Modern Money Theory revisited – still the same false promise

To begin with

The title Modern Money Theory – MMT for short – announces some kind of comprehensive general theory. MMT, however, is more like a toolkit with hypotheses from different sources and applied to the United States from an American point of view. MMTers tend to speak of that toolkit as if it were all their own invention, while most of it is in fact taken from post-Keynesian and circuitist money theory.

Furthermore, MMT places particular emphasis on chartalism. The term stands for the state theory of money after Knapp, Keynes and Lerner, meaning that money is a creature of state law, and that the official means of payment are created by a state's central bank or treasury, or in a mixed private-public arrangement under control of a state's monetary authority. MMT has been dubbed neochartalism, but, as will be discussed below, MMT's version of it is highly idiosyncratic and far from being representative of sovereign currency theory. Something similar has to be said on MMT's use of Keynesian sector balances.

So far, MMT has continued to re-adapt by absorbing some new element now and then. For example, in the beginning of MMT, the writings of Mosler and Wray did not include a systematic element of monetary and financial crisis theory and they did not, and still do not, see any need for monetary and banking reform. They portrayed the present bankmoney regime as a marvelous credit-and-debt machine run as a sovereign currency system. A credit-and-debt machine it certainly is, although it is neither marvelous nor a sovereign currency system. In spite of MMT's self-image to represent chartalism, MMT is in fact apologetic about fractional reserve banking, belittling the system-dominating role of the private banking sector, and thereby defending – as a matter fact – the banks' neo-feudal privilege of money creation by way of extending credit.

As the 2008 crisis did not swiftly fade away and MMT also faced some criticism, they then re-adapted, in that they remembered the financial instability hypothesis of Minsky. Equally, they were confronted with the question why – if what we have is supposed to be a sovereign currency system – there is that strange ban on the government to create money, leaving the sovereign monetary prerogative mainly to the banks. MMT reacted by profiling their thesis that government incurring debt allegedly equals money creation, whereby the central bank is in the role of a partnering government body, while the banks appear to be little more than helpful executors of the government's monetary will. To most economists, even heterodox ones, this sounds upside down but is typical of MMT's habit to distortingly re-interpret theories and facts.

MMT as an offspring of Postkeynesianism

It may generally be maintained that what is valid in MMT stems from Postkeynesianism and circuitism, while what is specifically MMT turns out to be untenable. One valid tenet of Postkeynesianism, for example, is
• endogenous money creation. Rather than coming from an exogenous source, money creation is endogenous in that demand for credit from within the economy triggers bankmoney creation, combined with
• accomodationism (be this in a horizontalist or structuralist variety[1]), meaning that central banks re-act to and re-finance the monetary facts the banks have created on market demand beforehand.

However, even these basically valid elements would need critical clarification:

• The distinction between endogenous bankmoney and exogenous central-bank money (in American usage, inside and outside money) is arbitrary and overstated. Historically, exogenous money existed in the form of traditional silver and gold currency. With modern fiat money, however, all money is endogenous, because also allegedly 'exogenous' central banks do not issue new money 'just like this' but always on demand, even if on conditionality; like the banks do in this regard. The banks, furthermore, accommodate the market demand for money very selectively, and also create bankmoney for proprietary business on their own initiative. If bankmoney is seen as 'endogenous' then central-bank money is 'endogenous', too, and if central-bank money is seen as 'exogenous' then also bankmoney is 'exogenous' to the economy. 'The economy' needs money and creates demand for money, but does not by itself create money, that is, means of payment in ubiquitous use. Today, only the central banks and the banking sector create money. So-called shadow banks do not create money. They accelerate the financial circulation of existing money and provide collateral against which money is or can be created.

, • Most Postkeynesians, like mainstream economists, still have an over-aggregate understanding of the demand for money and thus fail to be clear about its composition. (Over-aggregation is an MMT specialty). There is not the slightest distinction between GDP-contributing finance and non-GDP finance, as if all money creation would serve the real economy. Today, the major part of money and credit creation goes into non-GDP finance, straightaway or subsequently – a fact absent in MMT and most of Postkeynesianism. Instead, they have been discussing financialisation at great length without asking where all the money feeding financialisation comes from.

