in various conflicts that may escalate into a global conflagration.

You and your friends will look an awful lot like dirty hippies, some may even join in with the hippies and end up fighting the oligarchs with one of their own as leader (remember FDR?) who will manage to strip enough power to reboot the American system.

For a few generations you will behave responsibly, voting like hippies, until you amass enough wealth to start voting with the remnants of the oligarchy. Eventually your votes will strip the system of protections from the oligarchs, the ones your forefathers fought and died for, and the cycle will repeat.

morganwarstlerAugust 17th, 2011 at 10:05 pm

It doesn't work that way dude. Just think 1776 all over again, except the British have less guns. To truly understand government and money, you people REALLY need to study the fall of the USSR – smart little guys paid big dumb guys to stand around and protect their hard assets.

That's the crystallization right there. The moment the little smart guys have secured the assets in some way and stood their ground and meted out just enough to some big guys to get them to keep protecting the gravy train.

That's GOVERNMENT. Going forward all decisions will be run through that basic set up.

Look in the last 20 years, the folks who earn in the top 90-99% haven't lost a thing. They held their ground just fine.

The top 1% gained against the bottom 90%.

Now these groups are porous, but somewhere near 40M people easily spend time in that 90-99% group during part of their earning lifetime, even more in the top 80%.

So REALLY what we have are Oligarchs who own a good chunk of wealth and no votes.

A block of 40M-60M+ upwardly mobile folks with far more to lose than gain. They ALSO own a big chunk of wealth. They own ALL the guns. They own their house, many have start businesses, their kids go to college.

And everyone else. MMT makes the mistake of thinking it can win with everyone else.

It can't.

NONE of you ever really confront this. Note you tell a fantastical story about what might happen…

I'm telling a REAL STORY about what is happening right now.

Tax rates aren't going down historically because the oligarchs want it that way. They are going down because MY PEOPLE want it that way.

Our government is not printing money and taxing at at any level it wishes because MY PEOPLE don't want that.

Our Armed Forces LOVE my people. The police LOVE my people.

You can't get from where you are now to where you want to be, if you don't get down and kiss the ass of my people. If you want to change the rules, it has to firs benefit MY PEOPLE.

Look, you are dirty hippies. You know it, I know it. And all the chatter about money theory can't get around the fact that MONEY and GOVERNMENT are tools established by a hegemonic influence.

And Winslow, until you have the hard assets, votes, guns, and money MMT is per pilpul.

Winslow R.August 17th, 2011 at 10:57 pm

"It doesn't work that way dude. Just think 1776 all over again, "

Your analogy works great for Russia, oligarchs taking over 'unowned' assets, just like the 'patriots' took over the 'unowned' assets here in America.

You might enjoy this….

Real Estate and the American Revolution
http://www.slate.com/id/2300593/

….but you are too 1700's, we've evolved and the Russians are still generations behind. Yes, a large percentage of the population would like to go back to simpler times. Times they might understand better. Too bad for so many that MMT seems hard, as it is as simple as it gets.

When a Tea Party guy owns one of the top 5 banks in America, I'll take you seriously about you owning the system. Until then the oligarchs have gained control of the system, not that they always had control. No, they needed you and got your help by teaching you oligarchical economics in the oligarchical media.

The Tea Party guys are finding the oligarchs returning to America seizing their assets, you're pissed off in an unhelpful manner. The Tea Party guys are so confused they are being robbed blind and they no idea what is hitting them. The police, soldiers, judges and lawyers will help rob the oligarchs rob them blind because it is their job.

The Tea party needs the hippies to purchase/rent/consume the things they make and own. The hippies are going down and are going to bring the Tea Party down with it. Oligarchs will seize the hard assets, despite the guns and only then the system will change through votes, which you will vote because you vote every time.

morganwarstlerAugust 17th, 2011 at 11:09 pm

Winslow, I gave you FACTS. The earnings or wealth slice of the 90-99% hasn't changed. And even in top 80% is ti close to even.

Everything the top 1% have gotten comes from the bottom end.

