By Patrick Brogan
Is there a fix-all solution for all the economic issues and social problems they cause? Probably not, but it is clear the current mainstream economists and economic policies are failing us. The financial collapse in the last decade left many people seeking out alternatives. Modern Monetary Theory has become part of this search.
So what is it? In essence, it is a way of viewing the macroeconomy and how governments, central banks and commercial interests interact, “a framework understanding of the monetary system”. MMT looks at how money flows in an economy. We will get into that a bit more further on in the article.
For this article, we interviewed a man named Mike Hall based in Cork. Our initial interaction was an interesting one. I wrote an article called Inflation Explained back in June and Mike commented; “Please get some proper understanding of monetary systems… learn MMT”. So, we weren’t off to a good start. If I’m being honest, I didn’t feel totally comfortable writing that article as I don’t have a background in economics, and I felt maybe Mike did have a good point. To start with, I hadn’t a clue what MMT was or even stood for, I’d never heard of it. So, I wanted to learn more. Mike was kind enough to let me join his Facebook group on Modern Monetary Theory.
What Exactly is it?
Well, Mike has been studying it for about a decade now, so he is more than qualified to answer that question. “Really it is an understanding that explains correctly the operations of more-or-less all monetary systems, of all modern monetary systems including the Eurozone system, the UK system and the US Dollar system and so on. That then provides a number of macroeconomic framing understandings which follows on from understanding how the money flows in an economy, in and out of the banking system and so on, and the main actors there are the banking system and the government as a currency issuer or in the case of the Eurozone the European Central Bank as currency issuer and lender of last resort.
“It’s a little bit different in the sense that it is a factually based system, a factually based understanding and it’s also what is called an accounting methodology which basically means that the kind of analysis which MMT takes is to say okay where is the money at a point in time? So, that’s balance sheets or stocks if you like and where has it moved to from time at point one to time at point two? Typically we use a year as being of interest when we are looking at flows.”
A key feature of this theory is government spending and taxation. While most mainstream economists will argue that government spending and debt should be kept down, MMT takes a very different view. They believe that not only is any nation with a sovereign central bank spending more money a good thing, but they are actually obliged to do so. Governments give the order to issue the money. Rather than debt being a constraint to government and a noose that has to be paid back, it is necessary for an economy to function. Debt is a means of recording of how much money a central bank created to keep the economy growing. Debt is maybe the wrong word, deficit would be a more apt one and this deficit refers to the gap between what the non-governmental sectors created, in terms of employment, and what is needed for a functioning economy. A deficit is what the non-governmental sector chooses to save, it’s our surplus. Unfortunately, most of these savings have gone to the richer in society.
“We are interested in what are called the sectoral balances which means we want to know what’s the government’s balance sheet position, what’s the non-governmental sector position, that’s us — households and businesses–, and how that relationship shifts over time. So, we come into the concept here straight away of a government deficit, so immediately, from an accounting identity point of view we see straight away that if a government has gone into deficit over the period of a year from the beginning of the year to the end of a year, it has incurred a deficit then that means they have spent more than they have taxed back.
“What that also tells us; if a government sector has gone into deficit then a non-government sector must have gone into surplus, in other words, the households and businesses now have more net savings than they did the year before. That’s what a government deficit is. So, the government deficit is the non-government sector surplus and you know that is a good thing” because it means there is more money in our pockets and it “is important to realise that the governmental sector is the source of the net savings of households and businesses.” The next time you hear of governments spending money, don’t complain.
And where does this money come from? Well, a sovereign central bank can create the money without worrying about going bankrupt because they are answerable to themselves. “In fact, with a fiat currency, the government has no constraint there. What I’m talking about here is the monetarily sovereign countries of the world, like the United States and the UK.”
Now, it must be stated that money is not just created, important factors are considered first. We talked about this when I asked Mike if the US could just create a free healthcare system for everyone.
“Yeah. Yes, they could, absolutely, but there is another aspect to this and it is that we have established now that the US with a sovereign floating fiat currency is not constrained in any way. There are no fixed exchange rates that they need to worry about, they can issue how many dollars they want. So, sure. There are no financial constraints for the US Government to do that, but we have seen this and not just with the US Government but for any spending to be done in the economy. So, someone wants to get a loan and try and buy a new car or whatever the same condition applies; there has to be stuff to buy. There has to be available people to hire. So, the constraint is what we call real resources, that’s materials and labour available to buy.
