The Macro Tourist Presents: A Practitioner’s Guide To MMT

Read more from The Macro Tourist Lately there’s been a ton of talk about Modern Monetary Theory. Most of it critical. MMT seems to evoke a visceral gagging reflex from most finance-types, kind of like that feeling when your inappropriate uncle makes a lewd joke about your aunt. However, I have been fascinated by the subject. And no one is more surprised by that fact than me. Although I am an economics major, if you would have suggested spending hours listening to a neo-classical economics

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11 thoughts on “The Macro Tourist Presents: A Practitioner’s Guide To MMT

  1. quick question: I was describing MMT to my friend and I said that governments are the source of our money. but he said that was wrong, private banks are the source of our money because they create it out of thin air when you take a loan out.
    Then I thought about it and I realised that private banks can go bust, so they can’t really be the source.
    Was I wrong when I said that governments are the source of our money?

    1. @nonstop: private banks can indeed create money out of thin air by lending, but obviously once created that money (now a financial asset belonging to the bank) becomes someone else’s debt — and thus the net sum between creditor and debtor is zero. And as you point out, if enough of those debts go bad, obviously banks could fail. The federal government with a sovereign currency can always pay its debts in that unit of account, as it alone is the sole source of the currency. To me what matters in government spending is the availability of energy, goods, labor: those are the real limitations. As long as we have idle factory capacity, unemployed people looking for work, we arbitrarily suppress economic activity and cause ourselves unnecessary misery.

      1. this in most cases not really how private bank loans work. the sum is not zero. the sum becomes positive because most loans are asset backed. if you go to a bank and want 300k to buy a house the bank gets the house as an asset (in form of a security).
        so the time you get the loan the balance sheet for the bank shows -300k cash and +300k securities (house).
        your balance sheet shows +300k cash
        a bank can go to the central bank and order 300k in electronic money when they put in certain assets for example the house.
        for the economy the sum is now a net +300k, which is created by by private banks.
        a lot of loans work that way.

        1. edit: better wording: a bank can go to the central bank and can declare an asset as a reserve in the reserve account as far as i know.
          per reserve accounting different banks can settle payments to each other

          1. after reading some more a bank does not need the reserve. it can borrow from the central bank called “descount window”. although since there is a interest rate on that borrowing the bank does generate less money from the original loan.

            its all more complex than i originally thought.

      1. Yes and No. Definitely taken in summation no money is created as a debt balances it. $30k loaned out and $30k debt on the books adds to $0 net new money. However fractional reserve means that in terms of consumption you can certainly create more consumption money that was available prior. $30k in the bank can be used to make 5, 10, 15 or more $30k loans depending on what ratio the bank is operating at. Where as before there was $30k to spend and lending it would only be the same $30k… now that $30k in a bank could be $300k being spent. If it is being loaned towards consumption of resources then this will have in the short term the same effect as simply creating $270k.

  2. Banks issue their own IOUs called demand deposits. They don’t issue the US Government’s currency – only the US Government does that. Bank IOUs are denominated in terms of US dollars but they are not the same thing as US dollars. Bank IOUs are promises to pay the account holder US dollars on demand.

    If you have a demand deposit with a bank, the bank is promising to provide you with that amount of USD when you demand it. When you withdraw physical currency from an ATM or a bank branch, the bank is honouring that promise to you. When you make an interbank electronic funds transfer, the bank is honouring that promise to you (because your bank’s reserve balance at the Fed goes down and the recipient’s bank’s reserve balance at the Fed goes up).

    Commercial banks are essentially a form of public / private partnership. They help the central bank to run the payments system. The central bank provides a liquidity guarantee to the commercial banks. The central bank provides a partial solvency guarantee to the commercial banks.

  3. I have zero arguments against MMT, it seems certainly descriptive of reality. Currency is no longer a store of value which constrains government action, it is a momentary means to accomplish a goal and is created by governments at will. It has the ability to do this up until it has created so much money that it begins to cause inflation. This can easily be combated by assuring that this new money is allocated primarily to persons and entities who will not translate it into consumption as that is where you get interactions with real resources. Printing a trillion dollars and loaning it out for stock buybacks for example would inflate stock prices and drive higher executive bonuses which might lead to some extra vacation homes and BMW’s being demanded… but overall what really changed? You can buy toxic assets from banks endlessly so long as they do not lend that money back out to the general populace willy nilly as before. On the other hand if baby boomers start to retire and withdraw their 401K’s because they want to spend it on retirement… now you start getting demand effects due to the high valuations. One might posit that there must be a market adjustment to prevent this. On the other hand while governments can borrow this way corporate entities, municipalities and individuals cannot unless an actual jubilee program is created. In that case you would expect the credit cycle to continue to have meaning in the context of those entities only to the extent they are not granted access to QE funds or bailouts. Ultimately the government owns all the resources and they will just pick and chose who gets access to what based on strategic concerns and political cronyism. It’s Fascism with a fancy puppet show in the end is it not?

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