by Alasdair Macleod, GoldMoney:

The doyenne of MMT, Stephanie Kelton, has published a book this week explaining modern monetary theory. This article examines the foundations of MMT which Kelton explained in an earlier video released last year.

Introduction

Macroeconomics has become so far removed from reality that its practitioners cannot understand what is happening in the real economy. Never has this been more obvious than today. While they claim to be economically literate, macroeconomists are in thrall to their paymasters; a combination of government, quasi-government and financial institutions with a vested interest in not looking too closely at the full consequences of government economic and monetary policies. From this neo-Keynesian macro world, the latest spinoff is modern monetary theory, which is little more than a logical extension of Keynesianism —justifying intervention by the state and the use of fiat currency being expanded limitlessly. MMT is the end of the line for arguments based on macroeconomic fallacies that have their origin in Keynes.

Stephanie Kelton’s book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy was released on Tuesday (9 June):

“Stephanie Kelton’s brilliant exploration of MMT dramatically changes our understanding of how we can deal with crucial issues ranging from poverty and inequality to creating jobs, expanding health care coverage, climate change, and building resilient infrastructure.”

That is the first sentence of Amazon’s sales pitch. If these claims are true, the world’s economic problems are easily solved. But we must put aside the marketing hyperbole and look at MMT seriously.

Deficit spending is MMT’s solution to everything

A short essay cannot do justice to a book just released —selected reviewers get pre-publication copies in good time for that purpose. Instead I shall comment on Kelton’s earlier explanation of MMT, which she provided in a video aired by CNBC, recorded in March 2019. Since we are talking of economic theory, it should stand the test of time, being as relevant today as when it was when recorded over a year ago. Therefore, we are entitled to assume her book is an extension of the main points she made in the video.

If the basics are not right, then the rest of it can be ignored and the book will only mislead its readers. In this article, I address each substantive point in the earlier video. “SK” is Stephanie Kelton, quoted verbatim, and my commentary follows.

SK

MMT starts with a simple observation, and that is that the US dollar is a simple public monopoly. In other words, the United States currency comes from the United States government; it can’t come from anywhere else. So, what that means is that the federal government is nothing like a household. In order for households or private businesses to be able to spend they’ve got to come up with the money, right? And the federal government can never run out of money. It cannot face a solvency problem with bills coming due that it can’t afford to pay. It never has to worry about finding the money in order to be able to spend.

Comment

In other words, MMT is a rehash of the state theory of money, made famous by Georg Knapp in 1905. Which, incidentally, allowed Bismarck to finance Germany’s military build-up before the First World War and led to Germany’s hyperinflation, which destroyed the mark in late-1923. There is nothing new in this theory, and it has been lauded by inflationists of different stripes since unbacked fiat currencies emerged.

The argument deployed here is a common device used by economists in debate to mislead their audience into believing macroeconomics is somehow on a higher plain than human action. The statement that public finances differ from household finances is only true to the extent that a government with a fiat currency can for a period of time cover its deficit by printing money. In every other respect, it is governed by the same laws of finance and money as the rest of us.

But the state cannot print money indefinitely. The state’s insolvency is only deferred by monetary inflation for as long as it can pluck wealth from its population by debauching the currency. And the more it inflates, the more it has to inflate until it is forced by markets to face up to this fact.

SK

So, the deficit definitely matters; it’s just that it matters in ways that we’re not normally taught to understand. Normally I think people tend to hear deficit and think it’s something that we should strive to eliminate; that we shouldn’t be running budget deficits; that there is evidence of fiscal irresponsibility. And the truth is the deficit can be too big. Evidence of a deficit that’s too big would be inflation.

Comment

Here, Kelton presumes the state can control the degree to which it funds itself by monetary expansion. But the state is like a junkie: once hooked on free-and-easy money it is virtually impossible for it to stop using monetary debasement as an increasingly important source of finance.

What Kelton does not tell us is that there is a cost to inflationary financing: the transfer of wealth from those that have savings and earnings valued and paid for in the state’s currency. The beneficiaries are the government, its agencies and its crony favourites — usually commercial banks and big businesses. In other words, by debasing money for its own benefit the state is impoverishing those it claims to help.

By regarding inflation as a rise in the general level of prices, Kelton seems to think that so long as price rises are contained by a ceiling, then the state can expand the quantity of money as much as it likes. But that assumption must be conditional on the state being able or willing to restrict the expansion of money if the objective is exceeded.

Because that is demonstrably not true, by changing statistical methods of measuring the general level of prices an alternative has been found. Shadowstats.com and the Chapwood index have concluded that the general level of prices has been rising at an annual rate closer to 10% than the 1.5–2% reported by US government econometricians. To the extent these independent estimates are correct, the evidence of inflation Skelton refers to is concealed, invalidating her proposition.

Read More @ GoldMoney.com