Posted by: Dirk | February 18, 2019

The Economist misrepresents MMT

I have read the articles that The Economist published on Modern Monetary Theory (MMT) in the current edition of the liberal-leaning magazine (here and there). I am not happy with the reporting, which includes false statements in general and also misrepresentations of what MMT is.

First of all, let me point out that MMT is not a “left-wing doctrine”, as claimed by the paper. Defining a doctrine as something that is taught, as the Merriam-Webster dictionary does, means that MMT is indeed a doctrine – but so is neoclassical (mainstream) economics. What I do not agree with is “left-wing”. MMT is a scientific theory about how money “works” – how it is created and destroyed, how it is spent and received and what follows from this.

In my own book on “Modern Monetary Theory and European Macroeconomics”, which was published by Routledge in 2017, I discuss the balance sheet approach to macroeconomics that MMT truly is. Focusing on the Eurozone, there is a lot of discussion of money creation, but there is nothing political in it apart from the usual presuppositions – that we want full employment and price stability. If somehow this constitutes “left-wing” politics then it is only fair to say that the current mainstream approach is “right-wing” politics – or is it not?

I think that The Economist makes a grave error when it mistakes a scientific theory, which is falsifiable, for a “left-wing doctrine” (that is not). We need to talk about what money is, where it comes from, what it does, and how it is destroyed. We need to talk about how it changes the way that people think and act. We need to discuss the legal dimension as well. All of this cannot happen as long as The Economist claims – wrongly –  that MMT is a doctrine.

The other issue that I’d like to point out is that there are many statements in the articles on MMT that are plain wrong or confused or made by people who have no authority. Take this paragraph, for instance:

Jonathan Portes of King’s College, London, points out that under mmt a country facing a combination of weak growth and high inflation, as Britain did in 2011-12, would require spending cuts rather than the increased stimulus called for by Keynes.

Who is Jonathan Portes? I have never heard of him. Given his statement I do not think that he understands MMT, so why would The Economist let him act as an interpreter for MMT? Couldn’t they find an MMT economist and ask them what MMT economists would have counseled in Britain in 2011-12? This statement construct an MMT straw man, and a clumsy one at best. “Under MMT”? MMT is not a policy regime, but a theory of how money works. The UK cannot be “under MMT” or “off MMT” since MMT is a description of reality and not a policy proposal.

Apparently, the writer believes that since neoclassical economics supports neoliberal society, the same must be true for other theories. That is wrong. Where neoclassical theory is normative – it tells you how things should be: free markets, no/little government interference, etc. – MMT is descriptive. Once you have understood how money works you will find that it should be much easier than you thought to attack unemployment and to achieve price stability, but that is not MMT.

You can build policy proposals using the insights of MMT, but then these are not “MMT”. They have “MMT inside” in that they rely on the framing of MMT. Policy proposals based on MMT include The Green New Deal, the Job Guarantee, the Euro Treasury and many more.

The last issue I want to raise has to do with the way the article misrepresents MMT. Here is a paragraph which covers what supposed is MMT:

Some radicals go further, supporting “modern monetary theory” which says that governments can borrow freely to fund new spending while keeping interest rates low. Even if governments have recently been able to borrow more than many policymakers expected, the notion that unlimited borrowing does not eventually catch up with an economy is a form of quackery.

MMT does not say “that governments can borrow freely to fund new spending while keeping interest rates low”. There is no MMT author that I know that has said something like this, and I have been around for ten years. There is no paper or book where you can find this, and I challenge The Economist to show me their source. If they can’t I accuse them of sloppy reporting and misrepresenting a scientific theory.

What is the problem with that sentence? That is very easy to answer: the framing. MMT economists know that the government does not have to borrow in order to spend and therefore does not “fund new spending”. Actually, it can’t even do it, even if it wants to. In a monetary system with a sovereign currency, which the UK has, the government just spends the money by crediting the account of the seller’s bank with reserves. This is the Bank of England’s job.

