My response to a German critic of MMT – Part 1

Makroskop is a relatively new media publication in Germany edited by Heiner Flassbeck and Paul Steinhardt. It brings some of the ideas from Modern Monetary Theory (MMT) and other analysis to German-language readers. It is not entirely sympathetic to MMT, differing on the importance of exchange rates. But it is mostly sympathetic. I declined to be a regular contributor when invited at the time they were starting the publication not because I objected to their mission (which I laud) but because their ‘business model’ was a subscription-based service and I consider my work to be open source and available to all, irrespective of whether one has the capacity or the willingness to pay. But I have agreed to contribute occasionally if the material is made open source, an exception to their usual material. Recently, the editors approached me to respond to an article they published from a German political scientist – Modern Monetary Theory: Einwände eines wohlwollenden Zweiflers or in English: Modern Monetary Theory – Questions from a Friendly Critic. The article constitutes the first serious engagement with MMT by German academics and thus warrants attention. Even if you cannot read German you will still be able to glean what the main issues raised in the German article were by the way I have written the English response. The issues raised are of general interest and allow some key principles of MMT to be explicated, which explains why I have taken the time to write a three-part response. Today is Part 1.

The so-called “Friendly Critic” of MMT (self-styled) was Martin Höpner, who is a political scientist associated with the Max-Planck-Institut für Gesellschaftsforschung (Max Planck Institute for Social Research – MPIfG) in Cologne.

The original article (in German) was published on March 20, 2018.

Here is guidance on why Martin Höpner’s contribution is interesting but essentially flawed. To ensure these blog posts do not become too long, I decided not to quote his original German.

So, when I quote Martin Höpner using quotation marks “”, I am providing my translation, and, given my German to English is not perfect, nuanced errors in translation and interpretation (usage) are possible.

Martin Höpner considers MMT to be “one of the most exciting, if not the most exciting theoretical developments of the present day” which is a good start.

But he considers himself to be a “friendly critic”, the meaning of which is hard to interpret. Does that mean he is attracted to MMT but has some quibbles or wants to be attracted but cannot bring himself to accept the basic precepts of MMT? Or something else?

Whatever, his essay raises a series of questions which seem define his skepticism and I am not sure I would place them in the realm of friendship, which in English would suggest a concern for the welfare thereof.

I decided to accept the invitation to respond because the issues he raises are mostly reasonable – (with an exception as you will see in Part 2) and they are issues that many interested readers raise when they first encounter Modern Monetary Theory (MMT).

As an aside, he mentions my name among MMT contributors to Makroscop and suggests I “maintain critical distance to MMT”, which is clearly not correct in my case, given I am one of the founders to this approach to macroeconomics. MMT is central to what I see as one of my academic contributions. I am far from ‘distant’.

An aside though.

Martin Höpner initially summarises what he considers to be the “cornerstones” of MMT, which he correctly acknowledges builds on a range of previous economic approaches (“Keynesianism, Chartalism, and the functional finance approach”).

We could quibble about the “Keynesianism” reference. In fact, I would say it was the work of Keynes not what followed that is of more influence on some of the original developers of MMT, although in my case, it is the work of Marx through to Kalecki that has more influence than Keynes’ General Theory. But that is another aside.

Please read my blog post – Those bad Keynesians are to blame – for more discussion on this point.

The summary points which Martin Höpner uses to set his critique of MMT up are:

1. There is a difference between the currency-issuer and the currency-user, such that the former has no intrinsic financial constraints on its spending. Such a government can always meet any liabilities that are denominated in the currency it issues.

And, if I may extrapolate further, this also means that such a government can purchase anything that is for sale in the currency it issues, including all idle labour.

Which means that the government chooses the unemployment rate. An elevated unemployment rate is always a political decision rather than anything that is forced on a nation by ‘market forces’ or the choice of individuals/households.

2. The governments ability to spend is prior to any revenue it might receive in the form of taxation. Taxation revenue comes from just funds that the government has already spent into existence.

Martin Höpner says: “Decisive is the order: Government expenditures are the condition of the collection of taxes, not vice versa.”

3. Central banks are monopoly creators of “central bank money”, while commercial banks create “bank money” out of thin air – through “balance sheet extension”.

Central banks set the interest rate but cannot control the broad money supply or the volume of “central bank money” in circulation.

This might seem a little confused. On the one hand, the government is a monopoly issuer of its own currency but then cannot control the volume in circulation.

The way to understand it is to realise that the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability.

If cheques start bouncing because of a shortage of reserves then financial panic would follow.

4. “All considerations of deficits and debts must be made from a balance-theoretic perspective”, which means in the language of MMT that context is everything.

A government deficit (surplus) equals dollar-for-dollar a non-government surplus (deficit). This is the ‘balance-theoretic’ that Martin Höpner is referring to.

The non-government sector is comprised of the external and private domestic sectors. If the external sector is in deficit and the private domestic sector desires to save overall, then the government sector has to be in deficit and national income changes will ensure that occurs.

The aim of fiscal policy is not to deliver a particular fiscal outcome (surplus or deficit). Rather, it is to ensure that the discretionary government policy position is sufficient to ensure full employment and price stability, given the spending and saving decisions of the non-government sector.

If from a particular level of national income, the private domestic sector, for example, desires to save more overall and cuts its spending accordingly, then unless there is more net export spending coming in, the government will have to increase its deficit to avoid rising unemployment and a recession.

There is no particular significance in any fiscal outcome. Context is everything.

At this stage, Martin Höpner is in agreement – “Everything indicates that MMT provides the current best descriptive theory of money and credit creation with these points”.

So he believes that the proponents of MMT provide the best understanding of how the monetary systems we live within operate and the capacities that currency-issuing governments maintain.

Where he departs is when we start talking about “prescriptive” (policy) matters.

Here, he considers the policy implications of MMT to be “politically explosive”:

It reaches conclusions that seem contradictory to everything that was previously thought to be known about the room governments have to implement fiscal and monetary policy.

Martin Höpner is worried about some of the practical statements that MMT proponents make.

Which are?

First, he is worried about the advocacy of flexible exchange rates, which MMT proponents (like me) argue maximises the policy space for government to pursue domestic objectives.

That point is a fact.

Once a nation adopts a currency peg of any description (fixed exchange rate, dollarisation, currency board, etc) it loses its full currency sovereignty and compromises domestic policy aspirations in order to maintain that exchange rate rigidity.

It is not about giving reign to free markets but maximising the sovereignty of the currency-issuer that underpins our advocacy of flexible exchange rates.

It is about removing constraints on policy that compromise the capacity of government to maintain full employment and price stability and deliver equitable outcomes to all.

Martin Höpner’s objection appears to be that MMT proponents present what he considers to be a:

Remarkable … juxtaposition of non-liberal and liberal principles.

“Remarkable” carrying a pejorative inference in this case.

Apparently advocating flexible exchange rates places MMT proponents in the ‘liberal’ camp where the market is dominant. But then, we allegedly adopt non-market policy positions on other matters. That is inconsistent in Martin Höpner’s view.

But at this point, while Martin Höpner more or less accuses MMT proponents of being hypocritical, he reveals he hasn’t fully understood the difference between MMT as a lens, which allow one to see the true workings of fiat monetary systems, and particular value systems that proponents might apply to that understanding.

