Another excellent video, but this time a talk by Stephanie Kelton on MMT, given at Luther College in Decorah (IA) on September 28th 2011.
Margaret Thatcher once remarked of her disastrous brand of neoliberalism that “there is no alternative” (TINA) to it. Fortunately, for the world’s inhabitants there is – and Stephanie Kelton describes the basics of one: Modern Monetary Theory (MMT).
While discussing some MMT-related ideas with acquaintances, I proposed that a sovereign government can spend as much as it wants, because its debt is denominated in its own currency and it can issue more currency to pay it off.
ReplyDeleteOne threw my words back at me and said that a sovereign government with debt denominated in foreign currency can not do that, which is the situation with most Third World governments. I realized this was obvious. Ordinary people in the Third World don't have enough savings to give to their government and foreign investors demand currency of their own native place.
As far I can see, the theories of surplus during good times and deficits during bad times would still apply to Third World governments. Their ability to spend as much as they want is only a little more constrained than that of United States.
I proposed that a sovereign government can spend as much as it wants, because its debt is denominated in its own currency and it can issue more currency to pay it off.
ReplyDeleteI always add the priviso that even though deficits are not “financially” constrained, they face real constraints in available resources, capacity utilization, the unemployment level, the exchange rate, the external balance, and inflation rate.
"One threw my words back at me and said that a sovereign government with debt denominated in foreign currency can not do that, which is the situation with most Third World governments"
Do you mean the
(1) the government itself has debts denominated in foriegn currency or
(2) it will run out of foreign exchange reserves when deficits drive its trade deficit too high?
I have always said the MMTers pay insufficient attention to (2).
But in the case of (1), why would this stop the govenrment from being able to purchase what is available for sale in its own curreny area?
The solution to the ills of the Third World is partly a thorough reform of the international payments system.
It is obvious that nations needing foreign exchange for basic development and growth should not have crippling debt imposed on them. Something like a Marshall plan for the developing world is necessary.
That would increase demand for the industrialised world's products as well.
The massive accumlation of foreign exchange by Japan, China and others imposes a deflationary bias on the world economy:
Nations can agree to fix their exchange rates against each other, and then correct any imbalances that arise by rules based and negotiated exchange rate changes and other methods. The Bretton Woods system of fixed but adjustable exchange rates was an example of a rules based system, though it still relied primarily on the two traditional mechanisms. John Maynard Keynes, one of the architects of the Bretton Woods system had wanted additional rules to encourage surplus countries to share the burden of rebalancing, as he argued that they were in a stronger position to do so and as he regarded their surpluses as negative externalities imposed on the global economy.[42] Keynes suggested that traditional balancing mechanisms should be supplemented by the threat of confiscation of a portion of excess revenue if the surplus country did not choose to spend it on additional imports. However his ideas were not accepted by the Americans at the time. In 2008 and 2009, American economist Paul Davidson had been promoting his revamped form of Keynes's plan as a possible solution to global imbalances which in his opinion would expand growth all round with out the downside risk of other rebalancing methods.
http://en.wikipedia.org/wiki/Balance_of_payments#Rules_based_rebalancing_mechanisms
I have a friend who attends Luther College in Iowa. He doesn't read economics, but seeing this reminds me of the fact it's a small world now!
ReplyDeleteP.S. Lord Keynes, speaking of monetary theory, what's your opinion of Allan Meltzer?
I suppose Meltzer's "History of the Federal Reserve" is one of those multi-volume works that will endure.
ReplyDeleteAs for his monetarist economics: it is part of the problem of the rot that is modern
neoclassical macro.
The monetarists' belief in money neutrality, that the velocity of circulation is essentially stable, and their later embrace of rational expectations are all untenable.
When a quasi-monetarist policy was adopted by Volcker at the Fed from 1979-1982, it was a disaster.
I suppose many would want to know what modern monetarists say in response to that fact that when Friedman was interviwed by the Financial Times in 2003 (7 June), he said “The use of quantity of money as a target has not been a success ..., I’m not sure I would as of today push it as hard as I once did.”
