cross your eyes and wait
February 28, 2012 11:56 AM   Subscribe

Nearly four years into a global economic crisis that has withstood many attempted solutions, MMT theorists are trying to edge themselves into mainstream discourse. After an extended Dylan Matthews article in the Washington Post and a large Italian MMT Summit this weekend, some are claiming victory. But what is MMT?

The Financial Times Alphaville blog has posted a concise primer attempting to explain the core of the theory, which it stresses is an almost complete departure and reversal of the traditional way money is understood: "[r]ather than treating money as an object of wealth or somebody else’s debt, a means to trade ... MMT treats money as a claim on wealth, a product of trade."

Also Dr Stephanie Kelton, professor at the University of Missouri, blogger at New Economic Perspectives, and one of MMT's most prominent spokespeople, explains the current crisis from an MMT perspective in a 45 minute lecture

Alphaville also relates MMT back to the current crisis and fiscal policy:
[F]or the US domestic private sector to carry a positive balance, the government must in effect carry a negative balance.

This makes a lot of sense if you think of the United States as representing a completely self-contained credit system, where only one official government controlled currency is allowed (and no foreigners can buy US debt). If the economy is to be kept well lubricated and functioning, the government must be willing to take on more debt on behalf of its citizens when the situation calls for it. Think of it as the private sector positve balances (or savings) representing claims on goods and services which haven’t as yet been redeemed. If not for the government’s negative balance, these claims would be represented by billions of private negative balances instead — representations of debts/credits between individuals. Money earned, and taxed, but not yet redeemed. Everything from your right to redeem a dozen baked rolls from your baker one day in the future, to your right to claim 10 days worth of medical services from your local doctor.

Allowing the government to take on those debts/credits (and really we’re talking more about credits) in place of your counterparties allows for claim standardisation. This not only ensures claims can be redeemed more quickly, having a greater wealth effect on the economy, they can also penetrate the system more completely. Furthermore, they are given a state guarantee in place of a private guarantee.

No more is there a risk that the doctor’s services you earned (by fixing the boiler at the medical centre) are lost because the doctor in question has passed away. You will still be able to redeem the services due to the intermediary role played by the government. Your claim is now against the government, not the doctor. You can thus redeem it with anyone who feels inclined to settle transactions with government paper instead of private paper. And why wouldn’t they? Everyone, after all, has a use for official government currency since it’s the only payment unit which will be accepted for the settlement of tax bills — a.k.a the government’s redemption of the claims it has against you.
posted by crayz (11 comments total) 13 users marked this as a favorite
For those, like me, who had no idea what this was about, MMT is an acronym for modern monetary theory.
posted by chrchr at 12:02 PM on February 28, 2012 [11 favorites]

We need a ANE (Acronyms Not Explained!) flag!
posted by freebird at 12:17 PM on February 28, 2012 [3 favorites]

I thought MMT meant Mixed Martial Transactions - instead of paper money everyone fights over everything - preferably in steel cages and shown on the big TV screens the new government will set up in every town square. The future is going to be really cool.
posted by three blind mice at 12:26 PM on February 28, 2012 [8 favorites]

Is this the thread on Methadone Maintenance Therapy?
posted by PeterMcDermott at 12:48 PM on February 28, 2012 [2 favorites]

For those, like me, who had no idea what this was about, MMT is an acronym for modern monetary theory.

Thank you chrchr for this; I hit More Inside expecting and explanation of MMT and was surprised it wasn't there.
Wow (from the link): [...] the MMT view that deficits never matter as long as you have your own currency [...] Holy crap, it's the "I can't be broke, I still have more checks" joke in real life!
posted by Old'n'Busted at 12:48 PM on February 28, 2012 [2 favorites]

Still, it's nice to see an alternative to the Friedman/Greenspan TooBigToFail System running things right now that isn't just Krugman/Keynsian.