• Present-day general means of payment – base-level cash and reserves (the latter for interbank use only), and second-level bankmoney – are created by way of credit. Put more precisely, a loaned or invested amount of currency units is paid out in the form of these means of payment. The close link between credit (a financial contract) and money (the means of payment) has led over time to another over-generalization, which is the false identity of money and credit, prevalent in neoclassical and Postkeynesian thinking alike, and very pronounced in MMT. In fact, most economists today falsely identify money with credit, and thus confuse these two very different things and functions. This again involves an over-generalization blinding out 2,500 years of debt-free creation and issuance of money when precious-metal coins were spent rather than loaned into circulation. (Even today, in most countries treasury coins are still sold, not loaned, to the central bank).

As a result of the false identity doctrine of money and credit, many Postkeynesians and most MMTers deny the possibility of debt-free issuance of sovereign money. In some of them, this even involves a fierce defense of the banks' quasi-sovereign privilege of creating bankmoney. In view of the defenders' claim to be chartalist economists, this is grotesque as it is tantamount to a defense of what they claim to be critical about, namely, Banking School doctrine, efficient financial-market hypothesis and present-day financial-market capitalism.

Elements that are specifically MMT

Let us now focus on additional elements that make up the specific MMT profile.
How does MMT come to postulate that we would have a sovereign currency system, while at the same time defending the bankmoney privilege and failing to be clear about the all-dominating pro-active bankmoney regime that is re-actively backed by the central banks and warranted by government as the bankmoney guarantor of last instance?

Proposition #1 - Sector balances are netting out. Imbalances are not a real problem

An important theoretical building block in MMT is sector balances after Godley/Lavoie.[2] There are two sectors, the public and the private sector, and if it cannot be avoided, the foreign sector as a third one. The sectors are the basic categories of a kind of macroeconomic double-entry stock accounting (enabling aggregate flow analysis by comparing consecutive balances). What is not rebooked within one of the three sectors but leaves that sector, is an inflow into one of the two other sectors.

The sectors can and ought to be subdivided, particularly, for example, into monetary institutions, non-monetary financial institutions, fiscal bodies, and real-economic actor groups.[3] There are such sub-divisions in Godley/Lavoie. MMT claims to do likewise if need be, but in fact they do not. As a result, when they speak of 'the government' it is unclear who is addressed – the governing cabinet or the President's office, the treasury, the executive beyond, parliament, or the central bank as the national or intergovernmental monetary authority (while the judiciary is in fact not much involved here). All these state bodies and other institutions under public law are subsumed under the one category of 'government' or 'public sector'. One may then puzzle over what or who more precisely they refer to. What becomes obvious here is MMT's explicit intention to merge creditary and fiscal functions, as if to make that fundamental distinction disappear; a distinction relating to the further development of the separation of powers, which is fundamental to any liberal and democratic rule of law and indispensible in monetary and fiscal analyses.

In this paper, 'government' refers to the top positions of the executive state power, including a state's treasury, but not including other state bodies and the central bank (if the latter is a state body under constitutional and administrative law at all, rather than a commercial joint-stock company with the majority held by banks and other private owners).

MMT-specific proposition #2
'Government' creates money in the form of sovereign bonds

Having said that, the reader may not feel too baffled when learning that according to MMT it is 'the government' that 'creates' money when it originates sovereign debt in the form of Treasury bills, notes and bonds. Taken literally, this is simply wrong. Treasuries today do not issue money, except maybe for coins. What can be said, however, is that by issuing bonds or similar debentures, a government is likely to add to the demand for money which, if important enough – and as long as the banks and financial markets consider a government to be creditworthy – is in turn likely to trigger the creation of additional money in the form of bankmoney and central-bank reserves.[4]

This is in line with the endogenous money hypothesis, if government demand for money is seen as a regular form of market demand for money that triggers money creation like the demand from companies and private households. This is appropriate and usual, for example when discussing whether public demand for money, due to its normally higher rating, drives out private demand for money. MMT, however, does not see public demand for money in competition with private demand for it, but insists on 'the government' to create the money by issuing sovereign bonds.

