Great Leap Forward

Minsky and MMT in the News

Here is a very nice summary of the approach to crises taken by Hyman Minsky (disclosure: it quotes yours truly):

I am providing the link because this is a good antidote to the usual “Minsky moment” or euphoric bubble approach to Minsky usually taken. That is more Kindleberger than Minsky. Kindleberger was a great economist and a close personal friend to Minsky, but Minsky’s approach did not rely on irrationality. No “tulip bulb mania” for Minsky. In my view, his approach is much more relevant to the GFC of 2007, and also to the Great Crash of 1929. Sure there were bubbles and irrationality, and sure those made things worse, but they do not explain the dynamics.

Most economists are still trying to catch-up to the MMT explanation of what went wrong with the Euro project. MMT got it right as early as the mid 1990s. Others are trying as best they can to provide an ex post explanation to make up for the fact that they never “saw it coming”. Here’s a very early piece by Warren Mosler, that got it right–from 1997. If I recall correctly, this was Bill Mitchell’s first Coffee conference at Newcastle. Warren (correctly) explained what is wrong with pegging exchange rates. Of course the EMU upped the ante by going whole hog as nations dropped their own currencies and adopted a foreign currency–the Euro. The rest, as we say, is history. Read it here:

It just warms the cockles of one’s heart to see that many economists are now trying to “rediscover” the insights of MMT. (See here: Still, some find it very hard to shake the bonds of old-style approaches, such as the Kaldor-Thirlwall gold standard approach to current account balances. They mix up the constraints imposed by fixed exchanged rates or currency boards or currency unions with supposed current account balance constraints. As such, they think that Greece’s problem is that it ran trade deficits, not that it gave up its currency.

They accuse MMT of supposed logical problems. Our argument: a country that retains its own sovereign currency with a floating exchange rate has an “additional degree of freedom”–it can still pursue full employment at home, while letting the exchange rate float. It has at its disposal a number of alternative ways to deal with a current account “imbalance” should it choose to do so. Their interpretation:  “had the EZ been a currency area like the US, it could not have balance of payment crisis….So the problem is that the EZ is not the US, since if it were, no BoP crisis would have occurred!” No, of course this is not our argument.

Our argument: if the EMU had been formulated along the lines of the US, a current account deficit of a member state–say, Greece–would have been of no more consequence than the current account deficit of a US state–say Alabama. We do not talk of kicking Alabama out of the US because of chronic trade deficits with other US states. By the same token, if Greece had stayed out of the EMU, it might well have run current account deficits, but it would have had more policy space to deal with them (if it desired to do so) if it had its own floating currency. The argument is simple, it is straight forward, and it is correct. But those who never saw the EU crisis coming are still playing catch-up.

Our argument: a country that adopts a foreign currency (or otherwise pegs its exchange rate) has less discretion than one that retains its own sovereign and floating currency, and in many relevant cases must abandon full employment at home to try to keep the peg. It is not hard to find examples–in the EMU and all over the globe. Critics charge we never look under the covers deeply enough to examine any country except the US–the issuer of the international reserve. The charge is false. Read Warren’s piece. We’ve been very clear on these matters. Yes, the US enjoys some advantage–it takes two to tango but everyone wants to tango with the US dollar. Many want to tango with Australia and the UK and Canada. Fewer want to tango with Rwanda. It is thus easier for the US or Oz to run current account deficits. Yes!

But the MMT principles apply to all sovereign countries. Yes, they can have full employment at home. Yes, that could lead to trade deficits. Yes that could (possibly) lead to currency depreciation. Yes that could lead to inflation pass-through. But they have lots of policy options available if they do not like those results. Import controls and capital controls are examples of policy options. Directed employment, directed investment, and targeted development are also policy options.

Unfortunately, many learn the wrong example from–say–Greece. Rather than the obvious conclusion that giving up currency sovereignty ties hands of government, many conclude that Greece is an example of what goes wrong if you run a trade deficit. It is the wrong lesson–based on a tired old theory that was, itself, based on gold standard thinking.

We’re off gold. We’re not going back. Get over it.


30 Responses to “Minsky and MMT in the News”

OrigblessAugust 29th, 2012 at 5:56 am

Britain is proposing an emergency tax on high worth individuals to help with the pain caused by the economic collapse. Article in tonight's Guardian U.K.

Neil WilsonAugust 29th, 2012 at 8:31 am

The Lib Dems are proposing an emergency tax. It's conference season and this is a dog whistle to the faithful.

The Tories will tell them where to get off and the whole proposal will be forgotten by Christmas.

