Archive for the ‘Modern Monetary Theory’ Category

The Second International Modern Monetary Theory Conference

Michael Stephens | September 10, 2018

The Levy Institute is a cosponsor of the Second International Modern Monetary Theory Conference, which will take place September 28–30 at the New School and will feature Institute scholars L. Randall Wray, Pavlina Tcherneva, Stephanie Kelton, and Mathew Forstater:

Like the first conference, this year will feature contributions from fields as diverse as macroeconomics, law, history, public policy, and corporate finance, with the goal of creating a community of scholars working within the MMT paradigm. This year’s theme, “Public Money, Public Purpose, Public Power,” signals the MMT community’s efforts to build bridges between social justice movements, inspire broad-based participation, and more deeply discuss how our ideas may be concretized politically.

The conference runs from Friday, September 28 through Sunday, September 30. Friday will feature roundtable discussions and keynote addresses from MMT luminaries on the origins of MMT, the process of making MMT “mainstream,” and the relationship between MMT and progressive advocacy for the job guarantee. Saturday will feature workshops facilitated by a range of community leaders and experts seeking to develop and deepen connections between MMT and other fields. Sunday begins with two “town hall” meetings, exploring MMT’s capacity as both a domestic and an international movement. The proceedings will conclude with a plenary session on the strategic and institutional goals of the movement going forward.

To learn more about the Second International MMT Conference or to register, visit their website at mmtconference.org or email conference@mmtconference.org.

Learn more about MMT in these Levy Institute publications: continue reading…

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L. Randall Wray on MMT and Positive Money

Michael Stephens | February 16, 2017

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Xmas Cheer: The Debt Is Not Our Biggest Problem

Michael Stephens | December 31, 2016

Why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? It’s one of the most effective, and most abused, wedge issues in American politics.

by Kerry Pechter

The nomination of Mick Mulvaney—deficit hawk, three-term Republican congressman from South Carolina and founding member of the House “Freedom Caucus”—to the cabinet-level directorship of the Office of Management and Budget is not good news for the financial system.

Mulvaney has said (and perhaps even believes) that one of the “greatest dangers” we face as Americans is the annual budget deficit and the $20 trillion national debt. This notion is an effective political weapon, but it’s dangerously untrue. If it were true, the country would have failed long ago.

Debunking this canard should be a priority for anybody who cares about retirement security. As long as we believe in the debt bogeyman, we can’t productively solve the Social Security and Medicare funding problems, defend the tax expenditure for retirement savings, or even create a non-deflationary annual federal budget. Everything will look unaffordable.

Hamilton, the Broadway star

If you don’t believe me, believe Alexander Hamilton. In 1790, the new nation was awash in government IOUs but had little cash or coinage for daily commerce. Hamilton, the impetuous future Broadway subject, resolved the crisis with a simple argument. He reminded his fellow founders that debts are also assets, and that the most secure assets are those that yield a guaranteed income stream from a sovereign government with the power to tax.

At the time, according to Hamilton’s “First Report on the Public Credit,” the U.S. debt in 1790 stood at $54.1 million and change. In that document, the first Treasury Secretary laid out his plan—over the protests of deficit hawks—to restore the debt’s face value, secure the new nation’s credit rating, and put new money into circulation through interest payments on the debt, with revenue from taxes on imports.

The plan worked. With its par value established, U.S. debt became—and still is—the basis of the nation’s money supply. “In countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money,” Hamilton wrote. “Transfers of stock or public debt are there equivalent to payments in specie; or, in other words, stock, in the principal transactions of business, passes current as specie.”

Not a burden on our backs

Since then, during times of doubt, others have re-explained all this. In 1984, many people were panicking that the federal budget deficit had reached $185 billion. That July, economic historian Robert Heilbroner, author of The Worldly Philosophers, explained in a New Yorker essay that their fear was based on a misconception.