“If we are looking particularly at the US, as you have already mentioned, they are looking very much at a single-payer system or a UK National Health Service type system where it is free at the point of delivery and the Government hires or pays all the people working to provide that service and the whole shebang. They can do that. The question then becomes; yes, the US Government does have the money, always, the question then must become well what’s the real resources position and that must depend on prevailing economic conditions. The interesting thing there is that health services are already provided, it’s just that people are having to pay for it themselves through insurance schemes and that type of thing, so from that, the first point that we note there is that the actual healthcare things are being provided. Okay, some people are not getting it, but there are certainly plenty of real resources. I don’t think that anybody doubts that the US has enough doctors or hospitals to provide healthcare for everybody, that’s fine. So far so good.”
“The only thing we need to be concerned about then from an MMT perspective is okay, if the Government now starts to pay, people no longer have to pay health insurance premiums or pay for doctors and so on at the point of delivery, then those citizens are going to have more disposable income available because they will save because they aren’t going to have to pay that money anymore. So, that is the area, that effectively amounts to you know, as it were an injection of money into the economy, it’s a transmission. So, the Government is going to take over and buy the health services and inject that money, new money, into the economy because that is always how a sovereign fiat government spends, it just creates, the money is created in the act of spending. That money is injected into the economy, so we need to ask ourselves the more general question; does the economy, does the real resources side of the economy have enough spare capacity, productive capacity, enough idle workers and so on or unemployed workers to be able to absorb that amount of spending increase?
“Nobody has actually done accurate figures on that. It’s a little bit nebulous as well because there is always a time thing. It’s not a question of you know, if I want to see if there is a new car available to buy, I’m probably going to wait a few months to get the model that I want rather than go around all the dealerships and I say I will pay an extra $5,000 for that car if you give it to me now. You see, that would be inflation, wouldn’t it?
“So, generally the sort of figures I am seeing about the US economy right now by MMT economists, and they would have a reasonably good ability to estimate that, is that the amount of spare capacity in the American economy is somewhere between 15% and 25% and that is, that would sort of represent how the American economy could develop, how much more output it could have over say a period of two or three years while they introduced, for example, single-payer while they moved towards doing that because obviously, it is going to take time to do that.
“The opinion amongst MMTers is that no new taxes would be required. If there wasn’t enough capacity, real productive capacity to absorb the new money, then what the Government would have to do is take some money out of that economy then and they do this through taxation. Taxation destroys the money in the act of taxes being paid. The opinion at the moment is it is very likely that the United States would, with a single-payer move to healthcare, be a substantial and very welcome economic stimulus and it would grow the US economy.”
MMT is progressive and seeking a more democratic society as Mike explains; “Make no bones about it, all the MMT academics and founders and most of the activists are coming from a progressive political or left viewpoint. We are all interested in pursuing the public purpose and having our governments pursue the public purpose to the maximum that is possible in society. None of us are looking for a centrally planned economy or anything of that kind. You got to say that’s a more democratic conversation to say look constraints are real resources here and resources in material terms, raw material and also resources in employment terms, in terms of people to hire. So, that’s what MMT focuses on. It moves the conversation over. And that’s got to be good for democracy.” Mike also added it is technically an apolitical system framework that can work with any size or any system of government society chooses. MMT is more of a methodology than ideology.
British Bailout and Bretton Woods
Despite the Modern Monetary Theory assertion that sovereign central banks don’t need bailouts, this is exactly what happened to the Bank of England in 1976. The IMF bailed them out. Mike said they actually didn’t need one because a few years previous they dropped the Bretton Woods System. Under this system, they had to consider exchanges rates. When that was dropped, the financial constraints were no longer a barrier.
The Bretton Woods System was a plan drawn up after World War II designed at stabilising the global economy. Most currencies were pegged to the US Dollar. It effectively became the global reserve currency and the US agreed to exchange any amount of dollars for gold, “$35 an ounce”. The spending on the Vietnam War strained this system and it was dropped in 1971. OPEC‘s decision to rise oil prices in the mid-70s threw the British economy off kilter
The Central Banks Are Creatures of Their Government
We’ve all seen these videos, haven’t we? The ones that claim that all central banks are privately owned and usually by the Rothschild family. This is simply not true according to Mike. “We see this quite a lot on the internet and it’s a bit of a shame really, but it’s got no legal basis. By that I mean you won’t find a legal scholar anywhere prepared to try make that case. It’s pretty absurd, really. They are not privately owned. Certainly not privately controlled in any sense. These are sovereign currencies.”
