Kelton's last post on the blog page had the above statement. According to Mosler, if budget deficits were not covered by borrowing, the benchmark interest rate in the US (fed funds rate) would fall.

Dear friends, there are two huge logic errors in this sentence.

Firstly, in the United States, as regulated by law, "In order for the Treasury to spend, the same amount of money must enter its accounts that day through taxation and borrowing". If the sum of these two items does not equal the expenditure, that expenditure cannot be made. I repeat, this is the law!

Secondly, let's say Mosler's dream comes true. The law is repealed. When the budget deficit increases (under the assumption that borrowing remains unchanged), bank reserves will increase. This is true, but in order for the increased reserves to reduce the benchmark rate, the Fed would have to be in the pre-2008 corridor regime (with scarce reserves).

Kelton liked Mosler's post. 🙂

Mosler still thinks he's a mandatory reserve in the US. Sabri Öncü gave him a lesson.

Mosler wrote this at one point. I didn't share it because I didn't want to cause an outcry.

Coppola made it very clear.

I have tried to explain this many times. The MMT recognises that money is created by banks, yet it assigns divine power to reserves. This stems from their misinterpretation of the monetary pyramid. Friends, reserves are used for settlement.

The controversy flared up again this morning. I couldn't resist, so I lit the fuse.

This is figure 15.3 from page 331 of "Modern Monetary Theory and Practice"

The reason why the MMT places so much emphasis on reserves lies in this absurd graph. What they write as HPM is reserve money. MMT concludes that banks create money through reserve money. This is actually the thesis of neo-classicals and monetarists.

[I think they are trying to reinforce the thesis that public deficit will create savings for the private sector (national income equation)].

Coppola came into the debate hard. Remember the national income equation. MMT's view is that for the private sector to have a surplus in this equation, the public sector must run a deficit and the country must have a trade surplus.

In short, Coppola says that the private sector's savings are largely composed of its receivables from the private sector, and in this sense, we should look at this transaction cumulatively rather than net. Even if the public sector does not run a deficit, the private sector will be able to save. Most of the savings of the private sector arise from receivables from the private sector and some of them arise from public expenditures.

Engin YILMAZ (Veridelisi)

Source:

The Lens

“Modern Monetary Theory and Practice:An Introductory Text”, William Mitchell, L. Randall Wray and Martin Watts

“Modern Money Theory A Primer on Macroeconomics for Sovereign Monetary Systems”,L. Randall Wray

“Modern Monetary Theory and the Birth of the People's Economy”, Stephanie Kelton

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Proponents argue that without government spending, citizens would not have the resources to pay their taxes.

Proponents also argue that government spending exceeds taxes, overall bank reserves grow.

What are the criticism of modern money theory?

Critism 1:

If government spending exceeds taxes, overall bank reserves grow and if fiscal deficits are of any significant size, excess reserves in the banking system will result.

I said that expenditures may exceed taxes, but that this does not necessarily imply an increase in bank reserves.

To give an example;

This is the last Daily Treasury Statement from 04.12.2023

Total Expenditure (Withdrawals) : 13.776 million USD

Total Revenues (Deposits) : 26.944 million USD

Net Borrowing : 1.841—1.515= 326 million USD

26.944+326-13.776-=+13.994 Net operating Cash Balance increases

In this example, since revenues exceeded expenditures, the surplus was transferred to the Treasury's account (TGA) at the Fed. This means that bank reserves have decreased.

Now we analysis 01.12.2023 Daily Treasury Statement

Total Expenditure (Withdrawals) : 118.560 million USD

Total Revenues (Deposits) : 31.514 million USD

Net Borrowing : 1.550—5.157= -3.607 million USD

31.514-3.607-118.560-=-90.653 Net operating Cash Balance decreases

In this example, since expenditures exceeded revenues, the deficit amount was withdrawn from the Treasury's account at the Fed. This means that bank reserves have increased.

Now we analysis 25.11.2022 Daily Treasury Statement

Total Expenditure (Withdrawals) : 18.292 million USD

Total Revenues (Deposits) : 12.841 million USD

Net Borrowing : 132.452-109.223= 23.229 million USD

12.841 +23.229-18.292-=17.778 Net operating Cash Balance increases

In this case, expenditures exceeded revenues, BUTTTT the deficit was covered by net borrowing. The surplus was transferred to the Treasury's account (TGA) at the Fed. This means that bank reserves have decreased.