“The public’s concerns about the debt and the deficit arises from our tendency to picture both in terms of a household’s finances,” Heilbroner wrote. “We see the government as a very large family and we all feel that the direction in which these deficits are driving us is one of household bankruptcy on a globe-shaking scale.”

That’s not so, he explained. The government is more like a bank, which lends by creating brand new liabilities. (You can also think of it as the cashier at a casino, who has an infinite number of chips at her disposal.) “As part of its function in the economy, the government usually runs deficits—not like a household experiencing a pinch but as a kind of national banking operation that adds to the flow of income that government siphons into households and businesses,” he wrote.

Robert Heilbroner

“The debt is not a vast burden borne on the backs of our citizenry but a varied portfolio of Treasury and other federal obligations, most of them held by American households and institutions, which consider them the safest and surest of their investments.”

‘Heterdox’ economic view

Over the past 30 years, however, as the national debt has become a political football, this common-sense explanation of it has been suppressed. You hardly ever hear it articulated. It is kept alive mainly by “heterodox economists” like Stephanie Kelton and L. Randall Wray.

In the 2015 edition of his book, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Wray explained the flaw in the idea that the deficit, the debt or the interest on the debt will eventually overwhelm us. It’s the kind of straight-line forecasting, he wrote, that ignores self-limiting factors or feedback mechanisms.

“If we are dealing with sovereign budget deficits we must first understand WHAT is not sustainable, and what is,” Wray wrote. “That requires that we need to do sensible exercises. The one that the deficit hysterians propose is not sensible.” He uses the analogy of Morgan Spurlock, the maker of the 2004 documentary Supersize Me, to illustrate his point.

In the movie, Spurlock wanted to discover the effects of consuming 5,000 calories worth of food at McDonald’s every day. Wray pointed out that, if you ignored certain facts about human metabolism, the 200-lb Spurlock would inevitably weigh 565 pounds after a year, 36,700 pounds after 100 years and 36.7 million pounds after 100,000 years. Of course, that can’t happen.

Randall Wray

“The trick used by deficit warriors is similar but with the inputs and outputs reversed,” according to Wray. “Rather than caloric inputs, we have GDP growth as the input; rather than burning calories, we pay interest; and rather than weight gain as the output we have budget deficits accumulating to government debt outstanding.

“To rig the little model to ensure it is not sustainable, all we have to do is to set the interest rate higher than the growth rate – just as we had Morgan’s caloric input at 5,000 calories and his burn rate at only 2,000 – and this will ensure that the debt ratio grows unsustainably (just as we ensured that Morgan’s waistline grew without limit).”

Fooling the people

Like any other threat, the debt’s scariness factor depends on how you frame it. The 2016 budget deficit was $587 billion, which sounds terrible. But that was just 3.3% of Gross Domestic Product. The U.S. debt reached $19.9 trillion in 2016, which also sounds terrible. But that is the amount accumulated since 1790. Our annual GDP is almost $18 trillion.

To enlarge the frame, we should include the whole “financial position” of the United States. According to Wikipedia, it “includes assets of at least $269.6 trillion and debts of $145.8 trillion. The current net worth of the U.S. in the first quarter of 2014 was an estimated $123.8 trillion.” In that context, neither the deficit nor the debt seem like terrible threats.

If you’re bent on making the math look scary, you can easily do it. As Wray noted above, “If the interest rate [i.e., costs] is above the growth rate [i.e., revenues], we get a rising debt ratio. If we carry this through eternity, that ratio gets big. Really big. OK, that sounds bad. And it is. Remember, that is a big part of the reason that the global financial crisis (GFC) hit: an over-indebted private sector whose income did not grow fast enough to keep up with interest payments.”

But the government doesn’t face the same constraints as the private sector (which is why it could bail out the private sector in 2008-2010). Once you recognize that U.S. assets are huge, that U.S. debts are also private wealth, and that the debt needs to be serviced but never zeroed out, then today’s debt shrinks into the manageable problem that it is and not a source of panic. (Paying down the national debt—in effect, deleveraging the government—would be disastrously deflationary; that’s a topic for another article.)

