Thanks for the link, David. I’ll try the same exercise as you.
Modern monetary theory is a heterodox economic theory which states governments should not worry about government borrowing but be willing to aim for full employment. Full employment should be achieved through expansionary fiscal policy and financed by creating money.
That is an incorrect and incomplete interpretation. The interpretation, crucially, doesn’t identify the very basic element of MMT, which is that it is a description of the source of money in a country with a sovereign currency . Having identified the source it then describes how the money gets from its source into the economy.
This first paragraph doesn’t mention that at all.
All this paragraph describes, not particularly accurately, is how the basic knowledge can be used to drive a particular policy. In fact, on reflection, I think that it is a completely muddled understanding of MMT ‘s insights into government ‘borrowing’. That ‘borrowing is a misnomer in that the government, with its power to create and issue its sovereign currency has no need to borrow any money at all. That far from ‘borrowing’ it is, by the issue of bonds and provision of savings accounts, it is providing a safe facility for investing personal and institutional funds. Payment of interest at a fixed rate is guaranteed, as is full repayment of the principal invested either on demand or after a fixed term. Investment in any other instruments always has risk attached. The ‘national debt’, which is calculated on the extent of ‘borrowing’ represents the amount of money the government has issued into the economy which has not been taxed back. But as this is money which people have put by for future use , if it were to be repaid what would people and institutions do with the money they received?
MMT argues the only limit of higher government borrowing is the effect on inflation. Thus if the economy is depressed with unused resources, the government should immediately create jobs through creating money to finance extra government spending.
As this is basically Keynesianism I can’t see a problem with it.
As the economy gets close to full capacity and inflationary pressures start to rise, the government should increase taxes to take excess money out of the circular flow and thereby reduce the budget deficit.
The bit about reducing the deficit isn’t really anything to do with taxing to control inflation. And as inflation has more than one cause it should be stressed that taxation will only control inflation caused by insufficient resources available to purchase. It can’t do anything about inflation caused by pricing shocks, such as OPEC’s oil price rises in the 1970s, or increased interest rates.
MMT argues the traditional view of government borrowing is a mistake. It is not really ‘borrowing’ like a household but the government is ‘borrowing’ using its own debt instruments.
I’m mystified by this statement. No, it isn’t ‘borrowing’ as in a household or business. But the bit about ‘its own debt instruments’ is obscure.
What is interesting is that government bonds, issued at a set price can be subject to secondary trading (i.e speculation) and subsequently sold at a higher or lower price.
Some MMT theorists argue that bond issuance is unnecessary as it is just a hangover from gold standard days. They propose a straight government savings account would do the job.
MMT is a controversial economic theory, criticised for ignoring effects of crowding out
‘Crowding out’ is the market economists belief that government spending depletes the resources available to private enterprises. I’m not altogether sure of its validity as government spending always involves spending with private enterprises, but I suppose there may be occasions when they are both competing for the same resources. I just can’t think of an example.
‘^inflationary pressures^
I’ve already covered this I think.
and unrealistic world view.
Now that’s a nice unevidenced sweeping statement 😆
It has become more significant since the financial crisis of 2008 and 2020 have necessited very high levels of government borrowing to deal with falls in economic output.
Someone can’t spell ‘necessitated’..
QE was a sleight of hand operation whereby the BoE bought bonds with newly created money in order to put money into the economy to keep it afloat. The created money was recorded as having been lent to the government. As the BoE is owned by the state and created the money on the orders of the government it really does look like the government owing itself that money.. Which is absurd…
(When MMT talk about government – it includes *government and Central Bank acting as one.)^
See previous point. QED…
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