|
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
|
|
 |
|
|