His first error is to assert that:

MMT propagates state interference to an extent that most citizens find unimaginable.

No it doesn’t.

This is his “non-liberal” allegation.

I have stated this point often but it still seems to escape the attention of many critics (and second-generation MMTers, for that matter).

MMT is not a regime that you ‘apply’ or ‘switch to’ or ‘introduce’.

Rather, MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.

It helps us better understand the choices available to a currency-issuing government.

It is not a regime but an accurate perspective on reality.

It lifts the veil imposed by neo-liberal ideology and forces the real questions and choices out in the open.

In that sense, MMT is neither right-wing nor left-wing – liberal or non-liberal – or whatever other description of value-systems that you care to deploy.

I mean by that, that while MMT provides a clear lens for viewing the system, to advance specific policy platforms, one has impose a value system (an ideology) onto that understanding.

So, while I, personally, advocate the state resuming its historical responsibility under the Post World War 2 social democratic consensus for sustaining full employment, because my values tell me that the ability to have a job is a key element of a sophisticated society and a starting point for social inclusion and equity, others might consider mass unemployment to be of use.

For example, they would see mass unemployment as advancing the interests of capital by suppressing the capacity of workers to share in productivity growth and maintain real wages.

But they would not be able to say the ‘state has run out money and cannot provide work for all’. They would be forced to justify the state not taking responsibility to eliminate mass unemployment via direct public sector job creation in terms of more venal motives.

So a person who claimed an understanding of the principles of MMT and used that as a lens to explicate the consequences of their policy prescriptions could easily support a very ‘liberal’ set of interventions or a very small ‘state’ footprint totally in accord with neoliberal type conceptions.

But, given that, what one cannot escape are the constraints imposed via national income changes on the fiscal balance as a result of non-government spending and saving decisions.

Even if one opts for a very small government footprint in terms of the proportion of available real resources that the public sector commands to advance public policy initiatives, it would still be the case that that government would have to run fiscal deficits should the non-government sector desire to save overall.

That is inescapable.

Trying to run fiscal surpluses in the face of a non-government sector desire to achieve a surplus itself will just result in a major recession and a fiscal deficit via the automatic stabilisers (as the tax base shrinks, for a start).

That sort of fiscal deficit is what I call a ‘bad’ deficit because it is associated with a rise in unemployment and a loss of national income (as a result of the recession).

The same ‘small’ government should, instead, run a ‘good’ deficit, by allowing their net spending to accommodate – to ‘fund’ – the desire of the non-government sector to save overall.

It would not mean the government was ‘large’ – deficits do not imply anything in particular about the overall ‘size’ of government.

But if the non-government sector enforces a desire to save overall (via its spending actions) then the government has no choice but to fund that via a fiscal deficit or accept recession as the inevitable consequence.

All of this is quite apart from the debate as to whether the dominant neoliberal paradigm is, in fact, ‘liberal’.

As Thomas Fazi and I explain in our new book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – the claim that neoliberalism is ‘pro-market’ is a misnomer.

In fact, it just deploys the capacities of the state in different ways to advance the interests of capital at the expense of other claimants on national income.

When state interference is required to protect profits and shareholder capital, the lobbyists will be working night and day to ensure that fiscal or regulative support is achieved.

A far better juxtaposition is between the neoliberal regime that ‘privatises the returns and socialises the losses’ against a progressive policy framework that advances the well-being of all citizens and doesn’t privilege capital in any particular way.

Having clarified those issues, we move on to the next misconception in Martin Höpner concern about flexible exchange rates.

While he asserts the falsehood that MMT is about extensive state intervention, he then claims (thanks to BastaFari for a better translation of this sentence):

On the other hand, MMT trusts in the ability of markets to find the right value for the most important price in capitalist economies after the wage: the exchange rate.

[Note Tuesday morning: as a result of the more accurate translation I have edited the following section up to the +++++ demarcation point].

I have dealt extensively with questions of the exchange rate and the open economy in relation to MMT previously. For example:

1. The capacity of the state and the open economy – Part 1 (February 8, 2016).

2. Is exchange rate depreciation inflationary? (February 9, 2016).

3. Balance of payments constraints (February 10, 2016).

4. Ultimately, real resource availability constrains prosperity (February 11, 2016).

The issues usually relate to the inflationary effects of depreciation including the erosion of living standards, trade competitiveness, and the destabilising impacts of currency speculation.

Taken together these concerns are bundled under a heading – ‘balance of payments constraints’.

So, while MMT proponents argue that the currency-issuing state has no financial constraints, critics argue that the capacity of a nation to increase domestic employment using fiscal deficits is limited by the external sector.

And they argue that these constraints have become more severe in this age of multinational firms with their global supply chains and the increased volume of global capital flows.

These critics erroneously believe that fixed exchange rates provide financial stability and insulate nations from imported inflation, while flexible exchange rates undermine stability.

The long-standing claim is that government deficits, designed to reduce unemployment will not only render a nation uncompetitive as unions took advantage of the higher employment to press ever-increasing wage demands, but the rising income would push out imports, leading to a balance of payments crisis and exchange rate depreciation.

The argument then contends that the Government has to step in and introduce contractionary fiscal policy and/or tighter monetary policy to suppress the wage pressures, reduce import demand and attract higher levels of capital inflow.

It is argued that under these conditions a nation is forced to follow a ‘stop-go’ growth path, where periods of stimulus and growth push the economy up against the balance of payments constraint, which then necessitates an economic downturn (not recession) to restore balance.

While the ‘stop-go’ terminology was really born in the period of fixed exchange rates (Bretton Woods period), it is survived into the flexible exchange rate era.

The first problem these critics find with flexible exchange rates is that nations can ‘import’ inflation from other nations, which negate real income gains made through domestic expansionary policy.

The exchange rate does influence the real value of the nominal incomes that a nation generates via its impact on import prices.

The purchasing value of nominal incomes depends on what the translation of the monetary value into real value is – that is, what is the volume of real goods and services that an income recipient can purchase.

Ostensibly, that depends on the prices of goods and services, some of which will be more influenced by movements in exchange rates than others.

Non-tradable goods and services will be much less influenced by exchange rate movements than direct imports. In many cases, these goods and services will have negligible exposure to exchange rate movements.

The provision of many services, for example, will have little variability to exchange rate fluctuations.

So, movements in the domestic price level are what really matters for the ‘real wage’ and the extent to which those movements are influenced by shifts in import prices arising from exchange rate movements depends on the degree of ‘pass through’ and the importance of imported goods and services to the overall basket that determines the workers’ material living standards.

Imagine a nation (A) that imports good X from nation B, which uses $B.

Say that good X costs nation A, $B5 and the exchange rate is at parity ($A1 = $B1). That means good X costs $A5 per unit.

Then if the currency of A depreciates, say by 20 per cent, such that $A1.20 = $B1, then good X which still costs $B5 will now cost $A6, if the full impacts of the depreciation are included in the local import price.

That situation would represent a ‘pass through’ of 100 per cent.

But suppose local importers decide to defend market share (against say an import competitive product) and take some of the depreciation impact via reducing their margin.

So, for example, the local price might only rise to $A5.20 rather than to $A6.

