In a YouTube video, Robert Kiyosaki referred to MMT as “Marxist Monetary Theory”. A recent book about MMT, which mentions the “People’s Economy” in the subtitle, would appear to corroborate Kiyosaki’s accusation. The book, a bestseller titled The Deficit Myth, is a popular explanation of Modern Monetary Theory. What we call the theory is not all that important, but its roots are not Marxist. The ideas of MMT are challenging, and people, even those who are as successful as Kiyosaki, may be doing themselves a disservice if they just dismiss the theory because it is left wing.
One could infer that Stephanie Kelton, the author of The Deficit Myth, would agree that the federal budget deficit doesn’t matter much. On closer inspection, we see sentences like “That’s not to suggest that deficits don’t matter…” (The Deficit Myth, 2020; New York: PublicAffairs, 2021, 12). MMT, to oversimplify, is a theory about how some deficits are “not like the others” (Ibid, 18). According to Kelton, the United States federal government is a monetary sovereign and a currency issuer. The implications, according to MMT, are that “the federal government is not dependent on revenue from taxes or borrowing to finance its spending” (Ibid, 9). Stripped out of context, passages like the one below might look crazy:
Your taxes don’t actually pay for anything, at least not at the federal level. The government doesn’t need our money. We need their money. We’ve got the whole thing backward! (Ibid, 23)
Kelton is referring here to the United States. Not every country has monetary sovereignty, but the U.S. “issues its own nonconvertible (fiat) currency and only borrows in its own currency” (Ibid, 19). Because the U.S. is a monetary sovereign, it’s a myth that it can go broke (Ibid, 8): “the United States never has to worry about running out of money” (Ibid, 19).
The monetary sovereign spends first (Ibid, 72). The U.S. issues the currency. Therefore, “Uncle Sam doesn’t need dollars. When he collects taxes from us, he’s just subtracting away some of our dollars” (Ibid, 31). In Kelton’s view, the monetary sovereigns have “great power” (Ibid, 69). The U.S. in particular “is not a beggar, who must go hat in hand, in search of funding to support his desired spending. He’s a muscular currency issuer! He can choose to borrow (or not), and Congress can always decide what rate of interest it will pay on any bonds it decides to offer” (Ibid, 116). To be clear, when Kelton wrote “any bonds,” she meant it. The U.S., according to her, could “take control” of short term and long term Treasury rates. “It could even dispense with Treasuries altogether” (Ibid, 117). Someone coming from a “hard money” background or even from the centrist mainstream could very well think of her book as shock therapy in paperback. The (sharp?) contrast between MMT and other doctrines merits some attention.
Arbitrating between MMT and other ways of thinking is beyond my capacity at this time. At best, I can explore possible rebuttals. At worst, I may only be able to offer a survey of “He said. She (Kelton) said.” MMT is not going away, so if the teachings aren’t intuitive, we should at least look into why they aren’t. For now, I’ll just cite some passages that I think are difficult to reconcile with MMT. Maybe later we can figure out who’s correct. With respect to taxes, not much needs to be said about MMT being at odds with other writers. According to Kelton, MMT demonstrates that the United States federal government doesn’t need to raise tax revenue in order to spend money (Ibid, 3 & 8). Contrary to what may appear to be the case, “Congress doesn’t need to ‘find the money’ to spend it. It needs to find the votes!” (Ibid, 29) Taxes, the federal ones in the U.S. at least, don’t exist to raise revenue; they “are there to create a demand for government currency” (Ibid, 26). One would get a totally different impression from the following:
If the present value of future expenses exceeds the present value of future revenues, the government could have a problem. Economists generally define a deficiency of this nature as a “fiscal imbalance.”… If the fiscal imbalance is large, the government definitely faces a problem that requires an eventual solution. Either future revenues will have to increase or future expenses will need to decrease—or a combination of both. (John Allison, Introduction, U.S. Fiscal Imbalance by Jeffrey Miron, Washington D.C.: Cato Institute, 2016, 3)
MMT gives us no obvious reason why deficits and “fiscal imbalance” (future deficits) are going to be such a problem. Someone is apparently mistaken. Could it just be a controversy over which paradigm one chooses? We can doubt that because the conclusions from the paradigm are also different. Kelton wrote bluntly that “the government’s budget isn’t supposed to balance” (The Deficit Myth, 43). One group seems to be fine with “imbalance”; the other group is not.