At second glance, it turns out that even in MMT it is the Federal Reserve that in actual fact creates the money in tandem with the U.S. Treasury. MMT supposes the Federal Reserve to eventually buy up the U.S. government securities – indirectly so, from banks and other institutions, as also in the U.S. the central bank is not allowed to finance public expenditure by directly taking up sovereign bonds. The banks in this MMT construction are mere middlemen and for the rest strangely absent, as if money creation was just a matter between the government and the central bank. This is not explicitely stated, but in fact persistently suggested. The role of the banking sector and big finance is generally underexposed in MMT.

If the MMT view of the process of money creation were true, government debt would equal the central bank's holdings of government debentures – which definitely is not the case. Neither the central-bank holdings of government securities (assets) nor government and bank reserve balances (central-bank liabilities) equal government debt. For example, at the beginning of 2019, reserve balances with all Federal Reserve entities were roughly 1,600 billion USD, Treasury securities held by the Federal Reserve 2,200 billion, but government debt was 22,500 billion.[5] Bank excess reserves are about 3–4 times the balances of government transaction accounts with the central bank.

Government demand for money is neither the only one nor the most important trigger for modern fiat-money creation. Demand from non-monetary financial institutions, firms and private households is clearly more important and accounts for the major share of the demand for money, thus also for the bigger part of additions to the stock of money. Similarly, most government-originated securities do not end up on the central-bank balance sheet, not even if including foreign central banks, and not even under the recent conditions of Quantitative Easing policies that have absorbed extraordinarily high levels of sovereign bonds so as to flood the banks with reserves. Most sovereign debt papers are still held by banks and other financial institutions, with less than one sixth held also by private persons, depending on the country.

MMT-specific proposition #3
Government expenditure means money creation. Taxes do not fund government expenditure, rather, government expenditure funds tax payments

The next step in MMT's deliberate monetary-fiscal confusion is that taxes are not said to fund government expenditure, rather, that government expenditure equates money creation that would provide the funds for tax payments by which the money is retired.

There is a historical example that corresponds to such a mechanism: the medieval money surrogate of wooden tally sticks. Besides merchants, also feudal treasuries issued such sticks that were split up into a stock (for the creditor who thus became a stockholder) and a foil (for the feudal treasury as debtor). The stock circulated for a while as money, within certain milieus, before being used for the settlement of tax obligations – by which act the treasury hard-currency debt and the creditor tax debt were cleared, and the stocks withdrawn from circulation. Tally sticks thus represented a kind of mortgage on future tax claims, granted by the creditor to the feudal debtor.

In more modern times there was a similar practice that allowed using future tax claims in advance. From the 18th to the beginning of the 20th century, a number of European governments, for lack of revenue in silver and gold, have issued treasury notes. These notes were not a security but banknote-analogous paper money, used, for example, for paying state officials or suppliers. Such treasury notes, or say, treasury pay vouchers, represented modern sovereign fiat currency, issued side-by-side with central-bank notes and/or commercial-bank notes; generally accepted in everyday domestic use, but largely useless in foreign and wholesale financial transactions. For the most part the notes were not retired upon tax payment but re-spent into circulation. Of course, whether re-spent or retired and replaced with a new issue just makes a formal, not a real, difference.

Regarding the MMT postulate of <government bond issue = money creation = funding government expenditure = providing the funds for tax payments>, one ought to be aware of two things. Firstly, newly issued treasury debt papers in whichever form represent the minor part of current additions to the entire money supply. Secondly, the amount of outstanding public debt cumulated over time tends to exceed current public expenditure, ever so often even GDP.

Historically, for funding the Civil War of the 1860s, issuance of the American greenback dollars (northern states) and greyback dollars (southern states) might have been one of the exceptions to the rule. In any case, however, issuance of greybacks, greenbacks and later Treasury notes has long been discontinued. In Europe, treasury pay vouchers no longer exist. The central banks' legal monopoly on paper money has in fact put an end to treasury issued monies (even though that question is legally disputed). In the U.S., by contrast, should the government decide to issue new Treasury money in the form of paper notes or digital currency, it could in fact do so. Simply, it does not, leaving the sovereign monetary prerogatives largely to the banking sector, backed by Federal Reserve support and de-facto state guarantees for the banking sector and its bankmoney.