In this case, the 20 per cent depreciation has led to a 4 per cent rise in local price of imported good X and the ‘pass through’ would be 4/20 or 0.20.

This says that for every 1 per cent in currency depreciation, the local import price of a good will be 20 cents, a relatively low ‘pass through’.

The research evidence is clear – ‘pass through’ estimates are highly variable and depend on many factors including how much spare capacity there is in the economy, the degree of import competition, etc.

But that isn’t the end of the matter.

The second impact depends on how changes in overall consumer price inflation respond to changes in import prices. So ‘pass through’ might be high and rapid but the second impact low and drawn out, making the overall impact inconsequential.

So if imports are a relatively small proportion of goods and services included in the inflation measure, even if the ‘pass through’ is high, the overall impact on the domestic inflation rate will be small.

There is also the question of time lags – how long these separate effects take to impact. In many studies, the sum of the two impacts can take years to manifest.

It is also very difficult to come up with unambiguous estimates of these separate effects.

Estimates for Australia, for example, indicate (Source):

… that exchange rate changes are usually passed through quickly and to a large extent to import prices … [but] … the pass-through of exchange rate changes to overall consumer prices occurs gradually over an extended period … a 10 per cent exchange rate appreciation can typically be expected to result in a reduction in overall consumer prices … of around 1 per cent, spread over around three years.

That is a very small and drawn out effect, hardly justifying the assertion by Martin Höpner the exchange rate is the “most important price” in determining the purchasing power of workers’ wages.

The coherent empirical research on this question suggests that in the real world tells us that the ERPT is weak in most nations for which coherent empirical research has been conducted.

This blog post – Is exchange rate depreciation inflationary? (February 9, 2016) – discusses ‘pass through’ and the impact of exchange rate changes on inflation rates in more detail.

End of Tuesday Edit
+++++++++++++++++++

Moreover, the history of fixed exchange rates tell us that the operations designed to defend the agreed parities across nations severely restrict the capacity of the government in nations that run external deficits to advance the well-being of the citizenry.

External deficit countries in nations that peg their currencies are prone to recession-bias, as they must restrict fiscal policy stimulus and run higher than otherwise interest rate regimes, the former being more damaging than the latter.

The result, which history has documented time and time again, is elevated levels of mass unemployment and all the costs that come with that degree of labour wastage.

While Germany has historically, at least in the last several decades before adopting the euro, been managing upward pressure on its currency – due to its trading strength and the deliberate policy positions adopted by the Bundesbank (interest rate management), most other nations have had to contend with recessionary biases due to their current account positions.

Their experience is that fixed exchange rates are very damaging.

These costs tend to dwarf all other costs including fluctuations in price levels that might be sourced in exchange rate variability.

Australia is a very open economy that has historically endured large swings in its exchange rate. Between February 29. 1984 and July 31, 1986, the Australian dollar depreciated by 36 per cent against the US dollar – quite a shift.

By January 31, 1989, the exchange rate had appreciated by 48.6 per cent against the US dollar – again, quite a shift in the opposite direction. This is a familiar pattern to citizens of Australia, a primary commodity producer.

Over the first period, Real net national disposable income rose just 3.3 per cent (per capita measure fell by 0.2 per cent), while real GDP rose 8.4 per cent and GDP per capita rose 4.7 per cent.

So even with a massive exchange rate depreciation, which followed major declines in our terms of trade, real per capita living standards barely fell using the Real net national disposable income measure and rose using the GDP per capita measure.

Three years later, Real net national disposable income had risen by 17 per cent (per capita measure rose by 12.2 per cent), while real GDP rose 12.6 per cent and GDP per capita rose 8.1 per cent.

It is also the case that the distributional impacts of those shifts are uneven. Buyers of expensive imported (luxury) cars suffer more than those who purchase the lower-margin cars. Those who take overseas ski holidays at expensive resorts face higher costs. The rest of us go camping up the coast!

Australia regularly goes through these sorts of exchange rate swings but manages to be classified as among the richest per capita nations in the world.

It is simply untrue that a flexible exchange rate system severely compromises the material living standards of workers.

Second, it is false to think that a flexible exchange rate regime is more prone to speculative attacks on a nation’s currency.

If anything, the reverse is true.

When currency traders form the view that a government will have to eventually devalue a fixed peg parity to stem the consequences that accompany a chronic current account deficit they can easily hasten that decision by short-selling. It becomes a self-fulfilling inevitability.

And, in this context, it is also untrue to assert that MMT proponents such as myself advocate total market determined exchange rates when we advocate flexible exchange rates.

I have repeatedly noted that the nation state has the capacity to impose capital controls if there are destabilising financial flows present.

Iceland has demonstrated the effectiveness of using capital controls to stop the financial sector undermining currency stability through speculative capital outflows. Similarly, unproductive capital inflows can be subjected to direct legislative controls.

We outline how this is done in some detail in our new book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017).

Conclusion

That ends Part 1.

In Part 2 we will address criticisms about interest rate management and bond yields.

In Part 3 – and yes, it was a German raising these issues – we will discuss his fear that the political class will go wild once they realise that taxes and bond sales no longer fund government spending and generate … wait for it … uncontrollable inflation.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

Spread the word ...
    This entry was posted in Capital controls, Debriefing 101. Bookmark the permalink.

    54 Responses to My response to a German critic of MMT – Part 1

    1. Willem says:

      This is so good.

    2. GrkStav says:

      Eagerly anticipating Part 2. Part 1 was excellent (and, given my OCD regarding typos, etc, extremely light on those, for which I am very thankful).

    3. Some Guy says:

      The German article is free right now. “Friendly critic” is probably a more idiomatic translation than “benevolent doubter”.

    4. Jerry Brown says:

      I agree with Willem and GrkStav about this post- great stuff.

      But, for summary point #3 would it be more accurate to say ‘IF the government as the monopoly issuer of the currency determines that the main task of the Central Bank is to maintain financial stability of the payments system, and IF private banks are allowed to create bank money through loans, and IF the government decides to assist banks to keep their promise to convert bank money to government money, THEN the government will be unable to control the volume of its currency in circulation at all times? This statement recognizes that there is a policy choice about the priorities of the government involved. I think.

    5. Jerry Brown says:

      “At this stage, Martin Höpner is in agreement – “Everything indicates that MMT provides the current best descriptive theory of money and credit creation with these points”.”- He is right.
      “Here, he considers the policy implications of MMT to be “politically explosive”:” This is true if only because most people do not at this time understand the implications of the differences between a currency issuer and a currency user.
      “Martin Höpner is worried about some of the practical statements that MMT proponents make.” Very reasonable given that some MMT proponents forget real resource constraints in their enthusiasm and that as a practical political matter MMT proponents have not managed to get elected or formed a government anywhere yet. And that therefore “prescriptive” parts of MMT remain prescriptive possibilities rather than accepted as historical or actual fact.

    6. Kristjan says:

      “So a person who claimed an understanding of the principles of MMT and used that as a lens to explicate the consequences of their policy prescriptions could easily support a very ‘liberal’ set of interventions or a very small ‘state’ footprint totally in accord with neoliberal type conceptions.”

