"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Wednesday, January 5, 2011

Modern Monetary Theory (MMT) and Wealth Distribution

Rajiv, a reader of this blog recently emailed me some links as well as some commentary on MMT and the recent change in the distribution of wealth in the US that has occurred since the 1970s.   The links he sent me are easy reads and answer many questions one would have on MMT.

Here are the links:

A Kindergarten Guide to Modern Monetary Theory

Fiscal Sustainability Teach-In and Counter-Conference

A paper by Jan Kregel titled Fiscal Responsibility: What Exactly Does It Mean?

As for Rajiv's views on MMT as well as the severe change in wealth distribution that has taken place the last four decades, he commented:
While MMT explains the process of money creation, which has a set of policy implications, it has been rightly pointed out by both the MMT advocates and critics, that fiscal policy choices are in fact a political choice, and not a set of mathematically derived solutions. What in fact MMT advocates say is that the policy choices will have an impact on the probability of financial collapse, equitable distribution of wealth and income, which are different from what neo-liberal economists claim for those very policy choices.
What is clear in my mind is that fiat money should not be confused with commodity based money. This confusion I believe is what has led to a series of fiscal and monetary policy missteps, starting in the mid 1960's (when the US went off the domestic silver standard), continuing in the 1970's (when it went off the international gold standard). Additional problems were created -- again confusing fiat money and commodity money, when income tax rates were reduced in the 1960's, and then again reduced in the 1980's. These tax cuts for the top income brackets has led to an impoverishment of 90% of the US population. See the research done by Emmanuel Saez at UC Berkeley. It is not an accident that the golden age of American prosperity was in the 1950's and 1960's, and extended into the mid 1970's. Since then, income and wealth disparities have only increased, leading to the necessity of two income families, and longer work hours.
Some of these facts may be playing in the minds of those who advocate going back to a silver and gold standard. But the reasons for going off commodity based money were very valid, and still hold today. It is possible that after the world population stabilizes, and we shift to a "no growth" economy, commodity money could rise again -- though there really is no need of it, money after all is nothing more than an accounting of individual and societal obligations. 
I want to thank Rajiv for this contribution and the links he provided.  I have been meaning to post on this for some time, and to be honest, I am still reviewing these links, as well as some other writings by Paul Samuelson.

As for the wealth disparity in the US, Francis Fukuyama recently wrote on this topic in his essay titled: Left Out.

But I do disagree with Rajiv on a few points.  I have addressed many of these points in prior posts, and will either do so again in subsequent posts, or in the comments section of this article, if there is enough dialogue to flesh out my points.  They address the real-world management of money, and how members of the private sector ultimately influence government to their benefit, how money affects trade relationships and imbalances in trade, and how all debt based monetary systems ultimately end in collapse.  And by collapse, I don't necessarily mean a lights out, head for the hills situation.  The collapse can be drawn out, such as occurred in Ancient Rome with the gradual multi century long debasement of the silver denarius, or an immediate replacement of the monetary system such as occured by the end of Bretton Woods in 1971, or an extreme situation like Weimar Germany.

MMT to me, also represents a command economy to a degree.  The USSR was such a command economy that was free of private sector influence.  And that too did not end well.  On the other hand, in the US during the early 1900s, government was heavily controlled by a wealthy oligarchy (except, to a degree, the Teddy Roosevelt years - a great President) that ultimately ensured its own demise beginning in 1929.  In my view, those are two extremes of fiscal and monetary control to effect a coordinated command economy.  Keep in mind, that even "Capitalist" Financier John Pierpont Morgan hated the destructive and competitive nature of capitalism, and instead believed in monopolistic trusts that ensured high margins.

A final point I want to make is to distinguish US economic growth under the gold standard, and US Economic growth under MMT/Fiat.  Many Austrian School Economists often refer to the US Golden Age of growth that occurred in the late 1800s as proof that a gold standard can foster growth.