As regards tax payments, in most countries these at first go into bank accounts of the revenue office (payment in bankmoney) and are thereafter transferred in bigger amounts to a treasury transaction account with the central bank (payment in reserves). In any case, the money spent on taxes continues to circulate through ongoing government expenditure (the reserves in the interbank circuit among the banks, the bankmoney in the public circuit among nonbanks). The respective reserve balances are not deleted (as is quite often insinuated by MMT). Reserves are only deleted in the case of bank reserve payments to the central bank itself; as bankmoney is deleted by nonbank payments in bankmoney to a bank. By contrast, the reserve balances in a government transaction account continue to exist and circulate in government payments to whosoever. Deletion of these 'means in reflux' can only be erroneously assumed if – as MMT does – the tax office and the treasury, government and central bank are all lumped together in the black hole they call 'public sector balance', and if the transaction accounts of the government with the central bank are not recognized as being different from the banks' refinancing or credit accounts with the central bank.

Irrespectively of such confusion, it is clear that tax payments are no 'money in reflux' but an inflow of means that serve funding government expenditure, most often together with additional debt taken up. Public expenditure spends the money obtained from taxes and debt, but does not create money, nor does it represent 'credit' drawn on future tax receipts (even though, to repeat that, expanded government demand for credit is likely to trigger money creation, much like expanded credit demand from finance, companies and private households).

If it were true that public budgets are funded by government-issued money in the first place rather than being funded by taxes and debt, why originate bonds at all? And, why levy taxes at all? A plausible answer would be: to retire the money spent, thus preventing inflation or asset inflation. This, however – retiring the money – is definitely not what happens as the money continues to circulate. Such a situation would be bound to result in runaway inflation or asset inflation within a few years. Thus, also from this angle, MMT propositions #2 and #3 are untenable.

Sure, there is inflation (over half of nominal GDP) and a considerable degree of asset inflation, expressly deemed desirable in the 'soft currency' perspective of MMT. However, present degrees of inflation or asset inflation, rather than being the result of 'government money creation', are the result of the banking and financial sector's creation and circulation of money, partly fed by the over-indebtedness of public households as well as over-indebtedness of all other groups of economic actors; habitually refinanced (to the residual small fraction of private money surrogates) by the central banks under influence of the present pseudo-liberal belief not to be able, or not to have to, respectively, put limits to the expansion of money and finance.

MMT-specific proposition #4
Government debt is not really debt

Following on from the idea that issuing government bonds equals money creation, MMT has it that government debt is no debt. According to MMT, government debt would need to be re-interpreted – another idiosyncratic turn which is all the more irritating as it contradicts MMT's assertion of the identity of money, credit and debt. That false identity is decomposed here in a somewhat schizophrenic way, in that money is still supposed to be 'credit money' but not 'debt money'.

Admittedly, others have also had such thoughts, including Keynes when he conceived of 'perpetual zero-coupon consols', that is, non-interest-bearing government debt without maturity, eternal credit free of interest so to say. Similarly, in the earlier stages of the contemporary approach to sovereign money, the idea was for the central bank to provide genuine seigniorage to the treasury in the form of non-interest-bearing credit without specified maturity, as a special category of credit adding to the national monetary endowment; formally a credit but in fact no credit in almost any sense of the term. From the beginning, however, that re-interpretation was felt to be dissatisfying for confusingly over-stretching the notion of credit and related accountancy practices.

The next idea then was of booking additions to the stock of sovereign money (issued as genuine seigniorage free of interest and redemption) by an entry into the central-bank equity account, thus adding genuine seigniorage as a new class of 'profit' in the profit and loss statement. In terms of central-bank accountancy, this still remains dissatisfactory, this time for over-stretching the notions of equity and earnings.

The final solution – revisiting an old idea by Ricardo and the Currency School – was to separate sovereign money creation from operational central banking, including a currency register separate from the conventional central-bank balance sheet.[6] This does not involve any confusing re-interpretations, while nevertheless allowing to treat sovereign money like coins were formerly treated, that is, as a monetary asset only, no longer as a standing liability on the central-bank's balance sheet.

MMT, by contrast, sticks to re-interpreting debt as not to be debt, rather money creation to the lasting benefit of the 'private sector'. The over-aggregate MMT-model of sector balances simply conceals the fact that the lasting beneficiaries of public debt are the financial sector and the rich upper 1–5% of society.