The Treasury has a publication which confirms this story.

5 Funding

5.1 The framework for public expenditure control

5.1.1 Most public expenditure is financed from centrally agreed multi-year budgets administered by the Treasury, which oversees departments’ use of their budget allocations.

There you have it: “Public expenditure is financed from […] budgets administered by the Treasury”. It does not say: Public expenditure is financed from bond issuance. It does not say: Public expenditure is financed from taxes.

So, in an enlightened world where science helps society to make the right choices, you would point out that government spending in the UK is not financed through either taxation or bond issuance. That is a technical insight that is falsifiable. The Parliament can ask the Treasury whether this is true or not and have it explained to the public if it feels like this is a good idea.

As John Maynard Keynes once said: “I give you the toast of the Royal Economic Society, of economics and economists, who are the trustees not of civilization, but of the possibility of civilization”. Whether a society is civilized depends, among other things, on the way that scientific debates are conducted. The Economist just put the UK debate on progressive economic policy on a slippery slope, claiming that a particular school of economics science constitutes “doctrine” and then misrepresenting that school’s views. They should know better than this.

Posted by: Dirk | February 8, 2019

Re: “MMT Sounds Great In Theory…But”

An article appeared this week which runs a critique of MMT. It is basically this (my highlighting):

MMT has a cost that we have yet to hear about from its proponents.

The value of the dollar, like any commodity, rises and falls as the supply of dollars change. <<< For instance if the government suddenly doubled the money supply, one dollar would still be worth one dollar but it would only buy half of what it would have bought prior to their action. >>>

This is the flaw MMT supporters do not address. MMT is not a free lunch. MMT is paid for by reducing the value of the dollar and ergo your purchasing power. MMT is a hidden tax that it is paid by everyone holding dollars. The problem as Michael Lebowitz outlined in Two Percent for the One Percent, inflation tends to harm the poor and middle class while benefiting the wealthy.

Our fear is that MMT, which promises “free college,” “healthcare for all,” “free childcare,” and “jobs for all” with no consequences, instead delivers inflation, generates further wealth/income inequality, and ultimately greater levels of social instability and populism. Just as has been seen in every other country which has run such programs of unbridled debts and deficits.

The claim that the government could suddenly double the money supply and that this would lead to a depreciation of 50% of the US dollar is theoretically unsound and empirically wrong. Let us have a look at the relationship of money supply (I use all aggregates that I can get) and real exchange rate (data from FRED):

Monetary base:








I think that you don’t have to be an economist or have done a PhD involving econometrics (economic statistics) to see that the claim “doubling the monetary supply decreases the dollar’s exchange rate by 50%” does not hold at all. While monetary supply goes up almost all of the time, the exchange rate swung back and forth. There does not seem to be any causal relationship at all. This is not a surprise: almost all scholars of economics point out that the trade-weighted exchange rate is influenced by interest rates and expectations of interest rates. Textbooks of international economics contain discussions of (uncovered) interest parity and other issues, but there is no textbook that I know of that claims that monetary supply drives “the” exchange rate. Given the empirical picture above it is quite reasonable.

The other “arguments” against MMT belong firmly into the territory of “monetary cranks”, so that I will stop here. MMT, right from the start with Warren Mosler’s 1997 paper “Full Employment and Price Stability” has addressed concerns of inflation. Also, MMT does not promise anything. It is that when people understand the way the monetary system works – and THAT is what MMT is about – then certain problems seem to have rather simple solutions.