So why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? The answer is obvious. It provides an evergreen reason to delegitimize any and every type of government spending, regulation and taxation. It’s one of the most effective, and most abused, wedge issues in American politics.

Kerry Pechter is the founder and editor of the Retirement Income Journal. Reprinted with permission.

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L. Randall Wray on the Radical Imagination

Michael Stephens | September 1, 2016

Jim Vrettos, a sociologist at John Jay College and host of “The Radical Imagination”, interviewed the Levy Institute’s Randy Wray on how the discipline of economics has gone astray. Wray’s story begins in the late 1960s, with what he describes as a reaction against “New Deal economics.”

The interview ends with a discussion of the ongoing US presidential election.

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Wray on Revenue, Redemption, and When Austerity Is Justified

Michael Stephens | July 12, 2016

L. Randall Wray has an essay in the recent issue of the World Economic Review. Wray’s target is the belief that “government needs tax revenue to pay for most (or even all) of its spending.” According to Wray, a version of this belief distorts our understanding of what are the limits of, say, the US federal government’s ability to spend. (In terms of the sense of “limits” here, Wray wants to distinguish between the constraints imposed by the particularities of US law and broader financial/economic constraints.)

With the aid of references to the history of American colonial paper currency, Wray presents a competing conception of tax revenues as “redemption,” according to which taxes support the value of the notes that have been issued, rather than being the means by which the government raises its “income” and a precondition of its ability to spend.

What’s the upshot of this “taxes as redemption” story?

While affordability is not in question, inflation is a danger. To be sure, inflation can occur even at low levels of aggregate demand (witness the stagflation of the 1970s in the USA), but if government spending should drive the economy beyond full employment, then inflation will result. Government spending can also be inflationary before full employment if it is directed to sectors with a low elasticity of output (where additional demand causes prices to rise without increasing output much). One could envision additional ways in which misdirected spending and poor policy could cause inflation. The point is, however, that the danger is not affordability but rather inflation.

Currency depreciation is also a possibility for floating exchange rate systems […]

Hence, “more austerity” can be the right answer, but only in specific circumstances. If government is spending so much that prices are rising faster than desired, or if the currency is depreciating more than desired, then the answer could be to reduce spending or raise taxes. The difference here is not subtle. In these cases, it is not affordability but rather inflation or currency depreciation that is the problem. Policy makers ought to be able to see the difference: austerity is needed not because government is running out of its own currency but rather because prices are rising or currency is depreciating more rapidly than desired.

You can read the essay here: (pdf) “Taxes are for Redemption, Not Spending

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Donald Trump’s Printing Press Sends the Media to the Fainting Couch

Michael Stephens | May 18, 2016

Donald Trump generated some breathless commentary last week (perhaps, for once, unjustified) for suggesting, in response in part to those who have pointed out that some of the policies he has pseudo-proposed would enlarge the deficit, that the US government can always pay its bills: “This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK?” (He had also suggested that the government might buy back government debt at a discount if interest rates rise. Dean Baker argues this would be pointless, not disastrous.) Among the responses to these comments were claims that this “money printing” business would, ipso facto, be (hyper)inflationary.

L. Randall Wray spoke to Bloomberg’s Joe Weisenthal about the issue. Wray emphasized that the government always spends by “printing money,” or more accurately, by crediting bank accounts through computer keystrokes. With respect to whether Trump’s purported policies would or would not be inflationary then, the central question for Wray is not whether Trump would or would not have the government “printing money,” but whether the economy would be at full employment. At that point, a government deficit of sufficient size could be inflationary (in other words: “So, yes, deficits do matter, but not for solvency“).

