MMT CAN KILL SECULAR STAGNATION

David Minack

Published by Minack Advisors in their Down Under Daily, 23 February 2019.

In this essay the author describes the theory promoted by advocates of Modern Money Theory and suggests that if adopted it could end secular stagnation. His conclusion is that secular stagnation was advantageous to market investors so a full MMT regime may not be advantageous.
The article has now been reprinted and published by Evergreen in its EVA of 19 August 2019.

So, lets discuss this. Now, economists discuss all this in terms of 'money' the actual meaning of which is itself controversial. I prefer to examine the activity (exchange) in physical terms - actual production, distribution, and consumption of real goods and services. And I begin by the study of the exchange process that took place in the earliest social organizations (families, tribes and clans) and then with the earliest examples of societies about which we have written records - Mesopotamia, Egypt and China. The specific particulars change but the process - production, distribution, consumption - remains the same.

Mr. Minack opens with his opinions that - MMT is correct and obvious - but it is a description not a policy - and it is controversial for the reason that opponents of the theory object to the policies that using it as a justification would create. He believes it likely that the financial actions supported by this theory will indeed be taken.

It appears to me that the actions described in MMT have already been taken, or are at least being taken now. See my comments on a major advocate, L. Randall Wray in his book - MMT - which are discussed in my review, along with many subsequent issues related to recent leftist politicians actually embracing it. Here is my opening comment in my review of the book

The author's objective in writing this book was the justify what he claims is the current monetary manipulation practiced by governments ( rulers ) through their central banks used to finance welfare 'states'. But with a careful analysis the reader can see that it is an unintended exposé that reveals what may actually be happening. The question the reader needs to answer is whether this is only the academic concept and theory of the author or is it believed by the Federal Reserve and included as part of the theoretical base on which it decides on its monetary policy. I find no discussion of this theory in Mishkin's textbook on Money and Banking. Please go to the discussions of chapters 6 and 7 to learn what the book is all about and then return to the previous chapters to read how the author seeks to justify his recommendations.

Mr. Minack is correct in his opinion that MMT is a correct description of a particular monetary - fiscal policy. He is correct in writing that "MMT is likely to be used to justify aggressive and unconventional policies in the next cycle". Except that I believe that Professor Wray is correct that MMT is already the basis of current FED - Treasury actions. But it is indeed aggressive, but no longer 'unconventional' in the beliefs of FED policy creators. And it has been embraced by the radical left Democrat politicians as a a means to finance their "Green New Deal".

So, what is this MMT?
The first and basic concept is that a government which exchanges credit instruments denominated in its own currency for production that it consumes can always create more such credit to exchange for as much production as it believes necessary without becoming bankrupt. Of course the author uses the economists' term 'issues debt' rather than pays with credit. But the 'debt' is merely the accounting double entry book keeping number on the Treasury or FED balance sheet.
When the FED was created in 1913 the opponents (recognizing danger of unlimited monetary expansion) included in the law that there would be a ceiling number for the legal Government Treasury debt and that the FED would be prohibited from buying this Treasury debt (bonds and bills). Both those legal requirements have been removed in practice.

Mr. Minack continues by noting that although a government that can print money need not default on debts denominated in its own currency, some governments nevertheless have done so. But most incidents in which a government has defaulted is because it received credit (that is agreed to debt) in a foreign currency. Mr. Minack provides excellent graphs that depict this.
This is true, but he does not explain why that happens. The problem arises when the relative 'value' of that foreign currency in comparison with the 'value' in which the 'debt' was incurred decreases (usually due to inflation), resulting in that government being unable to meet the interest due or eventually even repay the principle.

His second observation is critical and ignored by the MMT aficionados. He notes that "there are limits to the productive capacity of an economy". Why is this critical? Because what is really taking place under cover of the depiction of it in monetary (credit - debt) terms is that government (which is a massive consumer but not a producer) is exchanging (taking) real production from its creator - the private sector - and giving credit instruments instead of other production from the real economy. Credit so exchanged is really a promise to create and repay in real goods to the private sector - which it does not intend to do, nor can it.

He continues with the correct observation that: "These two observations imply that it is wrong to see government fund raising - either by tax or debt issuance - as a prerequisite for government spending." Quite right - but what is government spending? It is fundamentally the same process as the most ancient governments in, for instance Mesopotamia and Egypt, engaged in by simply claiming that production and the means for production were owned by the government. They also collected tribute - which was later the major financial mechanism of the Greek cities and the Roman empire. Taking became 'spending' when governments introduced a 'medium of exchange', that is money, into the process as an intermediary activity. Governments created this 'money' exchanged it for private production and then taxed it right back to its own exchequer. And the money was not always coins - for instance for centuries it was hazel wood talley sticks, notched to indicate 'values'.

Mr. Minack continues: "The government does not need to tax to fund itself. The Principal reason for a government to tax the private sector is to reduce the private sector's demand". What a brilliant insight, but one already stressed by the MMT cabal. For centuries governments did not 'tax' in monetary terms, they simply expropriated or claimed ownership. The producers - mostly agricultural workers but also artisans, simply worked for the government. (Government in many times and places included land lords and nobility and the producers were slaves or serfs.) The governments did not think in terms of reducing the private sector's demand - such economic ideas were beyond them. But, with the modern monetary system, reducing the private sector's demand becomes significant because the exchange (taking) process has reduced the private sector's supply and leaving too much money with the private sector would result in its members bidding up the prices for the remaining supply - creating inflation.

