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Modern Monetary Theory And Its Requisite Toolbox

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Published : January 06th, 2013
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Category : Editorials





On the surface Modern Monetary Theory can seem to be an attractive proposition. And it troubles me that some people whom I like and even admire seem to be favorable to it. After a great deal of thought it appears to be the situation in which the cure is as bad as the disease, with reformers driven to pick up the tools of desperation and what looks like a quick fix.

The key objection one would naturally raise in considering Modern Monetary Theory is the protection of the value of the currency. Domestically the use of official force is an obvious if unfortunate reach. The real issue of acceptance of the currency at value comes down particularly in foreign trade where one cannot so easily enforce draconian rules designed to promote the value of the currency to some official prescription.

A short term solution is to maintain and expand your sphere of command and control until it overextends, fails, and collapses. We have seen how this worked out in the former Soviet Union.

Foreign holders have the 'right of first refusal' on debt and currency. It is almost a tautology to say that most serious instance of inflation, including hyperinflation, start outside that country.

Often people are attracted to the principles of Modern Monetary Theory because it sounds 'ethical' and fair. Why pay interest on debt to evil bankers when you can merely print your own money? Never mind that most debt is held by private people as savings vehicles, in theory at least. The current balance of trade problems and surpluses held by some foreign countries are policy aberrations. Free trade is a canard that suits multinational interests, but that is another story.

As I have said before, I do not intend to justify the current financial system which is distorted and corrupt. No system is perfect and self-regulating, but some are more prone to corruption than others.

I do wish to point out that any currency system must have some balance, some limiting factor, that is difficult for people to circumvent with respect to the expansion of the currency. A commodity standard like gold is one, since gold cannot be created. A debt based central banking approach is another, because the marketplace has some immediate ability to react to expansionary policies.

A concentration of power in few hands leads invariably to corruption and abuses.

But rather than belabor this, here is an excerpt from a recent essay from 'New Economic Perspectives' on Modern Monetary Theory. There is no need to debate this when one can merely peel back the fog of obfuscation and let it speak in its own words past the surface gloss.

The management mechanisms in the MMT toolbox are central economic planning to a far greater degree than we currently see in most developed nations, government allocation of resources, distribution of income at will, official propaganda (and presumably censorship) since the lie will tolerate none other, and foreign currency controls.

There is a juicy worm on the end of hook, but there is a hook in there nonetheless. I have read and listened to most of their spiels, to the extent that one can work their way past the browbeating and obfuscation that true believers like to deliver to doubters. I do not wish to be 'mean' but to me it seems to be an old fairy tale fraud in a new wrapper.

An Alternative Meme for Money, Part 6: Alternative Framing on Inflation
By L. Randall Wray

As we have discussed, sovereign government cannot run out of the keystrokes it uses to mark-up balance sheets as it spends...Obviously, government cannot run out of these. Government can “afford” to buy what’s for sale in its own currency.

The question is not about affordability but rather concerns effects on the value of the currency and impacts on the pursuit of private interest.

a. If something is in scarce supply, more purchases of it by either government or private buyers might push up the price. A government purchase of something that is scarce can “crowd out” a private purchase. Government purchases need to be, and can be, planned to avoid undesired crowding out and price pressures.

b. ...government has at its disposal a number of options to reduce price pressure, including patriotic propaganda and rationing. It also has the big gun: taxes. An excise tax raises the cost to private buyers; an income tax reduces disposable income to free up production for the public purpose.

We never need rich folks’ money in order to provide for the poor. We can keystroke the bank accounts of the poor so that they won’t be poor. We increase taxes on the rich only when their spending threatens our currency with inflation. If there’s no inflation danger, there is no point in taxing the rich before keystroking the poor.

The rich also are much more likely to endanger the currency’s value by pulling out of the domestic currency and running to safe havens at the first sign of inflation... We need progressive taxes and inheritance taxes to protect our currency from antisocial behavior by the rich.

Most important: the goal of taxing the rich has nothing to do with raising government revenue. Taxes are used to keep the currency strong and to punish sin. An ideal sin tax raises no revenue because it eliminates sin. While we cannot achieve that ideal, we can make sin less enjoyable. It is fitting that those who already enjoy all the benefits of life at the top ought to suffer more when they are sinful...

To conclude:

1. When inflation threatens, in some circumstances it makes sense to raise taxes. Since the rich pose a greater inflation threat, put the taxes on them. Cash registers don’t discriminate, so tax those with greater purchasing power.

2. There are additional measures that can be taken when inflation pressures arise; depending on circumstances, they are probably more effective: rationing, targeted wage and price controls, patriotic saving.

3. At full employment it makes sense to tax the rich while providing income to the poor. At less than full employment, this is not necessary.

4. Government spending and taxing need not be closely linked; however, as the economy nears full employment taxes need to be raised if there are strong public purpose interests in continuing to increase government spending. The goal is not to increase government revenue, but to reduce competition for relatively scarce resources in order to direct them to the public interest.

5. Not only does the high income and thus potential spending by the rich threaten domestic value of the currency, there is a danger that the rich will speculate against the currency. This provides an additional justification for removing excessive income from them through taxes, and perhaps also for taxing their speculation. Again, the goal here is not to raise government revenue, but rather to punish the sin of anti-social excess.

6. Explaining that government cannot run out of its own keystrokes (or other records of its IOUs) does not mean that one is promoting run-away government spending. Rather, it means that one must confront the inflation danger directly, ensuring that government spending and tax policy take account of inflation pressures.

Read the entire essay here.



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