      This is where I have a problem. I just cannot call It “state intervention”. For some reason It is called state intervention to deficit spend and to fight unemployment yet MMT clearly shows that there was no “state- intervention free” market in the first place.

      A lot of lefties blame greedy capitalists and I am sure you can make a point against some greedy capitalists sometimes but mostly It is politics and political choices. This is the same framework to talk about state intervention. Like there was some non interventionist economy somewhere?

    7. Neil Wilson says:

      What I find interesting is that there is very little analysis of the import/export over the currency exchange border in the round.

      If there is a shift in the price of imports, there is a shift in the price of exports. You have to look at the process in the round from all side.

      From what I can tell the issues with exchange rates are nearly always down to the central bank getting involved in the financial speculation process, rather than forcing the players to go bust based upon the bad bets they have made.

      If you statutorily barred the central bank from getting involved in the FX markets, and laid out rules for rapid resolution of failed financial institutions you would eliminate a lot of speculation. At that point the players would know that there cannot be a patsy in the market. They will live and die by the sword. FX reserves should be held by the Treasury, not the central bank and used exclusively to buy required goods for the population in an emergency – largely food and fuel. A purchaser of last resort buffer stock – part of the strategic reserves a nation holds to be resilient against international trade issues (random political sanctions for example).

    8. Neil Wilson says:

      “they can easily hasten that decision by short-selling”

      Something that can’t be done in a free float *where the central bank is banned from intervening* because you rapidly hit a liquidity crunch in the FX market.

      For every short seller there has to be a long buyer. The theory, that MMT implicitly rejects, is that the central bank can be forced by the market to become the long buyer of last resort. So you ban that from happening statutorily – which demonstrates the resolve of the state to see those who make bad bets go bust.

    9. Alan Longbon says:

      Hello,

      Friend Martin needs to study MEFO bills and how that worked for Germany in what was one of the best examples of what MMT can when run with a heavy State hand and then contrast that with Lincoln’s Greenbacks to see how the same system works with a lighter State hand. Then contrast the outcomes of the neoliberal system we have now where bank credit money at interest seeks to crowd out and deny state money at no interest.

      The AfD know all about currency sovereignty and MMT and are about the only political party on the face of the planet that openly do, but you rarely hear or read about that fact. One only hears about the racist material.

    10. Mike Ellwood says:

       
      Alan Longbon says:
      Monday, March 26, 2018 at 18:27
      Hello,
       
      Friend Martin needs to study MEFO bills and how that worked for Germany in what was one of the best examples of what MMT can when run with a heavy State hand and then contrast that with Lincoln’s Greenbacks to see how the same system works with a lighter State hand.

       
      Well yes, but for obvious reasons, I’m not sure that we want to emphasise this particular exploitation of what might be thought of as MMT thinking. It’s simply too easily misrepresented by biased media and hostile politicians.
       
      @Bill, I admire your determination to remain “open source”, which is one reason why I’m more than happy to occasionally send copies of your books (especially the latest one) to people who need to benefit from the fruits of your learning and research, and who might be influential.
       
      Of course, one can lead the horses (or donkeys, sadly, sometimes) to water, but one cannot make them drink of the fount of knowledge.
       
      Another German critic (not so friendly, perhaps) is Joseph Hueber, who is perhaps well known here, and is one of the influences behind the German equivalent of Positive Money.
       
      And talking of friendly critics, I found in my computer folders last night a paper by Marc Lavoie, entitled “The monetary and fiscal nexus of neo-chartalism: A friendly critical look”, dated October 2011. I also found a version published in “JOURNAL OF ECONOMIC ISSUES Vol. XLVII No. 1 March 2013 DOI 10.2753/JEI0021-3624470101”. I don’t know if it was a revised version or not.
      I don’t have a URL, but I imagine they are still findable online if anyone is interested.
       
      Lavoie’s critique is interesting, and challenging in some respects, and possibly only slightly friendly.
      I notice that Bill took Lavoie to task in this article for example:
      http://bilbo.economicoutlook.net/blog/?p=34200
      but I don’t know if it’s referring to this particular paper. Searching for his name on this blog gets quite a few hits, some relating to his 1984 book. I haven’t checked them all though.
       
      BTW, talking of German economists, back in my earlier days of trying to learn how money, I discovered a fascinating guy called Bernd Senf, a retired professor of economics in Berlin. I’m not sure how he would relate to MMT, but he’s very interesting on compound interest. His spoken English is not so good, and most of his videos are in German, but are not too difficult to follow if you have some German, as he speaks slowly and emphatically, and repeats things, using diagrams. He’s quite a “character” in the best sense, IMHO.
      I won’t give a link, but if anyone is interested, google for “Bernd Senf”.

    11. J Christensen says:

      Unfortunately, over here in Canada, no one in government seems to understand a word of what MMTr’s have said yet.
      There is still apparently a fear that the federal government might become insolvent, due to it’s “market debt”.

      http://www.cbc.ca/news/politics/federal-market-debt-1.4590441

    12. Francisco J Flores says:

      This is actually a question:
      RE: “….but cannot control the broad money supply or the volume of “central bank money” in circulation…. This might seem a little confused. On the one hand, the government is a monopoly issuer of its own currency but then cannot control the volume in circulation. … The way to understand it is to realise that the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability. …”
      • Technically, isn’t the private banking sector constrained in the US by the “10% on deposits” reserve requirement. If the banking sector wanted to go crazy and they are at 10x deposits/reserve deposits wouldn’t they have to stop lending. Of course individual banks can go into Fed funds market, but on a consolidated basis isn’t the sector constrained? If so, then technically the sovereign CAN control the broad money supply, correct? Again, always helps when MMT says stuff that is 100% correct. Sometimes we need qualifiers. (“…cannot DIRECTLY(?) control the volume in circulation.”…)

    13. Hopner says, “MMT propagates state interference to an extent that most citizens find unimaginable.”

      I’d guess he is assuming there that if MMTers were in charge of the economy, and they said demand needs raising by $Xbn, that that rise would necessarily consists of extra public spending, and that since raising the public spending to GDP ratio is a POLITICAL decision, that constitutes the “interference” which Hopner refers to.

      In fact (or at least hopefully) if MMTers were in charge, they’d say “demand needs raising by $Xbn, but it’s up to politicians to decide whether to do that via extra public spending or tax cuts”.

      Bernanke actually advocated such a system. See para starting “A possible arrangement…” here:

      http://fortune.com/2016/04/12/bernanke-helicopter-money/

    14. Ralph Musgrave says:

      Hopner says, “MMT propagates state interference to an extent that most citizens find unimaginable.”

      I’d guess he is assuming there that if MMTers were in charge of the economy, and they said demand needs raising by $Xbn, that that rise would necessarily consists of extra public spending, and that since raising the public spending to GDP ratio is a POLITICAL decision, that constitutes the “interference” which Hopner refers to.

      In fact (or at least hopefully) if MMTers were in charge, they’d say “demand needs raising by $Xbn, but it’s up to politicians to decide whether to do that via extra public spending or tax cuts”.