MMT-specific proposition #5
Deficits and debt are no problem but an unlimited source of funds

Should one not be convinced of MMT's re-interpretation of public-sector debt not to be debt, MMT has still another postulate in store, saying that the government of a sovereign state with its own currency cannot be over-indebted, cannot become illiquid, and thus need not default in its own currency, because the treasury and the central bank in tandem can always create as much money as they deem adequate. On the surface of it, this might seem to be so. In actual fact and practice it is a chimera as all over-spending and over-indebted nation-states had to experience at some point in time. Recent extreme cases in point include Mugabe's Zimbabwe in the 1990–2000s and presently Venezuela. Being indebted in domestic currency and to domestic creditors certainly carries less risk than being indebted in foreign currency and to foreigners, as exemplified by the de-facto national bankruptcy of heavily foreign-indebted Iceland in 2008. But also being indebted mainly to domestic creditors remains a problem, as exemplified by Japan's sub-optimal economic development since the 1990s.

Beyond critical thresholds, 'too much finance' – that is, too much credit and debt on the basis of overshooting creation of money and money surrogates – burdens the real economy rather than supporting it.[7] Inflation and/or asset inflation go up, real mass income and purchasing power go down. The foreign exchange rate devalues. Imports become more expensive and more difficult to finance in domestic currency, the more so in foreign currencies. Foreign investment drains off. Austerity penetrates public and private finances. Many developing and newly industrializing countries made such experiences in recent decades. Some old-industrial countries, too, are facing similar problems.

It might seem that the United States is the one exception to those problems of over-indebtedness. In a way this is true, to a degree. The reason is the 'exorbitant privilege' of the U.S. dollar as the all-dominant world currency.[8] Most international transactions in trade and finance are made in U.S. dollars and carried out through American banks and payment systems. The world thus needs many dollars, which Wall Street and Washington are happy to provide. The U.S. dollar has been devaluing in the long run since 1971 when the gold dollar gave way for what Hudson has dubbed the U.S. Treasury bill standard.[9] The dollar nevertheless continues to be the benchmark for all other national currencies. In this regard, Mosler's first MMT paper from 1995, titled Soft Currency Economics, was remarkably programmatic. Today, adherents of MMT produce slogans like 'money is for creating', conveying the connotation 'as you like', while keeping back from saying 'and make the others pay for it'. It costs Wall Street and Washington very little to provide dollars, while the 'foreign sector', also known as 'rest of world', has to deliver equivalents worth 100% of each dollar.

Some Postkeynesians and individual MMTers have suggested periodical debt cancellation, inspired by the antique practice of debt jubilee when a new ruler came to the throne.[10] Today, as long as the existing accountancy standards apply, debt cancellations, or capital cuts, respectively, are largely out of the question. One of the reasons is that on a bank's balance sheet this would involve writing off credit claims (financial assets) without being able to cancel related liabilities that represent the customers' bankmoney-on-account. It generally applies also to non-monetary financial institutions that writing off claims against debtors can only be done to the extent to which there are balance-sheet equity buffers.

MMTers avoid discussing the dynamics of 'too much money, credit and debt', except maybe for some incidental remark on inflation. Basically, MMT acknowledges that limits to money creation exist due to possible inflationary implications. Seen overall, however, this appears to be a rather hypothetical concession. Government expenditure is thought to be non-inflationary as for the most part it is spent on real-economic purposes, which is supposed to contribute to higher economic capacity utilization (which by itself, it may not entirely be overlooked, normally causes prices to rise).

Whether in today's capital- and technology-intensive world things really work in the desired way is questionable to a degree. As far as skilled and well-paid work is involved, maybe Yes. However, as far as jobless growth and marginalized and badly paid jobs are involved, additional money creation for government expenditure is unlikely to contribute to self-sustaining economic development.

Why does the real economy not lastingly absorb the additional government expenditure? In the real economy it usually takes more than just money. If the money is not targeted at technologies, markets, skills and education, it won't help much develop productivity and competitiveness. Furthermore, the question arises of where the non-lastingly absorbed money is ending up. At first it certainly serves consumptive demand, tax payments and perhaps some real investment. At the same time, however, it reproduces the unequal structure of income and wealth. Thereafter, and since many decades now, a big part of that money is being lastingly absorbed by non-GDP-contributing finance. In the last three decades, overshooting money, credit and debt has not much caused CPI to rise for temporary historical reasons (global low-wage and low-price competition from newly industrializing countries). Instead, the money contributed all the more to asset inflation and 'too much finance'.

