According to Warren Mosler, who seems to be the current “north star” of Modern Monetary Theory, the government doesn’t need to issue bonds at all. Why is this? It’s because, according to proponents of MMT [ Modern Monetary Theory ], the government is the monopolist, and it doesn’t have any necessity nor responsibility to balance its books the same way a household does.
What is Modern Monetary Theory?
Let’s say you want a house.
Well, you can’t just go into your bank account, change your 3,000 dollar balance to 300,000 dollars, and then go out and buy a house.
According to Modern Monetary Theory, as long as you’re a government, this is precisely how you work.
It’s said Mosler spent a lot of time looking at the balance sheets from the FED and he witnessed this is what’s going on. The government first pays, and then as a result issues bonds/levies taxes. The implications of this change in the construct of how monetary policy works entirely when viewed from the position of a government.
Taxes and Treasuries
Warren Mosler suggests that taxes don’t do what we think they do, and the government doesn’t really need to sell treasuries. This is a big couple of statements, so let’s unpack that a bit.
Taxes don’t do what we think they do:
When you think about the way that the Modern Monetary Theory supporter is viewing the relationship between currency and government, you have to change how you think about taxes. As we said, it’s not that the government has a cost and then has to pay it, the government wants to pay for something so it makes numbers on a screen and then poof, it’s paid for.
…so what purpose do taxes serve?
Well, think of it like a feudal construct. The king rules the land, and the kingdom has control over the commoners. Let’s say that people are trading for goods with rocks and sticks. You decide you want to collect taxes, and you don’t want to collect rocks and sticks. So, you issue a token, with your face on it. There are two things you need to do in order for this idea to work if you’re the issuing kingdom:
1. Issue the tokens to the commoners. You have to first distribute the token as a currency before the people of your kingdom can use it.
2. Tax the commoners and insist that your tokens are the only way to pay the tax.
The king makes the currency valuable, by taxing it. So, when you see things this way, taxes don’t pay for the spending of the kingdom, rather they give value to the currency.
It really just boiled down to: This token is worth something because you need it to pay a tax. If you don’t pay the tax, then the bad things happen.
So what happens to the taxes that you pay to the government?
According to MMT? Nothing. It pays for nothing. Taxes are there to literally scare you into having confidence in the currency.
So, given what we’ve learned, just follow the logic when it comes to treasuries. If in fact the government first pays for the thing and adds to the debt, why then do we need to sell Treasuries? If the government can just make numbers on a computer to get things paid, why would it have to sell bonds?
According to Mosler, it doesn’t.
He says that the practice of selling bonds is just in place because people still haven’t come to terms with the reality that is the modern monetary system, and they are stuck on practices they adopted during the gold standard.
Again, we’ll take a couple steps back to help break this down. In this construct, think like the issuer of currency, not the citizen. From this perspective, the total debt of the government is the total available revenue for the citizens.
Let’s use a federal job expansion as an example. If the government set out to create 50,000 jobs those jobs have to have salaries paid. The government simply goes into their computer, allocates numbers to bank accounts when people get hired for said jobs, and poof, employees are getting paid by the government. So, the government spending (salaries for the employees) is equal to the private sector available revenue (employees take the salary to then interact in the market.)
Now when you consider this and then retrace to the idea of bonds, you can see why Mosler is not concerned with them. As according to Modern Monetary Theory, the government has no necessity to pay off its debt, and in fact, the debt is exactly what’s making the citizens of the country so prosperous. Mosler essentially sees bonds as a passive income for the wealthy. A UBI for those who don’t need it, in a sense. As the government historically always pays on these bonds, and while the % of appreciation is minimal, it’s a margin of gain to the bond buyer, nonetheless.
So, what’s the problem with MMT?
If you’ve been reading up to this point and you’re thinking to yourself “Well, to be honest, this doesn’t sound that far off from what’s going on,” you’re really not wrong. It’s not as if Mosler is making inaccurate observations about how the monetary policy of the United States works.
This is something most Libertarians have been saying for a long time – but due to the fact that there are so many moving pieces to this theory, and to the financial apparatus of the US economy, it’s easy to get lost in the nuance and become confused.
On a podcast I did on the Think Liberty Podcast Network about the FED, there was a funny bit where I kept yelling out “It’s a private organization!” – inferring exactly what it is Mosler is pointing out with Modern Monetary Theory: The FED can call itself a private organization all it wants, it’s not fooling us. We know how the U.S. Government and the FED are related, and we’re not buying the “private entity” BS that we’re spoon-fed about the central banks.
So, does this then mean that both Mosler and I support MMT? Maybe, but I don’t really think so. While I agree with the core premise that he is working off of (the government is just creating money out of nothing,) there’s a lot of stuff he says that I just can’t agree with, at all. Like the article, he wrote for Huffington Post titled: The United States Can’t be Insolvent, where he states “insolvency is never an issue with a nation that has a nonconvertible currency and a floating exchange rate policy”
That was written in 2011.
Mosler writes off the situation in Greece because the Greek government adopted the Euro, and asserts that was the core issue. This is understandable, and I won’t argue it. However, how does this theory go to explain Venezuela and Zimbabwe?
Remember, according to Mosler: “insolvency is never an issue with a nation that has a nonconvertible currency and a floating exchange rate policy”
Like I said above, there are many moving pieces here, this really throws people off. The MMT supporter will say “This isn’t a prescription, it’s an observation!” – however, this isn’t entirely accurate in my opinion. Holding the ideas of MMT as truth has absolutely large implications on monetary policy. It’s not at all an “observation of the state of things” because the United States monetary policy isn’t operated in a way that says “Insolvency is never an issue.”