Neil WilsonAugust 29th, 2012 at 8:33 am

"But they have lots of policy options available if they do not like those results."

And the 'one that must not be named'. Redistributive taxation to share the real economy's products out more evenly.

roger ericksonAugust 29th, 2012 at 11:26 am

"to really take Minsky's ideas on board, you have to be willing to surrender some of the precepts of equilibrium economics, which is the sine qua non of most mainstream approaches, … And this, most economists still are not prepared to do. Minsky is still a bridge too far for most."

That should be carved into stone as a warning example. All refinements are based on letting go of prior presumptions. Show me another field that would advise economists to see systems as in equilibrium. There's a difference between equilibrium and dynamic-equilibrium.

If things are going to appear to be the same, everything must continually change … beneath the surface.

roger ericksonAugust 29th, 2012 at 11:35 am

any complex system faced with unpredictable future contexts evolves by discovering a seemingly infinite set of distributed tolerance limits;

every system discovers those tolerance-levels permutations by …. well, discovering them;

Ecology, biology, systems theory, thermodynamics … all would say Minsky's conclusions are self-evident, and obvious over 100 years ago, but where the hell did orthodox economists get their idea that evolving systems are in equilibrium?

LRWrayAugust 29th, 2012 at 12:42 pm

Thx Neil and Roger, agreed. I do not like the term "redistribution" applied to "tax and spend" fiscal policy. Delink the two. Yes, raises taxes on the rich (excessively high income going to the few generates all sorts of economic, political, social, and health problems). But do not link that to spending more on the poor. Higher taxes on the rich is not a solution resolve the pain from the GFC. We need relief for the poor, for those losing their jobs and homes, and so on. We need permanently higher taxes on the rich–not to "pay for" anything, but to resolve excessively unequal income. I MUCH prefer limits to earnings over higher taxes–but that is for pragmatic reasons. Once the rich get their income, prying it loose through taxes is harder than taking guns out of the hands of NRA members.

RonTAugust 29th, 2012 at 1:19 pm

Mr Wray,
Why be so dismissive of Mr Cesarotto's claims? Can MMT deal with that or not?

I would like to wrap my head around it, what does MMT tell small countries? Say Greece has its own currency and is a net importer. Does it pay with Drachmas or Dollars? If dollars, it means it borrows them? The it is not entirely sovereign. If it doesn't want to borrow, it means its net imports are restricted to however many Drachmas foreigners want to hold, which is not many. So basically what you are saying is the only solution for countries other than the US is not to be net importers? To forbid corporations and households from borrowing dollars?

ollyAugust 29th, 2012 at 1:24 pm

”had the EZ been a currency area like the US,"

The US is a COUNTRY. People don't seem to understand this for some reason

ollyAugust 29th, 2012 at 1:30 pm

"Yes, that could lead to trade deficits. Yes that could (possibly) lead to currency depreciation. Yes that could lead to inflation pass-through."

Do you think it's possible that the US dollar could collapse in value (as a result of the US trade deficit), resulting in very high inflation?

LRWrayAugust 29th, 2012 at 1:32 pm

MMT has "dealt with it" for 20 years. Read the Mosler piece. My own view: sovereign govts should not borrow foreign currency; their populations should push legislation to prohibit it. Private firms and households should be allowed to do so. Difference? If they cannot pay, they go bankrupt. Let them go bankrupt. Let foreign creditors lose. The problem is that bankruptcy by govt is a much different animal, supercharged with politics. When a govt borrows in a foreign currency, there is default risk but default is not an easy matter. Default by a private firm is much simpler, and very common. The govt (say Greece) can then choose how to deal with the aftermath of a private default (ie: what to do with the workers who lost their jobs), but it does not need to worry about the foreign creditors–they took their risks, got paid interest for doing so, but they lost the bet.

PZAugust 29th, 2012 at 2:02 pm

"Yes, they can have full employment at home. Yes, that could lead to trade deficits."

In the currency market, when someone wants to import, he has to offer local currency for sale. More imports mean more sellers of local currency, and for every sale there is a buyer.

Why do buyers want to aquire currency? Because they want to export. How much they want to aquire it? As much as they want to export.

There is no way this system can go out of balance. Every import funds equal amount of exports in the currency markets.

Many get confused because of official interferance, central banks buying and selling currency, and accumulating currency reserves.

