Fullwiler: MMT 101

MMT 101: A thread in 25 parts. May 28, 2019
1. From the very beginning in the 1990s, MMT has NEVER argued that ‘printing money’ was necessary. Anyone saying MMT = “print money,” even if they (correctly) incorporate an inflation constraint, is getting MMT dead wrong.
2. The argument from the earliest days–@wbmosler ‘s “Soft Currency Economics,” Wray’s “Understanding Modern Money,” or @StephanieKelton ‘s “Can Taxes & Bonds Finance Govt Spending?”–the MMT argument is that ALL govt deficits are ‘printing money’ ALREADY (!).
3. These and other foundational, early MMT pieces argue that the choice to issue bonds or not is about monetary policy how to set the CB’s interest rate target, not whether to ‘finance’ a deficit or ‘print money.’
4. The argument across literally dozens of publications is consistent–whether or not govt issues bonds when it runs a deficit, the macroeconomic impact of ‘bonds vs. money’ is nil.
5. What matters for macro impact is the deficit itself, and how it is created (spending/taxing priorities), since the deficit is creating net financial wealth in the pvt sector (note I did NOT say ‘real’ wealth (!)).
6. The choice to issue bonds or not in the face of a deficit is simply about 1 risk-free govt asset (say, Tbills) vs. another risk-free govt asset of perhaps slightly longer maturity (but that’s also a policy choice).
7. This is also partly why we predicted back in the 2001 that Japan’s QE wouldn’t be inflationary, and predicted the same for the US in 2008. QE & ‘monetization’ of govt debt is about an asset swap–it’s the deficit itself that has the ‘quantity’ effect, not the financing.
8. Similarly, in the real world, CB’s are defending their national payments systems every minute of every day. This means they accommodate banks’ demand for CB liabilities always at or near their current interest rate target.
9. From an MMT perspective, it’s really weird that people believe a govt running a deficit via overdraft at the CB is inherently inflationary, but the current system, where govt runs a deficit while CB guarantees mkt liquidity for bond dealers to buy govt bonds, isn’t.
10. So, from the beginning 20+ yrs ago, MMT said the ‘choice’ to issue bonds when running a deficit was about how to set CB’s int rate target. W/ bond sales, CB accommodates banks at its tgt rate. W/o bond sales, CB sets rate at ZIRP or uses IOR=tgt rate to set tgt rate <> 0
11. This is just supply and demand from ECON 101. If you push out the supply curve beyond the entire demand curve, either the price falls to 0 or you have a price floor set at <> 0. Those are the only 2 possibilities when ‘printing money’ to run a deficit.
12. Neoclassicals actually agree w/ this, for different reasons. For them, if ‘monetize’ govt debt & CB rate = 0, ‘monetization’ isn’t inflationary. Or, if CB sets rate <> 0 via IOR=target rate, still not inflationary.
13. In both cases, CB’s reserves are considered effectively equivalent to holding, say, Tbills. So, ‘monetization’ or ‘printing money’ is effectively equivalent to ‘printing’ Tbills. IOW, if you blend neoclassical model w/ actual CB ops, ‘printing money’ isn’t inflationary.
14. Putting this all together . . . MMT has NEVER argued that ‘printing money’ as conventionally interpreted is necessary to carry out MMT policy proposals. All deficits create net financial wealth for pvt sector, regardless of ‘finance’ method.
15. Choice to issue bonds or not when running a deficit is about how to set CB’s target rate, not ‘financing’ a deficit. This means that interest on national debt is a policy variable, or at least can be (for monetary sovereign, of course).
16. So, choice to issue bonds or not is not about ‘quantity’ impact of a deficit, but about ‘how’ CB chooses to achieve its target rate. Hitting interest rate tgt by overdraft to govt & pay IOR=tgt rate=2% has no difference of macro significance from . . .
17. … hitting interest rate target by govt instead issuing tbills while CB ensures mkt liquidity at tgt rate = 2% to banks & bond dealers.
18. Now, there are places where MMT scholars argued for no bond issuance, govt gets CB overdraft, & CB sets tgt rate= 0 (permanent ZIRP). Note, tho, that this is (a) not arguing in favor of ‘printing money’ even in neoclassical view (it’s Krugman’s liquidity trap, actually) …
19. (b) and is therefore, simply a policy proposal for low interest rates on govt debt. It is also NOT arguing for ZIRP in a neoclassical world–Wray did his Ph.D. under Minsky. Minsky was against manipulating short term rates; instead favored credit regs/margins of safety.
20. That is, when MMT proposes ZIRP, it is proposing it for ONLY the govt debt, NOT for the economy overall as in a New Keynesian model. There are dozens of MMT publications on regulating credit, and more on the way. MMT was about macroprudential before that was a thing.
21. Minsky was adamant that manipulating short-term interest rates was actually destabilizing (he blamed the rise of money manager capitalism on Volcker’s high rates). Raise margins of safety to slow credit rather than raising the overnight, risk-free rate.
22. A benefit of margins of safety is that raising interest rates to slow credit leads to higher hurdle rates that can only be met by riskier projects, while raising margins of safety slows credit by favoring the LESS risky loans.
23. Particularly given that the problem of a debt bubble is that credit QUALITY is bad, it’s really weird from an MMT perspective that it’s mostly MMT arguing in favor of macro policy that target credit quality …
24. … while neoclassicals go to lengths to NOT talk about credit quality–use a Taylor rule to manipulate short-term rates, increase liquidity requirements, increase capital, but little to nothing about underwriting. (Shocker–we now have a corp debt bubble.)
25. So, MMT is NOT arguing for ‘printing money’ and ‘ZIRP’ in the conventional, neoclassical world. MMT is arguing for stabilizing demand side of the economy w/ a mix of govt’s budget position (at low rates, however ‘financed’) & credit quality/margins of safety.