      Bernanke actually advocated such a system. See para starting “A possible arrangement…” here:
      http://fortune.com/2016/04/12/bernanke-helicopter-money/

    15. Jerry Brown says:

      Francisco, I think the answer to your question is that if the Fed desires to maintain the stability of the financial system we have at the moment, it would find that it has to make the necessary reserves available to the banking system. Or the bank checks start bouncing and the system crashes. We saw that about to happen in 2008 where the Fed made reserves available to even non- bank elements of the financial system. So technically maybe the Fed could refuse to provide reserves when banks need them but it comes at the cost of a real mess. Sort of like thinking you are shooting fish in a barrel while you are actually shooting your own foot off.

    16. cs says:

      I found the discussion of imported inflation due to exchange rate effects very useful.

      That seems to be the key issue for many in supporting more deficit spending in NZ. “Oh but the exchange rate will collapse causing a huge living standard drop for everyone”.

    17. Kim Yuu says:

      i speak a little german and i think a better (and more literal) translation of the title would be:”Objections from a well-meaning skeptic.”

      a heart-felt thanks to you, bill, for all you do!

    18. Keith Newman says:

      I also find odd, as does Bill, the assertions by some on the dramatic effects of swings in foreign exchange rates. The experience in Canada is similar to what Bill describes for Australia. Over the past 20 years or so we have seen our dollar drop by a third with respect to the US dollar, then rise by 50%, then fall enormously again, and everything in between. The effect on our inflation rate has been virtually zero. Of course in some markets prices have gone up and down, fresh fruit and vegetable in the winter in particular. Foreign travel also cost a lot more, or less.
      This does not mean there have been no effects on exporting/importing industries. When the Cad $ was low our forest products industry did very well indeed. But when it went above the US dollar 10 years ago there was a wave of closures of pulp and paper mills and sawmills. Many small mill towns were devastated. Other manufacturing industries were also affected in similar ways. Assistance programs were inadequate but did help a little.
      For the most part these were low value-added industries. Despite the obvious need for an industrial policy to support high value-added industries, little more than hand waving occurred. The mindset of our elites is very colonial (serving the dominant power, currently the US, formerly Britain), which makes it very difficult to get the magnitude of government intervention needed to re-orient our economy for the modern world.

    19. larry says:

      Mike, thank you for the Bernd Senf reference. I can recommend Dirk Ehnts who is a German MMTer. He has a blog, Econoblog101. I only came across him recently, but he published a book, I think last year, entitled Modern Monetary Theory and European Macroeconomics. Ehnts’ youtube vids are also in German.

    20. Neil Wilson says:

      “Technically, isn’t the private banking sector constrained in the US by the “10% on deposits” reserve requirement. ”

      No. The Fed has to supply sufficient reserves to cover the reserve requirements, or the interest rate heads towards infinity very quickly. If you follow the dynamics of individual banks, the bank that ‘overlends’ won’t necessarily be the one left holding the baby and dying from a liquidity shortage.

      All reserve requirements do is change the cost of money. Banks will lend to all creditworthy customers at that cost of money and stop when they get there. That will be fewer loans than if the reserve requirement wasn’t there, but it isn’t the quantity that is stopping the extra loans. It’s the price.

    21. Rick says:

      Keep debunking the lies. At some point it will all be needed.

    22. Alan Longbon says:

      Hello,

      I am fluent in German and the best translation that comes to mind is:

      Objections of a well wishing doubter.

      He has doubts because it is too good to be true, but he wants it to be true. It is like a cry for help.

      He just needs to be kindly shown the light.

      It would be hard for him coming from a country that does not have currency sovereignty and so the main concepts do not apply to his world as he perceives it.

    23. Francisco J Flores says:

      Jerry and Neil:

      RE: “…I think the answer to your question is that if the Fed desires to maintain the stability of the financial system we have at the moment, it would find that it has to make the necessary reserves available to the banking system. … No. The Fed has to supply sufficient reserves to cover the reserve requirements …”
      • Ok. So my point was to refudiate the notion that the Fed cannot control the broad money supply. And of course you gentlemen confirmed that that is exactly what the Fed does, as does Professor with the last statement I quoted.
      • I find this to be a bad habit among MMT proponants. A detailed description on the intracacies of the monetary/fiscal system and then an assertion/conclusion or the title of an article/blog/dissertation that contradicts the description.

      [Bill deleted an erroneous statement about taxes funding government spending – we are over that discussion]

    24. Henry Rech says:

      I think Bill is too cavalier in his views when it comes to exchange markets.

      In the end, putting aside capital controls, if markets don’t like what the Central Bank/Government are doing with currency issue ( i.e. printing money to maintain a prescribed level of spending), the capital will flow out. If markets don’t trust the authorities to manage the currency growth sensibly then trouble will ensue. The currency will fall, pushing the economy into an inflationary spiral.

      Putting capital controls in place might forestall capital flight in the short term, however, markets have memories and will place a discount on the currency (when the controls are removed) which is no longer trusted.

    25. PhilipR says:

      Germans are genetically predisposed to fear inflation.
      The mythology surrounding the hyperinflation of the 1920s runs deep.

    26. Francisco J Flores says:

      Henry Rech:

      So why do we care if “Capital” flows out? What are we talking about anyway? Foreign folk sell the currency, and someone else buys it. Currency falls and domestic employment spikes toward full employment. Higher inport prices only cause overall inflation if the dometic economy reaches full employment and can’t keep up. Expenditures from the Job Gty and other automatic stabilizers quickly approach zero at full employment.

      What’s the problem again?

    27. bill says:

      Dear Jerry Brown, Neil Wilson and Francisco J Flores (at 2018/03/28 at 10:59 am)

      The fact that the central bank more or less has to add reserves on demand does not mean it controls the broad money supply as is asserted (erroneously) in this comment.

      There is no direct relationship (causality) between the money base and the money supply. It is pure mainstream to think otherwise.

      I also deleted a part of the comment that is similarly erroneous.

      best wishes
      bill

    28. kevin harding says:

      loans build deposits so reserves do not limit loans

    29. Neil Wilson says:

      “the capital will flow out.”

      Capital can’t flow out in a floating rate currency system. All that happens in the exchange rate moves. The capacity of the financial system stays exactly as it did before and the capacity of the nation does as well – since there is very little physical movement of people.

      If one currency goes down, then another currency goes up destroying their export capacity – which then creates space in the exported-to nation for the creation of substitute industries. It is only ‘financial suppression’ that stops that response from occurring naturally.

      ‘Capital controls’ in MMT are just a way of reducing the speed of the flow. They are exactly the same mechanism as trading halts and other regulations on proper stock exchanges. It is hardly a radical concept to put the currency under the same control system as the main stock markets.

    30. kevin harding says:

      I do have some concerns of currency depreciation and potential import inflation
      as a result of fiscal stimulus.
      We are always talking about a political economy. A competition for real resources.
      Pressure from mainstream economists will quickly move from concerns about
      the money running out to fears of currency depreciation and inflation more generally.
      I will continue to repeat that mainstream economics is a fig leaf for the interests of the
      wealthy a justification for the wealthy to have first choice of the worlds resources and human
      labour.In this context monetary sovereignty is a threat that the wealthy will combat.
      The perception is more important than the reality in the political economic information wars
      but the reality of a fall in exchange rates is a predictable degree of import inflation which could affect price rises more broadly if oil prices rise[obviously many other factors than just currency
      exchange]

    31. Hog says:

      “Auf die Qualifizierung der Finanzierungsfunktion der Staatseinnahmen als Mythos lasse ich mich gern ein – aber nur unter Einsicht in den Umstand, dass es notwendige Mythen geben kann, die im Ergebnis reale Einschränkungen öffentlicher Handlungsspielräume konstituieren.”