MarkgAugust 29th, 2012 at 3:57 pm

Partly agree with Randy, taxing the rich to "redistribute" income does not work and is a poor choice of wording. I don't think taxing the rich will resolve income inequality (unless they lose political power in the process, but I doubt that). Income inequality will only be resolved when fiscal policy drives unemployment down to the point where labor regains bargaining power. Then income will be DISTRIBUTED more equitably. The rich will always find ways to avoid paying the higher tax; just ask Mitt.

DeusDJAugust 29th, 2012 at 5:49 pm

MarkG, it was a poor choice of wording but you still misunderstand the point of higher taxes on the rich. Sometimes our social policies do not direct investment where they should (ie towards employment, building infrastructure, etc) and by it's very nature hence capitalism creates haves and have nots. If a system exists where there is not some measure of planning in terms of making sure everyone who wants to be employed is, and hence capacity utilization is not at it's highest, by that nature capitalists will develop schemes to extract wealth from the lower classes, because the old way of creating something and selling it isn't working. So taxing the rich is simply a response to drips occurring from the optimal social benefit bucket which includes programs to keep capacity utilization high. Or, a country could look towards sustainability or worker rights and simply develop policies that doesn't keep utilization at a high point per say (work hours being lessened, weekends where business is closed everywhere, etc), and this as well can create inequality hence instability in the future, which is why taxation is a required policy. Not only that, if productive capacity is being kept low that also means that some industries may be created to simply extract wealth (think modern type banks/investment banks) and that is another reason why taxation is needed: to prevent some activities, and for those you can't necessarily prevent, you simply tax them at a high rate.

DeusDJAugust 29th, 2012 at 5:52 pm

I should add since I'm not making myself totally clear: it's not that we're taxing wealth so that their wealth isn't obscenely high compared to middle and lower classes. It's to prevent them from doing certain activities that can further enhance inequality and create a ruling elite that controls everything with money, which by it's very nature creates an anti-democratic state (much like the USA). And if we can't prevent certain activities or our legislature isn't on the ball, taxation takes care of those drips from what I called the optimal social benefit bucket.

LRWrayAugust 29th, 2012 at 8:38 pm

Deus: I agree that one purpose of taxes is to reduce "bad" activity–and the goal is to have a tax that is so burdensome the activity is eliminated. Think Wall Street. Some try to sell a "transactions tax" on the argument it raises revenue. No. It should raise 0 revenue as it eliminates undesired behavior. Tax them out of business. And to be clear: I agree it is very hard to use the tax system alone to reduce income at the top–like trying to pry guns out of the cold, dead hands of an NRA member (if you've seen the bumper stickers). Best not to allow the production, importation, and sale of financial (and other) weapons of mass destruction in the first place.

RonTAugust 30th, 2012 at 1:18 am

Mr Wray,
Than you for the response to my question above.

New question: which financial products/activities would you ban/tax to oblivion?

Edward StevensAugust 30th, 2012 at 12:05 pm

It just amazes me that we have discovered that there are credit cycles in the financial markets. I grant you the severity of the last one was extreme, but is it too bold of me to say that the cause me have been to cheap money for too long.
Also, would never argue that market sentiment swings between greed and fear– and that public policy should help limit the volatilioty of those swings.
Easy money = easy credit
Tight money = tight credit
the question is how tro balance the two– at leastg to my simple mind.

AndyAugust 30th, 2012 at 12:11 pm

Hang on – its MMT, the government cant go bankrupt. What difference does it make if the government borrows in a foreign currency – according to MMT the currency is free floating, and the government can always create as much as is needed anyway, so it makes no difference if a debt is in a foreign currency, the government can always create enough to exchange for the foreign currency to repay the debt. Why would the citizens even consider the legislation? I mean, this is fundamentally going to be a totally resolute economy with full employment at all times – its self fulfilling, so why with all that is presented as fact and core in MMT would the citizens at any point consider imposing restraint on government spending. Wouldn't that be artificial, self imposed constraint?

Sergio CesarattoAugust 31st, 2012 at 5:24 am

Note that I changed note 2 of Part 1 in this way:
"[DELETED: MMTs should, however, detach themselves from the open support to the bad-mannered conduct of the presumed guru (a journalist) of the Italian MMTs. This is irrelevant for me and the colleagues of mine victims of various vulgarities ….]
NEW: Things have changed in the meanwhile. Stephanie Kelton has showed great understanding for us, and I believe that her feeling is shared also by other MMTs. We are thinking about having an event together in Rome during her visit to Italy (with Auerbach and Mosler). Even if we shall not be able to organize it, the very fact that we tried is very encouraging."