The ISSUE is the progressive / liberal groups that claim represent the hippies have CUT DEALS with the oligarchs.

That's why you see Berkshire and Pimco all advocating higher taxes to help your guys.

To try and build government bigger your side SOLD OUT. Right now, my side is VETOING that deal.

Look, the best the hippies can do is favor tax law changes that hurt GE / Capital Gains and lower tax rates on the Tea Party.

And mark my words, when you see Tax Reform pass the average Tea Party SMB owner is going to get a overall tax cut, and the average oligarch is going to pay more.

Google Distributism – thats what is happening.

WHICH IS GOOD for hippies. America is moving towards a service economy. You hippies want the wealth spread out more evenly over the top 20%, so there are tens of millions more people buying high end goods and services.

Don't be a wishful tard. Don't imagine everyone is as helpless as you.

Winslow R.August 17th, 2011 at 11:24 pm

"Don't be a wishful tard. Don't imagine everyone is as helpless as you. "

You stoop to personal attacks. You have no idea who or how helpless I am.

I hope I made my point. You got me thinking, perhaps you'll start thinking.

morganwarstlerAugust 17th, 2011 at 11:42 pm

this is not tit tat, the reality is the Tea Party has the money and votes.

The left has only votes and the oligarchs have only money.

In power terms:

The Tea Party is the A power.
The oligarchs are the B power.
The left is the C power.

IN ANY GAME, the best strategy for C is to support A and B back and forth.

C will never be in charge.

The problem is C has been ONLY partnering with B against A, this has been bad strategy for C (look at the results).

Get behind A, and let the Tea Party gut the oligarchs. Look, my side can do battle with both C and B and fight to a draw, and you (C) do all the suffering.

Stop trying to argue with the guys who own their own stuff, accept that they are winning for a reason, and ask yourself what you have been doing to support the oligarchs.

You won't ever get to be in charge, but you don't have to get the shit kicked out of you either.

Nick RoweAugust 18th, 2011 at 6:35 am

OK. I have now looked at this piece by Randall Wray. I gave up about a quarter way through.

The insistence that deficits really, really, really *are* money-financed is pointless.

He misunderstands Paul Krugman. If the public doesn’t want to hold bonds, what does it want to buy or hold instead?

There is no discussion of what might equilibrate I-S+G-T+X-M. (Is it interest rates? Exchange rates? The price level? Can it *only* be real income?)

More accounting identities and balance sheets, when what we need are the MMT behavioural relations and equilibrium conditions.

I’ve hit badly diminishing returns trying to get something out of this that is not in Old Keynesian economics circa 1950.

Nick RoweAugust 18th, 2011 at 6:37 am

Oh Christ. Look. The mainstream of the economics profession figured out the difference between I-S+G-T+X-M=0 understood as an accounting identity, and understood as an equilibrium condition in the “ex-post ex-ante” debate back in the 1950’s. We wasted a lot of time and ink getting that straight. MMTers are still mired in it.

I’m afraid my worst fears about MMT have been confirmed. You guys don’t understand the difference between “quantity demanded = quantity supplied” and “quantity bought = quantity sold”.

You are teaching your grandmother how to suck eggs. And, getting it wrong.

Sorry, but this is why I (sometimes) despair.

L. Randall WrayAugust 18th, 2011 at 12:08 pm

OK, the crazies have found the site. Ooooh Hippies! Actually, Not, but I've got nothing against them. Give 'em soap and they clean up quite nicely.

Hi Nick, what took you so long? I notice you still need work on those reading comprehension skills! Only a quarter of the way? Keep at it. Takes three (sectoral balances) to tango. Yes the causation can be quite complicated. Throwing in the notion of equilibrium does not help. It's an economy, "dude", not a pendulum. You are still stuck in 19th century physics.