      “On the qualification of the financing function of government revenue as a myth I would let me on to – but only with insight into the fact that there may be necessary myths that constitute the result of real restrictions on public leeway.”

      this guy is supposed to be a political scientist?

    32. Henry Rech says:

      Francisco

      Where a country depends on foreign capital for investment then I suggest that overly messing with markets is not advisable and it’s not only foreign investors that will think twice about investment. There are plenty of examples in financial history where countries have been brought to their knees because they have been abandoned by foreign capital. A government practicing MMT policies would have to maintain strict disciplines – I just can’t see this happening routinely and automatically in the real world – governments are susceptible to all sorts of pressures particularly around election times. MMT sounds almost too good to be true. The real world is another place. There are recognition lags and decision lags. And markets have minds of their own. I don’t think MMT in practice will be as simple as it sounds.

    33. Henry Rech says:

      “Capital can’t flow out in a floating rate currency system.”

      !!!!!!!??????

      “‘Capital controls’ in MMT are just a way of reducing the speed of the flow.”

      Now you are contradicting yourself, Neil. Is there a flow out or not?

      “It is hardly a radical concept to put the currency under the same control system as the main stock markets.”

      Try it and see what happens.

    34. Some Guy says:

      Henry Rech: There are plenty of examples in financial history where countries have been brought to their knees because they have been abandoned by foreign capital.

      The problems come from the countries’ anti-MMT dysfunctional finance policies, trying to defend an exchange rate, not the “abandonment”. The really hard part is understanding that so many countries can actually do such idiotic things. This “cure” is far, far worse than the “disease” of an exchange rate floating down. It is the modern equivalent of bleeding and purging and leeches, even amputation – for a common cold.

      If anything, Bill is not cavalier enough for me. He isn’t as cavalier about exchange rates as Abba Lerner or perhaps FDR.

      A government practicing MMT policies would have to maintain strict disciplines:
      Well, it does – it spends up to full employment and no further. In practice this would generally mean non-JG spending to the point that would leave say a 5% unemployment and then having the JG employ everyone else. This would lead to low or no inflation and no unemployment. There is no problem, no particular foreign constraint. As Lerner said, there is nothing in functional finance that needs to be changed from the closed to the open economy case.

      The currency will fall, pushing the economy into an inflationary spiral.

      How much prices rise depends on the country. But “spiral” is definitely wrong. There might be a period of adjustment and risisng prices. But the strict discipline of MMT fights against continuing price increases. There is nothing in a drop in exchange rates that makes . On the other hand, the tools foolishly used against a “natural”, “laissez-faire”, “market” exchange rate drop can cause inflationary spirals!

      If a country happened to have an overvalued currency, desperately trying to keep it up through crazy interventions [the usual bleeding and purging procedure] is trying to maintain a policy of “always relying on the kindness of strangers”. This makes no sense for individuals and infinitely less for whole countries. I really think that North Korea, which maybe has too much of it, could do with exporting some of their excess juche with their kimchi.

      Nations aren’t helpless orphans at the mercy of a foreign capital nanny that can abandon them. What brings nations to their knees is this intense obsession with having nanny come back and take care of baby, thus disregarding and strangling their own capacities, not an actual inability to take care of themselves.

    35. Some Guy says:

      Sentence fragment above should be: [There is nothing in a drop in exchange rates that makes] inflation rise continually, causes a spiral. Rather, the processes are normally, eventually, self-limiting.

    36. Francisco J Flores says:

      Henry Rech

      RE: “… depends on foreign capital for investment … …”
      • Exactly. The trick is not to be overly dependent on foreign capital – to be as self sufficient as possible. But once foreign capital purchased domestic assets, a capital outflow is merely a drop in prices and in the currency, indeed making imports more expensive, but may even make further capital investment more attractive after the price drop.

      RE: “… depends on foreign capital for investment … …”
      • Exactly. The trick is not to be overly dependent on foreign capital – to be as self sufficient as possible. But once foreign capital purchased domestic assets, a capital outflow is merely a drop in prices and in the currency, indeed making imports more expensive, but may even make further capital investment more attractive after the price drop.

    37. Henry Rech says:

      Some Guy,

      “Nations aren’t helpless orphans at the mercy of a foreign capital nanny that can abandon them. ”

      I think that’s a naive thing to say. Foreign capital will avoid a currency if it’s not trusted. If you think replacing foreign capital is a simple matter, then I think you should think some more. Using fiat money to stabilize an economy is one thing, using fiat money to socialize investment (which is probably the corollary of long term private capital flight) is something quite else. If you want to preserve a mixed economy, then governments have to be mindful of markets and what motivates private money. Private money’s primary concern is preserving the value of capital. Making a return is secondary.

      As admirable as the underlying motivations of MMT are, blithely believing that the discipline of MMT can be strictly adhered to does not entirely gel with what happens in the real world. I am not saying it can’t happen. All I am saying is that dismissing such considerations out of hand, as MMTers seem to do, could be unwise.

      I haven’t read Lerner on this so I will take a look.

    38. Francisco J Flores says:

      Henry Rech
      RE: “… A government practicing MMT policies would have to maintain strict disciplines … …”
      • That’s the beauty of the Job Gty. As part of a Job Gty law put in place, the target to manage are unemployment, as in keep it at zero at all times, and inflation, as in keep it at a low comfortable level at all times. This modulates the spending automatically – never to high, never to low. Just right, always. Politicians can concentrate on on operating efficiently instead of bringing boondogle projects tot heir district – because everybody is always working.

    39. Francisco J Flores says:

      Professor (bill), Jerry Brown, Neil Wilson
      RE: “… has to add reserves on demand does not mean it controls the broad money supply …There is no direct relationship (causality) between the money base and the money supply …”
      • How can this be true? In the US, banks have a reserve requirement (more or less 10% of deposits). If the banking sector has reached this point and adding to debt (creating deposits) would exceed the limit, and the Fed refused to add reserves, by definition wouldn’t that indicate that the Fed was constraining loan growth and hence money supply? How can you then assert/conclude no causality? Or are you making a distinction between direct and indirect?

      Jerry Brown:
      RE: “… it would find that it has to make the necessary reserves available to the banking system. Or the bank checks start bouncing and the system crashes. … …”
      • So if the fed has to make additional reserves to the system, doesn’t that suggest strongly that the Fed has a strong influence on loan growth, in that it can ALLOW continued loan growth? And what checks would bounce? Whose checs would bounce at what bank. I’m just talking about the 10% of deposits reserve requirment. Nothing to do with insufficient funds.

      RE: “… Fed could refuse to provide reserves when banks need them but it comes at the cost of a real mess. … …”
      • What mess? Simply banks not being able to make more loans. Maybe increased interest rates.

    40. Mike Ellwood says:

      Francisco J Flores says:
      Thursday, March 29, 2018 at 5:52
      • So if the fed has to make additional reserves to the system, doesn’t that suggest strongly that the Fed has a strong influence on loan growth, in that it can ALLOW continued loan growth?