I kind of disagree with that.  The US was experiencing a massive change during that period from a predominately Agrarian society to an Urban, Industrial Society.  But under the post 1971 MMT/Fiat model, the US industrial growth model was running out of steam, or rather, was not growing at a fast enough pace.  Enter the FIRE (Finance, Insurance, Real Estate) economy:  pure speculation.  And so, my conclusion is this:  FIRE and MMT feed each other, and create the wealth disparities we see today.  FIRE and MMT are the ultimate Ponzi/Pyramid that will end in a spectacular collapse.

And so, maybe a monetary system needs to take into consideration an economy's stage of growth?  Rajiv alludes to this.  Is it possible?  There are always more questions than answers.

Again, I want to thank Rajiv and I look forward to anyone's and everyone's opinions.


Jim Slip said...

MMT seems to be a description of how a free-floating fiat monetary system works. As such it is not an ideology, and you can't criticize it on ideological terms.

A good government will make good use of the MMT framework, just like a good government will make good use of the gold-standard framework.

Norway has oil. It manages it in an efficient way and provides wealth for it's citizens. Venezuela has oil. It manages it in a non-efficient way, and is unable to provide wealth for it's citizens.

Will a return to the gold-standard eliminate the possibility of future crises? I don't think so. It didn't in the past. Perhaps we should just get used to the idea that we live in an imperfect world, and we are imperfect as well, so there can never be continuous growth and prosperity.

Nor would it be desirable. Such conditions (lack of hardship) would probably gradually lead to a state of degeneration. Maybe the FIRE economy is the result of such degeneration. Maybe not. Maybe they really thought they could produce things cheap in Asia and sell them (more) expensive in the West. Who knows. Asia got jobs, technology and geopolitical importance, while the West got cheap electronics, so for a while everybody was happy.

I was oblivious to the role of credit at the time, but I remember walking in Athens (Greece) in the early 00's and seeing all the building activity going on, and also seeing the ridiculous number of cars in the streets and thinking "this is not normal".

Alas, not even MMT would be able to save the Greek government, because malinvestments are malinvestments, and deficits are deficits, so while you would be able to finance your deficits, it doesn't mean that the foreigners would accept your paper. But at least it would force you to look in the mirror and say: now either we produce real stuff (for ourselves), or we get poorer.

Anonymous said...

How old are you, Jim?
In case you are still young i wish you many years of hardship for you and your family.

Degeneration starts with your brains and all we need to look for are the factors influencing it.

Do you know what German fascists once said ? "Arbeit macht frei" was written at the entrance of of a notorious concentrations camp. You have plenty of them (FEMA) in case you are American. You are a strong adept of MMT, aren't you? The FIRE and virtual economy are a consequence of MMT. The old gold standard was not the solution, too and it's not the next one either. The money creation and the unsustainable need to grow are also consequences of MMT. The MMT is done.

Anonymous said...

how desperate is that Bremmer about our leaderless world?

Is he so desperate because the US have no longer money to pay heroic mercenaries to sustain the American hegemony?

The first half of the 20th century was not leaderless, it was under English hegemony and the history of the two WW is written by the winners and still contains many lies we will never come to know.

Why should there not be a multipolar world?
Who entitles the UD to be the world policemen?
How many wars have taken place without American infiltration?
How stupid are these dirty news people to believe we want to hear what they say to us?

Reuters Thompson is a very manipulating news agency and one has to know who owned it before and who owns it now

Jim Slip said...

You might have to complain to Misthos about that one, Fauvi, instead of fighting windmills with me, Don Quixote-style. He's the one who brought up the Darwinian aspects of capitalism (aka survival of the fittest) that are being pushed over by central planning.

Jim Slip said...

And btw, Fauvi, thanks a lot for your kind wish, I wish the same for you.

Misthos said...

Fauvi - I appreciate your concern, and I agree with the dangers you believe that are inherent in the MMT system. But I don't think Jim Slip is advocating what you and I fear.

There is a difference in the system as designed, and what it can productively create, and a difference in the actual practice - what you and I fear.

Which brings me to Jim's points.


When we look back to the Great Depression that occurred in the US, many people fault the gold standard as a cause, or at least a limitation to dealing with the depression.

It is true that Sweden was one of the few countries that actively managed their monetary policy, in MMT fashion, and successfully, or at least better handled the Depression of the 1930s.