Contrary to present expectations, CPI is bound to rise again to the extent that financial investment opportunities are pushing the limits and financial investment is pushing the prices of real assets such as housing, land, commodities and energy. More generally speaking, CPI will rise again to the extent that the existing overhang of money is making inroads into real-economic expenditure. This also includes differentiation of former mass consumption into lifestyle classes of high-end and luxury consumption, increasingly detached from the rest of the people who struggle to maintain the living standards they have become accustomed to.

Politically, MMT sees itself left to the center. Nonetheless, MMT has so far swept aside such concerns, presumably on the grounds of its distorting interpretations of over-simplified sector balances. The basic line of arguing reads 'Public-sector debt equals private sector fortunes', more generally, 'Deficits of one sector are offset by the surpluses of the other sectors. No problem here'. Sure, double-entry accountancy does balance out. Economically, this is next to being non-informative. Balance sheets and sector balances as such do not reveal much about the dynamics and causalities behind. To MMT, however, public-sector debt even appears to be benign as it equals private-sector fortunes; never mind, more closely looked at, how incomes and private wealth are distributed, nor asking questions about the financial carrying capacity of an economy, the threshold beyond which finance stops to serve a generally benign build-up of capital and savings, becoming 'too much finance' actually sapping the real economy.

As regards foreign sector imbalances, MMT tends to underexpose this matter too; and if considering foreign sector imbalances is inevitable, MMT again does not see a true problem. From an American perspective, this has a point. The U.S. domestic economy benefits from imports of goods and services, while foreign economies obtain lots of dollars. The foreigners in turn can use the dollars for financing their international trade, or re-invest the money in the American real economy or, more often, put the dollars in American financial assets, including lots of Treasury bonds etc. As one saying goes, 'it works until it doesn't'. For once, Wray brought himself to say that foreign sector deficits might actually be a 'beggar thy neighbor' strategy; which, again, can only be said for the exceptional relationship between the Unites States and the more or less dollarized 'rest of world'.

MMT policy perspectives

Monetary financing and merging of monetary and fiscal functions

MMT considers the present monetary system to be a highly efficient and generally benign credit-and-debt machine which it supposes to be under control of the Federal Reserve and the Treasury. MMT's ideas about the future of money, banking and finance thus are expectably conservative: no need for structural, or systemic, change.

The only thing MMT supports in this regard is a tendency towards blurring the boundaries between fiscal and monetary responsibilities. MMT sector balances already treat monetary and fiscal functions as if they were merged into one and the same, and they want reality to come closer to that imagined state of affairs. This would certainly help facilitate the ongoingly over-expansive creation of money, credit and debt. What MMT would thus welcome is overt monetary financing, that is, money creation by the Federal Reserve according to government demand by the U.S. Treasury or Congress, for directly funding public expenditure as deemed desirable.

To avoid any misunderstandings, this is not about the fundamental question of whether or not monetary financing ought to be permissible. Under certain exceptional circumstances and according to specified monetary rules monetary financing can make sense.[11] Art. 123 (1) TFEU (Lisbon Treaty) in its present form is just another element adding to banking privileges, particularly the bankmoney privilege, undermining a state's monetary prerogatives and having in fact overridden them to a large extent.

In a severe crisis deliberately imposing austerity on a state and its economy and population is counter-productive. Experts, central bankers and governments have learned less from the Great Depression of the 1930s than one might think. The recent politics of Quantitative Easing (QE) has been QE for finance, while QE for the real economy, urgently needed in many places, has been missing (except, in a way, for the ECB's 'Targeted Longer-Term Refinancing Operations'). MMT, however, presents its version of monetary financing as generally desirable, not only in a state of national emergency or severe economic depression, but as an everyday practice also in times of business-as-usual. There is no monetary concept and constraint behind, just fiscal demands.