What Kelton taught about government borrowing could potentially overturn much of what even contrarians believe. I am not sure how to classify the so-called “permabear” Robert Prechter Jr., but his analysis has been serious and thought-provoking. When it comes to the impotence of the Fed and monetary policy, there are points where Prechter and Kelton seem to agree. Otherwise, I don’t see much agreement. First, some background information. Prechter does not agree with MMT when it comes to the origin of money (Conquer the Crash, John Wiley & Sons, 2003, 96). Like some other “hard money” authors, Prechter doesn’t think that the Fed can control interest rates. He wrote, “During monetary crises, the Fed’s attempts to target interest rates don’t appear to work because in such environments, the demands of creditors overwhelm the Fed’s desires” (Ibid, 126). Kelton focused on what the government as a whole could do with regard to the interest rates on the government’s bonds. When it came to that narrow class of interest rates, Kelton argued that a currency-issuing government “can exert substantial influence over the interest it pays on … securities” (The Deficit Myth, 122). Prechter, in an early book, appeared to argue that the government can’t control any interest rate: “While the Fed and the government might have had some power to control interest rates temporarily in the past, they have created and fostered so much debt that they no longer control the market” (At the Crest of the Tidal Wave, Second Edition, Gainesville, Georgia: New Classics Library, 1996, 288).
Speaking unambiguously about the U.S., The Economist magazine reported that the Fed “can clearly still set short-term interest rates” (Economics: Making Sense of the Modern Economy, Profile Books, 1999, 102). When it came to long-term rates, The Economist didn’t seem to be in agreement with MMT: “Although central banks can set short-term rates, they can no longer control long-term rates. The effect of a change in monetary policy on bond yields depends on the market’s assessment of its impact on the economy…. For example, if a central bank tries to loosen policy at a time when inflationary expectations are rising, its attempts will be partly neutralized by a rise in long-term rates” (Ibid, 106). The Economist’s article was originally published in 1995, the same year that the first edition of Prechter’s book was published. Prechter said the same thing from a different angle when he wrote, “Whatever liquidity the government tries to add to the system will come at the cost of falling prices for debt instruments, resulting in a net destruction of presumed wealth” (At the Crest of the Tidal Wave, Second Edition, 288). Kelton’s explanation of how the government influences interest rates is one of the most surprising in the book. I’ll need to try to grasp what non-MMT economists think before I move on. A digression is needed.
According to The Economist, “the Fed exercises monopoly control over the creation of currency and the reserves which banks must hold. As a monopoly supplier of reserves, a central bank can affect the price of those reserves (ie, the rate at which banks lend them to one another) by changing their supply through open-market operations [buying and selling assets]” (Economics, 103). Here’s what I thought this (presumably non-MMT) author believed: The government is authorized to spend money. Assuming a deficit, taxes cover some of the expenses. Government borrows the rest. If citizens don’t buy all of the Treasury notes, bonds, etc., the Fed will buy some of them with money created from nothing. When the Fed does so, it is known as “monetizing the debt.” If the Fed buys the Treasuries with newly-created money, it increases the supply of “reserves,” and, all other things remaining the same, interest rates, the short term ones at least, fall. Kelton’s book tells a different story:
Deficits push the overnight interest rate [the rate at which banks lend to one another?] down. In a world without bond sales or some other defensive action by the central bank, deficits will drive the short-term interest rate to zero. That’s because deficit spending fills the banking system with excess reserves, and a huge increase in the supply of reserves will push the federal funds rate to zero. (The Deficit Myth, 120 & 121)
In one narrative, the central bank changes the supply of reserves. In another, government spending seems to increase the supply of reserves. Perhaps I’ve misinterpreted one or both authors, but before reading about MMT, I never even thought to ask who or what was increasing the supply of reserves.
Kelton’s narrative leads me to ask another question: Isn’t the Fed known for buying government bonds and other assets? Elsewhere, I wrote that Post-Keynesians see the Fed as being an inflation fighter. There appears to be a lot of overlap between Post-Keynesians and the MMT economists. It’s no surprise then that Kelton is mentioning the Fed selling bonds. (When the Fed sells assets, money gets sucked out of the economy.) Unless I overlooked something, it’s not clear, under the MMT paradigm, why the Fed would be buying bonds. Are they buying them so that they can sell them later? Even under MMT, deficits would matter, but the Fed, allegedly an inflation fighter, swoops in and cancels out the effects of the deficit spending with its bond sales. Does fiscal policy increase the supply of money if the spending isn’t “paid for”? If so, the partisan talking points we heard for and against the Build Back Better bill would have been appropriate. By their words, are politicians corroborating MMT? Would abolishing the Fed mean that deficit spending would matter? Doesn’t the Treasury sell its own bonds? What if they sold the bonds and sucked money out of the economy? Does that take too long? Once we concede that Congress can spend unlimited money, we are left with so many questions.
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