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Reblog – No, MMT Didn’t Wreck Sri Lanka

Published by Anonymous (not verified) on Sun, 15/05/2022 - 8:37pm in

Debunking Bloomberg with Fadhel Kaboub

Written by Stephanie Kelton

Originally published on Stephanie Kelton’s “The Lens” on 29th April 2022.

Two poor men sitting on a trolley on a street of closed shops. Petta, Colombo, Sri LankaImage by Harshabad on Pixabay

Last week, Bloomberg touted an opinion piece (written by one of its regular columnists) claiming that “Sri Lanka was the first country in the world to try MMT” and that “the experiment has brought the country to ruin.” A few days later, The Washington Post republished the article. So it garnered a fair bit of attention. Unfortunately, the essay offers little insight into what’s really gone wrong in Sri Lanka. But, hey, editors and writers have discovered that MMT drives clicks, so there’s no dearth of efforts to shoehorn MMT into almost anything.

A number of people sent me the link and asked me to respond. I sat down to do just that, but then I remembered that MMT economist Fadhel Kaboub talks about Sri Lanka in some of his presentations and that he’s been studying the country for years.

Fadhel is an Associate Professor of Economics at Denison University and President of the Global Institute for Sustainable Prosperity. He brings deeper knowledge of the Sri Lankan economy and the policy decisions that have paved the way for their current predicament. So I reached out to invite him to respond to Mihir Sharma’s main claims about the so-called MMT experiment in Sri Lanka.

Sharma’s big claim is that “two cherished heterodox theories…became official policy in Sri Lanka and, within two years, they brought the country to the brink of default and ruin.” The government has halted payments of its foreign debt and warned that it may default. Import prices are surging. It’s hard for people to buy food and fuel. There are periodic blackouts and rationing. Inflation is close to 19 per cent and the central bank has recently doubled interest rates. Sharma acknowledges that there are ’structural factors’ at play, and he concedes that the pandemic hammered the nation’s tourism sector while the Russian invasion of Ukraine made everything worse. But he argues that “the deeper problem” is that the ruling elite “turned Sri Lanka’s policymaking over to cranks.” One of the heterodox theories that is supposedly responsible for the crisis is MMT.[1] What follows is a lightly-edited transcript of my Q&A with Professor Kaboub.

KELTON: Sharma claims that “Sri Lanka is the first country in the world to reference MMT officially as a justification for money printing.” He blames former central bank governor, Weligamage Don Lakshman, for listening to monetary cranks who convinced him that “nobody needs to worry about debt sustainability” as long as you “increase the proportion of domestic debt [relative to debt denominated in foreign currency].” Is there anything in MMT that says that as long as you “increase the proportion of domestic debt” you can “print money” without worrying about debt sustainability or inflation?

KABOUB: When I first read the statement of Sri Lanka’s Central Bank governor, Mr Weligamage Don Lakshman, back in 2020, it was very clear to me that he does not understand the basic MMT insights. He was under the impression that what matters in terms of monetary sovereignty is the proportion of foreign currency debt relative to domestic currency debt and that there was no need to rethink the foundation of the economic development model that his country has used since the late 1970s. Governor Lakshman focused on the proportion of debt but never questioned what the external debt was fueling, and never articulated how a higher proportion of domestic debt was going to build economic resilience in Sri Lanka.

MMT economists have been very clear all along that a country’s fiscal spending capacity is constrained by the risk of inflation, which is determined by the level of productive capacity (availability of real resources, productivity, skills, logistics, supply chains, etc.) and the level of abusive market power enjoyed by key players in the economy (cartels, exclusive import license holders, shell companies, cross-border traffickers, speculators, corrupt government procurement systems, etc.). Therefore, increasing a country’s fiscal policy space must be done via strategic investments to boost productive capacity and regulation of abusive market power. Sri Lanka’s economic policy choices (pre-pandemic and Russia-Ukraine war) do not even come close to what MMT economists would have suggested.

As I will explain below, Sri Lanka has three structural economic weaknesses that were systematically reinforced via mainstream economic policies: 1.) lack of food sovereignty, 2.) lack of energy sovereignty, and 3.) low value-added exports. These deficiencies imply that accelerating the country’s economic engines leads to more pressure on its external balance, a weaker exchange rate, higher inflationary pressures (especially food/fuel/medicine and basic necessities), and, as a result, it leads to the classic trap of external debt.

Here is how it all started. Sri Lanka, like many countries in the Global South, began the liberalization of its economy in 1977, and adopted a classic IMF-style economic development model based on exports, foreign direct investment (FDI), tourism, and remittances. This development model remained tamed during the civil war (1983-2009), but it was fully unleashed in 2009, and that is when external debt began to skyrocket, going from $16 billion in 2008 to nearly $56 billion in 2019. The value of the Sri Lankan rupee dropped from 114 to 178 LCU/USD. Thanks to a massive increase in government subsidies and transfers reaching more than 30 per cent of government spending in recent years, Sri Lanka struggled to keep inflation below 5 per cent. Yet, economists celebrated Sri Lanka’s great achievements with an average growth rate exceeding 5 per cent in the decade after the civil war, and a real per capita GDP growth putting the country officially in the upper-middle-income economy category. Sri Lanka was following the mainstream economic development model like a good student. In the decade starting in 2009, exports grew from $9.3 to $19.1 billion, tourism quintupled from 0.5 to 2.5 million visitors annually, FDI inflows quadrupled by 2018 to a record $1.6 billion, and remittances doubled to nearly $7 billion annually. These are the four engines of Sri Lanka’s economic growth, but they are also the engines driving the country deeper into the structural traps of food and energy dependency, and specialization in low value-added exports.

Here is how these engines constitute a trap. An increase in tourism induces more food and energy imports. An increase in remittances means more brain drain. An increase in low value-added exports induces more imports of capital, intermediate goods, fuel etc.; and an increase in low value-added FDI does the same plus the repatriation of profits out of Sri Lanka. On a global scale, these neocolonial economic traps have suctioned $152 trillion from the Global South since 1960.

KELTON: Sharma argues that it was the “printing of money” that caused inflation to hit record highs. He cites the rate of growth of the Sri Lankan money supply and concludes that inflation hit record highs because the central bank expanded the money supply by 42 per cent from December 2019 to August 2021. Why isn’t this a critique of MMT, and how do you think about the current inflationary pressures?

KABOUB: Sharma is wrong on two fronts here. First, he is assuming that the central bank actually controls the money supply, when in fact the money supply is an endogenous variable determined by the private sector (consumers, business, and banks). The central bank simply accommodates the needs of the market in order to keep short-term interest rates at a stable target, otherwise it will cause all kinds of instability across financial markets. Second, Sharma is assuming that inflation is caused by an increase in the money supply, when in reality, Sri Lanka’s inflation, like many developing countries, imports its inflation via food and energy imports. The higher the pressure on the external balance, the weaker the exchange rate, the higher the inflation pressure from imported goods. Sri Lanka struggled with these pressures for a decade, and managed to muddle through by accumulating more external debt, which quickly became unbearable after the pandemic (loss of tourism, remittances, FDI, and export revenues) and the massive increase in global food and energy prices after the Russian invasion of Ukraine.

The solutions to Sri Lanka’s inflation problems are not in the hands of its central bank. Raising interest rates in Sri Lanka will not end the war in Ukraine, or end the pandemic-induced global supply chain disruptions. The most effective anti-inflation tools fall under fiscal policy. It is the parliament, and the various ministries and commissions that can design strategic investments to boost productive capacity, and have the legal authority to update and enforce antitrust laws. In fact, raising interest rates can often fuel inflation (and inequality) because it is the equivalent of an income subsidy to bond holders, and a tax on actual investors who might be discouraged from increasing productive capacity

KELTON: Sharma appears to know that he has offered a faulty representation of MMT. He anticipates some of the counterpoints that I suspect you and I would both raise. He writes, “proponents of MMT will likely say that this was not real MMT, or that Sri Lanka is not a sovereign country as long as it has any foreign debt.” You have been studying Sri Lanka for a few years now. What, if anything, have policymakers done that suggest that they have been running any kind of “MMT experiment” over the last two years?

KABOUB: Well, this is where Sharma nails it! As I explained above, Sri Lanka’s economic policies don’t even come close to anything informed by MMT insights. Sri Lanka’s government ignored its structural weaknesses, didn’t invest in food/energy and strategic domestic productive capacity, didn’t tax/regulate abusive market power, has a corrupt political system dominated by a single family, and when it was backed into a corner after the pandemic, it doubled down on bad economic decision by claiming that agricultural fertilizers are unhealthy (when they really didn’t have the foreign exchange reserves to pay for the imports), so they destroyed agricultural output, especially rice, in the middle of global food crisis. If the Sri Lankan government was serious about investing in healthy food or a healthy economy, it would have put forward an actual food sovereignty strategy centred on native seeds, it would have discouraged intensive monoculture farming, it would have invested in regenerative farming to undo decades of damage to the soil, and it would have supported farmers to increase yields with well-defined medium and long term strategies. Clearly, this “organic farming” experiment was sloppy at best, but it should not overshadow the fact that the roots of the agricultural vulnerability have been decades in the making.

KELTON: Sharma chides the government for shunning the advice of “mainstream economists” and for “refusing to even consult the IMF.” Let’s assume he’s right about the central bank and other policymakers turning away from mainstream economists and institutions like the IMF. What kind of advice has the IMF given to Sri Lanka in the past, and what kind of economic development strategies would you recommend if officials called on you to advise them?

KABOUB: Sri Lanka has been following the IMF instruction manual for decades. It has received 16 loans from the IMF since the 1960s, and it is currently negotiating another one. Since 1996, Sri Lanka has never been away from the IMF’s negotiating table for more than 3 or 4 years at a time. Despite the political rhetoric of the Sri Lankan government over the last couple of years, the current Sri Lankan administration has abided by the IMF’s terms and conditions of the $1.5 billion Extended Fund Facility (that’s the 16th loan disbursed between 2016-2020). So maybe the Sri Lankan government has come to realize that the IMF instruction manual is actually harmful. The problem is that they don’t fully understand why, and they certainly haven’t identified an alternative strategy to escape from this trap.

In terms of policy advice, Sri Lanka needs emergency assistance with immediate shipments of food, fuel, medicine, and basic necessities. Sri Lanka needs debt relief rather than debt restructuring. For example, UNDP has recently recommended negotiating debt-for-nature swaps. There are other debt swap mechanisms such as debt-for-development, debt-for-equity, and debt-buy backs. The Sri Lankan central bank should be negotiating FX swap line agreements with the central banks of its major trading partners in order to stabilize the value of its currency.

Sri Lanka should also access the IMF’s newly created $45 billion Resilience and Sustainability Trust (RTS), which, unlike other IMF facilities, is actually a program that funds strategic investments to build resilience and promote sustainability. Sri Lanka would qualify for up to $1.4 billion of concessional loans with substantial grace periods. However, to qualify for RTS funds, Sri Lanka must first have an existing agreement with the IMF. It needs to enter these negotiations with its own strategic vision in order to escape the IMF’s austerity and external debt trap.

The IMF wants countries to establish an economic policy framework that leads to external debt sustainability, but its track record has been a miserable failure. Sri Lanka needs to convince the IMF and other lenders and strategic partners, that it can only escape this external debt trap if it tackles the problem at its source — e.g. by investing strategically in food sovereignty (with an actual long-term strategy rather than half-baked organic farming wishful thinking), investing in renewable energy capacity (energy efficiency, public transportation, etc.), investing in education and vocational training in order to climb up the value chain in the manufacturing sector, and becoming more selective in its support for export industries and FDI projects. In other words, ending the race to the bottom policies, and building resilience to external shocks.

These strategic investments must be coupled with an actual democratization of the political as well as the economic system. The government needs to crack down on corruption, cartels, abusive price setters, and entities that enjoy exclusive economic power and have every incentive to object to the strategic investments listed above.

The sad part of this story is that Sri Lanka is only one of many countries in the Global South facing the same structural traps, struggling with unbearable external debt, soaring food and energy prices, shortages, and rising social and political tensions.


[1] The other has to do with a shift toward organic farming that has apparently fueled a precipitous drop in crop yields, farming incomes, and export revenues.











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Out-of-touch Chancellor’s Spring Statement fails to help those most in need

“Once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilisation.”
John Maynard Keynes  

This week, amidst continuing global economic uncertainty caused by the ongoing pandemic and the outbreak of war in Ukraine, the Chancellor, Rishi Sunak, delivered his Spring Budget. Unsurprisingly, it did little to help the very poorest of households, as the Resolution Foundation reported in its analysis that followed:

“Taking into account the measures announced by the Chancellor, the typical working-age household faces an income fall of 4 per cent, or £1,100, in 2022-23. But the greatest falls will be felt by the poorest quarter of households who are set to see their incomes fall by 6 per cent. This will see a further 1.3 million people fall into absolute poverty next year, including 500,000 children – the first time Britain has seen such a rise in poverty outside of recessions.


Incomes are on course to be lower at the next election (2024-25) than they were at the last (2019-20), with typical non-pensioner income projected to be 2 per cent lower. Such an outcome would make this the worst parliament on record for living standards growth.


The Chancellor pre-announced a 1p cut in the basic rate of Income Tax for April 2024, saving an average earner £243 a year. But the gains of this and the lasting impact of a higher National Insurance threshold are wiped out by previously announced tax rises.  In 2024-25, when the income tax cut comes into effect, 27 million out of the 31 million people in work will pay more Income Tax and NI as a result of personal tax changes announced by Rishi Sunak.”