       
      I don’t know the US system in any detail, but I’m sure that the Fed could control bank lending if it wanted to, or at least try.
       
      I know for sure that the BoE used to have a pretty tight grip on commercial bank lending in the 50s, 60s, and even 70s. (whether it really succeeded as well as it hoped, or whether its broader policies were as successful as it hoped is another question). (That’s “tight grip” in terms of quantity of lending; whether it concerned itself with the quality of the lending, by which I mean was it for productive purposes, I’m not sure about).
       
      Of course, after financial deregulation all that went, and we just had the pathetic monthly ritual dance over interest rates.

    41. Henry Rech says:

      “This modulates the spending automatically – never to high, never to low. Just right, always. ”

      Francisco,

      I would like to remind you that Goldilocks was a character in a fairy tale.

      In the real world there are lags: recognition lags, decision lags, execution lags. Then there are political constraints. Before anything is done, the world could have turned on its head.

    42. Henry Rech says:

      ” The trick is not to be overly dependent on foreign capital ”

      Yep. Nice trick.

    43. Adam K says:

      Francesco J Flores,

      Let me respond to one of your recent comments:
      “If the banking sector has reached this point and adding to debt (creating deposits) would exceed the limit, and the Fed refused to add reserves, by definition wouldn’t that indicate that the Fed was constraining loan growth and hence money supply? How can you then assert/conclude no causality?”

      The Fed would not (in 2018) refuse to add reserves as it would breach its mandate of “Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.” (see “What is the purpose of the Federal Reserve System?” on their website). This would lead to losing the effective control over the interest rate on the interbank market (what happened under Paul Volcker in 1979 during the so-called monetarist experiment – it got to 20%) and might lead to eroding the confidence in the banking system. If such an experiment had happened during the GFC, a bank run (like in 1929) would have occurred.

      One of the way the Fed reacts to the situation described above (the debt – creating deposits – exceeding the limit) is by maintaining a “Discount Window Lending” (please search for this term on the Fed’s website). During the GFC they also made available other facilities providing liquidity in exchange for essentially junk-grade assets.

      Also – if a country has no reserve limit (like Australia) does it mean that it has a different causation in the bank money creation? This would be really interesting because from the functional point of view the banking system works in the same way in both countries. This example clearly shows the limitations of applying scholastic-type reasoning to macroeconomics. (Legal rules and “what-if-the-Earth-is-flat” type thinking allow to determine the causation).

      I can give another example – let’s imagine an electrical circuit consisting of a battery, a switch and a globe connected in series (the circuit is closed – you know what I mean). You are effectively arguing that when the switch is flipped off the globe will be dark and therefore it is the switch what is powering the circuit. I would suggest looking at the equations describing the production and consumption of the electrical power to determine which component is a source and which one is a sink. But using this language requires understanding of the physical concepts of voltage, electrical current and electrical power. We cannot get there by merely philosophising about the role of the switch.

      Now the main point. Professor Bill Mitchell has written extensively about these issues on this blog. You can find the article “Bank of England finally catches on – mainstream monetary theory is erroneous”. Please read it thoroughly and visit the links. I bet everyone commenting on this site understands the mainstream money multiplier model and must have heard about the loanable funds theory. Recycling arguments and explanations from a mainstream undergraduate textbook – this equally applies to the mechanics of government spending where you have “proven” that governments need to acquire pre-existing financial assets in order to spend – serves in my opinion no purpose and only lowers the quality of the debate on this blog.

    44. Francisco J Flores says:

      Adam K

      Wow. You know what serves to lower the “quality of the debate” on this blog and elsewhere in the MMT debate? Not reading and writing English words correctly.

      RE: “… let’s imagine an electrical circuit ……. You are effectively arguing that when the switch is flipped off the globe will be dark and therefore it is the switch what is powering the circuit. … …”
      • I have never suggested any such thing – suggesting that the Fed is necessarily “powering” loan growth. My original question: “If so, then technically the sovereign CAN control the broad money supply, correct? ” So doesn’t the switch cerainly CONTROL the flow of electricity into the globe? There is a difference between “POWER” and “CONTROL”.

      RE: “…The Fed would not (in 2018) refuse to add reserves as it would breach its mandate … they (fed) also made available other facilities providing liquidity in exchange for essentially junk-grade assets. …”
      • This is, I’m assuming, completely TRUE. But in the US, it also makes “….technically the sovereign CAN control the broad money supply, correct?” also TRUE and in fact confirms its veracity.

      RE: “… Also – if a country has no reserve limit (like Australia) does it mean that it has a different causation in the bank money creation? … …”
      • YES. The lack of a reserve requirement makes the statement “but cannot control the broad money supply or the volume of “central bank money” in circulation” to be TRUE, all other things being equal, perhaps like in Australia. This is because the banks have no limit to lending. In the US, they are constrained by the Reserve Requirement (10%), which gives the Fed some control. Now since 2008, the volume of reserves has skyrocketed because of QE so its not a constraint now. So my original post was a question, logically: in the past didn’t the 10% reserve requirement technically control loan growth? The lack of a coherent response focusing on the reserve requirement answered the question for me –> YES.

      RE: “… Bill Mitchell has written extensively about these issues on this blog … …”
      • I am well aware of Professor’s writings on this blog and elsewhere, and I understand MMT and the erroneous money multiplier model and loanable funds theory. And I am not espousing these theories. I’m espousing MMT. But WORDS matter. Truth MATTERS. I believe that one of the reasons MMT has not gained wide acceptance up until now is the cavalier use of words that are NOT TRUE. Folks aren’t stupid. They sense their falsity and dismiss MMT. Professor’s blanket statement about Fed lack of control of the broad money supply which he then contradicts a sentence later by pointing out the Feds obligations to maintain financial stability is the latest example I’ve pointed out.

      RE: “… The fact that the central bank more or less has to add reserves on demand does not mean it controls the broad money supply as is asserted (erroneously) in this comment. … …”
      • Actually, Professor contradicts himself in the same sentence. The Fed (I’ve been referring to the US from the beginning), has to add reserves per its mandate. But in exercising its mandate, it restricts or allows loan volume to expand. There is a word for that —-> CONTROL.

      Adam: WORDS. Look into them.

    45. Danny says:

      “‘Capital controls’ in MMT are just a way of reducing the speed of the flow.”

      Now you are contradicting yourself, Neil. Is there a flow out or not?Henry Rech:

      “Capital can’t flow out in a floating rate currency system.”

      !!!!!!!??????”

      “‘Capital controls’ in MMT are just a way of reducing the speed of the flow.”

      Now you are contradicting yourself, Neil. Is there a flow out or not?”

      Note that Neil only uses the word *out* in one instance. For someone to sell up in the assets of a country they need a buyer, hence the “flow” is actually a two way movement, an exchange/sale, hence the exchange rate represents the price of this sale and capital controls restrict the number and magnitude of sales.

      Orthodoxy would have you picture rich people leaving with suitcases of cash.

    46. Mel says:

      “RE: “… Fed could refuse to provide reserves when banks need them but it comes at the cost of a real mess. … …”
      • What mess? Simply banks not being able to make more loans. Maybe increased interest rates.

