–Am I MMT? Are you?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.

People often ask me whether I am part of MMT (Modern Monetary Theory), and my answer is, “No, I agree with MMT on its factual bases, but disagree with certain areas of opinion.

For instance, it is absolute, undeniable, historical fact that in 1971, the federal government gave itself the unlimited ability to create money, i.e. to spend dollars. This point cannot be argued. And because the government has the unlimited ability to create dollars, it needs neither taxes nor borrowing to support its spending. If taxes and borrowing were zero, this would not affect by even one penny, the government’s ability to create and spend dollars, which means that taxpayers do not pay for federal spending. The federal government does not spend taxpayers’ money. This too is undeniable fact.

If every federal lender (China et al) were to demand payment for all outstanding debts tomorrow, the U.S. government simply could say, “No problem. I’ll push this computer key, which will credit your bank account for the amount of the T-securities you own. All debts will be extinguished.”

Evolving from this is the fact that the federal government cannot be forced into bankruptcy, and evolving from this is the fact that no agency of the federal government can be forced into bankruptcy – not Congress, nor the Supreme Court, nor the Department of Defense, nor the other 1,000 federal agencies, including Social Security and Medicare. All those people who tell you Social Security will be bankrupt in “X” number of years, do not understand that the federal government supports all federal agencies the same way: By federal money creation. And none can be forced into bankruptcy.

Where I depart from MMT is where facts are lacking, i.e. in matters of opinion. MMT believes:
1. Taxation is necessary to give value to money
2. Inflation should be prevented/cured by reducing the money supply.

1. Taxation

Originally, MMTers said federal taxes were necessary to give value to dollars. I pointed out if taxes were necessary, there existed. sufficient state and local taxes to do the job. That belief now has been adopted by MMT.

As I have stated elsewhere in this blog (“Ignorance: Why you will pay more taxes and receive less service in the coming years.”) I do not accept the idea that taxes are necessary for money demand. People accept dollars because:

-They are handier than barter.
-Everyone else accepts them.
-The government has made dollars legal tender in payment of all bills.
-There is no other governmentally authorized form of money.
-If you sell a product or service to the government, it will pay you in dollars.
-If you receive Social Security, Medicare, Medicaid or any other federal benefit, you and your service providers will receive payment in dollars.
-If you receive food stamps, your grocer will be paid in dollars
-Your army pay will be in dollars
-Federal stimulus payments, to cure recessions, will be in dollars
-In 2010, the federal government spend $3.7 trillion, all in dollars. The state governments spent trillions more, also in dollars.

Then there are non-tax payments to the government:
*Fines and Fees (for instance, in court)
*Fees (for instance, garbage pickup)
*Licenses (hunting, fishing, driving)
*Services (real estate registration)

(*Admittedly, these could be eliminated by a Monetarily Sovereign government and could be considered taxes)

Millions of people in America did not pay taxes last year, but they accept dollars. Of course, taxes are not going to disappear, so in practical essence the question is moot.

2. Inflation

I believe inflation can and should be prevented/cured by raising interest rates. MMT holds that rather than curing inflation, raising interest rates actually exacerbates inflation. Their logic is: Raising interest rates, by increasing the cost of borrowing, increases the cost of production, which results in inflation. I suggest that interest payments are a minuscule part of most company’s costs, and increases in interest payments are even less important — not enough to cause significant price increases.

Instead, we should consider money to be a commodity, the value of which is determined by supply and demand. Yes, increase the supply, and the value goes down – unless you also increase the demand, which is influenced by the reward for owning money – i.e. interest. The higher the interest, the greater the demand for money. That is why, when interest rates go up, the demand for non-money (stocks, real estate) declines, while the demand for money (bank CDs, savings accounts, money market accounts) goes up.

MMT believes inflation can and should be prevented/cured by reducing the money supply, i.e by spending reductions and/or tax increases. However, history shows that every depression in U.S history, and most recessions, have coincided with reductions in debt growth or with actual reductions in debt. While recessions and depressions can stop inflation, they certainly are a bad medicine.

