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DEBT, DEFICITS AND MODERN MONEY by Winston Gee
Gee: Thanks for joining us, Professor Mitchell. I wanted to talk with you today about Modern Monetary Theory (MMT)—the theoretical approach you’ve been integral in developing—and its relevance to current debates over public finances. I know you’ve been quite scathing of mainstream economic discourse. For example, you wrote in your blog recently that “the economics media is dominated with financial issues – too much public debt; debt ceilings; fiscal sustainability; sovereign risk; and all the rest of the non-issues that have taken center-stage.” Could you take a moment to explain why MMT renders these things non-issues?
Mitchell: The most important misperception is that MMT is in some way outlining an ideal or a new regime that could be introduced. The reality is that MMT just describes the system that most countries in the world live under and have lived under since 1971, when the US president at the time, Richard Nixon, suspended the convertibility of the US dollar into gold. At that point, the system of fixed exchange rates—in which all countries agreed to fix their currencies against the US dollar, which was in turn benchmarked in price against gold—was abandoned. So since that day, most of us have been living in what we call a fiat currency system.
In a fiat currency system, the currency has legitimacy because of legislative fiat: the government tells us that’s the currency and then legislates it as such. The currency has no intrinsic value. What gives it value, what motivates us to use the currency that the government suggests, is the fact that all tax obligations are denominated in and have to be extinguished with that currency. We have no choice. If you live in America, for example, you have to pay American taxes to the IRS with American dollars. So demand for the currency, otherwise worthless bits of paper, is driven by the fact that all tax obligations have to be extinguished with that currency. Once you consider that, then you immediately realize that the national government is the monopoly issuer of that currency. That means that the national government in such a system can never be short of that currency; it can never run out of money. It doesn’t need you or I to lend it money or you and I to pay taxes to get more money. It can never run out of money. That’s the first basic insight of MMT: governments are not constrained in their spending by a need to raise revenue.
If you extend that logic a little further, you might ask, “Well, don’t we pay taxes and buy bonds so that the government can spend?” Well, you first have to ask yourself the question, “Where do you get the money to pay taxes and buy bonds?” And the answer is that we can’t get our hands on the currency until the national government spends it. Spending is the prior act in a fiat monetary system; taxing and borrowing are following acts. In effect, the government is only taxing what it has already spent, and it’s only borrowing back money that it has already spent. Once you start pursuing this logic, you realize that most of the propositions that are occupying the current debate around the world are based upon false premises.
http://web.archive.org/web/20160402025840/https://hir.harvard.edu/debt-deficits-and-modern-monetary-theory
FEDERAL GOVERNMENT DEBT IS NOT DEBT by Bill Mitchell
...
So while private debt may or may not be a problem and does raise the question of solvency of the debtors public debt is never an issue in this regard. It is clearly desirable that private debt levels be reduced at this time to reduce the precarious nature of the private balance sheets. But in saying that there are no parallels that can be drawn about public debt. It is simply a totally different construction.
An economic growth strategy based on running budget surpluses (withdrawing net spending from aggregate demand) and then relying on increased private sector indebtedness (negative saving) to keep demand growing is unsustainable. We need to learn that from this current episode.
We need to learn that the budget surpluses are causally related to the private debt binge. If the private sector didn’t increasingly load itself with debt then the government sector would not be able to run surpluses for very long. The output levels (income generation system) would react to the fiscal drag and contract and the resulting cyclical downturn would, via the automatic stabilisers, push the budget into deficit up to the point that the net public spending matched the desired private saving desires. You cannot escape this.
Further, the private debt build-up cannot sustain itself if there is nothing real created
http://bilbo.economicoutlook.net/blog/?p=3346
Gee: Thanks for joining us, Professor Mitchell. I wanted to talk with you today about Modern Monetary Theory (MMT)—the theoretical approach you’ve been integral in developing—and its relevance to current debates over public finances. I know you’ve been quite scathing of mainstream economic discourse. For example, you wrote in your blog recently that “the economics media is dominated with financial issues – too much public debt; debt ceilings; fiscal sustainability; sovereign risk; and all the rest of the non-issues that have taken center-stage.” Could you take a moment to explain why MMT renders these things non-issues?
Mitchell: The most important misperception is that MMT is in some way outlining an ideal or a new regime that could be introduced. The reality is that MMT just describes the system that most countries in the world live under and have lived under since 1971, when the US president at the time, Richard Nixon, suspended the convertibility of the US dollar into gold. At that point, the system of fixed exchange rates—in which all countries agreed to fix their currencies against the US dollar, which was in turn benchmarked in price against gold—was abandoned. So since that day, most of us have been living in what we call a fiat currency system.
In a fiat currency system, the currency has legitimacy because of legislative fiat: the government tells us that’s the currency and then legislates it as such. The currency has no intrinsic value. What gives it value, what motivates us to use the currency that the government suggests, is the fact that all tax obligations are denominated in and have to be extinguished with that currency. We have no choice. If you live in America, for example, you have to pay American taxes to the IRS with American dollars. So demand for the currency, otherwise worthless bits of paper, is driven by the fact that all tax obligations have to be extinguished with that currency. Once you consider that, then you immediately realize that the national government is the monopoly issuer of that currency. That means that the national government in such a system can never be short of that currency; it can never run out of money. It doesn’t need you or I to lend it money or you and I to pay taxes to get more money. It can never run out of money. That’s the first basic insight of MMT: governments are not constrained in their spending by a need to raise revenue.
If you extend that logic a little further, you might ask, “Well, don’t we pay taxes and buy bonds so that the government can spend?” Well, you first have to ask yourself the question, “Where do you get the money to pay taxes and buy bonds?” And the answer is that we can’t get our hands on the currency until the national government spends it. Spending is the prior act in a fiat monetary system; taxing and borrowing are following acts. In effect, the government is only taxing what it has already spent, and it’s only borrowing back money that it has already spent. Once you start pursuing this logic, you realize that most of the propositions that are occupying the current debate around the world are based upon false premises.
http://web.archive.org/web/20160402025840/https://hir.harvard.edu/debt-deficits-and-modern-monetary-theory
FEDERAL GOVERNMENT DEBT IS NOT DEBT by Bill Mitchell
...
So while private debt may or may not be a problem and does raise the question of solvency of the debtors public debt is never an issue in this regard. It is clearly desirable that private debt levels be reduced at this time to reduce the precarious nature of the private balance sheets. But in saying that there are no parallels that can be drawn about public debt. It is simply a totally different construction.
An economic growth strategy based on running budget surpluses (withdrawing net spending from aggregate demand) and then relying on increased private sector indebtedness (negative saving) to keep demand growing is unsustainable. We need to learn that from this current episode.
We need to learn that the budget surpluses are causally related to the private debt binge. If the private sector didn’t increasingly load itself with debt then the government sector would not be able to run surpluses for very long. The output levels (income generation system) would react to the fiscal drag and contract and the resulting cyclical downturn would, via the automatic stabilisers, push the budget into deficit up to the point that the net public spending matched the desired private saving desires. You cannot escape this.
Further, the private debt build-up cannot sustain itself if there is nothing real created
http://bilbo.economicoutlook.net/blog/?p=3346