L. Randall WrayAugust 18th, 2011 at 12:08 pm

Dave: look at it this way. There is a tremendous amount of financial wealth under management; the crisis only wiped out a bit of that (yes it was painful for those who lost theirs). So the money managers have to find a place to put it, and all need to beat the average return to keep their jobs. The only things going are stocks and commodities (real estate–the big driver over the past decade is dead and buried). So the money pours into those, in a nice price-reinforcing cycle. It goes on, until it doesn't. Maybe we are nearing the end of the speculative boom–impossible to predict. But when it ends, it will wipe out a significant part of the remainder; and values will drop until government puts a floor on asset prices (through bailouts and QE3, QE4, QE5….). Maybe our Teapartiers will revolt. Maybe a new FDR will rise (from the Republican party this time???) to prominence. Hard to say.

MarkSAugust 18th, 2011 at 4:13 pm

Morgan, your responses are childish and ridiculous. I've seen you around Sumner's site. Please stick around. We need people like you to keep pushing the QM idea so you can prove to other readers how wrong it is!

Thanks for your comments! They're incredibly effective at turning people against you!

MarkSAugust 18th, 2011 at 4:18 pm

Nick, why will the pvt sector stop wanting to hold bonds? You skip this crucial point in your analysis and create fictitious and unrealistic scenarios to prove your points. It's as ridiculous as Sumner removing the banking system from his models to "prove" his points. You have to be kidding me with that. That passes for academia these days? What a joke.

I am stunned at how these respected economists simply can't grasp simple MMT points. It's like you need to have a brainwash before you can be reprogrammed. Unfortunately, many of you are just hopeless.

morganwarstlerAugust 18th, 2011 at 4:22 pm

WINNER!

See the moment you admit MMT is social movement – I WIN.

Why do you think I do it? Consider it performance art that exposes you as having a social agenda based on government power.

You just proved it. Don't worry, countless other guys who claim to be economists get sucked in by me to.

Economics is not social justice. Sorry.

Scott FullwilerAugust 18th, 2011 at 4:36 pm

"He misunderstands Paul Krugman. If the public doesn’t want to hold bonds, what does it want to buy or hold instead? "

This goes to both Mark and Randy's points. Let's look at the real world. for a change:

First, there are these things called primary dealers, who can borrow at the repo rate and fix their costs for any maturity in forwards and buy any Tsy issue that goes above the borrowing costs. And the repo rate–created out of thin air with just a previously issued security as collateral–always arbitrages with the overnight target rate.

Second, there are these things called hedge funds–like 100s of Warren Moslers–who can (and in the case of Mosler, have and will continue to) borrow at LIBOR and fix this rate at any maturity in swaps or forwards. And LIBOR arbitrages at the overnight target rate, while eurodollars are created out of thin air like any bank loan.

Third, if the public doesn't want to hold bonds, there are these things called banks that offer these things called time deposits, and the public can hold these and earn interest at virtually any maturity. And then the bank can hold a Tsy and earn a spread, or it can hold interest earning reserve balances and earn a spread.

These don't work nearly as well for countries for which there is any significant risk of default (Greece), but that's another story and perfectly consistent with MMT..

MarkSAugust 18th, 2011 at 5:03 pm

Yes, Morgan. You sir, are a winner. Keep repeating this to yourself. It might come true one day. Just like your NGDP targeting. If we just keep telling ourselves we are all winners, it will just magically happen!

Good luck to you.

Seriously though – stop with the name calling. It makes you look ridiculous.

MarkSAugust 18th, 2011 at 5:06 pm

But Scott, the real world doesn't fit their models. It works better when we create some mythical world like the one Scott Sumner lives in where there is no banking system. Or the one Nick Rowe lives in where no one wants to hold bonds.

It's sort of like creating blue prints for you new house on Mars. Oh never mind how we get to Mars! That doesn't matter, right?

The state of modern economics is sad. It's nice that at least some economists are actually doing work that translates to the real world where people actually live and not the fantasy worlds of Nick Rowe and Scott Sumner.

Neil WilsonAugust 18th, 2011 at 5:06 pm

Randy,

The great beauty of MMT is that ordinary human beings can understand it. We don't need the High Priests of the Economic Religion to interpret it for us. It is the first economic 'Bible' written in English, not Latin.

