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Author Topic:   Modern Monetary Theory (MMT)
Posts: 20115
From: the other end of the sidewalk
Joined: 03-14-2004
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Message 1 of 1 (861487)
08-22-2019 9:06 AM

Democrats (Progressives) need to understand and embrace MMT:

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly for the government and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.[1][2] MMT is seen as an evolution of chartalism and is sometimes referred to as neo-chartalism.

MMT advocates argue that the government should use fiscal policy to achieve full employment, creating new money to fund government purchases. According to advocates, the primary risk once the economy reaches full employment is inflation, which can be addressed by raising taxes and issuing bonds to remove excess money from the system.[3] MMT is controversial, with active debate[4] about its policy effectiveness and risks. Its macroeconomic policy prescriptions have been described as being a version of Abba Lerner's theory of functional finance.

MMT states that a government that issues its own money:

  1. Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
  2. Cannot be forced to default on debt denominated in its own currency;
  3. Is limited in its money creation and purchases by inflation, which accelerates once the real resources (labor, capital and natural resources) of the economy are utilized at full employment;
  4. Can control demand-pull inflation[5] by taxation and bond issuance, which remove excess money from circulation, although the political will to do so may not always exist;
  5. Does not need to compete with the private sector for scarce savings by issuing bonds.

These tenets challenge the mainstream economics view that government spending should be funded pre-emptively by taxes and debt issuance.[6][7][4]

Theoretical approach

In sovereign financial systems, banks can create money but these "horizontal" transactions do not increase net financial assets as assets are offset by liabilities. According to MMT adherents, "The balance sheet of the government does not include any domestic monetary instrument on its asset side; it owns no money. All monetary instruments issued by the government are on its liability side and are created and destroyed with spending and taxing/bond offerings, respectively."[2] In MMT, "vertical money" enters circulation through government spending. Taxation and its legal tender enable power to discharge debt and establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met. In addition, fines, fees and licenses create demand for the currency. This can be a currency issued by the domestic government, or a foreign currency.[33][34] An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities by itself. The approach of MMT typically reverses theories of governmental austerity. The policy implications of the two are likewise typically opposed.

Illustration of the saving identity with the three sectors, the computation of the surplus or deficit balances for each and the flows between them[35]

MMT labels any transactions between the government, or public sector, and the non-government, or private sector, as a "vertical transaction". The government sector is considered to include the treasury and the central bank. The non-government sector includes domestic and foreign private individuals and firms (including the private banking system) and foreign buyers and sellers of the currency.[36]

Interaction between government and the banking sector

MMT is based on an account of the "operational realities" of interactions between the government and its central bank, and the commercial banking sector, with proponents like Scott Fullwiler arguing that understanding reserve accounting is critical to understanding monetary policy options.[37]

A sovereign government typically has an operating account with the country's central bank. From this account, the government can spend and also receive taxes and other inflows.[27] Each commercial bank also has an account with the central bank, by means of which it manages its reserves (that is, money for clearing and settling interbank transactions).[38]

When the government spends money, the treasury debits its operating account at the central bank, and deposits this money into private bank accounts (and hence into the commercial banking system). This money adds to the total deposits in the commercial bank sector. Taxation works exactly in reverse; private bank accounts are debited, and hence deposits in the commercial banking sector fall. In the United States, a portion of tax receipts are deposited in the treasury operating account, and a portion in commercial banks' designated Treasury Tax and Loan accounts.[9][39]

In essence, government spending creates money and taxation destroys money.

The interesting thing is that deficit spending is not a bad thing in and of itself, it is a measure of how much the government is supporting the economy -- deficit spending puts money into the economy, into the pockets of people, who then spend money, circulating it and boosting the economy. A sovereign government cannot default on debt, because it can create money to pay it off. If you doubt this consider the years of deficit military spending by the US ... has it weakened the dollar?

Rather than worry about the deficit, the question should be what benefit the spending has for the people of the country.

If there is unemployment, then spending is not properly allocated: Not all people benefit.

If there is income inequality, then spending is not properly allocated: Benefits are not distributed equitably among people for work done.

This answers the common question put to progressives / democratic socialists: How are you going to pay for it?

The answer is: the same way we pay for military deficit spending -- simply by issuing the money.

Inflation is controlled by taxation and federal interest rates (which work to remove money from the economy).

Taxation can also control how the money is distributed among the people -- those who benefit the most should be taxed the most.

Enough for now.


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