Beyond MMT: A Better Way to Supply the Economy with Money

Modern Monetary Theory (MMT) has been around since the 1970’s. Only of late, however, has it started to be taken seriously in higher councils as the possible basis for public policy.

MMT is not itself a proposal to do anything. It is an analysis of the functioning of the existing central-bank monetary system. The central-bank monetary system is the system that is used throughout the world today (though in the Eurozone it has been seriously altered).

For present purposes we only have to be concerned with how the supply of money for the economy is increased in the standard central-bank system, such as the one used in the U.S. In it the central government actually prints the money, but to increase the amount of currency in the economy the central bank and the central government act in concert.

We do have to distinguish between the supply of money and the money supply. Most important for that distinction is the fact that money in checking accounts counts as part of the money supply; it is therefore increased when banks make loans, crediting those funds to a checking account. The supply of money is the amount of actual currency that has been created. It increases only when new money is printed.

The amount of the supply of money can be increased when the central government spends more than it collects in taxes: deficit spending. Then, it must borrow the money it needs.

The central government borrows money by selling I.O.U.’s (“debt instruments”). It promises to pay at a later date the amount loaned to the central government plus interest. To sell those debt instruments the treasury of the central government gets together with the central bank to make all of the necessary arrangements.

The central bank is required by law to see to it that all debt created by the central government gets purchased. It will invariably purchase some of that debt itself. It negotiates with other domestic financial entities, to include commercial banks and insurance companies, and foreign governments to get the rest of it purchased.

To purchase its portion of the central government’s new I.O.U.’s the central bank might use money it has on hand. It can also require the central government to print money for it to use to purchase that debt. To be clear: for some portion of the central government’s new debt that is being purchased the central bank can have the central government print money to be turned over to the central bank to be used to purchase that debt.

The money acquired by the central government in that way then gets spent. Some of what is spent is recouped in taxes. Some of it is not.

The newly printed money that is spent by the central government but not recouped in taxes remains in the economy. That happens only if the total debt in the next budget is equal to or greater than the total debt in the previous budget. When that is the case the supply of money has been increased.

It is curious to me that ‘mainstream’ economists have resisted that analysis. I only have an M.A. in economics, but it seems to me to be a perfectly valid explanation of how the system we have functions, and nothing more.

Still, that analysis does provide a foundation for some rather revolutionary proposals. That’s because it implies that as long as the central bank has to purchase any debt the central government creates, which it can do by having the central government print more money for it to use to do that, the size of the debt can be theoretically infinite. There literally can never be too little money to finance the debt.

There are, however, issues raised.

One issue is the potential for inflation. More money in the economy does not of itself lead to higher prices. For one thing, people and businesses can hold onto cash in checking accounts, savings accounts, etc. It is a commonly cited fact that corporations are currently holding trillions of U.S. dollars in cash. If a nation has a negative balance of payments — if more money is leaving the country than is coming in — that also dampens inflation domestically.

Once that money is in the economy, however, it does have the potential add fuel to price inflation. When prices are rising money sitting in an account is losing value. Even accounts that pay interest never pay more than the existing rate of inflation. So rather than have that money sitting there, losing value, people and businesses tend to spend it. That increases overall demand, which bids up prices, to include the price of labor, and an inflationary spiral is underway. It gets out of control when government is forced to print more money for itself, not to increase purchases of goods and services (due to, for example, demographic factors), but to purchase the same amount of goods and services at the new, higher prices.

In addition, using borrowed money to supply the economy with money means that the supply of money is bound up with interest rates in general. Since by law the debt created by the central government must be purchased, there is no possibility for the central bank to ignore it. The central bank never wants to purchase all of that debt, so it must get other entities to buy some of it. It accomplishes that by negotiating interest rates.

Those interest rates will necessarily affect the entire regime of interest rates. The larger the amount of debt that the central government is creating, the larger that affect will be.

Since borrowed money in general is what makes this economy go, the presence of the central government in that part of the economy can be large enough to change the performance of the entire economy. That can be for the better, but it can also be for the worse. The point is that without any regard whatsoever for what is better or worse for the economy as a whole, the debt of the central government must be bought, broader economic implications be damned.

Besides the potential for inflation and other economic dislocations, using public debt to create money for the economy makes the interest paid on that debt a kind of meta-tax on the supply of money for the economy. That in itself is an issue of justice that has never even been debated.

Although, theoretically, the debt of the central government debt can be unlimited, as a material matter if the process ever got to the point of printing money to pay the interest on that debt, the scheme would be undeniably bankrupt. For the scheme to hold up, at least the interest on the debt must be paid using taxes.

In addition, the recipients of that ‘meta-tax’ in the form of interest payments are the businesses — mostly financial firms — and individuals — mostly very rich people — who own that debt. The point is that the money goes from the nation as a whole, not to government, as the instrument of ‘the people’, but directly to private individuals and businesses.

Government does dole out all of the money it collects in taxes to the private sector, but in ways that are approved by elected representatives. Interest as a meta-tax bypasses that process. The more money a business or person has to purchase that debt, the more of the meta-tax the individual or the business — and the individuals who receive the most profit from it — will receive.

There is also a matter of simple efficiency to consider. What has been described is at best a very convoluted way to provide the economy with money. That complexity makes it inherently unstable. That it is bound up with prices and interest rates more generally compounds that instability.

That brings us to the alternative monetary system I have developed. It is comparatively simple, hugely more efficient, and undeniably more just. It would provide the supply of money for the economy without debt of any kind.

If implemented, that monetary system — and the economy as a whole — would be self-regulating and as stable as the surface of the Moon, where mere footprints in the dust can last forever. Moreover, that would be an economy with no unemployment (at no cost to anyone), no poverty (without redistributing anything), no taxes (of any kind), and no public debt (at any level of government), yet with increased sustainability and still no limit on income or property or wealth. To prevent inflation there would have to be a mechanism for drawing money out of the economy, but (unlike taxation) no money would be collected from any person or business before it could be used for consumption or investment.

For a brief(ish) overview of how that monetary system would achieve those macroeconomic outcomes, check out “A Cure for the Ills of Capitalism” right here on Medium.com. For more, go to www.ajustsolution.com (Page: real justice /economy).

Don’t let the “real justice” part scare you off. It is a new approach to justice, but it involves mutual respect — which is implied by equality. Applied to society, that ethic of mutual respect would maximize liberty and reinforce political democracy while transforming the macroeconomic functioning of the economy as noted, via the revolutionary monetary system I am touting here.

That monetary system can however be considered strictly in terms of economics, without any reference to justice whatsoever. In other words, ‘justice’ is not used to, well, justify unsound economics. If that monetary system were to be implemented justice would be increased as a byproduct, as it were, of the system.

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Stephen Yearwood

unaffiliated, non-ideological, unpaid: M.A. in political economy (where philosophy and economics intersect) with a focus in money/distributive justice