Seen from this angle, two questions arise. First, whether monetary financing shall only be implemented under specific conditions, for a limited period of time and on a limited scale, or whether it is intended to be a continual all-seasons practice, basically involving any amount of money deemed desirable; second, whether related decisions are taken by the central bank (as a state's independent monetary authority) according to its legal mandate, or by the government (Cabinet) and parliament according to political and fiscal desirability. MMT not even raises these questions, because MMT, in the words of Wray, is aiming for a creditary-fiscal synthesis as anticipated in its unreal interpretation of public-private sector balances as well as in its proposition that government expenditure finances taxes (deriving therefrom that monetary financing allegedly can replace taxes to a large extent or even entirely).

In actual fact, however, non inflation-accelerating monetary financing might be possible in the range of about 1–5% of total public expenditure in old-industrial countries, depending on the national rates of public expenditure and (comparatively low) growth.[12] Such amounts are not negligible but far too little to be a substitute for taxes to a considerable degree. MMT apparently does not care too much, just saying that inflation might eventually put limits to monetary financing. As explained above, this can confidently be understood as a kind of appeasement formula. So far, MMT has not spelled out details on the matter – which, concededly, is rather complex if one does not want to fall back to monetarist over-simplifications. (Friedman saw inflation 'always and everywhere' as a monetary phenomenon). Changes in price levels depend on more factors than just the active money supply, the more so under today's conditions of comparatively high national exposure to the 'foreign sector'. A central bank must of course react to inflation, disinflation or even deflation. However, within the frame of the present bankmoney regime – which MMT wants to keep rather than change – conventional instruments of monetary policy have become largely ineffective.

Furthermore, MMT's lax attitude towards government expenditure ignores another problem already touched upon, which is the fact that government spending may initially serve some real-economic purpose, while at the same time reproducing the grossly unequal distribution of income, with most of the money ending up in non-GDP-contributing finance, thereby expanding the share of financial income at the expense of earned income. European spending on welfare as much as American spending on armament and warfare has strongly supported the development of present-day financial market capitalism. This is not to make an implicit plea for lopsided supply-side policy, rather, to stay aware of the overall dynamics of both demand-side and supply-side impulses in complementing and delimiting each other.

Job guarantee and Green New Deal

MMT would like to use monetary financing for funding a government job guarantee.[13] However, as active labor market policies in the 1970–80s have shown, employment subsidies are not such a good idea. They provoke windfall effects to the benefit of the employers without helping much in terms of stable and decently paid employment.

Rather than inefficiently subsidizing jobs it would be more forward-looking to push for using genuine seigniorage for a citizens' dividend, or for contributing to a general basic income, in this way reducing the wage-dependency of social security and welfare and the general growth-dependency of the present economy.[14] MMTers, however, openly dislike the idea of basic income. In this regard MMT represents a left-wing variety of old-industrial traditionalism.

Of late, MMTers have also adopted the call for a Green New Deal, put forth since about ten years by various persons and NGOs close to the U.S. Green Party and the U.S. Democrats. The analogy to the New Deal of the 1930s certainly goes down well in terms of political marketing but might not be entirely adequate considering related content. At the time, there was a situation of extreme unemployment and general lack of effective demand, thus under-consumption and idle capacities across the board. The obvious remedy was indeed to boost the economy by way of government expenditure, funding public works, creating mass purchasing power etc. This would also have helped in a number of European countries strongly hit by imposed austerity during the sovereign debt crisis after 2008. Apart from that, however, there is no general situation of under-consumption today and also in other respects the situation in today's high-tech information and knowledge society is different from those times.

A Green New Deal today can actually not be conceived of as a simple demand-side stimulus aimed at expanding economic output, employment and consumption. Instead, the originators of the idea have rightly imagined it to be a capital-, technology- and knowledge-intensive investment program for ecologically modernising industrial production and products, a program aimed at the ecological re-adaptation of the industrial metabolism, also including a degree of readjustment of lifestyles and patterns of consumption.

Any such huge restructuring endeavour is not a matter of a demand-side stimulus programme. A long-term continuous commitment to the greening of the industrial metabolism needs something different, first and foremost the consequent implementation of meaningful environmental regulation, including environmental standards of technology; at a certain distance followed by, second, revenue-neutral taxation of everything that fails to be ecologically sustainable; and third, putting more public and private investment into R&D for environmentally relevant innovations and the first steps of market introduction.

