Modern Monetary Theory: Misrepresented, Once Again

On a recent Bloomberg financial podcast an executive level J.P. Morgan employee stated he did not believe in Modern Monetary Theory (MMT). MMT is a controversial monetary theory which offers a description of monetary operations which challenge orthodox economic and financial thinking. Within current MMT reasoning there is a belief there is room for fiscal expansion which, when coordinated with the Nation’s central bank–the Federal Reserve (FED), would enable public investment in human and physical capital, i.e., infrastructure, without inflationary consequences. The J.P. Morgan executive argued that in order for MMT to succeed, that it would also have to fail: that to accumulate the debt which he implies is acceptable to MMT for public investment, then, even if the investment proved good for the economy, the accumulated debt would then tank the economy.

It was a very strange comment from an investment banker, and it also misrepresents MMT views. From an investment banker perspective, it is strange to state that debt issuance condemns an institution to failure. Bankers, afterall, are peddlers of private sector debt issued on the belief that gains from private investment will generally exceed the cost of capital. Government debt issued in order to facilitate productive investment: physical and human, likewise has the potential to create long term gains in the economy which exceed the cost of capital. So it was strange to hear an investment banker ignore the growth potential associated with public debt issuance which finances physical and human capital investment: the type of investment promoted within the MMT framework.

The MMT public sector investment portfolio would include such things as green energy, investment in education, and most importantly a federal job guarantee program which would offer a job to anyone who seeks a job, at a livable wage, with health and child care benefits–a near full employment program.

A legitimate concern here should not be the level of debt so long as the associated funds are directed into productive investment, but the concern should be the potential inflationary impact of large scale investment which creates individual earnings not yet matched by an increase in the provision of consumer goods and services. The temporary mismatch between increased earnings from new investment and the availability of goods and services may create short to medium term inflationary pressures in these consumer markets. One market concern undoubtedly is the belief that once inflation begins, it feeds on itself in an upward spiral of increased inflationary pressure which can only be resolved through monetary and fiscal tightenings, i.e., an induced recession.

It is not clear to me whether MMT has adequately addressed the short term inflationary impact of broad public infrastructure investment. MMT definitely recognizes that Federal spending is limited by potential inflationary effects of Federal spending and it seems they differ from the broader market participants in their view of the size and scope of available resources which can be put to work before real resource restraints create inflationary pressure. In other words, it seems that MMT believes there currently exists greater slack in the economy than the broader market participants believe, and it also seems that MMT believes that increased productive capacity which meets consumer demand can come online rather quickly in order to thwart these inflationary pressures. The latter view is undoubtedly challenged in a trade restricted environment.

It appears that MMT takes the long view and the bigger point is that green energy will eventually be a more efficient energy source while high tech education combined with liberal arts training will make us both more productive and better citizens. The federal jobs programs will assist in the development of work skills which will further enhance national productivity. Debt used to finance such activity would be a very good use of debt and will not inflict damage on the national economy, but rather will enhance long term growth in a noninflationary manner.

Much of the above discussion is premised on a misrepresentation of the MMT view on public debt. The J.P. Morgan Executive’s view is premised on the idea that Federal deficit spending must be funded with debt. This is not the MMT view. Federal debt issuance is a policy option, not a real requirement, only a legal requirement–which can be changed.

The MMT view is that a sovereign monetary authority, such as the U.S., which creates its own free floating currency, creates money when it spends and destroys money through taxation and borrowing. Money creation and money destruction need not be equal. Spending need not be fully funded, but only ‘funded’ to an extent, and in a manner, which prevents inflation in the goods, services, and asset markets. In other words, deficit spending need not be funded with debt: the
money for deficit spending is created through the act of spending. An equivalent debt issuance merely destroys an equal amount of money thereby neutralizing any inflationary impact of the deficit spending. Debt issuance, money destruction, is a mere tool for inflation control and for other convenient purposes, i.e. private portfolio investment stability, store of value, interest rate targeting . . . .

Furthermore, the Executive’s narrative ignored debt management techniques, discussed elsewhere on this Page (“Federal Debt Revisited”, scroll 2 essays down) such as debt extinguishment, the Platinum coin idea which grew out of the 2011 budget ceiling crisis, taxation of the well-off rather than borrowing from the well-off, and Federal Reserve perpetual holdings of Treasury debt on its balance sheet–which is costless to the U.S. taxpayer. The brief discussion of MMT was yet another false representation of MMT views.

Generally it is wise to dismiss about 85% of corporate reporting on MMT views. Most commentators have not seriously examined MMT; others are in no mood to change the status quo. Large capital interests in the private sector simply do not want to concede additional space to the public sector, regardless of the long term growth potential associated with public sector investment.

Undoubtedly, the Nation’s long term productivity potential would be greatly enhanced by the above public sector investments. But in the long run the current investment class won’t be here. Perhaps, this is part of the problem. The other part of the problem lies in the short investment horizon of private sector firms in response to investor demands. This does not align with the long term investment horison of the Federal government.