Furthermore, Mosler is against central banks and has been labeled at times (by other MMT supporters, I’ve not ever heard it from the man himself, however I have heard him call himself a “Tea Party Democrat“) as a Libertarian, or a limited government guy. However, he’s also opposed to reducing social security or medicare spending. Are we to pretend that government spending is not government expansion?
All of the above are some surface critiques, I’m sure Modern Monetary Theory supporters would be more than happy to tell me what I don’t understand or go on to describe Modern Monetary Theory harder to me (as Mosler often does as a response to tough questions, as if repeating yourself but in a more verbose manner is an argument.)
All of this, of course, is said without even mentioning what government ownership of industry or even large-scale government spending can do to price manipulation and the muting of market signals, which is another issue in and of itself.
However, none of that addresses what I see to be the largest issue that exists with Modern Monetary Theory.
The Value Of Money Is Only As Strong as The Confidence Those Who Hold It, Have In It
That’s right, when you peel away all of the insane apparatus, all of the economic mechanics that are involved in any system of commerce, at the end of the day currency’s largest utility is giving you one medium of exchange for many different products/services. The amount of value that it has is really only ever the amount of confidence those who hold it, have in the currency itself.
Can you imagine how hard it would be to keep a log of trade value without a currency? How many cows for a car? How many gallons of orange juice does a cow cost? How many balls of yarn does it take to buy a gallon of juice? With the amount of “things” people find of value on this planet, this ledger would be insane, and impossible to do business in any kind of efficient manner.
The part that the Modern Monetary Theory crowd has right, is the threat of force can establish “value.” When you look at it from the standpoint I’ve laid out, it’s clearly obvious. It’s confidence by way of fear, that the MMT tax/value/government fiat system works. However, it’s not the *only* way a currency can have value. Look at Bitcoin or any other cryptocurrency that has had a semblance of a successful go. A team gets together, makes a currency, and if folks adopt it, it raises in value. It doesn’t need an apparatus that deals with taxation or force. Cryptocurrencies are unique in that some of them offer utility outside of the currency itself, these utilities offered often add to the value of the cryptocurrency and make quite an interesting case against the core tenants held by those that support MMT. A monopoly wasn’t needed to create it, the threat of force is not needed to establish value.
We need to look no further than Brazil, for confirmation of this phenomenon of perception and value.
As you can see, from the 80’s well into the 90’s Brazil had a big problem with inflation. They just couldn’t seem to get it under control, and inflation did what inflation does. They went through price freezes, bank account freezes and seizures, nothing worked.
So, how did they fix this? Did they do as Mosler suggests, and just adjust and manipulate their way out of it? No. No, that’s not what they did at all.
What Brazil did to fix this problem, was craft a strategic approach to implementing a new monetary policy that was specifically designed to re-install confidence in currency to those who held it.
Before the strategy came into place, Brazil had it bad. The inflation was running at such a rapid rate, store workers would have to change prices every morning on products in the store to adjust for inflation, as the prices continued to rise.
And what was the solution?
Following the creation of this currency, they would publish tables in the morning paper. Showing how much 1 of the new currency was worth in “X” amount of the other, still inflating the currency. So while a gallon of milk may have cost 6 units of the old currency on Monday, and 10 on Friday, it’s still just 1 unit of the new, virtual currency.
This showed the citizens holding the currency that it was stable, giving them confidence, thus leading to the new currency to hold value (even though it wasn’t backed by anything at all). By the time actual paper dollars (meant to be representative of a 1:1 ratio, the notes were backed by the virtual currency) the currency was rock solid, and inflation had been avoided. It will last about as long as the confidence of the citizens have in the currency, until they have the issue show up again.
The point? The observation made by Mosler is irresponsible and dangerous to espouse as monetary policy. Don’t believe me? Look at how it’s been championed by the left as a way to finally afford socialism and the ever-expanding government spending that’s required by the policies favored by the left. Mosler and his supporters will tell you “Yeah, it can get worse if it’s done irresponsibly, but that depends on your politics.” So we just need to make sure we always have a Mosler in place to direct the policy of the country, to make sure we don’t end up like Venezuela? Currencies with a backing are finite, so they come with natural limitations of supply and demand that effect value and price. Prices are the eyes of the market, and when the prices are set by a finite resource who’s value and price is a result of scarcity, and utility, the perception of value is higher and all of these factors can lead to higher actual value and stability.
While the Brazilian fix addressed currency in a similar way that MMT does, in that the currency originated as totally virtual-more a strategic decision than an actual resource, it was designed with structures and limitations to create economic stability, just as the United States Central banks have, and the banks in Brazil have their own nuanced mechanisms for their own reasons. An MMT supporter will say this is a clear observance that proves their theory has merit, and again, I do not disagree entirely on that aspect.
This is not an endorsement of governmental financial institutions. Currency that is backed doesn’t need to be controlled and distributed and manipulated by a central organization, because it has the natural characteristics that lend to supply and demand that those controls are put in place to mimic in the first place. Deciding that a central organization can hold all of the knowledge needed to know what economic monetary approach is best planned for an entire country of people they are disconnected from is a fatal conceit.
Having the opinion that the spending of the government is the available money supply for the population is the dangerous part. You can see in many who support it, what the implications of this can mean depending on who’s politics are controlling the policy decisions of the government.
Just because Warren Mosler says that the United States doesn’t have to worry about being insolvent, doesn’t mean I’m buying it. The United States has a *really* big military, and it’s for that reason fear and intimidation acts as a blanket of confidence, propping up the value of the United States dollar. However, no Empire lasts forever, and no amount of perception makes a bad financial actor (be it a government, or an individual) impervious to the ability to not be financed by outside financial parties.
If the people you govern no longer want to use your currency, and the international financial players hold a similar valuation, you’re in a much different situation than Mosler seems to think you should be in.
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