Tenets of MMT – A Blankfiendish Perspective

(Before It's News)

My last post regarding Dr. Stephanie Kelton’s exposition of MMT really brought about quite a response.  Needless to say, my curiosity about MMT was certainly piqued enough to cause me to read further.  Having done further research, I believe MMT to indeed be a very useful lens through which to view the workings of the American monetary system.  Obviously, I have much yet to learn, but wanted to put together a list of my impressions.

The readings I used to reach these conclusions include:

Understanding the Modern Monetary System, by Cullen Roche
Pavlina R. Tcherneva “Chartalism and the Tax-Driven Approach to Money” Chapter 5, Alternative Monetary Economics
Modern Monetary Theory – A Debate, PERI, UMass Amherst

1. “Money” is a liquid tax-credit (or token) issued by the state.
2. The state has a monopoly on the issuance of tax-credits, as it alone specifies what it will accept to satisfy tax obligations.
3. Tax-credits are a liability for the issuer (the state), and an asset for the holder.
4. Hence, tax-credits, or “money,” are debt instruments – state-issued IOU’s, if you will.  While anyone can issue debt instruments, only the state has the ability to induce others to hold them.
5. Government spending creates tax-credits ex nihilo and transfers them to the private sector.  “Government spending ‘finances’ private sector ‘tax payments’ and not vice versa.”[1]
6. Government taxation removes tax-credits from the private sector, essentially destroying them.  (Think asset meets liability, matter meets anti-matter…)
7. Government bonds are merely securitized tax-credits that pay interest in the form of tax-credits.
8. Bank reserves are tax-credits which have been issued by the state, but remain idle within the private sector.  Reserve levels neither constrain nor encourage lending.  Monetary velocity expresses the degree to which idle reserves are transformed into credit for the private sector.
9. Private sector savings, or wealth accumulation, is the hoarding of tax-credits for future use.
10. Saving withdraws tax-credits from the system, requiring the government to issue more tax-credits than it collects through taxation in order to compensate and maintain full employment.
    “Government spending supplies high-powered money to the population. If the private
    sector wishes to hoard some of it – a normal condition of the system – deficits necessarily
    result as a matter of accounting logic.
    Furthermore, the government cannot collect
    more in taxes than it has previously spent; thus balanced budgets are the theoretical
    minimum that can be achieved. But the private sector’s desire to net save ensures that
    deficits are generated. The market demand for currency, therefore, determines the size of
    the deficit (Wray, 1998: pp. 77–80).
    In a given year, of course, surpluses are possible, but they are always limited by the
    amount of deficit spending in previous years. If during the accounting period government
    spending falls short of tax collections, private sector holdings of net financial assets necessarily
    decline. The implication is that surpluses always reduce private sector net savings,
    while deficits replenish them. It should also be noted that, when governments run surpluses,
    they do not ‘get’ anything because tax collections ‘destroy’ high-powered money
    (Mitchell and Mosler, 2005: p. 9).”[2]

11. Put another way, aggregate (on a societal level) wealth accumulation is only possible via government deficit spending. This is not the case on an individual level, as some may accumulate tax-credits from others willing to part with them. However, net-net, societal wealth (the amount of tax-credits available within the private sector) does not change via these private interchanges. 
12. An overabundance of tax-credits can lead to inflation.
13. An inadequate supply of tax-credits can lead to deflation, disinflation, and underemployment.
14. Bond issuance mitigates inflation by sequestering liquid tax-credits in a securitized form for a given term.
15. The primary role of FED Open Market Operations is to mediate the transformation of tax-credits between their liquid, but idle form (reserves) and their securitized, interest paying form (bonds).  Hence, these operations are an asset swap and do not of themselves create tax-credits de novo.   Fed “tightening,” bond selling, or raising the Fed Funds rate all involve transforming liquid tax-credits into their securitized, illiquid form.  ”Easing,” bond buying, or lowering the Fed Funds rate does exactly the opposite. 
16. Tax collection mitigates inflation by destroying tax-credits as they are redeemed for the payment of tax-liabilities.
17. Government spending increases the total supply of tax-credits, as mentioned above in (5).  By “government,” MMT uses a somewhat artificial conglomeration of cooperative Treasury/FED spending, which sees the FED as the Treasury’s bank.  In practice, the Treasury must have a positive balance in its account at the FED in order to spend.  It can achieve such a balance through the issuance of bonds, which are then indirectly transformed into liquid form when the FED “buys” them, creating liquid tax-credits ex nihilo.  (It would also seem that a positive balance in the Treasury’s account could be attained through tax collection, but this does not fit our model of tax collection being a means of outright destroying tax-credits as they fulfill existing private sector tax obligations.)
18. Given this de facto cooperation between the FED and the Treasury, MMT states that the “government” can never face a solvency crisis as it issues tax-credits that are not convertible to any other asset.  This has been the case since 1971, when Nixon defaulted on US debt obligations by closing the gold window.  (In current practice, the Treasury really is NOT a bank {it is a Currency User – not a Currency Issuer}, and the US places a statutory debt-ceiling on government spending, so default would be politically possible.  Some MMT advocates propose ways around this “inconvenience,” but I will not go into them here.)
19. If we accept tenet 18, the only spending constraint for governments that issue currency that is not convertible or pegged is inflation. 
20. As a derivative of tenet 19, government spending must be matched by innovative, competitive and productive uses of “money” in the private sector.  Only a nation that respects this tenet can expect to credibly fund itself in this way.  A nation which disregards the responsibilities to maintain innovation, productivity and competitiveness will eventually face inflation, a decline in living standards, and, potentially, hyperinflation.  Hyperinflation is the ultimate repudiation of the nation’s monetary system.  For more valuable insight into the idea of inflation as a real constraint, I highly recommend Part V of Cullen Roche’s Understanding the Modern Monetary System.

Having said all of this, I am not yet at the point of being a MMT advocate.  There are still many open questions for me, which will be the subject of a future post(s).  Nevertheless, as I said above, MMT does provide a useful lens to help bring into better focus what may be an incompletely resolvable complexity.  MMT is also a very interesting lens through which to view the European Monetary Union, and this shall also be the subject of a future post.

Notes:
[1].  Pavlina R. Tcherneva “Chartalism and the Tax-Driven Approach to Money” Chapter 5, Alternative Monetary Economics, p 78.
[2].  Ibid, p 78

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