Posted by: Dirk | January 7, 2019

Treasury Deposit Receipts (TDR) in the UK in 1940

This is from a paper by Geoff Tily in 2009:

In WWII Keynes and his HM Treasury colleagues devised Treasury deposit receipts that formalised processes for borrowing from banks. Howson is one of the few authors to discuss this vital tool of government policy:

The introduction in July 1940 of Treasury Deposit Receipts (TDRs), by which the major banks were obliged to lend directly to government added a new instrument to the floating debt, enabling the authorities to borrow on short term without either increasing the Treasury bill issue or having recourse to Ways and Means Advances. Of longer maturity (six months) than three-month Treasury bills and non-marketable, TDRs were less liquid than Treasury bills and carried a slightly higher interest rate (1 1/8%). This wartime expedient [14] was, as Sayers put it, ‘concocted . . . [so as] not to disturb the customary relationship [between banks, discount houses, and the Bank of England] and customary “ratios” of the peacetime [banking] system’, but it was nonetheless seen as a revolution in fiscal policy, at least in Labour Party circles … (Howson, 1988, pp. 252–3)

TDRs were quickly discontinued after the war, in spite of Keynes’s and HM Treasury’s recommendations to the contrary.

This is very interesting since apparently here the power balance between banks and the government was readjusted. It is a different arrangement from what the US did in WWII, where it was clear that “taxes for revenue are obsolete” (FRBNY chairman Beardsley Ruml). However, the logic is the same. You could just add some central bank deposits to the Government’s account and then it could spend. If your central bank won’t create them for you, you can force private banks to surrender their central bank deposits in return for more central bank deposits in the future – Treasury Deposit Receipts. I can imagine that the Bank of England was allowing banks to use the TDRs as collateral for borrowing.

For some reason, was selling the “Selected Essays in Economics” of Knut Wicksell and edited by Bo Sandelin (two volumes) for €7.51 per volume, so I had them shipped over to Germany. They arrived this morning and I went to read the book review of “The State Theory of Money” in volume II on pages 210-219 (Some pages are readable at Google Books, btw). It was originally published in Ekonomisk Tidskrift in 1907, two years after Knapp’s book.

Wicksell, very much concerned with the connection between the state of credit and the interest rate and, very importantly, the changes in the level of (consumer goods) prices, does not like that Knapp aims to have a fixed exchange rate as the ultimate goal. This is one of the instances of the debate of what anchors a currency: a fixed exchange rate or a stable domestic price level.

Nevertheless, Wicksell agrees with Knapp and ends with this: “it can probably be said that in terms both of its content and its form – though most of all its form, its refined dialectical style, the elegance which the brief account given above has only been able to hint at dimly – it is to be counted among the pearls of economics literature.

There is more on Wicksell and MMT in my working paper – written with Nicolas Barbaroux – published here.

Posted by: Dirk | January 3, 2019

Minsky in 1993 on the Non-Neutrality of Money

I have read an article from Hyman Minsky which is only 6 pages long but contains some major arguments of his thought. There are also some very nice quotes to take out of the text. The article was published in the FRBNY Quarterly Review issue of spring 1992 on pages 77-82. Minsky attacks equilibrium economics:

The essential problem is whether any macroeconomic theory that is constructed upon a set of assumptions from which the proposition that money and finance are neutral is derived can be a serious guide to understanding our economy and to the development of policies for our economy.

This, by now, is common knowledge. Macroeconomics has failed, and only entrenched interests and the unwillingness to change when confronted with new empirical evidence that should lead to paradigm change is what is blocking the path of Minskian economics. Minsky writes:

The conventional economic paradigm is not the only way economics interrelations can be modeled. Every capitalist economy can be described in terms of sets of interrelated balance sheets. Except for two sets of entries – those that allocate the real capital assets of the economy to particular balance sheets (of firms) and those that allocate the net worth of the economy to other particular balance sheets (of households) – every asset is a liability in another balance sheet and every liability is an asset in other balance sheets. Balance sheets balance.

