Monetary sects.

Modern Monetary Theory, Positive Money, other monetary sects.

Modern monetary theory (MMT).

1. L. Randall Wray.

MMT: A Doubly Retrospective Analysis

. . . it all goes back to PKT (Post Keynesian Thought) in the early 1990s—the first internet discussion group I ever heard of. It started off with all the stars of heterodox economics . . . But if we want to credit one thing for spreading MMT all over the planet, it was Bill’s blog. While the academic journals and the policy makers and the mainstream press could mostly ignore us, the blogosphere was wide open to new ideas.

2. Who’s Afraid of a Little Inflation? Kevin Drum, 19 February 2012.

Modern Monetary Theory . . . roughly speaking, says government deficits are always good unless there’s a risk of runaway inflation. Jared Bernstein comments . . . “This emphasis on using the tools of government, including the ability to print money and run large budget deficits in times of market failure, is MMT’s most important contribution to the current debate.”

Now this I don’t get. Sure, MMT says we should run large budget deficits during severe recessions. But so does Old Keynesianism. And post-Keynesianism. And New Keynesianism.

. . . The more important side of MMT is its insistence that we should run substantial deficits even when the economy is in good shape.

Accessed August 2015.

. . . if the . . . budget deficit goes up then either household savings must go up, the trade deficit must go up, or private investment will decrease.

Accessed August 2015.

Austrian School economist Robert P. Murphy . . . observes that the MMT claim that cutting government deficits erodes private saving is true only for the portion of private saving that is not invested, and argues that the national accounting identities used to explain this aspect of MMT could equally be used to support arguments that government deficits “crowd out” private sector investment.

5. Modern money theory (MMT): the emperor still has no clothes.
Thomas I. Palley, February 2014.

. . . MMT asserts that the . . . short-term policy interest rate should be set at zero . . . The interest rate is . . . an important policy instrument for addressing instability that can arise from financial capital flows and flight. . . zero interest rate policy . . . throws away a vital policy instrument in a world where policy makers already confront the challenge of having more targets than instruments.

. . . MMT currently has appeal because it is a policy polemic for depressed times

6. Alison Marshall, 11 September 2016.

The surge of interest in the Citizens Income or Basic Income Guarantee is opposed by MMT supporters who prefer the job guarantee strategy (JG). They think the JG can be used to provide economic stimulus without the inflation that discredited Keynesian stimulus policies in the 1970s.
( ).

“It is a program that stabilizes the incomes and purchasing power of individuals at the bottom of the income distribution . . . Strong and stable demand . . . stabilizes the rest of economic activity.” ( , accessed September 2016).

Other economists have other ideas about the causes of economic instability. Some, following Schumpeter, emphasise the disruptive effect of new technology, others think that demography is an important influence. Vince Cable has commented that it would also be useful to take account of imported inflation. ( ).

The wikipedia contributors admit that the JG alone is inadequate. Other policies would be needed to control inflation:

“The JG wage would be adjusted in line with productivity growth to avoid changing real relativities. Its viability . . . relies on the fiscal authorities reining in any private wage-price pressures.”

And they don’t seem to agree about what is meant by “full employment”:

“The aim is to replace unemployment and underemployment with paid employment (up to the hours desired by workers)”

So if zero paid employment is desired, unemployment is tolerated?

But “A range of income support arrangements, including a generic work-tested benefit payment, would also be available to unemployed people, depending on their circumstances, as an initial subsistence income while arrangements are made to employ them.”

So income support may be work-tested, so unemployment may not be tolerated.

I don’t disagree with job creation in the public sector, if it is affordable, but I think work should be allocated by self-selection not compulsion. If work doesn’t pay, there isn’t much self-selection. If it does, then wages could be allowed to adjust to the level at which the supply of labour matched the demand.

The most logical way of making work pay, with the least fuss, is with Citizens Incomes ( ). They would be less judgmental and no more inflationary than the job guarantee strategy.

Positive Money.

Accessed October 2013.

Fractional-reserve banking refers to a . . . system where the bank holds a fraction of the demand deposits it receives, and loans out the rest. It is the primary mode of operation of nearly all retail banks in the modern world . . . before there was regulation of fractional reserve banking by the Federal Reserve things were much more exciting for depositors . . . with . . . constant banking crises and all.

. . . In a system of fiat currency, banks’ monetary base . . . is made up of money backed by the central bank. However, when banks make loans above their reserve (which is pretty much always), it adds to the money supply . . . Fractional reserve banking is the subject of numerous conspiracy theories. . . Sometimes these theories are just the result of people failing to understand abstract concepts.