Perhaps the next time you're in Germany you can nail a copy of the MMT principles to the church door in Wittenburg. Apparently that's how you start a Reformation if history is any guide.

That and owning a printing press ;)

Ronald CalitriAugust 18th, 2011 at 6:46 pm

Hello Randy,
I'm glad to have been steered to your blog out of the Krugman. MMT Again discussion. Let me just say that your proclivity to answer comments is a breath of fresh air for the blogosphere.

Before weighing in, I should mention that in a conversation with Will Milberg about access to banking in developing countries, your research interests were mentioned. I should get in touch about that. It is an interesting statistical problem, since the international statistics count the number of accounts, rather than the number of people holding accounts. It seems appropriate to mention now, as so much of MMT turns around banking; and aside from the issue of inflation, for most people there are costs from holding money in banks, that must be balanced against the security costs of cash. This is less of a concern in U.S. macro, though in poorer neighborhoods at least 1/4 are 'bankless.'

The spillover, with regard to MMT, is that the large banks are not completely subject to control, not limited solely to domestic transactions in balancing their books with the Fed. It seems obvious as well that the world financial system is undergirded or at least interwoven with IFT (informal financial transactions) institutions. Not much has been heard of the role of these institutions in the current financial crisis, nothing being known of them by most analysts; but perhaps something can be said if IFTs have been playing any role in the buoyancy of some developing macroeconomies, recently.

With regard to MMT itself, my opinion that money arises from trade has only deepened in the decade since last expressing it in your presence. Matters are even more complex than Nicola Oresme left them in "De Monetas" (c.1357). Leaving the seashells aside, I can't help thinking that modern monetary theory has pretty much strictly evolved out of Keynes GT Chapter 17, though never acknowledged, into Modern Portfolio Theory (MPT), the Capital Assets Pricing Model (CAPM), and beyond. These latter are among the superstructural functions investors rely on. Every MBA in the world (and there are millions) has been taught Markowitz and how to utilize the U.S. Treasury as the risk-free rate. I'm not saying that either is correct, or indeed that practitioners use them in daily practice, just that the idea since Keynes has been that "money rules the roost," amidst quasi moneys (commodities and other assets). We should acknowledge this since the other side has attempted to remove quasi money from the vocabulary – see the Wikipedia entry – as it was properly used by Keynes, in Chapter 17.

So, getting down to brass tacks, I've read the manifestos too, and just a little bit more after Krugman. My conclusion is that that the agreements revolve around Keynes, and basically, what just drives the rest of us crazy, has to do with the quasi-Austrian, Hayekian roots one of the MMT legacy technicians, Abba Lerner. who studied at the L.S.E. under Hayek, then moved to Cambridge under Keynes 1934-35. Lerner’s argument in "Functional Finance and the Federal Debt" (1943), after praising Keynes' new thinking:

"Functional finance rejects completely the traditional doctrines of "sound finance" and the principle of trying to balance the budget over a solar year or any other arbitrary period. In their place it prescribes: first, the adjustment of total spending (by everybody in the economy, including the government) in order to eliminate both unemployment and inflation, using government spending when total spending is too low and taxation when total spending is too high; second, the adjustment of public holdings of money and government bonds, by government borrowing or debt repayment, in order to achieve the rate of interest which results in the most desirable level of investment; and, third, the printing, hoarding and destruction of money as needed for carrying out the first two parts of the program."

The first and second principles made their way into the early post-war textbooks, and are now much evolved. Today's functional finance requires estimation of time-varying sectoral expenditure and revenue multipliers as the President and sound advocates should propose. Unfortunately it will be mixed up, as attaining the full employment mix involves intervention in lines of business that governmental expenditures are not directly connected to. The established mechanism of reaching outside the Fed's checkbook involves tax expenditures, our version of industrial policy. As you note, paying interest on reserves is not a good idea, and is a recent and price-control version of idiocy imported from somewhere in Europe. We should note that the theory is called the "collar," and even if tax expenditures are off the table, "Busting The Collar," is perhaps possible.