So in summary, I agree with the factual basis of MMT, and argue (without proof) against certain opinions held by MMT. If you want to give what I believe a name, call it “Monetary Sovereignty.” I’m not MMT. Are you?

Rodger Malcolm Mitchell

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

24 thoughts on “–Am I MMT? Are you?

  1. Hi Rodger,

    I could be wrong, but I think MMTers also believe that raising interest rates may contribute to inflation by creating more dollars as a result. That is, at the end of a year I have 101 dollars if I deposit $100 in a savings account yielding 1% but if interest rates are 10% I’ll have $110. I take it you don’t agree?


    1. Actually, I do agree. There are inflationary effects to raising interest rates, but I believe (opinion) the effects are smaller than the increase in demand caused by the increase in reward.

      Economics is so complex, that one action rarely has only one effect.

      Rodger Malcolm Mitchell


  2. I don’t understand the MMT insistence on the idea that taxes are what makes people value money. I don’t understand why proponents think that it matters. I think that their argument on this front is very weak. That they have to trot out Nobel laureate Tobin who agrees kind of shows that they don’t have real logic to stand on. (Nobel prize winners can be wrong, you know.)

    On inflation, again, it doesn’t much matter, as long as something works. Pick your poison.


    1. Taxes are pump primers. You can kick start a fiat economy by imposing a tax in that currency. Then people have to get it or go to jail.

      Taxes show that you can force the use of a fiat currency mathematically without a nebulous concept like ‘confidence’.

      However after a time however the currency evolves and develops its own intrinsic value. There is ‘confidence’ in it. At that point taxes don’t give any added value other than as an inflation controller – and as Rodger points out interest rates could probably do that over a wide range of variation.

      It’s just like an engine – you don’t keep the starter motor turning once the engine has fired up.


      1. We don’t put people in jail for not paying taxes (in the US). Also, as Rodger noted, millions pay no tax and still value money.

        Let’s say you start from zero. The government says, I’ll give you some money if you give some of it back later. Why the heck would you want the stuff? It’s pointless.

        Then there is the UMKC example with Buckaroos, which demands payment even if you don’t have the Buckaroos. So they make you work for the Buckaroos and in turn you get a passing grade. But here the Buckaroos are simply a proxy for the work that the professor wants done – they aren’t accepted for anything other than a grade in a class. There is no incentive to work for more than the number of Buckaroos than you need to pay the tax, is there?

        You also miss the point that there NEVER is a start from zero. People are using money everywhere. If you provide new currency, you provide an exchange from old money to new at some rate, and voila, the new currency has value.

        If the idea is to come up with a thought experiment about how a new government plopped onto the globe with a bunch of people who don’t use money will start to use it, so be it, but that is a philosophical question that has no applicability to any real-world situation.


    2. I think that the experience of the Continental Dollar shows the value of accepting currency in payment of taxes. Although Continentals were backed by the “full faith and credit of the Continent”, they suffered from hyperinflation, even though the states won the Revolutionary War. They were eventually redeemed at 2 cents on the dollar.

      Based upon his knowledge of colonial paper currencies, Benjamin Franklin advised the Continental Congress to accept Continentals for taxes. (The Pennsylvania currency, which Franklin had had a hand in fashioning, had been supported by accepting it in repayment of loans on land by the colony.) A bill was introduced in the Congress to do just that, but it failed. The states were unwilling to let the Congress levy taxes, or to accept Continentals in payment for their own taxes. Their failure to do so, plus the war, led to the hyperinflation of Continentals.


      1. Min,

        The Continental Dollar lost value because too many were in circulation. It had nothing to do with whether or not they could be used to pay taxes.