MMT intends to pay for a Green New Deal by monetary financing. Government contracts and subsidies would certainly have to play a role in this. It is unlikely, however, and undesirable, that they cover the entire range of activities involved. There is no reason to make the government pay for all of it, the more so as the quantities of monetary financing involved would be overshooting, resulting in inflation and/or asset inflation (if not stretched over many years and even decades). The relevant industrial sectors and services and their skilled staff are well off. They do not necessarily need government contracts and subsidies, rather, clear guidance and binding targets, and financing by the capital markets.

To make necessary funds for R&D and investment available, targeted central-bank refinancing programs for funding important 'green' lending and investment activities could also contribute, as well as re-activating public investment and development banks for that purpose – all of which would be useful but has certainly not the same advertising appeal as the false MMT promise for the government to simply print money, while allegedly not incurring 'real' debt and not having to think about tax-borne financing of public expenditure.

Conclusion

Rather than being a coherent theory, MMT is primarily a U.S.-centered compilation of accommodation teaching, blinding out severe problems of the present money system, monetary policy, banking and finance, while pleasing Washington and Wall Street alike and also many of their European and Asian counterparts. They are all stuck in the dead end of never-ending deficits and debt, requiring self-propelling credit expansion and overshooting money creation, which in turn has ever more been feeding unstable and crisis-prone non-GDP finance rather than the real economy, and has led to levels of inequality of income and wealth that are both morally devastating and economically dysfunctional.

J. Meadway, a policy advisor to the British Labour party, is reported to have said 'MMT is just plain old bad economics'.[15] Another article in The Economist concluded that MMT ‘is macroeconomics as usual'.[16] Many economists will contradict. Regarding economic policy, however, MMT comes down to the entrenched pattern of tackling financial problems simply with still another injection of 'more money' and debt. The MMT program promises to facilitate the ongoingly over-expansive creation of credit-and-debt money and thus caters to almost all political interests – those who want to carry on with Keynesian-style deficit spending, those who pursue clientelistic policies of any kind, those who represent the military-industrial complex, and those who benefit from big finance. MMT promises all of them to be able to continue with everything they are used to without remorse. No wonder that quite a few politicians in America and Europe – who feel uneasy about the overall financial situation but have no remedy at hand – are now giving an ear to MMT's siren song of 'Don't worry about imbalances, deficits and debt'. In times of fake news and arbitrary truth, who cares when this is about economic surrealism rather than sound policy.

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Footnotes

[1] Palley 2013.

[2] Godley/Lavoie 2007.

[3] In this sense, Hudson (2006, 2012 55, 297, 333) has suggested to include a FIRE sector in the sector model (Finance, Insurance, Real Estate). Werner (2005 185) and Huber (2017 pp105) have suggested to complete the equation of money circulation by making a distinction between GDP-contributing finance and non-GDP-contributing finance.

[4] For a detailed description of how the present money system works see Ryan-Collins/Greenham/ Werner/Jackson 2012, McLeay/Radia/Thomas 2014, Ravn 2015, Huber 2017 57–100, 2017b, Deutsche Bundesbank 2017.

[5] Figures according to Federal Reserve of St. Louis, FRED Data, https://fred.stlouisfed.org/ as well as Board of Governmenternors of the Federal Reserve System, Quarterly Report on Federal Reserve Balance Sheet Developments, Nov 2018, 5.

[6] Cf. https://sovereignmoney.eu/central-bank-currency-register-for-accounting-for-sovereign-money.

[7] Arcand/Berkes/Panizza 2012, Reinhart/Rogoff 2009, 2010.

[8] Eichengreen 2011, Hudson 2003.

[9] Hudson 2003 pp377.

[10] Cf. Hudson/Goodhart 2018, Keen 2011 pp354, pp398.

[11] Vgl. Turner 2015 213–240.

[12] Huber 2017 176–79.

[13] Zaman 2019.

[14] Positive Money 2018.

[15] The Economist, Feb 16th 2019, 9, 18. Also see Hunt 2019, Henwood 2019, Febrero 2009.

[16] The Economist, March 16th 2019, 70.

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