Chancellor Rishi Sunak filling a red car with petrol at a petrol stationImage by HM Treasury on Flickr. Creative Commons 2.0 license.

While the Chancellor continues to count the tax beans and make his calculations, those who have already suffered the consequences of the last 12 years of Conservative policies will now be expected to take further pain in the form of a resurrection of harmful austerity dressed up in the concept of possible ‘jam tomorrow’. Cynically speaking, just before the next election.

In the light of a sustained round of higher government spending and the myth that we have borrowed heavily to sustain an economy hit by a global pandemic (even if much of that went into corporate pockets), some economically uneducated politicians are now appealing to the nation yet again to sacrifice their well-being on the altar of balanced budgets. We should be willing victims, according to this false logic. Despite the huge spending over the past two years, the household budget myths were never far away from the public gaze as the media pounded their messages about how there would be a price to pay, eventually.

At the same time as the Resolution Foundation lays it on the line as to the significance of the Chancellor’s budget, which yet again divides rich and poor, it then goes on to reinforce the myths about how the UK government spends. Tax receipts, it said, had come in much stronger in 2021/22 than expected, which would give the Chancellor ‘headroom against his fiscal rules’. The Independent claimed however that Sunak was keeping some of that tax bonanza back for a rainy day or to cover his planned tax cut in 2024. Whilst the Foundation’s analysis is stark on the consequences of this week’s budget, it is clearly still in the dark ages when it comes to describing how currency-issuing governments spend, as are so many think tanks and organisations on both the left and the right, not to mention a myopic media.

Charles Dicken’s character Micawber has been resurrected (if he ever went away) by a Chancellor who, after an astonishing fiscal response to the pandemic, is now re-donning Thatcher’s mantle, reinforcing the lie that taxes fund spending, or that government needs to borrow to fund itself over and above its revenue.

The suggestion by Torsten Bell at the Resolution Foundation, that these unexpected tax receipts would allow the Chancellor to consolidate the Treasury’s fiscal position and deliver his promises is just more shoring up of a myth that governments spend like our own households. And a bit of a joke because by any standards what the Chancellor, with his great wealth and extensive property portfolio, has done, is punish those who can least afford it and who do have to live within their financial means or face the prospect of debt because they are currency users, not currency issuers. The rising use of food banks and increasing homelessness can only get worse as his budget decisions begin to bite in April and our public services will continue to deteriorate without adequate funding.

Holding forth from his ivory tower, Sunak has not an ounce of understanding about the impact of government spending policies on the lives of working people, not to mention the economy. His decisions are directed by a desire to show himself fiscally prudent, not by public health and economic security.

When Rishi Sunak says, as he did earlier this week, that ‘we can’t help everyone because it’s too expensive’ or proposes an efficiency drive to cut £5.5bn of claimed government waste with a view to those savings being used to fund vital public services, it is quite simply a distortion of the facts to serve a political agenda.

Whether it is the Chancellor reciting the usual mantra about it being ‘vital that every single penny of taxpayers’ hard-earned cash is […] spent well,’ or the Shadow Chancellor and other uninformed left-wing politicians suggesting that they would fund public services via a windfall tax on energy companies, the public is being led by the nose in its ignorance of how government spends. An ignorance perpetuated by the daily narratives in both left- and right-wing quarters and by a compliant media singing from the same hymnbook. The economic orthodoxy rules the roost. And yet increasingly we are seeing the true cost of such narratives. They are not financial, they are the threats to human life, biodiversity, and a functioning planet.

Given the challenges we face from an increasingly forgotten climate crisis (and incidentally scarcely mentioned in the Spring budget), the ongoing exploitation of the global south, which has bled countries dry to sustain the lifestyle of the west and which is coupled with rising poverty and inequality affecting citizens across the world, it is time to challenge these myths which have served a political agenda and a toxic ideology. Keeping the myths alive for the purposes of social control and the profits rolling into private pockets with government serving its corporate masters.

Nothing is too expensive in monetary terms; government doesn’t have a finite pot of money with which to provide public and social infrastructure and neither does it have to doff its cap to the wealthy or large corporations to provide it. Contrary to the usual household budget narrative, when the government spends, it does so based on a political agenda, not the state of the public coffers. It just doesn’t want the public to know that, because it is a lie that can be used to justify its spending policies and who gets the money, or indeed yet another round of austerity when it suits. A harmful ideology that feeds government policies and spending decisions.

The proof of the pudding lies in the fact that when it serves that agenda there is always money to fund a government’s own political priorities such as war or defence spending, or public contracts divvied out to its mates with no accountability. Only this week, Sunak revealed that the UK had given Ukraine £100 million worth of weaponry. And yet at the same time, he tells us that savings in government departments must be found by rooting out waste which can in turn, according to the household budget narrative, be used to fund public services, as if a government that issues its own currency has no money of its own and has to tax or borrow or make ‘savings’ by robbing Peter to pay Paul to fund its agenda.

While the Telegraph talks this week about the parlous state of the public finances and running out of road, suggesting that excessive government spending was crowding out investment in the private sector by discouraging ‘innovation and competition in crucial sectors such as health and education’ (which tells us a lot about the priorities of those on the conservative right), it claimed also that government spending levels were ‘indefensible.’  These statements are predicated on the lie that money is a finite and scarce resource and that the State and its public infrastructure is wasteful of hard-earned taxpayers’ money!

While the Telegraph talks tough by suggesting that spending needs to be cut even further, the Spring Budget is already a kick in the teeth for those who are currently struggling to make ends meet and will mean even more hardship and poverty as energy, food and other costs continue to rise. The Chancellor has made a political choice to create further difficulties for already beleaguered citizens on the promise of ‘jam tomorrow.’ Fiscal discipline over national economic well-being. What a cruel way to view the lives of millions of people, who it seems have become expendable in some people’s eyes where government finances are concerned. Better a balanced budget than a happier, healthier more productive nation.

Let us ask what is the role of government? To balance the budget, keep the wealthy happy and the profits rolling? Or something else? What we should be discussing is not the state of the government finances, whether it has balanced its budget or gilded its reputation as being fiscally prudent, but how it has managed the real but finite resources it can, if it chooses, access through its tax and other policies to create a sustainable and functioning economy which benefits everyone, not just a small section of it.

Thus, a healthy economy depends primarily, not on a private sector paying its taxes to provide vital public infrastructure, for too long the public has been misled on this issue. It depends instead on the spending and legislative decisions taken by a currency-issuing government to create the publicly paid for and preferably managed national and local infrastructure upon which we all depend as individuals and businesses, from health to education, welfare, public transport networks, and employment. Government in service to its electorate, not the corporate body. That should be the starting point for a discussion about where we go from here and involves creating a better public understanding of how government really spends.

In short, the current economic problems and inflationary pressures are not caused by too much government spending as some would have it, but by supply chain disruptions resulting from the pandemic, the war in Ukraine and the growing effects of climate change on the world economy including food production. This is a moment not for fiscal retrenchment but thinking best how to support working people in these difficult days and planning for a sustainable and fairer future for all.




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Comments On "MMT And Policy Assignment..."

Published by Anonymous (not verified) on Tue, 01/03/2022 - 2:18am in



Arslan Razmi has released a working paper “MMT and Policy Assignment in an Open Economy Context: Simplicity is Useful, Oversimplifcation Not So Much.” It is a 27 page paper running through stability analysis of post-Keynesian models that allegedly tell us something about Modern Monetary Theory (MMT). In addition to having a condescending tone (as seen in the title of the paper), the analysis within the paper is not particularly impressive. In my view, Razmi has set up a straw man argument and then thrashes it vigorously. I have seen similar post-Keynesian articles in the past, so I did not spend much time digging into the details.

Countries that Borrow in Foreign Currencies Are Not Currency Sovereigns

The following sentence appears in the abstract.

Critics question the sustainability of MMT-prescribed approaches to fiscal and monetary policy, especially over extended periods of time, in the presence of international financial markets, and for developing country governments that borrow in foreign currency.

This ought to immediately ring alarm bells in readers’ heads. From the perspective of idealised mathematical models, a great deal of MMT debates revolve around “currency sovereigns.” In the real world, actual sovereigns lie on a somewhat messier “currency sovereignty spectrum.” In some cases, one could have a good faith debate whether a particular country is at least close to being a currency sovereign. However, there is not doubt that any country that borrows in foreign currency to any significant extent is not a currency sovereign.

(Why the “significant extent” wording? The Government of Canada is very close to the “currency sovereign” end of the spectrum, but it does have some outstanding foreign currency bonds. These bonds effectively finance Canada’s relatively insignificant foreign currency reserves, and also creates the administrative capacity to borrow in foreign currencies if absolutely necessary. To the best of my memory, this is common practice, with the United States being a major exception.)

If one wants to know what MMT proponents have to say about countries that are not currency sovereigns, you would need to read the papers that address that topic. My personal interest is solely the countries which I followed as a fixed income analyst, which are the developed market sovereigns. These include currency sovereigns as well as the euro peg countries. I am unfamiliar with what be termed the “emerging market” MMT literature — but I cannot see citations of emerging market MMT papers in Razmi’s article either.

What Does the Model Say?

I approached this paper in exactly the same way that I approached published papers in control theory when I was in academia: I jumped straight to the mathematical parts, and largely skipped all the textual representations about what the mathematics means. I am an applied mathematician: I can see the implications of a mathematical myself, I am not interested in what the author says that they mean. In economics particularly, there is often a massive gap between those two positions.

As a result, I am not going to quote the article extensively. The author includes a potted history of the MMT debates, although I am extremely unimpressed with the critiques cited that I am familiar with. Someone new to the debate might wish to use these references to start a literature survey. My interest is in what is new in this article itself, and the new content is based on the mathematical model and its implications.

The immediate problem is that the model is one of which in countries borrow in a foreign currency. This means the model is useless for a currency sovereign. As for non-currency sovereigns, we need to immediately ask: what are the MMT policy prescriptions for such countries? To what extent that could be puzzled out from the Razmi paper, the article’s assumption is that the policy prescriptions are the same as for currency sovereigns. This then raises the question: if MMT proponents believed that the policy prescriptions are the same for currency sovereigns and non-sovereigns, why do the repeatedly state that being a currency sovereign opens policy space?

Since I have not studied that part of the MMT literature, I will not attempt to figure out whether Razmi correctly characterised the MMT literature on non-currency sovereigns. Given that the policy prescriptions that Razmi discusses matches what MMT primers say about currency sovereigns, my hopes are not particularly high.

No Risk Assets

The paper relies on portfolio balance effects in a world where the only assets are local currency bills and foreign currency bills. Although algebraic tractability is going to be an issue for adding more asset classes, this is a very misleading situation. In the real world, currency market “clearing” is generally dependent upon risk asset flows — foreign direct investment, equities, corporate debt, real estate, and ape jpegs. The only time that government security flows are dominant is the case of countries that intervene in currency markets in size. This could be either a peg to hard currency, or a “managed float,” as seen in Japan’s history after the folding of the Bretton Woods system.

Although the case of countries managing their currency versus a “hard currency” is interesting, it goes without saying that the currency in such a case is not in fact floating. It certainly is not the focus of the MMT literature that I am familiar with, other than the questions around the impact on the “hard currency” issuer (the “Is China financing the United States?” debate of the previous decade). For what it is worth, I think that the export-led growth strategy built around a permanently undervalued currency (originally employed by Germany and Japan) is a good development strategy, but it is reliant upon geopolitical conditions (the willingness of the United States to absorb those exports). As such, I am unsure what the value-added of discussing such strategies is in 2022.

From the perspective of both developed countries and developing countries, this model structure is a serious defect.

  • In developed countries, governments do not finance themselves in truly “foreign” currencies (with the euro peg sort-of exception, which has been extensively looked at in the MMT literature). Even in the private sector, competent lenders do not finance borrowers with a currency mismatch. Post-Keynesians are a consistent source of absolutely terrible analysis of developed countries since they insist that borrowers love issuing mismatched foreign currency debt, even though they are obviously incorrect (where are all the defaults caused by currency movements?).

  • In order to capture the full range of emerging market crises, we need risk assets to create financial instability (as per Minsky). I am not an emerging market expert, but most of the conflagrations that I can remember resulted from pro-cyclical risk asset flows. There may be some countries that can reliably control their currency value with interest rate policy, but I am somewhat skeptical as to how widespread that is.

Although the belief that interest rate policy can influence the level of a currency, it is a bit of stretch to assume that a country can control its currency value solely by changing interest rates. If that were indeed possible, anyone able to do a half decent job of predicting interest rate differentials would be able to make a mint trading foreign exchange. The reality is that many investors do build “carry portfolios,” but the strategy works only until it doesn’t. (We can also note that the Russian ruble has collapsed despite a doubling of policy rates to around 20% at the time of writing.)

Inflation Pass-Through From Currency Changes Country-Dependent

The toy models used by post-Keynesians in these analyses suggest that there is a large pass-through into domestic inflation from currency changes. However, if we look at the developed countries in the “modern era”, it is extremely difficult to see the effects of exchange rate changes. In a services-based economy, the major driver of firm costs is the wage bill. Energy costs are admittedly set in global markets, but the volatility of energy commodity prices are much larger than the volatility of developed exchange rates: if oil prices spike, they are going up in all the developed economies, even though currency quotes are changing.