        From Wikipedia (O.K., it’s not the best source, but this quote agrees with many others I’ve read): “Some think that the rebel bills depreciated because people lost confidence in them or because they were not backed by tangible assets,” writes financial historian Robert E. Wright. “Not so. There were simply too many of them.” Congress and the states lacked the will or the means to retire the bills from circulation through taxation or the sale of bonds.

        Another problem was that the British successfully waged economic warfare by counterfeiting Continentals on a large scale.”

        The supply increased too much. The same would happen today, even with our massive taxation, if the supply increased too much.

        Rodger Malcolm Mitchell


        1. To be sure, there were too many Continentals at the end of the war, in part because of British counterfeiting. And, as history has shown, both with fiat currency and metal backed currency, war is a great inflator. Still, the worst inflation of colonial paper money before the Revolution had been 35% per year. At that rate it would have taken 15-20 years to approach the inflation of the Continental in 5 years. The Continental actually held up pretty well for a couple of years.

          As for claims that there was hyperinflation because there were too many Continentals, to what extent is that circular reasoning? Colonial paper money increased dramatically during the French and Indian War, peaking in 1760, and then decreased rapidly, with hardly any effect upon prices. During the Civil War, Greenbacks circulated at a discount, but returned to parity not long afterwards.

          I do not know the dynamics of the hyperinflationary spiral in the last years of the war, but it seems to me that taxation would have provided tangible support for the Continental, as well as removing some of them from circulation. One problem for the Continental was the possibility that Britain would win, which would have made it totally worthless. The fact that it received no support from the Congress or the states could not help.


  3. As I understand MMT — and I’m just a beginner — thinking of money as a commodity is alone enough to distinguish you from them. They define money as credit created for the purpose of taking positions in assets. Money is a transfer of purchasing power from the future to the present, and its value is a function of how hard it is to obtain. (I’m paraphrasing from a recent heteconomist post titled “Value of the Currency.”) Gold, by this definition, is not money. It is a commodity, like wheat, zinc, and pork bellies.


  4. Georgie,

    Gold is a commodity, but not money. Dollars are a commodity and money. They even are traded on the Mercantile Commodity Exchange, and their value is determined by supply and demand, just like any other commodity.

    And yes, dollars also are debt (aka “credit”).

    Rodger Malcolm Mitchell


  5. I’m not much bothered by what you call it, I just wish they’d stop using the word “theory.” The word allows opponents to label the “theory” as lunatic fringe stuff based on silly beliefs.

    If proponents simply got out the message of how the monetary system works, w/o resorting to anything that can be labeled “beliefs,” the work of getting people to actually understand how the system works might not get bogged down so much by the irrelevant name-calling from naysayers who don’t feel obliged to address what isn’t actually theoretical about MMT or Monetary Sovereignty.

    Debates about how to address inflation are irrelevant to the average person if they don’t even understand how the monetary system works to begin with. The hardest part for me when trying to understand the basics was in just realizing that it isn’t actually crazy complicated, but really rather straightforward. This lack of complexity itself tends to make people suspicious (“It can’t possibly be that simple!”)


    1. dah_sab

      Agreed. Monetary Sovereignty is not theoretical. It is a simple statement of fact. The federal government has the unlimited ability to create money. It never can be forced into bankruptcy.

      Your last paragraph is perfect. It should be in every text book.

      Rodger Malcolm Mitchell


  6. Andrew,

    I don’t know whether or not taxes are “pump primers.” There is no evidence one way or another. But in any event, the point is moot. We are way past the time when dollars have gained the confidence of the users.

    Rodger Malcolm Mitchell


  7. The situation in Brazil is an interesting test for interest rates. The high interest rates are making them the target for the ‘carry trade’.

    Other currencies are being dumped as people grab the Real.


    1. How does this work? Don’t the exchange rates adjust to account for the differences in interest rates to make things essentially net to zero? Or is there some thought by people who don’t know better that Brazil may default on debts denominated in their own currency?


  8. Andrew,

    Yes, exchange rates adjust as a result of greater purchase volume for one currency vs. another.