What about his other book? Keynes was a big advocate of both monetary policy and fiscal policy. In The General Theory, Keynes does talk about a "generalised Quantity Theory of Money" that is different from the "classical Quantity Theory of Money". It's in Book V of his magnum opus.
ReplyDeleteMeltzer does argue in a book that Keynes's writings on monetary economics have been misinterpreted, overlooked, and understated. (I believe I've referred to that book in a private message I sent to you.)
Also, what do you think of the econophysicists who publish in Physica A? I think the blogosphere ought to pay more attention to them.
"In The General Theory, Keynes does talk about a "generalised Quantity Theory of Money" that is different from the "classical Quantity Theory of Money"
ReplyDeleteYes, one has to remember, however, that Keynes was returning to the endogenous theory of money after the General Theory (see Dow, S. C. 1997. “Endogenous Money,” in G. C. Harcourt and P. Riach (eds), A 'Second Edition' of The General Theory. Volume 2, p. 43ff.)
"Meltzer does argue in a book that Keynes's writings on monetary economics have been misinterpreted, overlooked, and understated."
ReplyDeleteYes, some of the monetarists are enamoured of the early Keynes, because he was a kind of proto-monetarist in the early 1920s.
While discussing some MMT-related ideas with acquaintances, I proposed that a sovereign government can spend as much as it wants, because its debt is denominated in its own currency and it can issue more currency to pay it off.
ReplyDeleteOne threw my words back at me and said that a sovereign government with debt denominated in foreign currency can not do that, which is the situation with most Third World governments.
A sovereign government with debt denominated in a foreign currency certainly can & should "do that" - spend as much as it wants - if that means spend enough domestic money for full employment. Foreign-denominated debt is almost always a BAD IDEA, but it is independent of monetary sovereignty.
I realized this was obvious. Ordinary people in the Third World don't have enough savings to give to their government and foreign investors demand currency of their own native place.
If ordinary people don't have enough saving to give more to their government, it is because the economy is already being run at full employment, or much more likely, because the government is not spending enough to satisfy their savings demands, under the influence of modern mainstream quackonomics. Foreign investors are like old-fashioned domestic bankers - they'll extend credit to people who don't really need it - or they (more usually) are loan sharks who prey on the poor. To hell with them is usually the best policy. A counterexample was the 19th century US - the US railroads were the best gambling casino in the whole world, and successfully attracted British capital to their casino, where the House (the USA) as always, won overall.
As far I can see, the theories of surplus during good times and deficits during bad times would still apply to Third World governments. Their ability to spend as much as they want is only a little more constrained than that of United States.
Deficit during bad times & smaller deficit (rarely surplus) during good times is the correct theory. The natural tendency of monetary economies, especially modern ones is deflationary. Government "intervention" - that's like saying you "intervene" with your body when you scratch your own ass - is necessary to counteract that.
True, the third world govenments are only a bit more financial constrained than the USA. Which is why promulgation of mainstream quackonomics is important. The true "real" constraint is the subversion & military attacks emanating from the USA if they attempt to be other than slaves. Why else go out of your way to trap & attack Iraq (the only Arab state with water & oil, more educated than Israel in the 1970s) or Libya just now?
"2) it will run out of foreign exchange reserves when deficits drive its trade deficit too high?"
ReplyDeleteDeveloping countries should have rules in place that state that they can only purchase in a foreign currency a matched amount with that sold in a foreign currency.
Obviously they can buy as much from overseas as they like with their own currency.
Now for any country with enough food (or enough export capacity to swap for food) that's easy.
But for those countries with little food it will need an international development aid fund. (And it is this that international aid should be spent on - supplying food while the countries get their domestic system up to speed).
London Review has removed the paywall from wynne godley's essay on the maastricht treaty from oct 1992
ReplyDeletehttp://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that
Cool - Thanks for that!
DeleteI'm well-aware that the monetarists cite Keynes to bolster their own argument. I'm not a monetarist, but simply believe that both policies are equally important in a deep economic downturn. To say one is less important than the other is to miss the point Keynes was trying to make.
ReplyDelete