Of course, this is not true for all countries. Less developed countries where unprocessed food are a large proportion of consumer expenditures and rely on imported manufactured goods will have more exchange rate pass through.

Although it might not seem intuitive, this factor is best understood as being a component of “currency sovereignty”: can a country pursue a policy of benign neglect of the value of its exchange rate? The developed countries largely have this flexibility, whereas this is not the case for many developing countries. The implication is that developing countries have less policy space, and that has nothing to do with the currency in which the government borrows. Policy recommendations need to reflect this reality. Returning to the article we are discussing, if we want to discuss MMT in this context, we would need to read MMT proponents’ discussion of what to do in this situation — and not discussions that are explicitly or implicitly aimed at developed countries.

MMT Policy Recommendations Ignored

The model in the Razmi paper ignores key MMT policy recommendations. The most important of which is the Job Guarantee, which is completely unmodelled. It makes no sense to argue that MMT policy recommendations are in some sense “simplistic” if you do not make any attempt to model them.

How one would model a Job Guarantee is going to be controversial. However, unless the Job Guarantee wage is set at so low a level that it would be ignored by everybody, I would expect that at least 2% of the population would be employed by the programme, even during boom times, but the average across the cycle might be closer to 4-5%. (I want to emphasise that these figures are purely my guesstimates, and do not reflect any scholarly estimates.)

The Job Guarantee programme would thus be significant enough to effect wages at the low end of the wage scale. As a result, the Job Guarantee wage is a policy variable.

In any event, the modelling tools used within the paper are worthless when it comes to analysing the Job Guarantee, since it ends up being stability analysis around some stationary point. Either the analysis suggests that the Job Guarantee wage has no effect on aggregate wages/prices — which is obviously nonsensical — or else it would suggest that governments can fine-tune the economy just by changing the Job Guarantee wage. (Why is the no effect possibility nonsensical? It implies that the government could raise the Job Guarantee wage to an arbitrarily high level without affecting average wages.) Although MMT proponents are fans of using the Job Guarantee wage as a policy tool, I doubt that any of them think it can be used to make economic variables follow arbitrary target trajectories. Realistically, the effects of the Job Guarantee are going to be highly nonlinear (e.g., much easier to prevent deflation in wages than inflation), and we cannot discuss the macro effects of the programme with a stability analysis of a steady state.

Meanwhile, the simplified aggregate model ignores MMT arguments regarding the use of institutional policy levers in an attempt to control inflation. Such policy levers are complex and controversial (and unpopular with conventional economists), but we cannot truly discuss the MMT position without them. Once again, the modelling technique in the paper cannot be used to model the MMT position.

Concluding Remarks

A mathematical model is just a set of statements about sets. One makes assumptions, then one cranks the handle of mathematical operations to see what is implied.

Many simplistic Post-Keynesian and neoclassical macro models are built around an assumption that government policy is largely captured by two policy levers: interest rate policy, as well aggregate fiscal policy. (“Money creation” might appear, but so long as the money demand function is monotonic in interest rates, a money growth rule is just an alternative expression of an interest rate rule.)

It is therefore unsurprising that if you take such a model, and you then remove interest rate policy, the policy space is greatly reduced. However, the questions that matter are whether that model reflects reality, and/or whether other policy levers exist. There is no point in adding epicycles to models in already published papers if you make no attempt to model what you are supposed to be modelling.

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(c) Brian Romanchuk 2022

MMT Wrangling Back...

Published by Anonymous (not verified) on Tue, 08/02/2022 - 7:18am in



There was a NY Times article about MMT that caused my Twitter timeline to explode. All I can say: read my book (MMT and the Recovery). (Also: please ignore all my incorrect prognostications about the current recovery, thanks.)

Why buy my book?

  • It’s cheap, at least the e-book edition. (The paperback has to cover more costs, so I can’t keep the MSRP too low. But even it is incredibly cheap if you compared it to anything produced by an academic publisher.)

  • It’s succinct. My objective is to minimise the amount of text, while keeping it easy to read.

  • One of the distinguishing features (I believe) is that I have a chapter on MMT debates. The introduction of MMT is done without going to far into detours about competing approaches (to keep the text clear), and then I look at critiques. I am obviously biased, but a reader should be able to work around that bias to get a feel for the two sides of debates.

I will split this article into two pieces: did anything new come up in the recent kerfuffle, and a discussion of MMT resources (that are not my book).

Anything New?

I did not read the NY Times article that triggered this whole thing, but I instead saw a lot of points that got stirred up on Twitter. Some of the complaints seem to be new.

As far as I can tell, the new story is that countries (like the United States) “implemented MMT” (or some such), and it didn’t work out according to plan. So, boo MMT.

To me, that is self-evidently nuts, but hey, I’m biased. Here is my rundown of complaints I have seen, with a definite inflation sub-theme.

  1. There were no policymakers anywhere following a full script of MMT policies in the aftermath of the pandemic. You will read “what about country X?” from people whose main interaction with MMT is misrepresenting it.

  2. Some MMTers would have supported particular policies in particular countries. Can we really pin bad things happening (mainly inflation) on just one policy? What exactly did the MMTers say?

  3. The strongest complaint I see is that people demand MMTers come up with an anti-inflation policy. The problem here is straightforward: whatever policies MMT proponents have discussed, nobody pays attention to. Anything other than rate hikes — which are assumed by practically everyone to be the best way to control inflation — is ignored. I am not in the policy recommendation business, so I am not the person to pursue this line of discussion.

  4. There is a related complaint that MMTers did not predict the extent of current inflation. Considering that the consensus — including neoclassical central bankers — expected inflation to return to around 2% after a hard-to-predict surge, I am unsure why MMTers are being singled out for any alleged forecast miss. Although MMTers can write triumphalist prose, I cannot recall them arguing that they have the ability to churn out exceedingly accurate inflation point forecasts in the presence of what are arguably unprecedented shocks. Although some individuals will have good forecasts — at any given time, somebody has to have the forecast closest to the data — the issue is whether a “school of thought” has models that consistently forecast the data accurately. In the case of inflation, that would make breakeven inflation trading a solved problem. I am no longer close to that market, but I see no indication that is the case.

  5. One final complaint is that MMTers somehow underestimated the political toxicity of inflation. To me, that is just elementary political economy. The people who are continuously droning on about the political toxicity of inflation are hard money bugs. MMTers tend not to be hard money bugs. I suspect that if you polled MMT proponents, they would prefer to have a period of high inflation and a reduced loss of employment instead of low inflation and exceedingly high unemployment. That is a political/moral preference, and unless somebody can work out the Grand Unified Theory of Ethics, I doubt that there is a “right” answer.

My inflation view is straightforward: inflation is complicated, and aggregated models have serious defects. Those defects are discussed in post-Keynesian critiques of neoclassical methods, and I have not dug deep enough into the topic to be able to contrast and compare the MMT’s inflation story versus the non-MMT post-Keynesian story.

What is MMT (Sigh)?

I wrote about this in my book, with a one section summary of main points. An un-edited first draft appeared here, but for a mere few dollars, you can get the edited version here. (OK, fine, time to stop plugging the book. But yes, if you have a topic of interest that is in my book, there is probably an initial draft on my blog. Not my Substack, since I started that later.)

But, I want to offer a key point: MMT is a body of thought, not a single model. If you want to ask something about MMT, you need to ask: does this request make textual sense if you replace “MMT” with “<an entire economics school of thought>”?

Models (Sigh)

The other thing are models. Neoclassical macro theory can be described as: take the canonical RBC model, and then keep adding epicycles to it. Neoclassicals will jump up and down and cry about “epicycles,” but those “imperfections” and “frictions”? Those are epicycles, pal.

Like every other reputable body of scholastic thought, heterodox economists question the wisdom of fixating on a questionable model and then adding epicycles to it.

Simple canonical models exist in MMT — I describe one in my book — but the literature does not consist of adding epicycles to those models. So it makes no sense to fixate on such models.

What to Read?

For someone with no background in economics, Stephanie Kelton’s The Deficit Myth is the obvious starting point. It is a best-seller for a reason.

For more advanced readers, things are more awkward. The textbook Macroeconomics by Mitchell, Wray, and Watts is presumably considered the “MMT Economics 101 textbook.” The problem is that it is economics 101, and it overlaps with post-Keynesian economics. If someone wanted to distinguish PK economics and MMT, it might be awkward. Some of the most distinctive parts of MMT are also done very briefly.

  • I like Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems by L. Randall Wray. It is a primer, but it covers the major topics of discussion. A reader might need to dig through references on topics of interest.

  • Warren Mosler has a website with his books (including free versions). The texts are more self-contained, and less tied to the broader post-Keynesian literature.

  • There are a number of monographs that I discuss in my book, but they tended to be on specific topics.

  • Bill Mitchell’s billyblog was an early entry to the blogosphere, and probably has the equivalent to a dozen academic texts posted over the years. It includes links to resources, including the educational programme MMTed (

  • New Economics Perspectives has a variety of resources, including an online version of the Wray primer.

  • For a journal article database, there is maintained by the Gower Institute for Modern Money Studies.

I am not an academic, and I do not have access to a research library. I cannot easily offer an exhaustive literature survey. That said, I was taught how to do literature survey, even during the cave man days where publication databases did not really exist. (There might have been something in the library, but from what I recall, it was not a great help.) The key is that you need a topic of interest; “MMT” is just too nebulous. You need to identify an MMTer (and not a critic!) who has written on the topic, and ideally it is a well known paper. You then read the paper, and then look at the citation chain. What previous articles were seen as important? Read the interesting-looking ones. Repeat.

No Substitute for Hard Work

I have rock solid credentials in applied sciences and mathematics, and a couple of decades of experience as a rates analyst. In topics of governmental finance and bond markets, I am arguably an authority. I can just state from my position of authority that in the domains of economics I am interested in, MMT is useful, and neoclassical economics not.

If you do not want to trust my authority, you either end up trusting someone who probably knows less than I do about these topics, or you have to do the hard work of analysis yourself. If one distrusts arguments from authority (I do!), you need to roll up your sleeves and do the work of reading. This is very different than the conduct of many mainstream economists, that insist on critiquing MMT without seriously reading a single academic text written by MMT proponents.

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(c) Brian Romanchuk 2022

How the Government’s Super-Platinum Credit Card Works

Published by Anonymous (not verified) on Tue, 18/01/2022 - 9:06pm in

By Neil Wilson.

Reblogged from Wilson’s New Wayland website


Platinum credit cardImage courtesy of Michelle Meiklejohn /

Modern Monetary Theory explains that monetarily sovereign governments (like the US, UK, and Japan) can issue money without first raising it via tax. That’s what puts the “fiat” in fiat currency. At first glance, that appears to be counterintuitive. How can that be?

Once you stop to think about it for a moment, most of us come into contact with this concept every day.

It’s called a credit card.


If you imagine that a government does all its spending on its credit card, then you’ll have the structure about right.

There are differences. A monetarily sovereign government can get the best credit card deal in the world. It is a super-platinum credit card with the following benefits:


It has no spending limit

Some individuals can get “no pre-set spending limit” cards, so it’s hardly surprising that a sovereign government with its own currency and full tax-raising powers has one.


It can repay itself

The government issues its own credit card, which means it can settle the credit card bill and any interest charges with the same credit card. If you could settle your credit card bill with a credit card, you’d never require a balance in your bank account either.


It has the best cashback deal in existence

The cashback deal is truly spectacular. You might get a measly percentage when you spend money at the shop. When the government spends at the shop, it gets a percentage of the spending and another percentage when the shop pays its staff. After that, when the staff buy beer at the pub, the government takes another chunk. And so on, until the initial government spending turns entirely into cashback.

Nothing can beat this amazing cashback deal.

For the government, when it spends £100, it will always get £100 back in cashback[1].

For everybody else, this is called taxation, and, besides death, it is the only certainty in life.

With this deal in place, the only time there will be a balance on the credit card is if people haven’t spent everything they’ve earned. In other words, a balance on the credit card is caused by people’s savings.

What we know as “the national debt” is just the balance on the credit card, and the change in the balance is “the deficit.” The cause, on the other hand, has not changed: people are saving.


If only I had one of those…

Now just think what you could do if you had one of these cards:

    • you can spend as much as you want anywhere that accepts the card.
    • you’d never have to fund your spending.
    • you’d never worry about the balance because you wouldn’t have to pay it off, it doesn’t affect your credit limit, and you know you’ll get cashback to cover it anyway when people get around to spending their savings.


So what’s the catch?

With great power comes great responsibility.

Although you can never run out of money on your super-platinum credit card, you can run out of real things to buy. You must make sure you use the money wisely in a manner that encourages the production of real stuff. That way, there will be more for you to buy in the future.

If nobody is tending your garden, hire somebody without a job to tend it for you. It doesn’t cost you anything – you have a super-platinum card – but it gives someone the means to support their family.

You might want to trim back the cashback percentage a little. It doesn’t cost you anything. As long as the rate is positive, you’ll get all your money back eventually, but it does put money in people’s pockets and allows them to keep paying the mortgage or rent and, perhaps, buy more real stuff for their families.

You might pay for the upkeep of universities and training colleges. It doesn’t cost you anything – the colleges already exist – and keeping them up gives people without work jobs. You might also fund students to go there. It doesn’t cost you anything, and those students will be able to use their greater skills in the future to generate more real output for you to buy.