paolo barnardAugust 31st, 2012 at 2:28 pm

I can see that you, Prof. Cesaratto, are somewhat inclined to delete things these days. Not just your note 2 of Part 1, but also the slander that you and particularly your buddy Prof. Bagnai have heaped on Kelton, Auerback, Mosler and yes, on Rady Wray too in at least one occasion from your blogs. It's all in the records, want me to publish the lot? Now try to delete your hypocrisy if you manage. Have a good day. PB

chiara zoccaratoAugust 31st, 2012 at 2:42 pm

I beg the pardon of Prof. Wray, because this is a place of economic debate of his articles, but to this must be answered:

It’s a shame, Prof. Cesaratto, you are a liar and an opportunist, you and the other one, Prof. Bagnai, slandered very much Prof. Kelton, Mosler, Auerback, Parguez and even Wray not just by MAKING AFOOL OF THEM in your blogs, but also via filthy insinuations (Bagnai: "Wray sold out to Roubini and the Rothchilds"). Paolo Barnard was labled as a “fascist”.Barnard? Bagnai calls him Donald Duck…a "piece of crap"…he wrote this on hisblog, in which he doesn’t accept any comment or confront with MMT Italy peoples(see the rules of the blog, he really loves debate…)

And why? Because Barnard, a journalist, told you that you have been totally useless in your own country from a social and cultural point of view (absolutely true!), that you never stoop down so low as to speak to the simple people, in a plain language(Bagnai even writes in latin…my god!) and trying to involve them rather than trying to get the attention of the Italian Democratic Party – you – and Bagnai we do not know of whom, as he affirms boldly to be an elitist…he’s just an egomaniac.

The 2000 “stupid” Italians who went to Rimini last February, now, they are useful to you opportunist guys, our money isn’t stupid, is it? We pay for the travel of the UMKC professors and you have your names next to them for free…oooohhhhhh!!!!! In the end a bit of popularity…all the work is done by others…you are smart professors…the stupid journalist must be put aside, so you can step on stage, enjoy some glory and THEN PUT APART THE STUPID AMERICAN PROFESSORS TOO…because they aren’t so smart actually…there is no novelty in their Theory…they say old things everyonealready knows…Bagnai wrote “I made the same presentation that Kelton did in Rimini, no difference (!), some months before her… those 5 UMKC economists are a bunch of pricks”. And that man, Mosler, is, according to you Mr Cesaratto, a dangerous financial speculator that "speculates on peoples' good faith"…- Just thank theLord, Mr Cesaratto, that American people here cannot read the Italian language so they can’t go to your blogs and read what you wrote! –

Your thinking is just: "The people? what more do they want of us? We are just economists,bloody hell, what can we do? We could lose our reputation shouting out to the Austerians “you are criminals” in front of thousands of people publicly, let “Donald” do that…it’s not my style…”

Ok in these times of despair you can afford to have a “style”…Parguez has a perfect style and shouts out “criminals”. Perhaps the problem isn’t the style but the moral engagement.

You are shameless and I hope that Paolo will public on his site the answer that Prof. Kelton gave you…it’s not so kind, but certainly full of understanding… of your real nature! Obviously, negative.

p.s. I met academic people that were able to deal with personal disagreements with a hundred times more dignity than you.

You are writing on an international blog, on the page of a world-renowed and esteemed colleague, begging for attention and whining like a child for the bad manner of…a journalist?

Chiara Zoccarato

Paolo BarnardAugust 31st, 2012 at 5:01 pm

Dear Wray, on top of the previous slander, here's what Zezza's and Cesaratto's partner and friend Prof. Bagnai published on you today in Italy.

"Wray is one that blabbers Y=C+G+I+X-M, obsessively, sometimes he gets lost. He's an accounting feticist… His analysis of Ireland is exemplary of this (including his blunders on the data). He's a wonderful guy, pity he doesn't understand that unbacked Fiat dollars are backed by a few nuclear warheads… But it's not that he doesn't get it, he doesn't want to get it, he likes it that way. Well, at least Wray is an American that doesn't pretend not to be one, unlike our Monti!"

Note: there has never been a single time when your Italian heterodox 'friends' intervened in the public debate here to distance themselves from all the slander that the Cesarattos and Bagnais poured on MMT, you and your colleagues, never once. They let MMT be ridiculed over and over. I intervened, not them. And this (sorry Warren) includes Andrea Terzi.