But here's my view:

It was not the gold standard per se that should have been blamed, but the excess credit growth that was allowed by the Federal Reserve and the US' deflationary price of gold after WWI that caused the Great Depression.

Furthermore, the word "Recession" is a modern one that did not exist in the 1800s. Thus, every cyclical downturn in the 1800s was termed a "depression." Luckily, we modern types have developed an Orwellian knack at using language to confuse people. And so, we are not in a "depression," but a Great Recession, that technically, is over. To me, that's just lying to ourselves.

And you make a comparison between Norway and Venezuela. For every Norway, there are countless Venezuelas in the real world. The US, in terms of wealth disparity, is approaching Venezuelan characteristics.

Norway produces about 2.3 million barrels of oil a day, while Venezuela produces 2.47 million barrels a day. Their respective populations? Venezuela at 27 million, Norway at 4.6 million.

There's a lot more money to go around in Norway.


Misthos said...


I also want to make one point, and ask you if you agree.

During the 1930s, the restrictive monetary policy of the US, that was constrained by the gold standard, helped destroy the US Financial System both in terms of political power, and in actual financial power.

Today, you have to agree, that if it were not for the MMT system we have, Wall Street would be in a very different situation.

In the 1930s, Wall Street was so damaged, so weakened that the PECORA hearings were held, and Glass Steagall was passed (as well as many other regs) that controlled a weakened Wall Street.

Today, we find ourselves in a much more different situation. The bankers are bigger and stronger, their incomes are reaching all time highs again, and their political clout has grown.

Which brings me to the fear that Fauvi and I share. MMT is easily hijacked and ultimately damages democracy. It steals wealth from the many, for the benefit of the few.

Yes, MMT is a theory, not an ideology. But those that understand MMT, and consider themselves MMT'ers, also believe in a command economy to a degree. They want to use MMT to create full employment, a better distribution of wealth, etc...

Those are lofty goals that I support as well. But the MMT system can, and does, allow for the manipulation and destruction of the economic and political system, in my view. It's academic good intentions verse real world financial pirates. Who really wins? The Pirates, not the academics. That's the problem.

And when I speak of the Darwinistic aspects of capitalism - this is what I mean:

The Federal Reserve's bailouts of the banking system subverts the Darwinistic aspects of Capitalism. Large Banks that create little society value, and are actually parasitic in nature, should be allowed to fail. Nature does not look kindly on such destructive institutions.

But we prop them up with a monetary system that keeps them stronger, and more dangerous than ever.

And the result? A destroyed middle class, a democracy under attack, societal fallout, and an endgame that takes down the entire system.

My fear is that we end up worse than we did in the Great Depression. Nothing has been solved.

Misthos said...

Jim - regarding your observations of Greece, credit, and malinvestments - spot on. I agree with you.

The problem Greece has is that economically, its competitors are more like Turkey than Germany. That is, tourism and agriculture are a large part of GDP. Now is the time for Greece to have a weak currency, not the early 2000s - when the cheapened Euro created bubbles and malinvestments in the periphery.

Anonymous said...

I agree with every word you've written.
I have a new account as gmail closed upon my account - I wonder why? I was engaged in an exchange about gold history with Dave (the dog, the tail) and eventually - no email, no account.

Jim Slip said...

Misthos, I am from Greece (found this blog through Market-Talk), and am old enough to remember how it was in the age of the Drachma. Even though I don't remember technical details about Greece's monetary policy, I do remember the constant devaluations and the high rates of inflation (I'm talking about 15% rates of inflation here). So Greece had it's own currency, and we didn't prosper, we were just poorer.

Yes, the subsidies from the EU, cheap borrowing and the subsequent strong Euro, all did terrific damage to the productive base of Greece, but that has more to do with Greece and it's policies, and not with the subsidies, borrowing, and Eurozone per se (though if I was the European Commission, I would be more careful about how each country spent the subsidies).

So we keep coming back to that a responsible government (and country) will make good use of any framework.

Easy credit and monetary policy delayed adjustments that should have been made a long time ago (when Western production moved to the East on a major scale). That much is clear.