    Say one unit of currency “X” is worth $2. Then, the government of “X” decides to increase the interest on currency X, so more people want it. It’s value increases. Now currency “X” is worth $3. Prices in the land of “X” fall.

    Rodger Malcolm Mitchell


  9. Min,

    Yes, there are so many variables, and so many differences in variables, it’s impossible to claim one variable (lack of taxes), was responsible for inflation.

    As I’ve stated before, MMT has facts and MMT has opinions. A fact is the government’s unlimited ability to create money. An opinion is taxation’s support for money value. I agree with the fact and disagree with the opinion–but that’s what opinions are all about.

    Most of the hyperinflations, of which I’m familiar, began with ordinary inflations caused by specific economic circumstances. The governments attempted to cope with these inflations by printing money, which resulted in hyperinflation. The inflation caused the money printing, which led to hyperinflation.

    Rodger Malcolm Mitchell


  10. By reducing the money supply, you must mean raising taxes, as no sane person advocates physical control of the money supply these days. Additionally, increased productivity can also control inflation and under the assumption that increased productivity means lower unemployment this would result in an increase in the money supply. So therefore to say MMT proponents suggest reducing the money supply to control inflation is inherently false.

    There is sufficient evidence to indicate federal taxes give money its value. Even if you deny the taxes, there is sufficient evidence the use of force by a central authority gives money its value. This is near enough to say taxes give money its value.

    I need to consider your interest rates argument some more, once I enhance my understanding of MMT. I think it would depend on whether you come at it from a business perspective (eg. borrower) or an individual perspective (eg. saver)

    Now given you accept that you agree with the factual bases of MMT that makes you MMT as that is all MMT is, a description of the modern money framework and how it works. The opinion only comes from what policy the MMT proponents advocate. Eg. Bill Mitchell is someone I would consider from the Left and Warren Mosler is someone I would consider from the Right

    Even though you deny it I consider you MMT


  11. Senexx,

    You said, “So therefore to say MMT proponents suggest reducing the money supply to control inflation is inherently false.”

    But that is exactly what Warren and Randy suggest. Check their writings. I argue with them all the time about this. What is your opinion regarding how MMT would prevent/cure inflation?

    Taxes do help give value to money. I disagree with the MMT proposition that taxes are necessary to give value to money. If the U.S. eliminated all taxes, I believe the dollar would continue to have value.

    If I am MMT, then consider me a renegade MMT.

    Rodger Malcolm Mitchell


  12. Reducing the money supply by control of the money supply was last done by Fed Chairman Volcker according to Mosler’s book. I suggest they’re using lay terms to get their message across about “reducing the money supply” as taxes and surpluses will reduce the money supply. And I’ve all ready made the employment point

    As for if all taxes were eliminated tomorrow we would still use money, only because we’re used to it. It would become traditional. Though I think the individual States would have a problem without taxes though.


    1. I was speaking of federal taxes. The states, being monetarily non-sovereign, require taxes. I gave a dozen reasons why people would continue to use money, even if there were no taxes, and you boiled this down to “used to it”?


  13. Not sure that MMT claims that taxes are needed to give money value. Money existed before state money, and historically some countries have entirely run on private money with no state money.

    The claim is that acceptance of money at state payment office creates a reason to accept state money in goods markets in order to transfer goods and service to public use.

    If the state only accepts its own liabilities as payment for obligations to the state, then the state forces those who have obligations to the state to obtain state money. Most modern states accept only their own currencies in satisfaction of obligations to the state such as taxes.


    1. Tom,

      I agree with “creates a reason,” but I’m not sure that’s what MMT believes.

      There is no doubt that taxes “create a reason” to accept dollars. That is so obvious, one wonders why MMT even would bother to mention it.

      My memory is that MMT believes in a much stronger role for taxes than “creates a reason.” I believe they are at the “are necessary” level.

      Drop Randy Wray a note and ask him the question. Let me know what he says.


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