Why central banks were set up is key to understanding their function in a society. “The reality is that the Fed has no authority to issue money. What I mean by that is that the Fed is governed by acts of Congress and it cannot issue money without clear contractual obligation to repay. So, in other words, the central banks provide liquidity. They are the lenders of last resort. That is their function, to stop bank runs. If a bank runs out of liquidity, funds to hand out to customers, then the central bank comes in and says well, okay, you are obviously solvent it’s just that you don’t have enough working capital, if you like. What we are really talking about for banks is your bank that does not have enough working capital for all those customers’ demands. We’ll just provide it. By the way, we are only doing this on the basis that we know you are going to repay all this money, that you can cover this in future. That’s the point.” On rare occasions, the US Government can issue money to the banks, via its own central bank, outside of these terms. This is to stop an economic collapse, like they did in 2008.
This is important because it further underlines the concept of a nation with a sovereign central bank being unable to go bankrupt. “The likes of Greenspan and Bernanke have actually testified to that effect before the Senate. The basic plot there was Greenspan said the Government can make any payment to anybody, at any time. End of story. So, that’s the case. There is no bankruptcy condition. I mean, there never has been a bankruptcy condition.”
Where do these claims come from and is there a less than genuine motive for saying the central banks are owned by powerful families? “I have seen quite a few of them and you actually go straight to a blog page of somebody who is a gold trader and that’s the point I’m making. If somebody, take the likes of us in MMT, we have quite a considerable group of academics now worldwide and we got Bernie Sanders’ chief economic adviser, now a fellow of the Sanders Institute, Stephanie Kelton and we have these kind of people involved in MMT, but Christ, none of us have the kind of money to spend, to splash out on hour long videos to tell everyone whether the Fed is private or public with nice, high production standards. We just don’t have that money, you know? So, vested interests have got to be behind it. I mean neoliberalism and the status quo system works for the top end of town, it works for the capital-owning minority in society, not the ordinary, 90% or so citizens under the capitalism system that needs to work for a living.”
There a number of issues where MMT departs from mainstream economics and the government policy this informs. Firstly, Mike said the financial crash was not caused by ordinary citizens. There were many causes that led to this, but they all originated from greed from the bankers and financial institutions themselves. He warns that MMT is not an anti-fraud system and people have to be careful of lauding it as the answer to everything because if regulations are not in place every system is open to fraud and other criminal acts. That along with deregulation and giving triple A ratings to loans and mortgages that clearly were not deserving of it.
Where it differs is what to do with the potential use of a fiat currency and the advantages this can bring. As already mentioned, Mike said MMT wants government to focus on maximising potential output. But, they don’t do this, in fact, most governments around the world do the opposite. “Well, it turns out that they typically use an unemployment figure for what they consider stable inflation policy of about 5% or 6% of the working population.
“They don’t really cover this up and one of the most incredible things that I find is that the media, the mainstream media and politicians never pick up on this. What they are saying is, what these central bankers are saying is and the politicians, the political leadership all seem quite happy with this sort of approach, what they are saying essentially is alright folks, as soon as we see 5% unemployment what we are going to do is to start to inhibit the economy. We are going to start to close things down, we are going to start to pull more money out of the economy in the form of interest, higher interest rates on bank credit.
“The idea here is that what they are basically saying to the country is actually for one in twenty of you, there isn’t a job. But they are not even actually talking about it publicly and what’s more, and what I find really egregious, is that they then, the political leadership and the media, the neoliberal media and so on, they all start blaming the unemployed for being lazy and not trying to get a job when they are deliberately running the economy at 5% or 6% unemployment. That’s their target.”
Mike suggests a Jobs Guarantee system would be most effective for ensuring full employment. “So, the Job Guarantee is saying, we know people are available and most of them want to work. We want a society that has an agreed public sector provision of services. The Government provides education, roads and so on and those will provide public sector employees. We agree.