. . . what banks do . . . it’s not mostly about money creation . . . there is a tension between the needs of individual savers – who want ready access to their funds in case a sudden need arises – and . . . productive investment, which requires sustained commitment of resources.

Banks can largely resolve this tension . . . normally only some depositors want to withdraw funds in any given period . . . The problem, of course, is the vulnerability of such a system to self-fulfilling panics: if people believe that a bank will fail, everyone will . . . want to withdraw funds at the same time . . . trying to meet those demands through fire sales can in fact cause the bank to fail.

This then leads to the need for policy: deposit insurance . . . lender of last resort facilities . . . bank regulation . . . And . . . the FDIC-plus-regulations system kept us free of banking crises for 50 years after the Great Depression; it was only when financial deregulation eroded that system that the bad stuff started happening again.

. . . Any arrangement that borrows short and lends long . . . is a bank in an economic sense – and is potentially subject to bank runs. . . what we had in 2008 was mainly a run on shadow banks, on non-depository institutions.

So, are you going to ban fractional reserve strategies by money market funds? . . . repo? Auction rate securities? Where does it stop?

. . . it’s difficult even to regulate shadow banking. But if . . . you try to ban banks from . . . banking, all the banking is going to take place in the areas not subject to the ban, leaving you more vulnerable to crisis than before.

3. “Positive Money”, March 2014.

My objections to the Positive Money campaign (PM) are:

a) I don’t agree that credit cycles are the main cause of economic instability.
b) I don’t agree that the PM reform will stop the creation of money by private banks.
c) PM aren’t targeting the kind of banking that was a factor in the 2008 financial crisis.
d) They ignore the power of spending which isn’t influenced by lending.
e) They reject the money multiplier model of broad money creation.

Other monetary sects.

1. Should we replace Mervyn King with a robot? Seán Keyes, 13 January 2012.

. . . the poorer world could become the richer one, with a collective change of mindset. Here is where our market monetarist central bank comes in. Its role is as the great persuader. It creates those expectations of prosperity.

. . . What market monetarism does not say is that monetary policy can induce ever-higher levels of growth. . . your existing stock of factories and workers can only generate so much activity . . . after which point new money stimulates prices and not output.

. . . The idea is . . . to suppress demand-side recessions, unnecessary recessions. Supply or productivity shocks – say higher oil prices or a tech boom or a natural disaster etc – can’t be avoided.

2. Roger Bootle, 5 February 2012.

There is something about monetary economics that . . . attracts more than its fair share of cranks. . . the behaviour of the monetary system is at the centre of debates about economic management and the role of the state. . . monetary fluctuations can cause booms and busts which affect everyone.

. . . The arch-monetarist, Milton Friedman, . . . advocating that the central bank should maintain a . . . specified rate of growth of the money supply . . . said that by not doing this the US Fed caused the Great Depression.

By contrast, for most of the post-war period, the orthodoxy has been that the monetary system has to be managed through a combination of interest-rate tweaks and regulation . . . The financial crisis has threatened this orthodoxy.

. . . outside the orthodoxy, radicals argue that we should take the monetary system away from the state altogether: no regulation of banks, no central bank, no state-issued notes.

. . . For purists, gold offers the answer . . . a monetary system based on gold is likely to display long-run price stability, although this may still mean enormous price instability in the short term. . . the expanding and contracting edifice of paper (or electronic) money rests on a foundation of gold. . . The stockmarket bubble which ended in the Wall Street Crash of 1929 occurred while America was on the Gold Standard.

. . . the Austrian route. . . that instability should have free rein. According to this view, the error of the post-war years has been perennially to avoid downturns by pumping in more money and resorting to ever lower interest rates, and now, ever more QE. . . Surely the Alan Greenspan way of countering every financial downturn with even easier money was partly responsible for where we are today.

. . . People of a certain cast of mind find modern economic life unacceptably messy, so they seek a complete monetary solution. In pursuit of their quest, they often take on the characteristics of a religious sect’s veneration of the sacred texts. . . In practice, we seem, quite rightly, to be heading for a separation of banking functions; increased preparedness for non-core banks to collapse, and tighter regulation of the whole financial sector.

On top of that, I would advocate a stronger emphasis on asset prices and financial stability in the setting of interest rates. Yes, compared to the radical solutions on offer, it is messy – but then, so is the world.

Further reading.

Inflation, interest, and the supply of money: history, currencies, and targets.
Inflation, interest, the multiplier, broad money, quantitative easing.
Money-printing, currencies and trade, sectoral balances, Brexit.
Inflation targeting, deflation, alternative targets.