You might decide to create a high-speed rail link across the country. Again, it doesn’t cost you anything – you have a super-platinum card – and engineers short of work like nothing better than a big project to get their teeth into. The infrastructure would last a century or more, providing great benefits to all (as well as not insignificant accolades to those who built it).

You could encourage the use of more machines to produce real things more cheaply with less labour. That might sound a bit like Star Trek, but without progress along those lines, we’ll end up over-consuming the planet.

And you might be bold and provide a job offer to everybody so they can always contribute to society and live free from poverty. Ending unemployment and poverty once and for all is surely a worthy goal, particularly when you can do it with the mere wave of a credit card.


But I haven’t got one of these cards

No, you don’t, but your government does[2]. You might like to ask them “what’s in their wallet” and why they’re not using their plastic more effectively.


[1] eventually…

[2] or could certainly obtain one.











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The post How the Government’s Super-Platinum Credit Card Works appeared first on The Gower Initiative for Modern Money Studies.

Join Us for the 2022 Levy Institute Summer Seminar

Published by Anonymous (not verified) on Wed, 12/01/2022 - 3:54am in

The Levy Economics Institute of Bard College is pleased to announce it will be holding a summer seminar June 11–18, 2022. Through lectures, hands-on workshops, and breakout groups, the seminar will provide an opportunity to engage with the theory and policy of Modern Money Theory (MMT) and the work of Institute Distinguished Scholars Hyman Minsky and Wynne Godley. Intended for those who are introducing themselves to these approaches as well as those who are looking to deepen their understanding, the seminar will be of particular interest to graduate students, recent graduates, and those at the beginning of their academic or professional careers.

Topics will include the history and theory of money, central bank and treasury operations, inequality and austerity, the job guarantee, MMT and developing economies, current debates over inflation, the Green New Deal, the stock-flow consistent approach to macroeconomic analysis and modeling, financial innovation and the financialization of the economy, cryptocurrency and central bank digital currencies, and more. The teaching staff will include well-known economists, legal scholars, monetary historians, writers, and financial market professionals working in the relevant topic areas.

The seminar will be limited to 60 attendees. Admission will include provision of room and board on the Bard College campus. The fee for the seminar will be $3,000; a fee waiver is available for all those in need.

Applications may be made to Emily Ungvary ( and should include a current curriculum vitae and letter of application. Your letter should indicate the nature of your interest in the program and, if applicable, your reasons for requesting a fee waiver. Applications will be reviewed on a rolling basis.

The current list of confirmed faculty and speakers, which continues to grow, is below the fold (in alphabetical order):

Rania Antonopoulos

Raul Carrillo

Christine Desan

Dirk Ehnts

Steven Fazzari

Mathew Forstater

Rohan Grey

Farley Grubb

John Harvey

John Haskell

Geoffrey Ingham

Fadhel Kaboub

Stephanie Kelton

Matthew Klein

Yan Liang

Bill Mitchell

Richard Murphy

Yeva Nersisyan

Michalis Nikiforos

Dimitri Papadimitriou

Paul Sheard

Ndongo Samba Sylla

Pavlina Tcherneva

Eric Tymoigne

L. Randall Wray

Gennaro Zezza


Join Us for the 2022 Levy Institute Summer Seminar

Published by Anonymous (not verified) on Wed, 12/01/2022 - 3:54am in

The Levy Economics Institute of Bard College is pleased to announce it will be holding a summer seminar June 11–18, 2022. Through lectures, hands-on workshops, and breakout groups, the seminar will provide an opportunity to engage with the theory and policy of Modern Money Theory (MMT) and the work of Institute Distinguished Scholars Hyman Minsky and Wynne Godley. Intended for those who are introducing themselves to these approaches as well as those who are looking to deepen their understanding, the seminar will be of particular interest to graduate students, recent graduates, and those at the beginning of their academic or professional careers.

Topics will include the history and theory of money, central bank and treasury operations, inequality and austerity, the job guarantee, MMT and developing economies, current debates over inflation, the Green New Deal, the stock-flow consistent approach to macroeconomic analysis and modeling, financial innovation and the financialization of the economy, cryptocurrency and central bank digital currencies, and more. The teaching staff will include well-known economists, legal scholars, monetary historians, writers, and financial market professionals working in the relevant topic areas.

The seminar will be limited to 60 attendees. Admission will include provision of room and board on the Bard College campus. The fee for the seminar will be $3,000; a fee waiver is available for all those in need.

Applications may be made to Emily Ungvary ( and should include a current curriculum vitae and letter of application. Your letter should indicate the nature of your interest in the program and, if applicable, your reasons for requesting a fee waiver. Applications will be reviewed on a rolling basis.

The current list of confirmed faculty and speakers, which continues to grow, is below the fold (in alphabetical order):

Rania Antonopoulos

Raul Carrillo

Christine Desan

Dirk Ehnts

Steven Fazzari

Mathew Forstater

Rohan Grey

Farley Grubb

John Harvey

John Haskell

Geoffrey Ingham

Fadhel Kaboub

Stephanie Kelton

Matthew Klein

Yan Liang

Bill Mitchell

Richard Murphy

Yeva Nersisyan

Michalis Nikiforos

Dimitri Papadimitriou

Paul Sheard

Ndongo Samba Sylla

Pavlina Tcherneva

Eric Tymoigne

L. Randall Wray

Gennaro Zezza


Canadian Provinces And Parallel Currencies

Published by Anonymous (not verified) on Wed, 05/01/2022 - 4:31am in


fiscal, MMT

I was asked some questions about the viability of Canadian provinces issuing their own local currencies — with the idea that it might open fiscal space. The analogy is to the analysis of parallel currencies in eurozone countries. I have not paid much attention to this topic in the context of other countries, but I have reservations on its applicability to the Canadian provinces (and even municipalities).

Some Areas of Applicability

I see certain areas of applicability that I will first outline.

  • As a way of asserting political sovereignty, and as a possible prelude to separation from the common currency. I will return to this at the end.
  • As a gimmick to boost the local economy. From my perspective, this largely applies to municipalities.
  • Launch a crypto-currency to fleece suckers. This can be justified on the basis that everyone else is doing it.

Conventional Analysis

Putting aside the previous disclaimers, I do not see much room for parallel currencies at the Canadian provincial level. Although I will use some MMT terminology, the logic is quite conventional. This discussion expands on the one in Section 8.6 of my book Understanding Government Finance.

The Canadian Federal Government is a currency sovereign, and the Canadian dollar has been floating for almost the entire post-1950 period (there was a short peg period within that interval). The Canadian tax system is effective, and the decks are stacked against any alternative currency. (Cross-border trade with the United States is large, and so many businesses have U.S. dollar operations. However, the volatility of the Canadian dollar means that firms operate on a largely hedged basis — tales of bankruptcies due to currency mismatches are extremely sparse. Households have ready access to U.S. dollar-denominated bank accounts, but mortgage borrowing in anything other than Canadian dollars is largely shunned. The only case I was aware of was an ex-colleague with a yen-denominated mortgage — as a speculative short — and from what I recall, he took a bath on the transaction.)

Provinces and municipalities are currency users, and they have almost the same financial constraints as private actors. They issue bonds which are rated by the rating agencies, and the spreads of the bonds generally tend to follow the ratings as well as “technicals.”

  • Smaller provinces (or those with small debt outstanding) can only have small, illiquid issues. These are not attractive for trading, and so tend to have a wider spread than the rating might imply.
  • Referenda for Quebec independence tends to widen spreads far in excess of what the rating might imply.
  • Like corporate bonds, rating changes tend to lag events. One could back out a “market-implied rating,” and that rating might imply an upgrade/downgrade before the rating agencies react.

However, unlike the American state and local bond market or corporate bonds, Canadian sub-sovereigns do not really default in the modern era — for reasons to be discussed below. This means that the spread movements are generally not very dramatic — away from Quebec referenda. This is similar to other quasi-sovereign markets, like supra-nationals and products like German pfandbriefe.

This all leads to a fairly conventional framework for finance: the provinces and municipalities have to abide by the “rules of the game” (which are specific to their peers) to keep access to the bond market. That is, they face a financial constraint.

The Rules of the Game

The main rule that provinces and Canadian municipalities have to adhere to is that their debt levels need to be sustainable in the long term. This sounds exactly like the neoclassical financial constraint. The difference between the Canadian provinces and American states is that they are largely free of arbitrary technical rules about borrowing (e.g., balanced budget rules) and they generally do not worry about liquidity risk — short-term loss of access to financing in a crisis. Although I cannot state that provinces are default risk free, it is a reasonable working assumption is that they are too big too fail: if they do not do something that greatly angers the Federal government, the Federal Government and/or the Bank of Canada will backstop any short-term financing crisis. And being a currency sovereign, the Federal Government is an extremely credible backstop.

Admittedly, this was not always the case. In Quebec, the nationalist politicians of the 1960s were extremely unhappy with the provincial bond traders down Highway 401 in Toronto. The desire to get greater autonomy versus that group helped push the province to create la Caisse de dépôt et placement du Québec (“the Caisse” — my old employer). This entity mainly manages public service pensions as well as the base state pension plan of Quebecers (Quebec opted out of the Canada Pension plan), and has a big balance sheet that acts to stabilise the market in Quebec bonds.

In any event, so long as the provinces do not do crazy things, the Feds have their back. However, the taxpayers of the province (or future taxpayers) will need to service debt. So even if the provincial government does not have to worry too much about bond market vigilantes, they still need to worry about voters not being happy about future tax hikes.

Results at the Provincial Level

The Canadian federal financing system has been stable in the post-World War II era. The Canadian welfare state is largely implemented at the provincial level, with the Federal government acting as an agent to transfer financial resources. Quebec — one of the more heavily indebted provinces — has a debt/GDP ratio of around 50%, which dwarfs the ratios of American states (typically 10% of GDP). The expenditures/revenue are similarly large. From my experience, the income tax take of Quebec is roughly equal to that of the Feds, although that might differ at very high/low ends of the income spectrum.

Implementation of the welfare state also allows for regional political economy divergences. Alberta is at the other end of the spectrum from Quebec. Courtesy of a plucky attachment to free market capitalism — and large hydrocarbon resources — Alberta has low provincial taxes and a somewhat more barebones welfare state, and historically extremely low debt levels. (They also have the provincial equivalent of a “sovereign wealth fund.”) Attempting to force more centralised programmes would only spur separation movements — not only in Quebec, but even in Western Canada. (I no longer live out west, but my guess is that the support for Western separatism is at a historical low, but that also reflects the low profile of the Federal government in recent decades.)

Municipal Finance

Only a few Canadian municipalities are large enough to issue bonds, and even for the ones that did, the issue sizes were small. As such, I personally paid little attention to them (but other team members did monitor them). However, I believe I picked up enough by osmosis to offer the following remarks.

The first thing to note is that Canadian municipalities largely exist at the whim of provincial governments. This is different than the usual experience in the United States. As an example, the Quebec government ruffled a lot of feathers by fusing most of the municipalities in the greater Montreal area into a few large units. Voters were enraged, and many of the municipalities split off from the larger cities. Very simply, if the provincial government can arbitrarily put your municipality out of existence overnight, the provinces have the power to oversee municipal finance.

The philosophy for Canadian municipal taxes is straightforward: decide how much revenue they want, and then back out the property tax rate based on the aggregate assessed property values. The municipalities very slowly move the assessed values, and employ the sneaky trick of keeping them below market. If your assessed property value is well below market, you tend not to challenge the assessment.

This means that Canadian municipal finances would be less strained by a hypothetical drop in house prices than was the case in the United States in the aftermath of the Financial Crisis. The municipalities with problems are the ones that are getting an influx of revenue from new developments.

Low Defaults

Since World War II (roughly when the Canadian government became a currency sovereign), there have been no provincial defaults. Based on a vaguely-remembered conversation with a ratings agency analyst, there was one municipal default. I believe it happened in the 1950s, and there was some kind of hanky-panky by the municipal government.

Bond markets that do not experience defaults tend to trade on a spread basis. It is very hard for “bond vigilantes” to get steam, since “mean reversion believers” will eventually step in.

Things were more exciting before World War II. (Since Canadian Confederation was only in 1867, there is not a whole lot of pre-World World II history to work with.) Canadian federal politicians mindlessly held to the Gold Standard, and so bailouts of sub-sovereigns were not automatic.

I am unsure how many municipalities went under, but there was one provincial default — Alberta. I never tracked down an economic analysis of the default, but read political analyses. Alberta was dirt poor at the time (oil riches were in the future), and they elected a Social Credit government.

Social Credit was a heretical monetary doctrine — which cynics might compare to some other heterodox activists in the modern era — that had a policy recommendation in favour of “social credit” payments: an early universal basic income proposal.

This horrified the not particularly bright or innovative gold standard believers in Ottawa, and so tensions were high. Since Alberta was hit hard by the global collapse in grains prices during the Depression, they ended up in default, helped by Ottawa throwing them under the bus.

The Achilles Heel of the System

The main risk to the Canadian governmental financial system comes from the provinces. Although there is implicit “too big to fail” backing from the Federal government, there is no explicit guarantee. As such, the provinces have big balance sheets, and things could go horribly wrong.