Watch the interview here at Bloomberg:

Weisenthal Wray Interview

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Bloomberg: Modern Money Theory Gaining Converts

Michael Stephens | March 14, 2016

Bloomberg just published an article focused on the rise of Modern Money Theory (MMT), featuring comments by Senior Scholar Randall Wray:

The 20-something-year-old doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on government spending in nations with their own currency.

Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars or yen — but they’re also the monopoly creators of dollars or yen, so can always meet their obligations. For the same reason, they don’t need to finance spending by collecting taxes, or even selling bonds. […]

No one’s saying there are no limits. Real resources can be a constraint — how much labor is available to build that road? Taxes are an essential tool, to ensure demand for the currency and cool the economy if it overheats. But the MMTers argue there’s plenty of room to spend without triggering inflation.

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On the Intellectual Origins of Modern Money Theory

Michael Stephens | February 19, 2016

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MMT and the New New Deal

L. Randall Wray | November 20, 2015

Yesterday, Senator Bernie Sanders gave an important speech in which he invoked President Roosevelt’s “Second Bill of Rights” in defense of his platform. As Bernie rightly pointed out, all of Roosevelt’s New Deal social programs to which we have become accustomed were tagged as “socialism”—just as pundits are branding Bernie’s proposals as dangerous socialist ideas. You can see Bernie’s prepared remarks here.

Just before Bernie’s speech, I was asked to do an interview with Alex Jensen, on TBS eFM’s “This Morning” English radio program in Seoul, Korea. I was sent a list of questions and jotted down very brief responses. Unfortunately, in our radio interview we were only able to get through a few of these. You can listen to the interview here (“1119 Issue Today with Professor L.R. Wray”).

As you will see, in addition to the subject of MMT and its critics, we talked about the platform of Senator Sanders and why his proposals have caught the imagination of the US population.

Here are some of the questions and my brief (written) answers. continue reading…

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Endogenous Financial Fragility in Brazil: Does Brazil’s National Development Bank Reduce External Fragility?

Michael Stephens | September 22, 2015

by Felipe Rezende

Introduction

The creation of new sources of financing and funding are at the center of discussions to promote real capital development in Brazil. It has been suggested that access to capital markets and long-term investors are a possible solution to the dilemma faced by Brazil’s increasing financing requirements (such as infrastructure investment and mortgage lending needs) and the limited access to long-term funding in the country. Policy initiatives were implemented aimed at the development of long-term financing to lengthen the maturity of fixed income instruments (Rezende 2015a). Though average maturity has lengthened over the past 10 years and credit has soared, banks’ credit portfolios still concentrate on short maturities (with the exception of the state-owned banks including Caixa Economica Federal [CEF] and the Brazilian Development Bank [BNDES]).

While there was widespread agreement that public banks, and BNDES in particular, played an important stabilizing role to deal with the consequences of the 2007-2008 global financial crisis, there is, however, less agreement on BNDES’ current role (de Bolle). BNDES has been subject to a range of criticisms, such as crowding out private sector bank lending, and it is said to be hampering the development of the local capital market (Rezende 2015). It is commonly believed that “development banks and other institutions in Latin America tend to replace markets rather than address collective action failures that lead to market incompleteness.” (de Bolle 2015). In particular, critics of Brazil’s national development bank have argued that large companies can borrow from private international capital markets and the bank extends credit to companies that have access to domestic capital markets.

Much of the policy discussion has been misplaced. Though the conventional belief assumes that capital markets are efficient and produce an optimal allocation of capital, this view is not supported by evidence. Free and competitive international capital markets have repeatedly failed to produce an optimal allocation of capital and privatized free-market banking systems have failed to assess risks properly thus misallocating resources (Kregel 1998, Wray 2011). Moreover, access to international capital markets has been based on the false premise of lack of domestic savings. As I have argued elsewhere (Rezende 2015) rather than justifying the existence of public banks —and BNDES in particular, based on market failures (Garcia 2011) — an effective answer to this question requires a theory of financial instability. continue reading…

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