Monday, January 26, 2015

MMT Is The Most Flawed Monetary Theory...

... except for all the other monetary theories we have.

I said so in an update to my previous post, and now I have to back it with more specific criticism. I connect the Modern Monetary Theory (MMT) mostly with Abba Lerner. He made many good points and helped us realize how we have misunderstood money. But one reason this misunderstanding lives on is that Lerner's main thesis, Functional Finance theory, is wrong.

Money is not something that can be thrown into the economy in quantities required to maintain full employment. Money is credit. Credit cannot be thrown into the economy in quantities required to maintain full employment.

Credit, as trust, is a much more delicate thing, or non-thing. It takes a long time to earn it, but it can be lost in the blink of an eye. The easiest way to lose it is by using it excessively. By throwing it at the slightest problem and finally even at mere inconveniences. Credit gets often misused when one believes that it is impossible to lose it -- that it has always been there, for good reasons.

But if we give credit another name and make it appear as something tangible, perhaps it cannot be lost. And not just that, but more of it can be created at will. Let us call it "money".

I believe John Law was of good nature. But if he saw us now, I think he would have a laugh. He knew that credit can be created at will. That it can be taken as something tangible ("money") for a while, and that all this can create a very real sense of prosperity. Real houses and real cars are built and bought -- and assumed to have been paid -- with that credit. Had we not used credit, these houses and cars would have been built, and bought, much later in time. If ever.

It's like this magical credit just cannot run out. It sloshes around the world. They say there is a glut of it, and that thanks to this glut, it is even easier to create more of it. So the glut becomes bigger all the time.

Eventually, the false sense of prosperity will disappear, often in an abrupt manner. But life will go on and become in many ways much richer, deeper again. Of course there is pain involved in this transition, and minimizing this pain will become our top priority -- rightly so. But the first thing we do must be to stop making this false sense of prosperity even grander by throwing more and more credit at our problems and inconveniences.

p.s. I'm willing to be even more specific in the comments section, especially if there are MMTers who feel that this criticism misses their main thesis. Nothing beats a good discussion, and I'm willing to learn more. Let me hear from you.


  1. Re your point that money should not be "used excessively", MMTers agree with that. They are for ever pointing out that inflation is a very definite barrier when it comes to expanding demand / the money supply.

    1. I see what you mean.

      But for me, "inflation under control, at target" alone is no sign that credit creation is not excessive.

      As I said to you in "Mainly Macro":

      "If you say that public debt is a more benevolent form of debt, I probably agree with you. What I'm saying is that with so much private debt, it is a big mistake to try to boost growth with public debt. No matter what Krugman and others say, this is no Depression -- yet. I'm 100 % for public spending to fight debt deflation and 15-25 % unemployment.

      I'm against public spending aimed at keeping the GDP growth rate positive in the face of an enormous debt overhang and continuing credit-fueled spending around the world. We should keep our powder dry."

      Now, it would be too obvious to point only at *asset* price inflation. Although we should keep asset prices in mind too, I would like to make a broader point. We need to look at the total amount of credit in the economy and decide whether the amount is sustainable or not.

      And this is where we cannot find agreement. As I wrote to Simon Wren-Lewis (above the comment I just linked to):

      "I don't see that the debate, ultimately, is about Austerity vs. Stimulus. If we want to speak in these terms, then I would frame the debate as a question: "How much Stimulus?".

      I fully agree with you that stimulus now would create growth now. The problem -- for us who find ourselves in "There is such a thing as too much stimulus" camp -- is that (credit-financed) stimulus translates to "borrowing future growth through intertemporal effects" (to use William White's expression). If you and I could agree on this, then the question would be: "How much stimulus, or borrowing from future, is sustainable so that we don't just create a bigger hole in the road ahead?".

      What we disagree on is the *amount of* stimulus. We agree on the fact that stimulus usually translates to growth here and now. What we are missing is common understanding on how credit -- always intertemporal -- really works in the economy. Until we have it, you and I cannot agree on how much we are borrowing from the future, or even how exactly we are borrowing from the future.

      I'm in the "We have been borrowing too much from the future camp", with Mr White and BIS economists. We are not stupid. You are not stupid either. Our views on credit just differ substantially, because there is no sound credit theory. (Exhibit 1: Modern Monetary Theory, though it gets many technical facts right, is far from sound enough to convince you, or me.)

      I'm very far in my work on a sound (and simple) credit theory which, in my view, will change this situation totally and free us to do real science again."

      If you would like to understand better where I'm coming from, I could point you to an absolutely seminal "package" when it comes to my thinking on this issue:

      This is Adair Turner’s “Stockholm Speech”. If you have read it, then I suggest you read it again. I find myself going back to it from time to time and being always surprised how it, despite its quite substantial length, manages to be thick with relevant points! Wicksell and Minsky, they are all there. This speech pointed me in the right direction and sources when I was looking for answers to what have shown to be very relevant questions (and intuitions) I had in my mind already in 2013, and quite long before that too.