“With the Job Guarantee, we can’t have a separate system there that sort of second guesses if somebody loses a job in the economy we can’t automatically say well, we will plug them into the public services. Or, we can’t just say we will give them as a free worker to the private sector. That screws up the whole labour market thing and the knock-on effects you can imagine. You can’t sort of subsidise private sector workers.
“Well, what the Job Guarantee system says is let’s employ them where they can work, in a third employment sector and we’re going to call this the community and charity sector. Or the social employment sector and these jobs will be paid at the minimum wage rate. In Ireland, if we said minimum wage is €9.65 per hour, they would basically be employed at that rate. The idea would be nationally funded or sovereign monetarily funded ideally. The JG activities would be locally determined and controlled. The local organisations would set-up and administer Job Guarantee offers and payments. So, if a charity is involved with the elderly, making sure they get visited or whatever that would be a good JG job. They are publicly useful things.
“They are activities that we haven’t fully committed to permanently finance and resource fully as normal public services. There is a constant flux. Some jobs become redundant over time. [Due to automation, artificial intelligence and other technologies] The Jobs Guarantee will mop those up, those jobs that change over time. You’ve been made redundant, no problem, come over here. What would you like to do? We have a charity here and we will try match up your skills and what you would like to do with what’s available here. There’s a musical charity here that wants somebody to teach kids guitar after school. Oh, you play? Cool, can you teach? Can we match you up then and plug you in? They put money back into the economy, it’s what’s known as an automatic stabiliser for the economy and it has a tremendous social value for participants and for the communities and it maximises employment resources. That’s a core part of MMT.”
How Mike Got Into the World of MMT
None of the problems that created the economic crash have been addressed and the Eurozone is a particular worry as it was set-up in a very imbalanced manner. In a sense, this is what brought Mike into contact with MMT.
“I sort of looked on in horror at the great financial crash of 2008 and then subsequently what happened here in Ireland, Anglo-Irish Bank and all the corruption, publicly I’m obliged to say it with a small c, you know, where all of that was like the Wild West. They were just playing fast and loose. The Eurozone being the thing that it is, it’s a very poor structure. As we know, the German economy is a net exporter. So, they are a net importer of Euros. Because of that, they are awash, they and their financial systems are awash with money and nothing much to do with it and they shovel it across to the Irish banks because we are all in the Euro system and nobody was looking.
“And then the thing is the European Central Bank and the European Commission and so on, the Troika, that’s Ireland’s problem they should have been watching their own banks there. The European Central Bank has got all the data. Why was all that money getting funnelled through? Do you not think that someone there should have been just a little bit curious about all these tens of billions of Euros, and relative to Ireland’s GDP and relative to its Eurozone size all these billions, tens of billions of Euros going into Ireland to be invested into what, exactly? Property? Land? Existing assets? There wasn’t any chance of a bubble growing there, Mr ECB?”
“I looked on at all this in horror and thought what on Earth is going on here? I just thought okay, I am now redundant and I’ve got a bit of time. I understand a little of financial accounting and all that kind of thing and so I thought I’m going to have a look at this. I’m going to see if there’s something there. Why did that happen and I just fell upon MMT. I read a paper by a Dutch academic Dirk Bezemer I think his name is, at the University of Maastricht interestingly enough, a rather ironic place for all this to come from. He wrote a paper and said who did see this then?
“None of the mainstream economists, even a matter of weeks before Lehman’s went belly up, none of them had seen it coming and this was their “Great Moderation”. This is what they were after. Not that they just didn’t see this coming, this is what they were after, this is the “Great Moderation”, folks. We’ve got the stability tapped here, man. No boom-and-bust now. No 1930s, we’ve done it. Three weeks later, Lehman’s crashed.”
Bezemer credited economists Steve Keen of Kingston University and Michael Hudson of the University of Missouri, Kansas City with seeing it coming. Not only did they see it coming, they had the methodology to say how and why. It was Hudson that led Mike to MMT as UMKC is very influential in the forming of MMT. Another author Mike closely follows is Australian Bill Mitchell who he describes as prolific. His site can be found here.
This certainly is fascinating. You realise after a while most of the world’s problems stem from economics. What MMT is saying is; all the proper systems are in place, it’s just that they are being used badly. Obviously, the private banking sector needs cleaning up as it is still corrupt and liable to cause more problems down the road. What MMT is trying to achieve is a fairer, more democratic society. Who can argue against this?
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