On MMT however, Lerner's third principle vanished into the dustbin of history, about as relevant as the Divine Right of Kings. I recall meeting him, about 1985, from my impression then, it seems plausible that he simply didn't absorb the Ch. 17 (1936) maternal while at Cambridge 1934-5. In contrast to Keynes, in MMT, there is one rooster, and no hens; hence there are no eggs. Apologies if that sounds harsh, but I have posted it elsewhere. In the “real” world, when the rooster goes crazy, one or more of the hens steps up.

mphippAugust 18th, 2011 at 6:54 pm

Could you please describe MMT with the interpretation and workings within a Failed Banking Institution circa 2008 and it's subsequent takeover by the FDIC . What happens or should happen with the money/ loans that now have been re-distributed to a non-bank (/Lennar) for collection for all or some portion of the loan based on a personal guarantee's, even though (/Lennar) only put up .08 on the loan dollar value and the FDIC put up or guaranteed .20 on the loan dollar value and precluded any opportunity for other parties in participation.. Additionally the FDIC gave this .20 dollar advance on a 0 interest no recourse , 7 basis year program. Does MMT have any definitional standing in this above proposed transaction?

Neil WilsonAugust 18th, 2011 at 6:54 pm

"Everything I have said in this post about government finance is a description, not a proposal. "

To be fair its a description after you've done a bit of algebraic reorganisation – which you have to do because for some reason the authorities want to make the monetary system look like something it is not.

wh10August 18th, 2011 at 7:10 pm

I would be very interested in an academic critique of MMT, but I would much prefer a targeted approach at MMT's economic concepts rather than mere assertions that it strictly comes out of arcane theories or doesn't have any 'hens.'

Ronald CalitriAugust 18th, 2011 at 8:07 pm

Sorry, but the "arcane" "theories" of Oresme and Keynes were built upon observations by first-class minds. As Socrates remarked, "observe; and see if you can understand."

I'm simply suggesting there are no specific policies in MMT, beyond the standard Keynesian policies. There is enough quarrel over these not to require introducing a spurious dimension. Policy discussions must be practical; so, beyond busting the collar, the "growth" discussion should be mesoeconomic and pursued by specialists in detail

Hugo HedenAugust 18th, 2011 at 9:44 pm

Another MMT rookie here (although I'm not a mainstream economist either).

I'll try to convey my current understanding of what MMT says. Maybe it'll be fruitful. (I encourage "real" MMT:ers to correct any errors!)

> "The insistence that deficits really, really, really *are* money-financed is pointless."

MMT:ers would say that the word "finance" is indeed misleading — government bond issuance does not "finance" deficits — issuing bonds is not a "financing" operation.

MMT:ers instead emphasize that government issues bonds to alter/control interest rates — and that's all. (It could potentially alter/control the whole yield curve). They see this as a monetary operation, not a fiscal one. To alter interest rates is not a "financing" operation.

I think MMT conceptually separates fiscal policy (calibrating government spending and taxing) from monetary policy (deciding on interest rates, and maintaining them accordingly) quite carefully. The two can be considered as two rather independent functions.

In more concrete terms, MMT states that there is a government function for running monetary policy. What it does is to maintain a certain overnight interest rate (and perhaps longer term interest rates as well). This is done by paying an overnight interest rate on excess bank reserves, and/or issuing/selling and buying repos and bonds.

If the market for some reason is not interested in buying government bonds at the various interest rates offered, then so be it. Perhaps the current monetary policy is to keep interest rates low, to stimulate investment instead?

There is also a government function for fiscal policy — calibrating government spending and taxing. MMT:ers hold (like most others) that the government should constrain its deficit spending in order not to induce inflation. Government deficits add to non-government income, and thus also (via spending multipliers) to aggregate demand. And if aggregate demand is pushed beyond the capacity of the real economy to meet it, inflation will result.

Now, consider the case where the government runs a fiscal deficit (in a way that does not induce inflation by pushing aggregate demand beyond the capacity of the real economy to meet it). Given that there is an independent monetary policy function in place that constantly maintains the desired interest rates, why would there be any reason to issue further bonds in conjunction with the deficit? There is none.