The conventional worry would be a “rogue province” going nuts, and making unsustainable fiscal promises. Canadian voters are volatile, and frankly, some provincial politicians are real pieces of work. The conventional response is to worry about bond market vigilantes, and the pressure from the financial media would sooner or later make the provincial government back down. In practice, the Canadian establishment is fiscally conservative, and so the “crisis” would largely be a media affair, and what the bond market participants might do is largely hypothetical.

The other risk is that the Federal government follows a hard line “sound finance” policy, and makes it unclear that it is unhappy with provincial debt levels. This would eliminate the implicit backing. That said, the Canadian bank oligopoly is heavily invested in provincial bonds as part of their liquidity management. The bank economists that dominate financial media are normally sound finance types, but their principles might shift if their employers’ continued operations are put at risk.

Provincial Parallel Currencies

I can now return to the original discussion that spawned this article: does issuing a provincial parallel currency make sense? Given the history of provincial experimentation leading to the development of the Canadian welfare state, having greater financial flexibility might appear attractive.

However, for provinces that intend to remain part of Confederation, their government accounting is firmly in Canadian dollars. Issuing a scrip is just another financial instrument, and how much does it cost? The problem I see with a scrip is that the cost of administering it is going to be larger than the cost of issuing a 30-year bond. The potential float is small, and the main reason people might hold it is if the scrip can be used to pay provincial tax (or similar) obligations. Realistically, they would only do so if the scrip traded at a discount to their par value in Canadian dollars. This discount would end up embedded in the cost of issuance.

The use cases seem to be minor.

  • Issue a crypto-currency to take advantage of current market conditions.
  • As a gimmick, which might be more useful if interest rates rise a lot.
  • A desperation move in a financing crisis.
  • Preparation for sovereignty.

The problem with issuing a scrip is that it does not fit the “rules of the game” of Confederation: money is the domain of the Federal government. This would naturally raise the ire of both the politicians and the Bank of Canada. This puts the implicit backstop of provincial debt at risk. If such an act raised the risk premia on provincial debt, the added debt service costs could easily overwhelm whatever financial benefit the scrip issuance provides.


If a province wanted to leave Confederation, they might want to issue a parallel currency in preparation. (I believe Warren Mosler offered a suggestion for a structure at the last Quebec referendum.)

In the case of Quebec, there are very good political reasons not to do so. Since the 1960s, support for Quebec “sovereignty” waxed and waned. At various points, it polled above 50%. The problem is that the support level was extremely dependent upon the wording. For example, using “independence” instead of “sovereignty” dropped the polling results, typically below the 50% level. Although this might seem unusual to outsiders, “sovereignty” in Quebec is in practice vaguely defined. In fact, “sovereignty association” — which looks like a self-contradiction — was the preferred phrasing.

Adding specifics were also damaging — particularly the loss of Canadian passports and the Canadian dollar. Ask the question whether they would be willing to give up using the Canadian dollar and their passports, polling dropped by 10-15% — well below the 50% threshold.

As a result, issuing a parallel currency is not politically attractive for sovereigntists.

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(c) Brian Romanchuk 2022

Running a Modern Money Economy

Neil Wilson explains how the economy can work for the benefit of the people; how it can be the servant of society rather than its master. Originally published on Neil’s New Wayland blog on 16 May 2017.


ABB articulated robots moving glass panels with vacuum terminalsImage by ICAPlants, CC BY-SA 3.0, via Wikimedia Commons

Modern Monetary Theory (MMT) is a description of the existing monetary system and its interaction with the production mechanisms. It takes a unique viewpoint that highlights opportunities that remain out of sight to traditional methods.

From this viewpoint comes a number of suggested policy proposals. So how do those proposals help keep things running smoothly?




We know how MMT helps an economy avoid a recession and pullback. After all, we’ve been talking about little else for the past ten years. You implement a Job Guarantee which injects additional spending into the economy where it is needed at precisely the right amount — all completely automatically.

The Job Guarantee is an advanced auto-stabiliser which implements ‘Spatial Keynesianism’. ‘Spatial Keynesianism’ is just a fancy way of saying that spending happens in the locations that need it. More in some areas and less in others depending upon the level of other activity at the time.

So as the economy moves out of recession and into growth, what do we need to do to stop overheating?

Well, firstly, you implement a Job Guarantee which injects additional spending into the economy where it is needed at precisely the right amount — all completely automatically. “Precisely the right amount” means that it is withdrawn progressively and spatially as private economic activity increases. People hired away from the Job Guarantee start being paid with private funds, not public funds, so you get a swap of spending power, rather than an increase.

Over the cycle, people come on and off the Job Guarantee which grows and shrinks government spending automatically. All without any politicians or central bank ‘experts’ making any discretionary changes. The result looks something like this over the cycle.

Graphic of how the Job Guarantee increases and reduces in size over the economic cycle

The Job Guarantee job is just a job like any other. It generates GDP with labour that nobody else currently wants to use. The private sector no longer has to go into areas it doesn’t really belong, or want to go, in a misguided attempt to try and “create jobs”. It can be left to do its thing of eliminating jobs with innovation and automation via capital investment. That drives up productivity and leads to an increased standard of living for all.

In fact, the private sector can be encouraged down the route. Controlling labour supply makes labour expensive which shifts the capital/labour ratio towards using more capital. You can ensure competition is intense because you’re no longer terrified about firms going bust or moving abroad; the Job Guarantee ensures there are always jobs in a locality that people can take. You don’t need the jobs of the private sector; they are a ‘nice to have’. This is the correct approach to take, because the private sector actually creates jobs as a side effect of its main task of destroying them with capital investment (hence capitalism, not jobism).

Government can set policy to eliminate price adjusting firms — via a combination of regulatory action (a strengthened Competition Authority with power to break up cartels rapidly) and competitive action. The Post Keynesian view of a firm shows that quantity-adjusting, time-shifting competitors will outcompete price adjusters at any given quality level. Nobody gives up market share willingly in a truly competitive market.

Intense competition, and regulatory authorities aiming their 12-bore at price adjusters who break cover, along with tough government purchasing tactics, force businesses to compete or fail. Failure moves workers from the private sector to the Job Guarantee, activates the auto-stabilisation mechanisms and avoids cascade contagion. Only the misallocated resources are purged.

With the Job Guarantee in place, you can let firms go bust and can hold firms to a much higher competitive standard than if you are relying on private firms to ‘provide jobs’. Job security is provided by a liquid local job market backed by the Job Guarantee, not by propping up individual firms with state subsidies. Businesses can be treated as cattle, not pets. If we are to have capitalism, we should have it — raw in the teeth and brutal — but merely restrict its effects to the capitalists. Those that survive this Ninja Challenge will then have truly earned their spoils.

The Job Guarantee helps prevent an unsustainable boom by creating an environment where bad firms can fail early and fail often.

Movement between the private sector and Job Guarantee automatically stabilises the fluctuations in business activity.



Alongside the Job Guarantee are the Mosler Mechanics for banks. These regulate the asset side of banks and prevent the banks creating another Minsky Moment.

The job of a bank is to promote the capital development of the economy. That is its public purpose; the job it is licensed to do. All other activities that conflict with that purpose must be prevented.

For banking to be effective it must be boring — bowler hat boring. The job of a bank is to provide capital development loans to the economy based solely upon credit analysis. All other activities deflecting from that purpose are Ultra Vires.

That means:

  • Banks can only lend directly to borrowers for capital development purposes (i.e. business credit lines and household loans), and the banks keep those loans on their books until cleared.
  • Banks must operate on a single balance sheet. No hiving things off into ‘off balance sheet’ subsidiaries to try and hide them.
  • Banks cannot accept collateral. Collateral is a fixed charge over an asset as an insurance policy and aligns the incentives of banks with those possessing assets, not ideas. It stops banks being capital developers and turns them into pawn shops. That is the wrong alignment of incentives. We want loan officers with skin in the game. Their success should depend upon the success of the borrower. Banks should line up in insolvency with the other unsecured creditors (and importantly behind the remaining preferential creditors — employees).
  • Depositors are protected 100% at all amounts. A depositor in a commercial bank is holding nothing more than an outsourced central bank account. They are not investors in the bank and should never be treated as such.
  • Regulation is provided by the bank resolution agency, which is a public body funded entirely by government. There is no charge or levy to the banks for the operation. The job of the bank resolution agency is to ensure the banks are properly capitalised given their loan book and declare them solvent. If they are not, they take the bank over and resolve it with any excess losses absorbed by government. This aligns the incentives of the regulator. If they get the solvency calculation wrong and the capital buffers exhaust, the regulator stands the cost.
  • The Central Bank provides unlimited, unsecured lending to regulated banks at zero interest rates. Collateral serves no purpose since the bank has been declared solvent (and therefore there is no reason for it to be illiquid), and collateralised Central Bank lending just shifts the losses to depositors who are protected 100% anyway.
  • Once you get rid of interbank collateral and funding requirements, you get rid of one of the final excuses for keeping Government Bonds. National Savings annuities for pensions (allowing retiring individuals to receive a secure lifetime income) would get rid of the final one. Transferable instruments that confer government welfare on the owners do not serve the public purpose. Government welfare receipt is a social decision, not a market-driven one.

As the asset side is heavily regulated, you want the liability side to be as cheap as possible. Unlimited central bank access ensures liquidity for depositors and allows lending-only banks to arise. It gets rid of the Interbank overnight market and replaces it with central bank overnight accounts. It puts the Central Bank ‘in the bank’ as a major investor — with open access to the commercial bank’s loan book via the work of the solvency regulator.

All levies, liquidity ratios, reserve requirements and the like are eliminated. The cost of maintaining the collateral system is eliminated. The result is loans at a low price with the quantity restricted solely by credit quality. As an economy heats up, credit quality declines and loans become restricted — systemically preventing the Ponzi stages of finance that lead to a Minsky Moment.

Proscribed banks, forced to rely on credit analysis for profit, help prevent a boom by issuing less credit as project quality declines.

You get a natural and steady withdrawal of funding that is far more surgically targeted and responsive to local conditions, than the carpet-bombing approach of interest rate adjustment.

This leaves the payment system, which should be as costless as cash and clear just as instantly to eliminate transaction frictions. Whether that should be publicly provided, or remain outsourced to the banks is an open question. Depositors are a cost to the bank and would effectively be a tax, but leaving them with the banks would give them an incentive to get the cost of clearing provision down. It may boil down to a political question that depends upon your view of the effectiveness of public and private provision. I’d lean towards an Open clearing system created by the state (or even states) and available to all on an open licence. We want one good clearing system like we have one good Linux.

Banks are currently too complicated, too large, too impersonal, too intertwined and systemically dangerous. They need to be simpler, smaller, more local and relationship-oriented in scope. All of which are easy to achieve once you adopt the Mosler Mechanics for banking.

Once again, because there is a Job Guarantee and a government that will use fiscal policy, we don’t need the banks to provide endless credit, any more than we need private firms to provide endless jobs. Banks and firms can be maintained at their appropriate natural size and location as determined by the technological level of the economy and where people actually reside.



MMT describes a currency as a simple public monopoly, and that monopoly rules apply to its use. Where a nation has its own currency, runs its own central bank, floats its currency on the currency markets and has no material state-owned debt in any other denomination, the government controlling the currency is in charge and sets the rules of the game.

Government can command any resources available for sale in its currency and can use its sovereign power to force those resources to be freed up so it can purchase them for the public good.

This is in sharp contrast to the neo-liberal viewpoint which is that government is just another organisation in the system that has to compete for resources by price. Businesses and banks always get first choice of resources and government has to make do with the scraps. They believe the bankers and businesses should be in charge and that the population are just factors of production to be shifted around, like ingots of steel, as business requires.

MMT shows there is a different approach. You can determine that business and banks are servants of the people. Government can take first choice of resources for the public purpose, then allow business and banks to work with what is left, before hoovering up any leftover resources with a Job Guarantee.

The public wrap of the private system provides a containment vessel around the nuclear power of capitalism. We can draw its power without the boom. We can fuel it with public investment and improve the power output.

The focus of government action shifts from money to the actual things we need to buy for the public purpose. Smart people talk about government buying, not spending.

From this, government sets the policy for spending and taxation at a level that allows the Job Guarantee and other auto-stabilisation mechanisms (such as standby investment contracts) to function.

Government keeps the Job Guarantee anchor working by making discretionary policy tight enough to maintain a functional buffer.

Because Job Guarantee jobs are just living wage jobs you don’t need to get people ‘off the Job Guarantee and into work’. They are already in work doing things people see as useful and delivering valuable output. Therefore, you can adjust policy more slowly based upon data from the Job Guarantee as to how liquid the buffer is in different parts of the country.

Politicians are almost certainly useless at driving an economy. In fact, the only people worse than politicians are central bankers and their lackey economists. Politicians are at least partially grounded in reality because they have to get elected.

Enhanced auto-stabilisation via the Job Guarantee and proscribed banking gets all these people out of the way. Discretionary policy is then decided by politicians in parliament once a year, and the day to day gyrations are handled automatically by the system.

Central bank civil servants can then go back to being anonymous operators, just like the ones operating social security, applying the rules they have been given and keeping out of the limelight. It’s time for the era of rock star Central Bank Governors, waving their expectations fairy wand, to end. There is no factual basis for their actions. If we turned up in a remote jungle and found a tribe managing their affairs in the way we do at present, we’d call them primitive and superstitious. The One Rate to Rule Them All is just as much of a fantasy tale as the One Ring.

Kalecki (1946) made a similar point:

It should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.