What is most amazing about this open statement about 'reduce private sector's demand' is its blatant admission that the 'private sector' that is everyone except government officials and their minions will suffer a reduction in their standard of living as more of their own production is taaken away to be consumed by government.

The remaining sentences in that paragraph amplify (explain) the reason.

Next, a third observation which is: "that in a closed economy net saving (saving net of investment) is zero - or, put another way, saving by one sector must be matched by dis-saving by other sectors." This is pure theory advanced by Michal Kalecki, a Polish Marxist economist active from the 1930s to 1970. see The key to this is Kalecki's concept of dividing society into two sectors - capitalists and workers. The result is that saving by capitalists results in 'dis-saving by workers, and would be in reverse if workers had the opportunity.
This is true in the sense that when capitalists 'save' part of the 'retained earnings' of production and invest it the short term result is that the workers cannot be given part of that 'retained earnings' for short term consumption. Actually ALL saving in a society is the result of 'retained earning' from the production process. And the amount of that 'retained earning' that is then allocated to the production process NOT to increase consumption but to increase new production is the essence of capitalism. Consumers who are not producers do not and cannot save. All taxes are paid out of production, not consumption. But of course when a quantity of production is taken by government, then the consumers all have less produced goods and services to consume. So in that sense they 'pay' for what government takes by the increased prices of what they can consume. This is the new 'magic' of capitalism - prior to its conceptual development, ancient governments (societies) would take whatever was retained from production - over and above what was immediately consumed - and themselves consume it by building pyramids, temples, palaces, castles and the like. (or wage wars)

Mr. Minack writes that the above concept is not a theory but an accounting identity. Yes, but only because the definitions of the 'sectors' into which society is divided are Marxist. But he continues by applying the same concept of saving and dis-saving to the world economy, in which it is true that if one country consumes more than it produces another country must produce more than it consumes - in real terms. But in financial terms countries 'balance' their books by manipulating the exchange value of the 'money' that serves as the medium of exchange.

He continues with more of Kalecki's theory. "Likewise, this implies that if the private sector, in aggregate, wants to save then the public sector must dis-save. Put another way, without the public sector running deficits it would be impossible for the private sector to save."
But ALL saving is created by the 'retained earnings' of private production. And in reality what the quotation means is that if the public sector (government) did not run a deficit (issue more credit) to balance the financial books, when it takes and consumes private production there would be none of the privately created savings left to that sector. The diagram Mr. Minack shows does show how the public (government) and private sector financial books are balanced, but does not, of course, show the original causation - the 'exchange' in which government acquired private production without itself exchanging any production - only credit.

Next, an important 'aside'. The difference between saving and wealth - "A sector saves if it consumes less than it produces." ... "Wealth is a stock"...
Yes indeed, wealth comes out of that 'retained surplus' from production that is not consumed, or taken by government - and can be then retained by the producer - but astute producers in modern times recognize that they can greatly increase their ultimate wealth by investing some of that 'retained surplus' to generate more production that in turn can produce more wealth. Remember, the government 'sector' does NOT produce anything but consumes production taken from the private sector.

One problem in modern society is that this process initiated by government of creating credit through the banking system is that it has enabled the growth of 'financial capitalism' - the expansion of the financial industry we see in standard categorizations of stock market entities. And the operators of this financial industry take a big cut out of the newly created 'credit=money' provided by the government in its exchange of production with the private sector, before passing it on to the public - so their 'wealth' was not a result of 'retained surplus' of production but is 'paper' wealth.

He continues by remarking about MMT: "But as a theory it is only a descriptive framework without any direct policy implications. The key point now is that MMT is being used as an argument to justify important policy changes".

I had the same impression when I first read Wray's MMT but saw the implications the theory had for politicians. And now as Mr. Minack writes - we are faced with a huge effort to justify not simply important policy changes but the entire structure of society. Reading the text of the Green New Deal indicates the extent of the revolution the authors hope to achieve..

He notes the early role of Abba Lerner in MMT theory. The roots are deeper - George Knapp and Chartalist theory - the academic conflict between Knapp and Chartalist school (meaning the State Theory of Money) and Menger and market creation school over the very nature of money, its origin and ownership. The issues involved go to the very essence of society. I try to include something of this in my review of Wray. And I have reviewed many other books on the history of money as well.
So MMT theory grows out of one of the major theoretical conflicts of the last century - namely between the State Theory of Money and the Market creation theory of money.

Then Mr. Minack opens another aspect of the situation. He writes: "If this policy approach (substituting fiscal for monetary policy) were implemented it would would be fatal to secular stagnation."
I do not understand what he means by 'secular stagnation'. But would much like to know because in his final sentence he continues. "Secularly stagnating was great for investors, a MMT era probably not so." Why?

It seems to me that both the American economy and the world economy are not 'stagnating' but exploding in a massive increase in standard of living, life span, and increased productivity. The real measurements of the condition of world population do not capture the statistics that make up GDP and the like.

Between these intriguing and important sentences he develops the implications of MMT policy. I have to agree, except with this. "It seems to me that MMT is the perfect theory for the times".
I believe it is a disaster for the way it can be and is being used to justify radically revolutionary social changes.

For an analysis of MMT as it is described in L. Randall Wray's lengthy text titled MMT see my review at

An extensive list of references and discussion of the recent relationship of MMT to the advocacy of "Green New Deal" is attached to that review.

L Randall Wray - MMT

Georg Freidrich Knapp - Wikipedia entry

Georg Knapp - The State Theory of Money

Michal Kalecki - Wikipedia entry