Misthos said...


You're right about responsible governments making good use of any framework - I agree with that, to a point.

But the existing framework, or monetary system, allows for trade imbalances and debts to grow much larger than under a gold standard.

These imbalances create prosperity, a surplus, with "responsible" countries, such as Germany - but that surplus too is in question.

Think of it this way: Germany lends money to its customers (which are net importers) and enjoys a trade surplus. But how valuable is that trade surplus when the customer (for example, Greece) can't manage its debts any longer? The same applies with the US-China relationship of recycled dollars and debt.

On the domestic level, I have already written above about the financialization of an economy, and what that means to a democracy. The Banks take over. This is happening in the US.

Yes, Greece was poorer in the 1970s and 1980s. But so too were many other countries in Europe compared to today. Unfortunately, I think much of the wealth in the West the past 30 plus years was illusory - and I mean for both debtor and surplus countries.

Michael Hudson sums it up in a way that I find useful to understand:

"But replacing gold – a pure asset – with dollar-denominated U.S. Treasury debt transformed the global financial system. It became debt-based, not asset-based. And geopolitically, the Treasury-bill standard made the United States immune from the traditional balance-of-payments and financial constraints, enabling its capital markets to become more highly debt-leveraged and “innovative.” It also enabled the U.S. Government to wage foreign policy and military campaigns without much regard for the balance of payments."

Hudson makes this point to describe how the US gets a "free ride." But the same argument can be made, to an extent, to every other country in a global debt based fiat system - especially net importers and debtors.

So here's the big question:

How does this problem of debt imbalances resolve itself? The problem is much more pervasive than the random South American crisis. It's global and it affects major western countries.

So far policymakers are addressing the issue of excess debt and trade imbalances with the creation of more debt - and currency wars.

That's not constructive, in my view.

Misthos said...

Fauvi - google blogger has been acting up on me with the comments. Even people that have posted here before have had their comments tagged as spam.

Hope everything is OK with your account.

Jim Slip said...

Misthos, I don't have a clear opinion. Obviously MMT gives a new perspective to deficit spending, but essentially (under any framework) every economy is a combination of the amount of goods and services produced within the economy (and how these are distributed to the general population), plus the amount of money circulating within the economy (and at what exchange rate).

Obviously globalized finance makes an already complex equation even more complex because money is so interconnected globally these days. I guess I see an unwinding of globalization as the more likely outcome, Iceland style. I mean, a deflationary adjustment is an unwinding of globalization of sorts: by becoming poorer, you import less, and capital controls might surface at some point.

Now, we know for example that Latvia (with it's peg to the Euro) has suffered a massive deflationary recession. But there's a major difference between Latvia and the PIGS. Latvia doesn't have the PIGS' debt and the resulting interest payments. What's going to happen to the global monetary system, I do not know.

Jim Slip said...

Damn it, I just realized my previous post doesn't take into account MMT at all. It's the same erroneous gold-standard thinking.

OK, I got it now. In MMT, it's all about crediting bank reserves, but crediting reserves creates a lot of horizontal expansion WHERE there's credit-worthiness (or perception of it). So herein lies the problem, in economies of account deficits, at some point there's gonna be a mismatch between horizontal expansion and vertical expansion.

Misthos said...

Jim - I agree with you regarding de-globalization. Much of global trade that exists today is being fueled by massive government intervention that is not sustainable.

The question is, how does it end, or rather, rebalance itself?

Remember also there are massive wage disparities in the world today. Billions of low paid workers entered the marketplace in the blink of an eye. If Western wages continue to fall, what happens to western asset values? The rebalancing will have consequences that few can anticipate.

I don't see how even MMT can address those issues.

Vilhelmo said...

"A final point I want to make is to distinguish US economic growth under the gold standard, and US Economic growth under MMT/Fiat"

What do you think gold standards are?
Any gold standard is an example of government price fixing where the government sets the price of gold, by fiat, instead of the market. It then promises to exchange, on demand, government currency for gold at this fixed rate.
It is fiat money with fixed prices.

If this is what you call commodity money, then commodity money is really just fiat money.