Still, I'm somewhat disappointed that MMT didn't stand for Magical Mystery Tour. Psychedelic-Era Beatles Economics, oh yeah!
posted by oneswellfoop at 1:09 PM on February 28, 2012

There seem to be MMT commenters on Krugman's blog all the time, and they generally come across as trolls intent on "gotcha" games, who think they've had some amazing insight the rest of us are too dumb to see. It doesn't do a lot for their credibility.
posted by idb at 1:10 PM on February 28, 2012 [1 favorite]

if you think of the United States [or any single country] as representing a completely self-contained credit system

But but but but...
posted by wilful at 3:34 PM on February 28, 2012

posted by moorooka at 7:18 PM on February 28, 2012

not to be confused with market monetarism and NGDP targeting...

btw here's a primer on 'safe assets', negative interest rates, 'sovereign equity' and fiat currency :P

A global 'safe asset' shortage [1,2,3], along with financial repression and perhaps inequality, have driven not only real interest rates negative, but nominal rates as well, cf. rehypothecation [1,2,3], compelling questions on how to pay for what we need, just to employ everyone putting slack resources to work, maybe with the need of more public banks [1,2,3], sovereign equity [1,2,3], and/or crowdsourcing [1,2,3], afterall, it's only money: "To be short of money when there's work to get done is like not having enough inches to build a house."

posted by kliuless at 9:21 AM on February 29, 2012 [2 favorites]

oh and how this relates to a balance-sheet (B/S) recession...
If it's about deleveraging balance sheets, the problem is an income/debt issue. It can be solved by reducing debt through forgiveness, lower interest rates and refinancing, equity swaps, a jubilee, and many other options. The models used in these stories indicate that any kind of transfer from creditors to debtors will make the economy better off. [cf. Reason, GDP and Capital]
...(lack of) investment: "A lot of the weakness of AD comes from the investment side, and in fact it predated the recession... I would put more emphasis on our inability to replace industrialization with something comparably important..."

and trade...
I have made the case many times that the Fed is a monetary superpower. It controls the world's main reserve currency and many emerging markets are formally or informally pegged to dollar. Consequently, its monetary policy gets exported across much of the globe. The other two monetary powers, the ECB and the Bank of Japan, are therefore mindful of U.S. monetary policy lest their currencies becomes too expensive relative to the dollar and all the other currencies pegged to the dollar. As as result, the Fed's monetary policy gets exported to some degree to Japan and the Euro area as well. This understanding implies the Fed helped fuel excessive global liquidity in the early-to-mid 2000s, but now it is doing the opposite with its passive tightening of monetary policy.

This understanding also weaves nicely into the shortage of safe assets story. Back in the early-to-mid 2000s the Fed's loose monetary policy meant dollar-peggers had to buy up more dollars to maintain their pegs. These economies then used the dollars to buy up U.S. debt. This increased the demand for safe assets and further drove down yields. Fast forward to late 2008. The Fed fails to prevent the collapse of NGDP and never attempts to fully restore it to some reasonable pre-crisis path. This causes the destruction of many safe assets and thus further exacerbates the safe-asset problem. Now these developments are only the cyclical part of the safe asset problem--there was also a structural shift in demand for safe assets coming the emerging world--but it is an important part of the story.

I bring this up because Andrea Ferrero of the New York Fed has a new paper that makes a similar argument. He, however, uses more formal modeling than me and notes the implications for the current account deficits. He is careful not to say the Fed's monetary superpower status was the only factor, yet finds that it was quantitatively important. Here is an Ferrero: "[T]hese [pegging] countries import U.S. monetary policy so that low U.S. interest rates lead to low global interest rates. The quantitative analysis shows that foreign pegs, coupled with over-expansionary U.S. monetary policy, exert additional downward pressure on the real interest rate and impair a real depreciation of the dollar that would help rebalance the U.S. current account de cit. Taken together, the relaxation of borrowing constraints and low interest rates in the U.S. coupled with foreign pegs account for about two-thirds of the increase in real house prices and almost one-half of the deterioration of the current account during the first half of the 2000s. These quantitative findings complement the role of other factors in accounting for the correlation between the house price boom and the deterioration of the current account in the U.S. during the early 2000s."
which greenspan of all people noticed way back in early 2005 :P
Interestingly, the change in U.S. home mortgage debt over the past half-century correlates significantly with our current account deficit.6 To be sure, correlation is not causation, and there have been many influences on both mortgage debt and the current account. Nevertheless, over the past two decades, major innovations in the United States have improved the availability and lowered the costs of home mortgages. These developments likely spurred homeowners to tap increasing home equity to finance consumer expenditures beyond home purchase. In contrast, mortgage debt is not so readily available among our trading partners as a vehicle to finance consumption expenditures.
interesting indeed!
posted by kliuless at 9:56 AM on February 29, 2012

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