In conclusion, no comment can be made without looking at three factors that determine the state of bank reserves.

Criticism 2:

MMT argues that the state must spend in order to pay taxes. They argue that without government spending, citizens cannot pay their taxes.

Let's start with the graph.

1- The government opens the tap (public expenditures)

2-The government opens the tap and injects money into the economy.

3-The government controls the amount of money it injects through the spigot (through tax policy)

4-Taxes, as a whole, are a withdrawal of money that the government injects into the economy.

I say this:

This would be true if only the state created the money supply. In an economy, 94 per cent of the money supply is created by banks. The state creates only 6 per cent.

Let's say you work in the private sector. You have a company. And you don't have any credits and debits with the state. Now, are you going to wait for the government to spend on you to pay taxes? Of course not. With the money created by the banks, you will pay your taxes to the state.

Engin YILMAZ ( )

Source:

The Lens

“Modern Monetary Theory and Practice:An Introductory Text”, William Mitchell, L. Randall Wray and Martin Watts

“Modern Money Theory A Primer on Macroeconomics for Sovereign Monetary Systems”,L. Randall Wray

“Modern Monetary Theory and the Birth of the People's Economy”, Stephanie Kelton

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Are you curious about the Modern Monetary Theory (MMT) and its impact on fiscal policy? Look no further! In this third article, we will delve into the essentials of MMT, shedding light on its principles and potential implications. As policy-makers and economists continue to debate its validity, understanding the basics of MMT is crucial. With a focus on functional finance, MMT challenges traditional notions of government spending and deficits. By emphasizing the role of a sovereign currency issuer, MMT suggests that fiscal policy can be used to achieve full employment and economic stability.

Join us as we explore the depths of this theory and unravel its potential impact on our economy.

In general, when monetary and fiscal policies are compared, MMT is said to favour fiscal policy.

Why not monetary policy?

The effects of monetary policy are uncertain. The use of the interest rate instrument to increase interest rates is more in favour of lenders. Moreover, the effects of monetary policy on income distribution are uncertain. They emphasise that fiscal policy is a more effective tool to improve income distribution.

For example, they state that QEs only increase banks' reserves but do not increase banks' propensity to lend. For a bank to lend, it needs customers to come to the bank and ask for a loan.

At the same time, here again they question why governments issue bonds to spend? Remember, sovereign states have no financial constraints. What MMT is getting at, my friends, is that the law says that the amount of taxation and borrowing must cover state expenditure. But since the sovereign state has no financial constraints, this should not be an obligation. It is not necessary!

MMT economists emphasize that the central bank cannot be independent of the treasury and, due to operational realities, they need to work together. Ultimately, the short-term interest rates set by the central bank serve as a leading indicator for long-term interest rates.

Simultaneously, they argue that if government spending exceeds the amount of taxes collected in the same period, excess reserves will accumulate in banks. Due to the potential effects of these reserves, it could limit central bank policy. Therefore, they strongly emphasize the need for collaboration between the treasury and the central bank.

They suggest that for the interest rate, a crucial element of monetary policy, to effectively impact spending, spending must be sensitive to interest rates. For example, if you are unemployed and interest rates drop, would you borrow and spend? They also point out that the impact of interest rates on inflation is uncertain.

Fiscal policy is the best.

They criticize the idea within neoliberal economics that states should run budget surpluses. They argue against austerity policies, stating that tightening the belt of countries traps them in a vicious cycle and leads to a worse balance.

The proposed solutions are as follows:

When citizens' spending increases significantly, government spending should decrease, and vice versa, following Lerner's functional finance principles.

As the government spends, household income (savings) will increase

Engin YILMAZ ( )

Source:

“Modern Monetary Theory and Practice:An Introductory Text”, William Mitchell, L. Randall Wray and Martin Watts

“Modern Money Theory A Primer on Macroeconomics for Sovereign Monetary Systems”,L. Randall Wray

“Modern Monetary Theory and the Birth of the People's Economy”, Stephanie Kelton

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Welcome to our insightful guide on the Modern Monetary Theory (MMT). In this second article, we will delve into the fascinating world of MMT and explore its implications for the economy. MMT challenges conventional economic thinking by putting forward the idea that countries with fiat currencies, like the United States, aren't constrained by budget deficits in the same way countries under the Bretton Woods system were. By understanding MMT, you'll gain valuable insights into the role of government spending, taxes, and inflation. Join us on this journey as we break down the key principles of the Modern Monetary Theory and examine its potential impact on the global economy.