LRWrayAugust 31st, 2012 at 9:34 pm

OK I hope we can put this to rest. Honestly, I do not know about the state of the debate on MMT in Italy. I've never heard of this "Prof" Bagnai and from what I've seen I have no desire to know him. I've been assured he's never actually read anything I've written, but I don't know if that is due to lack of intellectual curiosity or capacity. No matter. Much worse has been said of me than that I babble on about identities (true) and am an American (also true). I was shocked that Cesaratto chose to use his diatribe against my positions on current account "imbalances" to also attack Americans who go to Italy at the invitation of an Italian reporter (of importance is the fact that I was not one of them!)–apparently he meant Paolo Barnard–as if that is some kind of transgression to be ashamed of. But he has now deleted that from his attack on me and I'll accept that he knows he erred. We all make mistakes in what we blog and that is what the delete button is for. I'm much more concerned with his apparent refusal to correct the many mistakes of interpretation of the MMT position in his various pieces. But, so be it. Let's all move on.

LRWrayAugust 31st, 2012 at 9:50 pm

Oh, I forgot the nice little bit about Roubini and Rothchild. Hilarious! Yes, they're paying me the big bucks for these blogs! As Borat might say after a very long pause…..NOT! Never met Rothchild but Roubini has been a very gracious host. Nice to meet someone as perpetually bearish as me, and all of his staff at Economonitor have been equally nice and accommodating. I'm still amazed they not only agreed to host my blog, but that they also list it as featured, popular, and occasionally most read. I still think I suckered them, not the other way 'round.

CalgacusAugust 31st, 2012 at 9:57 pm

The problem is that "the government can always create enough to exchange for the foreign currency to repay the debt." is false.

The difference is that foreign currency debt can become infinite measured in domestic terms. A sufficiently high foreign-denominated debt can become unpayable, no matter how much domestic currency is issued to pay it off, even if the government issues so much that the domestic currency hyperinflates.

Paolo BarnardSeptember 1st, 2012 at 3:02 pm

If I may just add, Randy. The fact that you are not part of the growing MMT crowd (Kelton, Auerback, Mosler, Black, Galbraith) that is now working with me for MMT in Italy on a permanent basis is a great loss for us all and for a country you know well. Can I ask you to join us? You taught me MMT, I owe you so much. PB

RobertMSeptember 4th, 2012 at 4:07 pm

re: " Yes, raises taxes on the rich(excessively high income going to the few generates all sorts of economic, political, social, and health problems). "

or put another way- Concentrated wealth destroys democracies.

We have seen this become more and more apparent in the last few years with Citizens United, company destroying vultures like Romney buying a presidency, blatant lies being presented as facts in the "news", the criminogenic environment Bill Black writes about… all brought about because of the excessive wealth allowed to the 1%, whom now can almost completely control the government.

Vassilis SerafimakisSeptember 5th, 2012 at 11:38 am

Thank you, LRW, for being stubborn with both the facts and the correct interpretation of macro events. (Eg. You remark abt income tax on the richer citizens "funding" relief to the poorer ones.) What is (understandably) lacking from the many and valuable proposals put forth by heterodox economists is a more detailed plan for countries that want to leave the Eurozone. Not so much on the purely operational aspects of the departure (E.g. the Wolfson economics prize winning entry) but the nit and grit of economic policy itself.

This, I believe, is one of the main reasons that European peoples get so easily scared by the pro-Euro propaganda, a propaganda that is nowadays entirely about the dangers of all alternatives! (Every time I debate a mainstream economist or a Euro-fan, I concede that I hear a ton of arguments against monetary sovereignty and I also hear arguments in favour of it. what I do not hear at all are arguments in favour of the status quo, i.e. the Euro! I ask if they would want, today, with all the empirical information available, Greece to join the Eurozone, I get only blank stares.)

Vassilis SerafimakisSeptember 5th, 2012 at 11:39 am


We need to work up a blueprint for the immediate tasks ahead for a government that desires to regain its monetary (and fiscal, i.e. exit Maastricht) sovereignty. If that would be "Greece", it would be very beneficial, because Greece is, as we speak, in a death trap and needs immediate action. Additionally, if a credible alternative is presented for Greece, arguably a country with significantly more systemic problems than the rest of the Eurozone, then the path to salvation will become even clearer for countries with fewer such problems.

The project for a peaceful and prosperous Europe is too noble and valuable to allow it to get derailed by neo-liberal madness.

All the best.

LRWraySeptember 5th, 2012 at 3:13 pm

Vassilis: I agree–we need a plan for orderly exits. We did discuss this in Ireland and came up with some plans (including one by Warren Mosler) but I agree we need more specific ones, tailored for each individual country that might leave.

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