This is essential Minsky. For me, this approach is the only way to go forward. Either you are dealing with with assets and liabilities and trying to make sense of the macroeconomy or you are abstract and non-realistic, prone to repeat the mistakes of the past. As Minsky writes:

Balance sheet relations link yesterdays, todays, and tomorrows;

Again, this is fundamental. The economy is structured by legal constructs that potentially trigger cash flows, and these contracts were made mostly in the past, some in the present, and extend into the future. Minsky is lead to a very important question:

For economics the appropriate questions is, How do rational individuals behave in an irrational world, that is, a world they do not fully understand?

The center of analysis is the money-making process:

The fundamental borrowing and lending act in this system is an exchange of “money” now for “money” in the future.

He then foresees what Richard Koo has called the yin and yang phases of the economy:

We also need to be able to swing from periods in which the private economy dominates in the determination of gross profits and periods in which public debt-financed spending takes over the burden of sustaining gross profits.

This is brilliant. There is more in this short article, so I urge readers interested in a short introduction to Hyman Minsky to read this six-page article.

Posted by: Dirk | December 4, 2018

Progress in economics?

This is a quote from John Maynard Keynes from the General Theory, Chapter 22, Section 3, p. 322:

“We reach a condition where there is a shortage of houses, but where nevertheless no one can afford to live in the houses that there are.”

And here is a quote from an anonymous Spaniard from a Stake holder interview taken from this 2013 publication:

“The government has capacity for offering more social housing than it currently does. […] Currently there are hundreds of thousand empty houses and hundreds of thousands of families with extreme difficulties affording a mortgage or a rent.”

So, there seems to be an even more impossible situation today compared to the 1930s. We have houses in abundance in Spain but yet “no one can afford to live in the houses that there are”. Or perhaps not everyone.

It is almost 2019 yet. Economics still needs to change.


I’m helping to organize a conference on MMT with the topic “Why money matters”. It takes place in Berlin on February 1-2, 2019 at EBC Hochschule. The Call for Papers is open until December 31, 2018 and registration opens on December 1st. Find more information on

Posted by: Dirk | November 28, 2018

Will the price of Bitcoin fall to zero?

Much has been written about Bitcoin, and the recent loss in price (in USD) has led investors to ask where this will all end. As an economist, I would say that it is quite likely that the price of Bitcoin will be zero.

When a currency – which Bitcoin is not – experiences a fall in the exchange rate to the USD, there is usually some demand for it at a lower price. Economic units with debt in that currency and assets that are denominated in others find it profitable to pay off debt while the exchange rate is low. This is what normally stops the decline of hard currencies. Speculation about this can dampen the over- and undershooting that we see with softer currencies, but it is roughly the same game.

The price level can react to the exchange rate, but normally prices are set in domestic currency. Therefore, changes in the exchange rate do not influence domestic prices much. This is an empirical fact, as the up and downs of the oil price in the last twenty years did not cause wage rates and prices to follow along.

Now, Bitcoin is different. When the price of Bitcoin falls, everything will be more expensive in terms of Bitcoin. Changes in the price of Bitcoin are translated into inflation one to one. With Bitcoins price falling, people holding Bitcoins and using them to buy things will experience hyperinflation. They need more Bitcoins to pay for the same basket of goods every day. This is not a nice feature. Where does this end?

If there are no debts denominated in Bitcoin, then it is obvious that the price of Bitcoin shall be driven to zero. Once the ship starts sinking – the price of Bitcoin goes down – it becomes clear that there is no stabilizing demand, like with currencies. Nobody is forced to use Bitcoin for tax payments either, as with normal currencies. Once Bitcoin goes down, expectations will be that it goes down further. Who would want to hold an asset with a declining price and no reasonable theory of why it should go up in price?

The price of Bitcoin should fall to zero. When, nobody knows.