The policies MMT put forward reduces the political power of bankers and the ‘captains of industry’. Reducing the scope of bank lending creates spending space in an economy and reduces the need for general taxation. Limiting lending to useful activities is, in effect, a massive tax on the excesses of banking — all without touching a single tax rate. Forcing the ‘captains of industry’ to undertake actual capitalism, where they have to invest heavily, in an environment of scarce labour resources, to gain a profit, is loathed by big business. As Kalecki (ibid.) points out:

The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

The Job Guarantee takes that power away from business and makes them the servant of the people once again.

The neo-liberal framing of the debate studiously avoids these views, but an MMT analysis brings them both into sharp relief.



MMT is a description of how the current fiat monetary system operates. It takes a different viewpoint on the economic circulation that reveals insights hidden by other viewpoints (deliberately so in the case of neoliberalism).

This reveals new political choices. There is an alternative.

  • Monetary policy stabilisation has been an utter failure leading to crippling levels of private debt and inequality. The idea that economic stabilisation is simply a matter of banking policy is Victorian zombie economics at its worst. The One Rate To Rule Them All belief can be rejected entirely, along with all the people that support it.
  • Banking can be returned to bowler hat boring. The job of a bank is to lend for capital development and not a lot else. The Mosler Mechanics for banking puts banks back in their box, and at the same time releases a huge amount of misallocated resources for other uses. Private debt is constrained and naturally limited by credit analysis. No more private debt fuelled booms.
  • Everybody can have a job in the location where they live with the help of the Job Guarantee. Business is moved from master to servant. Business must wander the nations looking for labour to serve it and compete hard to get any. Or it can engage in actual capitalism, and invest in advanced technology and techniques — eliminating jobs while driving forward productivity and our standard of living.
  • We can treat businesses like cattle, not pets. Those that don’t make the grade can fail to allow those that do to flourish.
  • The gyrations of the economy can be stabilised automatically. We have no need for central bankers doing their Wizard of Oz routine. It’s a waste of money and borders on a superstitious ritual. The last ten years have proved that these experts are nothing of the sort, and it is time for them to find alternative employment. (Perhaps they can join Psychic Sally on tour…) Government can adjust fiscal policy with a long term view once a year in the budget, and leave the enhanced automatic stabilisers to handle the short term wiggles in the interim. We need to get people out of the stabilisation business and let fiscal policy and competitive mechanics handle it instead.
  • We can contain the nuclear power of capitalism and make it work for the public good. MMT shows that the government is in charge in its own domain, by virtue of its monopoly over the currency. Government can deploy the resources it requires for the public good, allow the private sector to work its wonders with what is left, and then utilise any remaining capacity with the Job Guarantee. This puts an advanced containment vessel around capitalism giving greater control and output than ever before.
  • Government can focus on what it buys and how it buys it. Once money is out of the picture we can get back to what economics is supposed to be about — the allocation of actual physical resources to tasks. If we want more nurses, where are they coming from? If we want buildings, who is going to build them and what with? What were the alternative uses? What are the opportunity costs? Just because government can command resources, doesn’t mean it should. Neo-liberalism likes to imply that market value and social value are the same. The MMT view shows they are very different beasts. Public provision has to be assessed politically on its social value and social costs.

The sovereign state with its own currency is the world’s unit of independent governance — allowing a set of people to manage their affairs in the way they wish without compromising too much to any other set of people. If you believe that system is worth preserving and can work for the good of all then the MMT viewpoint gives you the tools to make it work well.

The globalists and internationalists of both liberal and neo-liberal persuasion won’t like it. But they have failed us, and their day is done.

The future is independent states of people operating democratically in co-operation with each other, not world government by an aristocracy of the arrogant liberal elite in thrall to bankers.











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Rendezvous in Mallorca: a conversation with Warren Mosler

Warren Mosler and Stuart Medina Miltimore portaitsWarren Mosler and Stuart Medina Miltimore

By Stuart Medina Miltimore. Extract from a long interview with Warren Mosler held in Mallorca on October 14, 2021. Originally published by Red MMT in both English and Spanish


Stuart Medina Miltimore (SMM): A good starting point is your inflation and interest rates story. Let’s start with inflation. You frequently argue that inflation is not always driven by demand. Indeed, you could argue that [demand driven inflation] is a rare event. After that, we can talk about interest rates.

Warren Mosler (WM): Inflation academically is defined as the continuous increase in prices that is faced by agents today looking to purchase things for delivery in the future, whether it’s next week, next month, next year or five years forward. But they want to purchase it now for those dates. And they’re facing what I like to call a term structure of prices. The continuous increase of that term structure of prices is academically the rate of inflation. And, with floating exchange rates, it’s also a direct function of the central bank policy rate.

So, if you have a permanent zero-rate policy, something like Japan has now, where [the Central Bank] controls up to ten years at zero, the term structure of prices is flat. And so the inflation rate under the academic definition — the way I read it — is zero, because agents are looking at flat prices relative to spot prices. So, if I’m a gold manufacturer, I can buy gold today for jewellery manufacturing at $1,800 an oz. But I have other choices: I could buy it a year from now for $ 1,800 or ten years from now for $ 1,800 plus some storage, insurance and other sundry charges. But effectively it’s the same thing.

Now, if the central bank raised rates, say to 1% from zero, the term structure of rates would now be locked at 1% instead of zero. Then the price of gold for every year forward I want to buy would go up. Prices would continuously go up at a 1% compounded rate, so the rate of inflation would be 1%. By the academic definition of inflation — as I read it — the central bank sets the policy rate, which is the rate of inflation, the structure of the policy rate.

The Fed only sets overnight rates, as in the European Union, and allows the term structure to adjust to what market participants anticipate that the Fed is going to do. That’s their policy choice. So today, with a one and a half per cent ten-year note, you could say the forward structure of prices is increasing linearly at an average of one and a half per cent a year for ten years. For people looking today to purchase things for delivery next year or the year after —and this could be somebody who wants to buy a house which is going to take a year to build, or who wants to build a factory which is going to take three years to build — they have to look at the forward prices of those things. The term structure of prices, which is set by the policy rate, is the rate of inflation.

According to that definition, you would not see a headline today saying inflation is at 4%, right? Because that’s what the CPI did versus a year ago, which is a very different thing. What we have today is what’s called a price level. And if the rate of inflation is zero, as it is in Japanese yen, that’s not to say that the price level won’t change, go up, go down, go sideways for the next ten years. It is to say that, right now, if I want to buy something for one-year delivery, the forward price is the same as the spot price.

The next question is, what does determine the structure of prices? And one of the questions it brings up is why the central banks won’t even consider this, or put any time or effort into trying to see what the relationship is between the term structure of prices and their policy rate. Because central banks think they’re in control by using the reference rate.

Well, they’re looking at changing the price level, not realizing that when they raise rates, which presumably causes the price level to go down, they’re establishing a higher inflation rate. They haven’t looked at it from this point of view, nor done the research on it. So, it’s not that they’re right or wrong, it’s just that it doesn’t even occur to them to look at this.

Let’s look at the price level. Why are prices where they are? Why does this thing cost $10 or €9? Where does this price come from? The mainstream [economists] do not have a theory of the price level or a way of determining it independently from what it was yesterday. So they just say it’s historic, because they don’t have anything better and their math doesn’t work to determine the price level as they claim.

SMM: It’s an infinite regress story such as the Marxist labour theory value. Prices are determined by the amount of [socially useful productive] work that you need to get that gold out of a mine, yes, but how much was that hour of work worth in your first place?

The currency is a simple public monopoly.

WM: They don’t understand the source of the price level. What I recognized with MMT, since inception, is that the currency is a simple public monopoly. The economy needs the government’s funds to pay taxes and the government is dictating the terms of exchange when it spends, — whether it knows it or not. So, what markets can do, and that is what the mainstream recognizes, is set relative value. And all their models do is try to determine relative value. They can tell you why peaches cost twice as much as apples or 1 hour of labour earns enough for three pizzas or one pizza per hour of labour. Markets can determine relative value, but markets can’t determine absolute value. They can’t determine whether the hour of labour should be $10 or eleven and a half euros per hour.

SMM: It’s like saying I can tell that this distance is twice this other distance, but somebody has to define a measuring rod.

WM: That’s what I call absolute value. The only information the markets get on absolute value comes from the government through its institutional structure.

SMM: What we’re seeing with the electricity market in Europe right now, is that an institutional structure is determining the pricing in the market. It has nothing to do with production cost.

WM: Exactly. And the institutional structure has a large effect on relative value.

If the government needs to pay for soldiers and nobody else wants them, then it’s setting their value. They get what we pay for them. These soldiers can say, “We need the money to pay the tax”, and we say, “This is what we will pay”. They’re kind of stuck with those terms right now. The government, of course, is setting some price in terms of currency supply and demand.

The demand comes from the tax liability, which then causes the private sector to need the government’s money. So, nothing happens without the tax liability. The story begins there. The mainstream money story begins with the government collecting taxes and what they don’t collect, they have to borrow.

But we see it the other way around, the actual way it works, where the government spends first and then taxes are paid. But they can’t spend first without creating the tax liability. Once the tax liability is established, then the government is in a position to dictate terms of exchange. So, the price level is necessarily a function of prices paid by government when it spends. And, I used to add, also the collateral demanded when it lends, because, if the government lent, open-ended, with no collateral, anybody could borrow all the money they wanted and become the agent for government spending. If you’re getting it in exchange for nothing, it has no value and you would just get hyperinflation. Money would be worth nothing. You could borrow the money, pay the taxes, and nobody would care about it anymore.

However, if you look carefully, when a bank lends, the debtor signs a note and they give you a balance in their account. They give you a cheque; they’re buying a note. It’s a purchase of a signed note. So lending is a [financial] asset purchase by a bank. And any purchase by a bank is paid for by increasing the balance in someone’s account. That creates a new deposit or addition to an existing deposit. This is new money, so to speak, if you define bank balances as money, which everybody does.

Banks in the commercial banking system are agents for the state because they are chartered members. They have an account at the central bank. They’re fully regulated. Regulation includes who they can lend to, what collateral they have to provide, their management, how much they can pay their management, whether they can pay a dividend on their profits… everything. The Regulators have an acronym, CAMELS[1], which explains what they regulate, which is everything. If the banks are agents of the state, I can now say that bank lending is a subset of government spending in the purchase of financial assets.

Then we can just stick with the simple statement. The price level is a function of prices paid by the government when it spends. We don’t have to qualify further with regard to lending. That’s the only source of absolute value. So, the price level doesn’t change without some change in the absolute value information coming from the state.

SMM: How do you put into the equation the fact that the government buys an assortment of goods and not a single uniform homogeneous commodity?

WM: So it’s determined by what needs to be offered at the margin: what the population has to do to get that next dollar from the Government. But it’s not the same offer for everyone. For someone, it could be one hour of labour and for someone else an additional mile of highway.

The government is not only influencing the absolute price level. It could also be influencing the relative price level. If they decide they want apples for everybody in the army, then the price of apples goes up. If they want everybody in the Army to wear a Rolex watch, the price of Rolex watches goes up.

The government creates a notional demand but there isn’t any aggregate demand until the government spends first. It is the source of aggregate demand. I call it the ‘demand filter’. How do the dollars get from the government to the taxpayer? If they just hired everybody —let’s say they tax everybody’s house — then everybody would work for the government and it would give you a job. In this case, the demand filter just has one layer. But if they took the whole $5 trillion [budget], or whatever it is, and gave it to one contractor and said: “here you go; run the economy”, then you would get very different results. He might keep a bunch for himself and you get a whole different distribution.

SMM: Then this person would be the price setter instead of the Government.

WM: Exactly. Especially if he wasn’t given any instructions. Now, if you give him money without instructions, then he becomes an agent of government spending in terms of price level. If the Government pays you a Social Security cheque, you can go out and tell people what they have to do to get this money. But if they say, “here’s money to buy a car”, or “here’s money for food only”, then that’s a different story.

SMM: When you talked about banks, you said they are buying those promissory notes from their borrowers. Presumably, those borrowers will pay back their loans and the promissory note will be cancelled, as well as the deposits that were created when the promissory note was first given out to them. What happens when a borrower goes bankrupt and is not able to pay back?

WM: So that deposit is still outstanding. The bank capital has been reduced and that’s a loss for the shareholders. So it all balances out in the end.

SMM: Recently the European Central Bank redefined their inflation target. They used to say, less than, but close to, 2%. And now they say that they will allow inflation to overshoot that target a bit. However, do you expect the Fed or the European Central Bank will be raising interest rates [in response to the recent price increases]?

WM: They’ve got the interest rate thing backwards. So the answer to that question is, if they believe that inflation, the way they define or report — the CPI, the core, all these things — is somehow ahead of their targets, whatever that means, then their response will be to raise rates because they believe that the cause-and-effect sequence is “we raise rates; inflation comes down”. They don’t have any hard evidence nor supporting theory for that anymore, but they believe it. That’s their story and they’re sticking to it.

We can give them all the theory and evidence to the opposite. [However] they fear that if they’ve got their money and interest rate stories backwards, then the logical conclusion is that central banks really cannot do that much about inflation in the first place. They never have, indeed. That’s why they will never believe this story because they know they will be out of work.

In the meantime, MMT has pointed out several things that the economics profession totally got backwards to the detriment of the economy and the standard of living for a long time. One of them is the sequence of spending. They think that they have to take money in at the federal level to be able to spend. We pointed out that’s backwards. It’s the economy that needs the government’s money. Every mainstream economics model gets that backwards. And that’s a lot of models for many years that have won a lot of Nobel Prizes for having it backwards.