      This mess. The one Prof. Mitchell describes in the article:
      “If cheques start bouncing because of a shortage of reserves then financial panic would follow.”

      Somebody said something very instructive somewhere, in this thread or another.
      The money a bank lends is the bank’s own fiat money, which it pegs to the Central Bank Dollar. When I spend my borrowed money, and my check is presented at another bank, that bank sends the check to my bank, and demands that it honor the peg. My bank does this by accepting the check and transferring the appropriate amount from its reserve account, in Central Bank Dollars, to the other bank. If my bank doesn’t have sufficient reserves, the check can’t be honored, the check bounces, my business takes a hit. In fact insufficient reserves would impact every check written by any of my bank’s customers. Very bad for them.

    47. bill says:

      Dear Francisco J Flores (at 2018/03/29 at 11:57 pm)

      As I have indicated previously, you are welcome to your own views but relentlessly repeating erroneous claims on my blog is not acceptable to me.

      In an endogenous money system where commercial banks create credit at will, the central bank cannot control broad money aggregates unless they wish to send banks bankrupt and create a financial crisis. That is the sense in which Modern Monetary Theory (MMT) proponents talk about a lack of control, which just builds on the Post Keynesian views on circuit theory and endogenous money.

      The central bank can set a price on reserves it adds but only within tight spreads on the target rate it chooses as its policy rate.

      History shows this does not provide a tight control on lending at all.

      You are free to write your own variant views on these topics elsewhere. But we end the misinformation on this topic here, now.

      best wishes
      bill

    48. Mel says:

      RE: “… The fact that the central bank more or less has to add reserves on demand does not mean it controls the broad money supply as is asserted (erroneously) in this comment. … …” … etc.

      I may be out of turn with this. I hope not.

      Steve Keen has cited Alan Holmes, a senior Vice President of the New York Federal Reserve Bank, writing in a paper in 1969. Holmes decried

      “[…] the naive assumption that the banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves.”

      Holmes A.R. (1969) ‘Operational constraints on the stabilization of money supply growth,’ in F.E.Morris (ed.), Controlling Monetary Aggregrates, Nantucket Island, MA; Federal Reserve Bank of Boston, pp. 65-77

      This is no bizarre novelty or abstruse philosophical quibble. This is a Vice President of the Federal Reserve describing what banks actually do.

    49. Neil Wilson says:

      “Now you are contradicting yourself, Neil. Is there a flow out or not?”

      There is no flow *out*, but there is a flow. Because for you to leave somebody else *has* to come in, or you can’t leave. So the flow is within the currency area. The number of people engaged within the currency area may shrink, but the financial capacity of the production within the currency area is undiminished.

      Capital controls on a market simply slow that exchange down – as they do with share transactions. So that the structural price can reveal itself. And doing that has little effect on the real economy since anybody engaged seriously in cross border trade uses currency buffers and future markets.

      There is no need for ‘foreign investors’. Domestic investors are perfectly fine, or the state as investor of last resort – particularly in anything that is very risky.

      I don’t want ‘investors’ looking to ‘protect their capital’. All they do is trade chips with each other on a casino trying to create asset spirals. There is very little justification for allowing foreign owners of domestic property any exclusion rights on empty buildings, for example. I’m looking for ‘investors’ who will drive capital development – enabled by banks that lend for that purpose.

      Not all capitalists are worth having.

    50. Joachim Endemann says:

      Regarding your statement about the AfD (__the so-called ”Alternative for Germany”__) that “the AfD know all about currency sovereignty and MMT and are about the only political party on the face of the planet that openly do”, I would like to state the following: to me, it is difficult to figure out whether you do not know the function the AfD is taking or you know it and you want to mislead the attentive audience abroad.

      It may well be assumed that all the party members of the AfD with an economic background know about the importance and meaning of a sovereign currency, as this is not uncommon with economists. And it is true that these economists and those spiritually akin, demanded more of what is to be called “neoliberal structural ‘reforms’” in the midst of the 2000s and repeatedly ever since.
      These economists’ saturated neoliberal thinking is widely held with all those who are or used to be part of the business wing of the CDU and who now are influential in the AfD. However, this party first and foremost serves to hold the focus on a problem resulting from the false foreign policy practised by the wanna-be hegemon of the EU (__Germany__), thus in tow with the USA, France and the UK. A matter, that, indeed, let feelings run high across the EU in the second half of 2015 and the first half of 2016. But since the midst of 2016 the German political slogan has been: “deportation, deportation, deportation!” of the refugees (__who, it be repeated, are one of the results of the policy of the West’s__). Hence, it is not the task of the AfD to implement a reasonable economic policy according to lessons learned from what the MMT says: how our monetary system works, but it is their task to shift the whole society to a socio-political direction that I call neo_Wilhelminist, which is another result of the neoliberalism requiring the authoritarian national state rather than a state that is liberal regarding its inhabitants and sovereignly sets basic conditions for its economy and monetary system.

      Yours faithfully, Joachim Endemann

    51. Francisco J Flores says:

      Professor:

      Well then I hope you will allow folks to continue the discussion at: http://mmt-inbulletpoints.blogspot.com/2018/03/not-hard-core-porn-can-fed-constrain.html

      Professor and Mel: I’ve provided further clarification of he issues involved at the blogspot. Feel free to comment.

    52. Henry Rech says:

      Neil,

      “There is no flow *out*, but there is a flow.”

      It’s about intentions and purposes, isn’t it? The seller of the funds (a capitalist) has decided he wants out of the currency in question. He may have wanted to build a factor or some such and decided that it was no longer prudent to invest his money in the country in question. Whether there is a flow of investment intentions out, if you like, depends on what the purchaser of the seller’s local currency position has in mind. The purchaser might be an exporter who is exchanging offshore currency for local currency so he can attend to financing his commitments in the country in question. In this case, the funds have been transferred to someone who wanted to build a factory to someone who wants to pay his wages bill and pay dividends to his shareholders. So there is a long term macroeconomic consequence.

      “Capital controls on a market simply slow that exchange down”

      They do more than this. They change capitalists opinions about the country question. You obviously believe it matters not what these opinions are.

      “There is no need for ‘foreign investors’. Domestic investors are perfectly fine….”

      That is if you presume that domestic investors have not been infected with the same change of view as foreign investors. Domestic investors are just as likely take their money and run.

      “I’m looking for ‘investors’ who will drive capital development – enabled by banks that lend for that purpose. ”

      What YOU might be looking for and what you get are two different things. You are not dealing with reality. If there is capital flight, it is more than likely to be broad based and drive the currency down.

    53. Henry rech says:

      “In this case, the funds have been transferred to someone who wanted to build a factory to someone who wants to pay his wages bill and pay dividends to his shareholders.”

      Correction, should be: “In this case, the funds have been transferred FROM someone who wanted to build a factory to someone who wants to pay his wages bill and pay dividends to his shareholders.”

    54. Arthurian says:

      “The aim of fiscal policy is … to ensure full employment and price stability, given the spending and saving decisions of the non-government sector.”

      But the spending and saving decisions of the non-government sector are not “given”. They too have been influenced by policy.

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    *
    To prove you're a person (not a spam script), type the answer to the math equation shown in the picture.
    Anti-spam equation