Posted by: Dirk | June 2, 2018

Seminario en la Universidad de Zaragoza

Invitación Seminario Knapp.png

I recently read the book by the UK sociologist Zygmunt Bauman and want to comment on a few things that I really like and a few I did not. The book starts with interesting chapters (originally, articles) on, among other things, Amartya Sen’s Theory of Justice. Bauman writes on page 22 (source):

“Just society” is a society permanently sensitive and vigilant to all cases of injustice and undertaking to take action to rectify them without waiting for the search of the universal model of justice to be completed”. In somewhat different and perhaps simpler terms, a society up in arms to promote the well-being of the underdog; the “well-being” including in this case the capacity of making real the formal human right to decent life – recasting “freedom de jure” into “freedom de facto”.

This is very interesting, almost revolutionary in today’s Western societies. Yet I think that the societies we live have largely been built by people promoting the well-being of the many, assaults on the welfare state and the public sector in general in the last few decades notwithstanding. I believe there is today a very large gap between what we think is how societies, and with it, economies work and they way the actually work. Financial crises, trade wars, polarization and inequality do not spring up from out of nowhere. They are symptoms of underlying processes. Bauman picks up this topic on page 50 (source):

There were, in other words, “natural” limits to inequality and “natural” barriers to social exclusion; the main causes of Karl Marx’s prophecy of the “proletariat’s absolute pauperisation” turning self-refuting and getting sour, and the main reasons for the introduction of the social state, a state taking care of keeping labour in a condition of readiness for employment, to become a “beyond left and right”: a non-partisan issue. Also the reasons for the state needing to protect the capitalist order against the suicidal consequences of leaving unbridled the capitalists’ morbid predilections, their fast-profit-seeking rapacity – and acting on that need by introducing minimal wages or time limits to the working day and week, as well as by legal protection of labour unions and other weapons of workers’ self-defence.

This should be undisputed, but probably it is not be the mainstream view of today, at least not in Germany and those countries in Europe that were left relatively unscarred by the last economic crisis.

Now we come to the main issue that I do not agree with, written on p. 76 (source):

Watching the already exorbitant yet still fast rising federal debt of the US, one may feel excused if wondering whether Bin Laden and his successors might have managed to take a hint and learn the lesson, and are set to repeat Reagan’s feat.

The idea that the federal debt of the US is a problem is moot. The US is issuer of its own sovereign currency and hence faces no budget constraint. Stephanie Kelton wrote as much in her LA Times article last year:

In other words, the government spends money and then collects some money back as people pay their taxes and buy bonds. Spending precedes taxing and borrowing – STAB. It takes votes and vocal interest groups, not tax revenue, to start the ball rolling.

If you need proof that STAB is the law of the land, look no further than the Senate’s recent $700-billion defense authorization. Without raising a dime from the rest of us, the Senate quietly approved an $80-billion annual increase, or more than enough money to make 4-year public colleges and universities tuition-free. And just where did the government get the money to do that? It authorized it into existence.

Whoa, cowboy! Are you telling me that the government can just make money appear out of nowhere, like magic? Absolutely. Congress has special powers: It’s the patent-holder on the U.S. dollar. No one else is legally allowed to create it. This means that Congress can always afford the pony because it can always create the money to pay for it.

Now, that doesn’t mean the government can buy absolutely anything it wants in absolutely any quantity at absolutely any speed. (Say, a pony for each of the 320 million men, women and children in the United States, by tomorrow.) That’s because our economy has internal limits. If the government tries to buy too much of something, it will drive up prices as the economy struggles to keep up with the demand. Inflation can spiral out of control. There are plenty of ways for the government to get a handle on inflation, though. For example, it can take money out of the economy through taxation.

So, if you want to create a “just society” as Zygmunt Bauman envisioned it, there is no financial problem of “running out of money” or “rocketing public debt”. There are internal limits – you can only use the resources that government can buy for its money – and there is inflation, which can be handled by taxing people (which we already do).

Those reading Zygmunt Bauman should be warned. I applaud Bauman the sociologist for his clear thought and ideas. However, I would not recommend Bauman the economist who seems to believe that national governments like that of the US can be driven into bankruptcy by “over-spending”.

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