Large nations convened at Bretton Woods after the end of World War II to establish order in international payments and, consequently, to establish stable exchange rates. In this meeting, a fixed exchange rate system was adopted. So, how does the fixed exchange rate system work?

All currencies would be directly tied to the dollar, and the dollar, in turn, would be tied to gold. The value of 35 dollars would be equivalent to 1 ounce of gold. Under this system, when you purchase 35 dollars at the specified exchange rate, there is a guarantee that the U.S. Treasury will provide you with 1 ounce of gold.

According to this agreement, central banks have the right to intervene (buying and selling dollars) to keep the exchange rate within a 1% band above or below the established parity.

This system was believed to create stability worldwide, based on the limited supply of gold and the cautious approach of the U.S. Treasury and banks in creating dollars.

What challenges were faced:

Countries experiencing a current account deficit faced issues with the value of their currencies. As an analogy, consider this as a pool where a country provides its own currency extensively to the system, especially in comparison to other currencies, leading to a decrease in the value of its currency. This happens because, when engaging in imports, the country pays with its own currency, but when it exports, it receives other countries' currencies. The disproportionate contribution of its own currency to the system contributes to the devaluation of its currency against others.

As a solution to this, contractionary monetary and fiscal policies are implemented. However, the consequence of these policies is the emergence of unemployment. For a more detailed article on this matter, refer to the following link.

Nowadays, fiat currencies have emerged that are not linked to any value, unlike the previous system where currencies were connected through the dollar (which was also linked to gold).

Under the Bretton Woods system, both central banks and treasuries limited themselves in terms of money creation because an excessive increase in money supply could lead to the depreciation of exchange rates. Hence, any surplus liquidity injected into the market through spending was withdrawn through mechanisms like increased taxes or borrowing. The government operates under financial constraints. (I believe the fundamental idea here is based on the concept that liquidity is injected into the market through spending and withdrawn through taxation/borrowing.)

In the fiat currency system, this constraint has been completely eliminated for some states, particularly those with strong currencies. A strong currency is simply the currency widely used by everyone within the country for any purpose, eliminating the need for another currency. Here, it's worth emphasizing that the sole constraint on the government is the quantity of real resources (labor, land, capital) in the economy. Since the amount of resources needed for production is limited, an increase in money beyond this point will lead to inflation.

In the fiat currency system, money is not backed by a tangible commodity like gold. So, how do governments ensure that a piece of paper is accepted by people? They achieve this by collecting taxes and conducting expenditures using this currency. Bill Mitchell argues that without citizens having this money in their hands, they cannot pay taxes. The conclusion drawn here is that the government should first spend money, providing it to citizens, who would then use that money to pay taxes. This challenges the mainstream notion that the government must collect taxes before spending, emphasizing that this sequence of the government first spending is essential.

A strong state and full employment: You have a real resource constraint.

A strong state and insufficient employment: You don't have a real resource constraint.

A weak state and full employment: You have both financial and real resource constraints.

A weak state and insufficient employment: You have a financial resource constraint.

Engin YILMAZ ( )

Source:

The Lens

“Modern Monetary Theory and Practice:An Introductory Text”, William Mitchell, L. Randall Wray and Martin Watts

“Modern Money Theory A Primer on Macroeconomics for Sovereign Monetary Systems”,L. Randall Wray

“Modern Monetary Theory and the Birth of the People's Economy”, Stephanie Kelton

“Modern Monetary Theory and the Birth of the People's Economy”, Stephanie Kelton

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What is Modern Monetary Theory (MMT)?

Key Principles of MMT

Welcome to the world of Modern Monetary Theory (MMT), where traditional notions of financial constraint are challenged.

In this article, we will delve into the core principles of MMT and shed light on what it means for a sovereign country's fiscal policy.