SMM: Their models were designed under the assumption of a gold standard [monetary system].

WM: Now they’re coming around on the realization that government at least prints the money or creates the money when it spends. They haven’t taken the next step: which means accepting that all their models are wrong, but they do know that all their models are broken. And that includes their interest rate models because, when you look at all their forecasts which are based on their models, they’ve all been wrong. So, they recognize their models are broken. So that’s a good start.


Interest rates

WM: The second major thing that we’re saying is they’ve got the interest rate thing backwards. They haven’t gotten anywhere near as close to seeing that our way — at least in public — as they have on the fiscal side. They’re no longer worried about default, but they’re worried about inflation. And of course, the reason they worry about inflation is because it’ll cause the central banks to raise rates to fight it, which is backwards. So now it’s in their best interest to be able to do the countercyclical spending without concern that central banks are going to raise rates, because that’s only going to make matters worse.

Once they know it’s in their best interest to leave interest rates at zero, they should just leave them there forever, which is what we’ve been saying for 35 years now and Japan has proven for 30 years.

SM: There’s also a twisted logic in thinking that by raising interest rates and causing the economy to slow down, they’re actually decreasing capacity and increasing productivity. They’re actually making things worse by slowing down the economy.

WM: Let’s look at their thinking. Remember the situation with Greece. They were not right about the Greeks being lazy and not wanting to work. It was shown that Greeks actually work harder than anybody else. But let’s just concede that they were right. So here you have a population that’s lazy and doesn’t want to work. How do you punish them? Well, you impose austerity and put them out of work. What sense does that make? So even on their own terms, which are completely wrong, their whole internal logic has always been completely flawed since the beginning. But it’s always worked politically and only things that work politically actually happen. If it doesn’t work politically it doesn’t happen.

Unfortunately, they’re not anywhere near as close to the idea that they’ve got the rate thing backwards.


Export-led growth model

SMM: What do you think about this obsession with the export-led growth model, which a lot of countries pursue?

WM: The old textbooks show that it is absurd. Imports are a real benefit; exports are a real cost. It couldn’t be more obvious.

SMM: Yes, even Paul Krugman or Milton Friedman or any classical economist would have said that some years ago.

WM: But not anymore.

SMM: They are just thinking in terms of export-led growth models.

WM: That’s just rhetoric demanded by fixed exchange rates to build reserves so that you can maintain that fixed exchange rate. That is what the IMF was created for: to help countries in the fixed exchange rate system to maintain reserves. So they would recommend these export-led growth models. Not because it served your population or standard of living or terms of trade or anything like that, but because, under the Bretton Woods system, that’s what had to be done to sustain that system for better or for worse.

The system is long gone, but they’re still doing it and the whole understanding is still there. People are doing that unilaterally without even being pressured by the IMF.

SMM: I’m hoping some of the readers of this interview will be Latin Americans, where there’s a long tradition, or obsession you may call it, with fixing the exchange rate or pegging it to the US dollar or managing it some way or another to stabilize the exchange rate. What would you tell them? What’s the point of doing that?

WM: The place to start is to look at the real wealth of the nation. And then you can look at the distribution of that real wealth. So the real wealth is what I call your pile of stuff [for consumption] and everything you produce domestically makes your pile of stuff bigger. All the goods and services you produce, and the more people working, the bigger your pile of stuff that you have to allocate somehow, through market forces or whatever, to everyone.

So, if you want anything less than full employment, you’re sacrificing your pile of stuff. So why would you ever do that? Why don’t you just get as large a pile of stuff as possible? Whatever you’re producing, you don’t want to give that up to adjust your prices, which is an allocation. You probably want to deal with your allocation problem separately. Don’t sacrifice your workers and your production of real output. Domestic real output, is yours, right? And that’s your wealth. Real wealth, plus anything you import from China, or Japan, or Korea, makes your pile bigger.

Your imports minus your exports, which make your pile smaller, are your real terms of trade. Just making your pile larger or smaller. Now, once you understand that, then you can go on to ask if fixing the exchange rate will help make my pile larger or smaller. And what happens if you use fixed exchange rates to maintain your foreign exchange reserves, that requires periodic episodes, sometimes extended periods, even forever, of unemployment to stay competitive. It requires you to keep your people working for fewer calories and you can’t afford to eat your own meat, so that you can maintain your exchange rate. When your target is your exchange rate and your reserves, you’re at less than full employment. So your domestic pile of stuff is smaller than otherwise; you’re giving up that much real wealth.



WM: With a World unemployment rate that is probably 15%, the losses of real output in one year are probably much larger than all the destruction of real goods and services done by all the wars in the history of the world. It’s unbelievably staggering!

SMM: Some of the economists who argue for these sorts of exchange management policies would say that, given that your output capacity is limited and that employment or unemployment is determined by your productive capacity, we need to manage exchange rates so we can afford the capital goods that we need to increase the productive capacity of our economy [in the future].

WM: Two hundred years ago, when we were a totally agricultural society and 99% of people worked in the fields or they would starve, what was the unemployment rate?

SMM: Zero.

WM: Then we started inventing tractors and everything else, creating unemployment in the process. So those people didn’t need to do [that work any longer]. And then manufacturing came along so we went from 99% in agriculture to 1% today. But unemployment is not 99%. Then people went to manufacturing but now manufacturing in the US is 7% of the employment. So at 8% in Agriculture and Manufacturing, unemployment is not at 92%, it’s 3%.

SMM: There is a twisted logic in the idea that, since we can’t create more employment, we have to create unemployment.

WM: The point is there’s always more to do than people to do it. Every day we start off with too many things to do and not enough time to do it with everybody working. So there is never a shortage of jobs. There’s only a shortage of funding.

SMM: I was reading a paper by the Reserve Bank of New Zealand, which was published some years ago when they decided to float their currency. One of the arguments they gave for free float is that managing the exchange rate creates more abrupt changes in the exchange rate, and hence more disruption to the economy and the financial system. Whereas the floating system makes for smoother adjustments in the exchange rate to changes in response to the trade imbalances.

WM: You can always use countercyclical fiscal policy and a Job Guarantee to support full employment. But you can’t do that with fixed exchange without losing your reserves from time to time, which means you have to float.

SMM: The argument these economists retort with is that’s not real employment. You are not creating real jobs nor creating real output.

WM: Well, no, but it’s only short term, because if you have a job guarantee or a transition job guarantee, you then either hire them in regular public service out of the pool, or you relax fiscal policy and the private sector will hire them, which they will. Yes, on day one, it’s not full employment, but on day two and day three it is and those people immediately transition out of there. And it’s a process where you’re keeping the number of people in the job guarantee somewhere between 2% or 5%, something like that, on a continuous basis. So, in that sense, over time you’re at full employment-

SMM: What is your view on the proposals to use the job guarantee as part of the Green New Deal and employ those who are going to be rendered unemployed by shutting down coal mines or oil rigs in the ocean and employ them, presumably in a job guarantee program? Do you think that makes sense?

WM: I consider myself a progressive, okay. To me, that’s not a progressive way to provision the public sector with labour. If you want to hire these people, just hire them! Hire the coal miners to do whatever you want them to do. Don’t put them in a job guarantee at ten Euro an hour. If the regular public service job is €30, just hire them at €30. The whole point is not to undercut the base scale of the public sector. Once you fully provision the public sector with the green new jobs wherever you want, then the rest of those people you want to transition into the private sector, they’re the ones in the job guarantee.

And then you conduct a fiscal policy, you give government grants, loans or whatever you want to do to get the private sector to hire them. If you don’t want them in the private sector, if you want them in the public sector, just hire them.

SMM: The size of the public sector is a political choice that depends on the preferences of the electorate or the elected representative.

WM: I met with a guy from the Pentagon in 1999 or so and, in about three minutes, everything that’s wrong with hiring in the public sector came out. He said, “We really need to build the military up so we’re going to do that.” And I said, “Well, look, unemployment is at 3% right now. We’re at full capacity. You can do it, but you’re going to be taking those people away from the private sector right now. It’s going to be transfer of real resources and you’re going to be competing with them for those. You should have done that seven or eight years ago when we had high unemployment because of the recession. That would have been the time to do it if you’re going to build up the military.” He said “Well we could not do that then because we were running a budget deficit. We didn’t have the money. Today, with a surplus, we can get this done.

So, that little story tells you everything wrong with how the public sector operates right now. The monetary system gives them no information as to what they should be doing. What gives the public sector information is the real economy. How many people do we want in the military? If we have too many then there’s nobody to grow the food and build cars. If we don’t have enough, we’re going to lose the war. That’s how you make your decisions.

What’s our budget and what balance do we have has nothing to do with it. The thing that gives them no information is where they get 100% of their information.

SMM: I think it was Keynes who understood this in his famous treatise How to Pay for this War. He understood that it is the real resources that matter. He just wanted people to spend less and make sure that they were either taxed or put their money away in patriotic bonds or whatever

WM: Which is true, but at the same time he has the government spend by getting money through taxes or borrowing to be able to spend, right? You could argue that under the fixed exchange rate those policies were true, and, although he wasn’t a supporter of those, he still was operating under that context.


The trillion-dollar platinum coin and the debt ceiling

SMM: Speaking of government deficits and debt, let’s talk about the trillion-dollar platinum coin. What’s your take on that?

WM: Well, as you know, it came off a discussion by blogger Carlos Mucha (Beowulf), which was a very good comment and led to a discussion that I had with him at the time. He pointed out that under the Constitution, or whatever, the Treasury could mint a platinum coin, which would be an asset at face value and the Fed would be obliged to buy to it. That would put those funds in the Treasury’s account. My response to that wasthat’s nice, but they really don’t need it. The treasury can sell three month bills and that is what it always has done. But it’s certainly valid and it’s something they could do if they wanted to. And I don’t have any objection to it or anything like that. I thought it was a good find on his part. It was very perceptive on his part to pick that up as an option.

Not much happened since then, except that it was seen as some sort of a cool thing. Then now we ran into the debt ceiling and we said the Treasury can sell all the three month bills at once. But Congress is saying; “No, we don’t want you to sell three month bills. We don’t want you to pay your bills.” So the will of Congress is for the Treasury to not make its payments. Yes, we approve the spending, but we’re not approving you the means to get the money, presumably because we don’t want you to actually spend the money we appropriated.

So now the question is, what does the Treasury have to do: do they abide by the will of Congress immediately? Do they look at the Constitution, which says the government has to honour all its obligations? And President Obama said: “It’s the will of Congress”. I think President Biden is saying the same thing: “It’s the will of Congress”, and we are going to let Congress figure this out and then tell us what to do. We’re not going to try and undercut the will of Congress.

In the meantime, he could have said “We have a constitutional requirement to pay our bills. So, we’re going to mint the coin.” But the political decision was made to go by the will of Congress. And Congress came back kicking the can down the road until December. You can argue which is right or wrong or what they should or shouldn’t do, but their position is a legitimate position.

My issue with this is they’re not well informed as to what happens if we do hit the debt ceiling limit. They’re saying that we would default on our bills or the Treasury bills won’t mature, or that we won’t make payments on the bonds and our credit would be bad and so we wouldn’t be able to borrow.

That’s not the problem though. None of that actually matters. They just start trading arrears like they did in Russia in 1989 and we get through that and they say, well, the government shut down.

We’ve had government shutdowns before. Nothing particularly bad happens. The national parks are closed, etc. The reason nothing bad happens is because, although workers don’t get paid – not because of the debt ceiling, but because the government is closed and there’s no budget – other things get paid and it causes spending to go on. A lot of automatic spending goes on, such as Social Security cheques. And the deficit goes up.

SMM: Yes, automatic stabilizers kick in because there’s more unemployment.

WM: Yes. So the automatic stabilizers kick in and the deficit is allowed to go up. But when you hit the debt ceiling, you suspend all the stabilizers. A better way to explain it is that, when the government stops spending, tax revenues fall off. Before, that was okay, but this now means that you’ve got to cut more. Which means within about three days, you’ve watched 25% of GDP wiped out. It’s unimaginable how pro-cyclical deficit spending is. And also, a lot of spending comes from bank lending. The banks can’t lend when the government shuts down and people are losing their jobs, because their lending is pro-cyclical. So now the automatic stabilizers required to get through are much higher and they’re accelerating. What you get is this accelerating race to the bottom.

I’ve never seen it described in any [analysis] of the consequences of hitting the debt ceiling. They assume the consequences are the same when the government shuts down, so they kind of slough over them. But they’re much, much more severe. If those consequences were understood, I think they wouldn’t think of going anywhere near it, because it’s seriously catastrophic; much worse than they think. It’s like nuclear weapons. One of the dangers is that we might hit it because they don’t understand the consequences.

SMM: One of the implications of MMT and political theory is that really Parliament, or Congress, or whatever your legislator is called, is the creator of money.

WM: It’s the source of money. It’s the government that levies a tax liability and then it establishes what the tax credit is, the dollar or the Euro, that can be used to pay it.

SMM: In fact, in the Spanish [Government] budget, the items in the budget, the Appropriations for the government are called ‘budget credits’. I don’t know if it’s the same in the US. So that means the government has credit to spend and it’s authorized to spend to whatever limit is set in the budget.

WM: Very good.