Let's say that the current monetary policy is to maintain an overnight interest rate of 1%, and that this is implemented by the central bank paying an overnight interest rate on excess reserves. Given that, why would a fiscal deficit be inflationary (except of course due to the above mentioned effects on aggregate demand, which MMT agrees can be inflationary)? And how would bond issuance help?

The fiscal deficit adds excess reserves to the banking system. There is a common belief that this would be inflationary and that bond issuance would help. Again: why would it be so?

First of all, banks can't lend reserves to customers, so the increased /amount/ of reserves per se will not stimulate credit growth. (Wray writes that banks can do only three things with excess reserves: lend in the interbank lending market, buy government bonds, and convert to physical currency).

Second. Yes, the added excess reserves would push the interbank interest rates down, making it cheaper for banks to "fund" (given the reserve requirements in place) credit growth than before the deficit. For monetarists, this would be considered stimulatory/inflationary. But this effect is nullified because of the monetary policy function that the government performs, in this example keeping the interest rate at 1%.

Hmm. Was this helpful in anyway?

RuneAugust 21st, 2011 at 1:54 am

Very interesting comments on Krugman. I read your book 'Modern money' and found it very convincing although the chapters on how to implement zero employment was not detailed in any convincing way. As a matter of fact Sweden, now governed by neo liberal oriented right wing parties, have implemented a three step solution for unemployed whitch in some ways resemble the solution in your book.

Step 1 normal unemployment benefits which is gradually lowered. The upper ceiling is held low so for most people unemployment insurance through the unions for 90 days is needed (it's supply side economics – the social democrats don't approve). Step2 includes education, still receiving benefits. Step 3 consists of very low salary work for sharity organisations, public offices etc.

RuneAugust 21st, 2011 at 2:01 am

The problems with the solutions mount. The step 3 jobs are the end station for many eg sick persons, elderly, immigrants with low competence etc. People feel used, as garbage etc.

As part of the government politics one is tackling the high numbers of sick leave by setting a limit on how many days are allowed so after about a year people are transfered to employment benefits and eventually ends up in the step 3 part. This can happen earlier as a decision point is set after three month to see if the person should leave the company (a bit rough description here) and seek other jobs.

The supply side economics being the base for these programs had a forrunner in the crisis of 1992 with high unemployment and preasure on the employees which led to high number of sick leave five years later and forward. It's also a problem of the high number of unemployed among immigrants.

Anyway I wanted to point out some interconnected problems with the solution proposed in your book and point to an ongoing experiment which have some similarities to the proposal in your book although I beleive your main point was theorethical setting out a direction and showing the effect on prices and stability of the economy.

L. Randall WrayAugust 21st, 2011 at 4:49 pm

Rune: I cannot see how your 3 steps bears any relation at all to my Employer of Last Resort/Job Guarantee proposal. Here is mine:

Step 1: universal job guarantee to anyone who wants to work; aim for living wage and benefits; must be socially useful work so that individual feels useful and society supports the program
Step 2: on the job training and education to upgrade skills (note: job first, then education)
Step 3: private sector recruits employees out of program; goal is to produce an employable pool, with the pool acting as buffer stock

tons of work on this topic; go to http://www.cfeps.org, http://www.levy.org, and http://neweconomicperspectives.blogspot.com/

RuneAugust 22nd, 2011 at 3:00 pm

The steps I refer to is different periods in the life of an unemployed following a timeline. You start in step 1 period a regular job seeker during which time the unemployment benefits succesively is lowered. Then you enter the step 2 face, and finally the step 3 face.

My step 3 (official naming standard – timeline of unemployment) corresponds to your step 1. The difference being you have to disqualify in order to enter (no of days unemployed).

My step 2 is the same as your step 2 (different educational activities).

Your step 3 corresponds with my step 3 that is the goal is to keep employee competence up through on the job training. Criticism has been launced that no education takes place here.

