Mar 29 2019

Modern Monetary Theory in 500 Words Or Less

As a writer I’m constantly plagued by the sneaking suspicion the nobody reads my stuff, perhaps because I’m too prolix and verbose (prolix suggests unreasonable and tedious dwelling on details, verbose implies dullness and obscurity). If it’s a complicated subject which I know in depth it’s hard to restrain myself from a 2500+ word tome (dK Button Pushing, History), a little over 5x a typical 500 word Op-Ed.

So tl;dr. I get it. But writing short is hard.

I didn’t have time to write a short letter, so I wrote a long one instead. – Sam Clemens

Randy Wray found an interesting piece by James Montier (unfortunately presented in .PDF) that, while longer in total, contains a 400 word summary of the basic principles of MMT in 7 bullet points.

Why Does Everyone Hate MMT
By James Montier, GMO
March 25, 2019

  1. Money is a creature of the state. Money is effectively an IOU. Anyone can issue money; the trouble is getting it accepted. The ability to impose taxes (or other obligations) makes a country’s ‘money’ valuable.
  2. Understanding the monetary environment is vital. The monetary regime under which a country operates matters. Any country that issues debt only in its own currency and has a floating currency can be thought of as being monetarily sovereign. This means it cannot be forced to default on its debt (i.e. the U.S., Japan, and the UK, but not the Eurozone or most emerging markets).
  3. An operational description of the monetary system is critical. Understanding that loans create deposits (which in turn create reserves, aka endogenous deposits create loans. For example, knowing that government deficit spending creates reserves and drives down interest rates is vital to understanding Japan’s bond market.
  4. Functional finance, not sound finance. Fiscal policy is much more potent than monetary policy. Fiscal policy should be aimed at generating full employment while maintaining low inflation (rather than, say, achieving a balanced budget position). A Job Guarantee scheme is an example of a useful policy option to effect this outcome (acting like a buffer stock in a commodity market) in the eyes of MMT.
  5. Limits are real resource and ecological limits. If any sector of the economy pushes it beyond the limits of capacity, then inflation will result. If a government spends too much or taxes too little, it can create inflation, but there is nothing unique about the government sector in this regard. These are the limits that matter – people, machines, factories – not ‘financing’ constraints.
  6. Private debt matters. Even in a monetarily sovereign state, private debt matters. The private sector cannot print money to repay its debts. As such, it has the potential to create a systemic vulnerability. Think Minsky’s financial instability hypothesis: stability begets instability.
  7. Macro accounting (Godley style) keeps us honest. One sector’s debt is another’s asset. So, the government’s debt is the private sector’s asset. Understanding how one sector relates to another using a sectoral balance framework is very helpful, as is understanding the Kalecki profits equation, or the way reserves work in a financial system. Accounting isn’t glamourous and identities shouldn’t be taken as behaviours, but they can help us spot unsustainable situations.

Ok, it gets a little arcane in patches but the reason you have “terms of art” is to encapsulate information in a short hand form. You can look up the authors referenced if you like and the concepts, but how long do you want to study Economics? I took the minimum for my History Major because I’m far more interested in Sung Dynasty landscapes and ceramics.