MMT argues that a currency-issuing sovereign government, such as the United States or the United Kingdom, is not constrained by the same budgetary restrictions as households or businesses.

By understanding the fallacy of composition, MMT suggests that these countries can use their fiscal policy to pursue full employment and control inflation, without the fear of bankruptcy.

Join us as we explore the key tenets and implications of this controversial economic theory. Get ready to challenge your preconceived notions and delve into the world of MMT.

The course given by Bill Mitchell on EDX is completely free of charge. The login page of the course is as follows.

Week 1 / 1.2 Household Analogy

One of the biggest mistakes people make is to equate the household economy with the economic policy of the state. In simple terms, it is a case of equating "a household managing its own budget with a state managing its own budget". If you hold this view, you think that "the state should do the same things as households do in managing their budgets".

In order to spend as a household, you need to have an income. Let's say you do not have any income. Respectively; you use your savings you have made before, you sell whatever you have, you look at it, you go and borrow. When you consider all of these as a whole, you realise that you are in a financial constraint.

Week 1 – Achieving Economic Literacy/1.3 Ground Zero 01:44

Very good, you realise that households have financial constraints.

The problem starts when you think that this constraint also applies to the state.

Of course, what we are talking about here is a strong state (sovereign countries). A strong state is a state that manages to use its currency in all monetary transactions within its borders. The official currency of the Mexican state is the peso. If Mexicans use this currency in all their transactions (including investment), this state is a strong state.

States that fall into this class of strong states do not have "financial constraints" (of course, they are not infinite).

Week 1 – Achieving Economic Literacy/1.3 Ground Zero 02:20

States do not have to have a resource/income like households. Governments do not have to collect taxes or borrow to spend (My rejection: they collect taxes and borrow because there is a legal constraint).

Stephanie Kelton / Deficit Myth, p:99

On this subject, I recommend Stephanie Kelton's Deficit Myth. Who would have thought that a book by a heterodox economist would become a best seller. The constant emphasis in Kelton's book can be explained with the simple graph above. The US Treasury can spend first and then collect what it spends from the market through taxes. (Note that in US practice, due to the law, spending requires tax collection and borrowing) Kelton wants the state to be more active in the economy by abolishing this article of law.

Week 1 / 1.3 The Fallacy of Composition

It is stated why the classical arguments for the solution of the 1929 crisis are wrong.

Keynes calls the view that what is valid for the individual will be valid for the sum of all individuals an error of composition. He explains this with the paradox of saving. The solution of classical economists in the face of crises is to reduce wages and less spending by the state. According to classical economists with this idea; if the individual spends less (saving), his income will increase. Unfortunately, if all individuals start saving, income will not increase. Because one person's income is another person's expenditure. Or let's simplify; let's say all individuals start saving, the demand for goods produced by firms will fall and firms will start laying off workers.

When this nonsense of the classics reaches the level of the state, things get out of hand. The state should do the same. It should spend less (austerity). Keynes explained that you cannot get out of the crisis with this mentality. According to Keynes, this logic puts the economy into a spiral . In fact, let's call it "a deflationary spiral".

Week 1 / 1.4 The stylised facts in macroeconomics

In this section, the example of Japan is given in response to the general fallacies of mainstream economists.

Japan's budget deficit to GDP ratio is 14 per cent.

The ratio of Japan's gross public debt to national income is 255 per cent.

The Bank of Japan bought 45% of government bonds.

So what did the mainstream economics books say? INFLATION HAPPENS, INTEREST RATE INCREASES, THE EXCLUSION EFFECT WORKS, YOU CANNOT BORROW, YOU GO BANKRUPT.

Now let's see what happened to inflation?

The green line is inflation. ????

Let's look at interest rates.

Interest is negative. ????

Week 1 / 1.9 Reading between the lines

This episode discusses how neo-classical theory permeates our minds and how the jargon they use affects our entire lives.

Engin YILMAZ ( )

Source:

The Lens

“Modern Monetary Theory and Practice:An Introductory Text”, William Mitchell, L. Randall Wray and Martin Watts

“Modern Money Theory A Primer on Macroeconomics for Sovereign Monetary Systems”,L. Randall Wray

“Modern Monetary Theory and the Birth of the People's Economy”, Stephanie Kelton

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