RuneAugust 22nd, 2011 at 3:51 pm

The steps I refer to is different periods in the life of an unemployed following a timeline. You start in step 1 period regular full time job seeker during which time the unemployment benefits succesively are lowered. Then you enter the step 2 face, and finally the step 3 face.

My step 3 (official naming standard – timeline of unemployment) corresponds to your step 1. The difference being you have to disqualify in order to enter (no of days unemployed).

My step 2 is the same as your step 2 (different educational activities).

Your step 3 corresponds with my step 3 that is the goal is to keep employee competence up through on the job training. Criticism has been launced that no education takes place here.

RuneAugust 22nd, 2011 at 3:53 pm

My first point is that it doesn't seem to occur any recruitment from unemployed in the step 3 face, but times are rough and the reforms only three years old, and that handling an unemployment reserve army can't bee seen out of context that is questions like immigration of a low skilled work force (100 000 persons including family a year, population 9 million), health problems due to working conditions and preasure due to taxes and profitability, problems for elderly and young (especially with non completed education) to get a job in Sweden, housing shortages which hinders people to move to regions with low undemployment etc.

My second point is that the Nordic countries with life lon support through different systems cound be woth a study.

nemiAugust 25th, 2011 at 3:09 pm

Interesting post.
What is, according to you, the function of bonds then? Simply to keep the Treasury and FED (somewhat) independent from each other?

wonkspaceAugust 26th, 2011 at 11:12 am

MMT has been hard for me to grasp, as has Krugman. But I'm still studying, so I greatly appreciate the numerous links.

But look, guys…if you're gonna set a tone here that calls folks who need time to understand the rather complicated world of economics, finance, banking, etc. weak-minded or intentionally dishonest, you're creating a cult, not a monetary theory.

And I suggest you just ignore the rants against you to retain your dignity.

lisaAugust 28th, 2011 at 5:53 pm

"Seigniorage" by key-strokes, and no clear reporting and explanations of real financial transaction details for people to understand the lack of transparency of real trillion, and billion dollar scams, is the dilemma of shadowbanking, that are filtering down, and impacts the real world currency transactions on the real streets. Street transactions are based mostly on debt and interest manuevers processed, and serviced through a few banking conglomerates. In real time, the real little guys have to be responsible players. The big guys don't ,aren't and never have to be. The rules are different depending if you create the game, or if you are stuck only playing the games.

When you throw in all the ramifications of certain sovereign hedge fund "key-stroke holdings" ETC. /vs paper dollars or other currencies, such as the mess that lovely Libya's will eventually reveal, and the predecessor BinLaden's and who knows all the up and coming POLITICAL exits all over the world-it's a rigged monetary game. Certain people and families are fortunately for themselves ONLY -taking the money on the run, while they still can get away with it.

The 90+percent of the rest of us are the unfortunates playing with the increasing worthless currency, and anything and everything else regardless of inflationary or deflationary spectrum. Labor vs. laborer's real return in whatever currency is the bottom line factor. If real return for whatever individual labor is increasingly depreciating, and that return on labor can not buy any reasonable sustainable goods in the acknowledged social/political/monetary economy, what do you get?

You have to understand the game and start your own, with your own rules on whatever acceptable local level that you can. Be your own banker, and know who you are trading with in real life. Circulate your own funds as judiciously as possible within your own community. This exchange is getting harder and harder to do on the street levels. It is not impossible. It is the alternative that used to be the banking baseline to help indigent small population groups in developing nations. (Really just exploited population groups within certain nations.)

As the generally accepted and approved currency sources are dying, right now, real people are grasping to sustain themselves, and are having to initiate new currency sources. In fact, barter and new currency alternatives may be the only real choice for many of us, while the political theatre escalates, before revealing what a flop of a play shadowbanking really is.

In other words: the float-time for financial transactions is finally gonna hit the fan exponentially in the real world, rather than just manipulated, as fluctuations and variables by certain "key-strokes", and algorithms.

Lisa's RULE #1 on Real Political Economy

It is impossible by humans or computers to fool all the people all the time.

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