SMM: So there’s political theory implications that derive from MMT, which I think are profound and transcend economics.

WM: The whole system is based on coercive taxation. That’s not well understood, because that taxation creates a not well understood anxiety in the population. It creates greed and people being money-hungry who then can’t sleep and start taking all kinds of medications and everything else. That’s the anxiety created by ongoing tax liabilities. It’s like you’re in a bathtub with the water continuously going out and you’ve got to work to keep water coming in. And it literally drives people crazy and mad. And it’s a very powerful force to provision government, and it wins the war and creates this largest standard of living but it creates massive psychological consequences for the population. I’ve never seen it discussed.

SMM: You wouldn’t see that sort of behaviour in the premonetary sort of tribal society. They would have other problems like finding food, but that wouldn’t have those psychological effects that you described.

WM: That’s not to say that there isn’t a better way to do it, whatever better means, or a different way to do it. There are probably alternative ways and the results are going to be very different. Maybe this is the desired way, but that doesn’t mean you don’t recognize it, understand it, and look into it to see what you’re doing and how you can modify some of these effects.


Monetary sovereignty

SMM: I mentioned the words monetary sovereignty previously, and you reacted by asking “what do you mean by monetary sovereignty?” What is your position regarding the notion of monetary sovereignty?

WM: Before MMT, the meaning of monetary sovereignty was a sovereign government that issues its own currency. But right now, the meaning has been extended to include other meanings such as non-convertible currency, or no foreign debt, or food independence, or something else. So now I have no idea what they mean anymore.

SMM: I would understand it as a government that issues its own non-convertible IOU.

WM: Right. But let’s say you are the Franklin University, and you’re issuing the Franklin franc, which is your tax credit of which you are the sole issuer and which the students need to pay a tax. Do you have monetary sovereignty?

SMM: Well, no. They are only the sole issuer of that currency.

WM: When you said ‘sole issuer of the currency’ I wouldn’t have questioned you when you say that they have monetary sovereignty. But you don’t need to be a sovereign to be the sole issuer.

So, what are you trying to say when you use the word monetary sovereign? Well, you could be just referring to countries that do this or that. And some of the proponents have a list of eight things you need to have, or you don’t have monetary sovereignty.

SMM: It muddles the issue.

WM: Yes, it muddles the issue, and it opens you up to criticism that sidetracks the issue for no reason. It’s hard enough to have enough time to focus on the actual points, without having to put out all these fires all around the edges which using that word creates.

So, it’s like using the word money. I don’t ever use the word money unless it is in a casual conversation.

SMM: What do you use?

WM: If you go back, you will remember that I said bank loans create bank deposits. It’s the same thing. The definition of ‘money’ is so casual that it is not constructive.

SMM: It’s more a taxonomy sort of issue, or rather about being precise about the definition of what we’re talking about.

WM: You want to get your point across. And this concept makes it more difficult to get a point across, not less difficult. It works against you getting the point across. So when I say bank purchases create bank deposits, I’ve got my point across. If I say bank purchases create money, you might raise all kinds of questions and start discussing those, maybe even arguing about them.


The European Union

SMM: Now that you’ve been in Europe for a few weeks, what would you recommend the European Commission, the European Council or the ECB do regarding the end of the pandemic and the gradual return to normal? Employment rates have bounced back, not completely to their pre-epidemic levels, but they have recovered; activity is almost back to normal. Would you recommend them to continue with the €1.5 trillion program that Christine Lagarde announced a year and a half ago?

WM: Let’s just review the last thirty years quickly. Twenty-five years ago, we were sitting in a Bretton Woods conference on the European Monetary Union, recognizing what was going to happen this whole time, discussing what the end game would be. The Endgame would be a permanent zero rate policy. There would be a central bank guarantee of all national debt, and they would have to use the deficit as a policy tool, rather than as a constant deficit limit. So now here we are. And we also discussed that they were going to need a credible central bank guarantee which is necessary for deposit insurance. Without that, the banking system is going to collapse. They are forced to have one because there’s no other way to do it. This is a point of logic.

So here we are 25 years later. I would say it’s time to declare victory and move on. They’ve got a 0% rate. Just make it permanent! They’ve got the central bank guarantee of all member nations. They’ve got the credible deposit insurance. Just put it in writing. Don’t make it a Mario Draghi policy that we are continuing.

And, as of last year, the Commission decided to change the 3% limit.

SMM: Yeah. The escape clause.

WM: Make it a policy tool!

SMM: But you know that this is temporary.

WM: But temporary and crisis means it’s a policy tool, right? It’s a policy for a crisis. It’s a policy, temporary or permanent. So what they’ve decided is that it’s not fixed at 3%. It’s a tool to use to obtain a result: to get out of the crisis. To solve the energy crisis, the natural gas price crisis, whatever, they’ve recognized that you have to do this. Before that, there was no discussion about this. We went through a lot of crises and they never changed it. They tried to enforce penalties, and then the central bank enforced the rules by letting people up from under the umbrella to let your spreads widen if you didn’t comply with what was always a hard limit. Now it’s a policy tool.

Now, they can move it back if they think that’s beneficial. If they think it isn’t beneficial, they don’t have to move it back. And that’s what they’re trying to decide. Is it a trillion and a half, or isn’t it? It’s a policy tool now. Otherwise, there’s no discussion like before. Three per cent, there is no discussion! Where did we get that?

Now they’ve got the correct policy tool.

What’s left is to recognize that raising rates causes inflation, in which case they will leave interest rates permanently at zero. Because why would you raise rates if you don’t want to cause inflation? Use the other policy tool. Let everybody have lower taxes or higher public services. Raising rates is a totally regressive way to regulate the economy: basic income for people who already have money. There’s nobody in favour of that! Right? Even the basic income people are against that kind of basic income.

So, their economists now have data that show what this deficit limit of 11% or 6% or 3% or 20 % or whatever does. They can give the Commission a spectrum as to what their forecasts are when they put the policy tool at those levels, and they can also get forecasts from private-sector economists, like they already do.

Where do we want it to be next? Should we be back to 3% or not? Well, what do our forecasters say is going to happen at these various levels?

We know that with the central bank guarantee, even Greek debts are at zero %. There’s no credit risk anymore. They used to have credit risk but now that’s all behind them. It’s not there for the banking sector. It’s not there for the government. The debt to GDP ratio is what it is. And with permanent zero rates, why should they sell long term securities at all? They should all just sell three months securities at zero per cent. Now they have no debt service.

The tool of fiscal policy is where all the impact comes from. Use your technocrats to determine what it should be. And then the Commission would decide which one is the most appropriate for the European Union.

SMM: Well, this would still be a rules-based determination of what the deficits should be. The reasonable alternative might be that we want a rule that requires as low an unemployment rate as possible and let the deficit be whatever it needs to be.

WM: The technocrats can tell them that, so they have to make the decision. They’ll tell them what the corresponding inflation rate will be. They’ll tell them what the currency will do. They’ll tell them everything.

SMM: Unfortunately, my impression is that next year they’ll start tightening the belts again.

WM: They might. If they recognize it as a policy tool and that they’re not bound by historical limits, but by future outcomes, then the European Union could do enormously well. It could be the most prosperous Union of all time. They can figure that out. And they’re right there. They’ve already got the things in place now, which they didn’t have two years ago. I say they’re on the edge of greatness. Right?

SMM: Except some people are closer to that edge than others. Not all the technocrats have the same understanding. They have the guarantee from the central bank. They’ve suspended the deficit limits. But they’re still anxious about the consequences of that.

WM: But they have data on what the consequences are, right? They have data on what happens with 11%. They didn’t have that before. They might have been afraid that the currency would collapse, hyperinflation, etc. Well, now they know it doesn’t happen.


The Biden administration’s proposals for tax increases

SMM: What’s the deal with the Biden administration’s proposals for tax increases and wealth taxes and so forth? Do you think it’s necessary?

WM: Trump was the price that the voters were willing to pay to keep the Clintons out of office. Now, with Biden, the price voters are willing to pay to keep Trump out of office [laughs]. There isn’t anything positive about the last couple of US elections, it has all been about the lesser of two evils.

So, Biden is in there in the middle of the road, finding ways to pay for things, looking for legislative compromises.

SMM: Do you think it’s just tweaking the tax rates a bit to satisfy part of his progressive electorate, rather than an actual policy?

WM: Satisfy the headline progressives; not the real progressives, the MMTers. It satisfies people like Robert Reich who say that you could tax the rich and get enough money to feed everybody. That’s what a lot of voters want to hear.

SMM: Are you concerned about the hike in oil and gas prices having consequences in terms of prices and demand?

WM: Isn’t that what triggered the 2008 debacle? Oil just went straight up.

SMM: That year was the maximum for oil prices. I was looking at a time series of natural gas and oil prices. And the last peak was around 2007-2008. I have been hearing comments of people saying, oh, prices of natural gas are an all-time high. No, they’re not! They are higher than they were a year ago, but not at an all-time high.

WM: Yes, but that can drain demand and money goes to places that don’t spend it.



SMM: Before we began recording, you mentioned something which I thought was interesting about the European official trade surplus perhaps not being as high as recorded in the official figures. You said one proof that the official statistics are not picking up the real imports could be that the Euro is not appreciating.

WM: Yes, because you never see a case where trade surpluses keep going on and on without the currency appreciating. According to purchasing power parity, the rate should increase; although there are other things that determine the value of the currency.

There are several articles about how trade figures from different customs offices don’t add up.

SMM: Well, if you add the trade surplus or deficits of all the nations in the world, there’s always a huge gap. Those missing exports must be going somewhere. It’s not going to another planet, for sure. But the statistical discrepancy is very large indeed.


The future of MMT

SMM: What is your opinion on where MMT is headed?

WM: It’s just nice to see the proliferation of MMT discussions. Anybody who gets involved in the discussion can go right to the source material. My Seven Deadly Innocent Frauds book was written for readers with a third grade level. All the knowledge is there.

The interesting thing is that MMT has become a grassroots movement. We might have created our own celebrity with Stephanie Kelton, but we certainly didn’t have a celebrity promoting it in the beginning. Nor did we have any central banks promoting it.

Somehow, people like yourself just sprung up all over the world. For what? It wasn’t for say animal rights, or women’s rights, or the green movement. Who would have heard of a movement to get central banks and governments to understand that they have fiscal policy backwards, that they spend first and then tax? How is that the stuff of a grassroots movement that not only spread to millions of people but also filtered up? And none of them were senior economists, even junior economists. There were zero mainstream economists participating.

But now — there might be one or two reluctant ones — they’ve all started changing their models because they could see that they weren’t right. And MMT is now mentioned and studied at every central bank of the world and discussed in every legislature. How improbable was that!

SMM: And there have even been some attempts to declare MMT a pernicious and dangerous idea.

WM: Yes. The US Congress has a resolution condemning a theory describing monetary operations.

When I talk to senior people at the Fed they go: “Well, yeah, of course. That’s how it works. Everybody knows that!” Then why don’t you say anything? “Well, it’s not our job”.

So, it’s nothing except monetary operations. So how do you get a grassroots movement to instruct the central banks and the legislatures on monetary operations and how it’s done? How improbable is that? It is quite improbable in this channel.

SMM: You didn’t expect this when you started writing about this, did you?

WM: This started purely as an exercise of logic.

SMM: Well, I think it has to do with the pain that standard neoclassical economics has caused to a lot of people, especially in countries like in Southern Europe, where you have high rates of unemployment, which wasn’t necessary.

WM: Yes, but that is not how it started. It wasn’t the unemployed who started this. It came in kind of out of nowhere, off on a tangent somewhere, and filtered its way in through regular working people. It wasn’t like we started addressing the unemployed and getting them all whipped up. People we talked to were already working. And it was just me at first and my partners in ‘92 or ‘93 and then some people in the financial sector followed. I tried to introduce these ideas to the academic community in ‘96 without much success. Later, Bill Mitchell, Randy Wray got involved and then we met Stephanie Kelton.

SMM: What is the issue with the academic community? Why are they so reluctant to embrace MMT? Because the logic is impeccable. It’s hard to contest it. But you get these, sometimes, visceral reactions from some of the academic economists. It is true that some post-Keynesians seem to be more sympathetic to these ideas. But in general, a lot of the neoclassical economists are just plain hostile. They will claim that MMT is nothing new, nothing that we didn’t know already, and if it’s new, then it’s false. I don’t know if you’ve ever reflected on why there’s so much hostility on their side.

WM: I take it personally (chuckles). I worked in the financial sector for 20 years, been out of it for 30, but that doesn’t seem to matter.

SMM: They don’t like an outsider telling them how it actually works, right? Ivory tower complex, I guess.

WM: Yes. Maybe they just resent having been wrong, but they won’t even agree to realize that they were wrong. Maybe that is just what the type of people that go into that field are like, and it has less to do with anything that I or anybody else did to them. They are like that towards life in general.

SMM: They’re just bitter with life (laughs). It took them a long time to realize they didn’t understand anything about how the currency and the system work.

WM: That’s going to come around eventually. I’m not going to be around to see it, but history is not going to be kind to them.

SMM: That is what happened with Darwin’s theory. There was a lot of hostility towards it initially. Nowadays few people would reject the theory of evolution or even Einstein’s theory of relativity, which was probably not well understood initially.


[1] CAMELS is an international rating system used by regulatory banking authorities to rate financial institutions according to the six factors represented by its acronym. The CAMELS acronym stands for “Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity.”











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