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On financial reform and chartalism

On financial reform and chartalism

In conjunction with Professor Michael Mainelli

This text was submitted as a comment but, because it is so wide and so rich, it has been appended as a page in its own right. It consists of three sections.

The first of these describes Chartalism - also known as Modern Monetary Theory, or MMT. This is a controversial economic stance that provides usual prescriptions for difficult times. It is interesting for two reasons.

Here is an edited quote from a talk given by Professor Stephanie Kelton:

The United States government is the only entity on the planet that can legally create the U.S. dollar. The U.S. government taxes in dollars. It spends in dollars. And it controls its own currency. Why is this important? What are the benefits of issuing your own currency? They are extraordinary.

The government, when it issues its own currency, and goes into debt in that currency, can always pay its debt. It can never go broke. It can never run out of money. It can afford anything that is for sale in that currency. It doesn't need to borrow its own currency. And it can set its own interest rate. It does not have to pay what markets want.

Governments operating under a gold standard do not have a sovereign currency. They have to limit their spending and limit what they do with their policies. A key problem with the Euro is that it cannot be created at will. The governments must go out and get Euros from someone else. They have sacrificed their ability to conduct soverign economic policy.

The second item is a heavily-footnoted description of the extremely unconventional Swiss banking scheme known as the WIR, meaning both "we" and an abbreviation of Wirtschaftsring or 'Economic Circle'. This is a cooperative amongst small companies, which lend to each other, use their collective value to borrow and engage in other forms of cooperation. It currently has 62,000 member firms.

Professor Mainelli has been involved in an extraordinarily wide range of activities that consider institutional reform and stabilisation, including Long Finance, the attempt to see how value and investment can be transformed into something other than a game of shot horizons and abstract numbers. Papers associated with this activity are listed in this, the third section.

Chartalism and Modern Monetary Theory.
The Swiss WIR banks
Papers on financial reform

Chartalism and Modern Monetary Theory

(Readers who just want to know what Chartalism implies may want to skip to the next heading.)

The idea of Chartalism was first formulated in the 1930s, and has since had many contributors. The name comes from the Latin "charta" meaning "a token". It is now more often referred to as Modern Monetary Theory, or MMT, which is the convention that we will use here.

Its key notion is that money is a unit of account which is given its value by the state. The state destroys money when it takes taxes, and creates it when it spends these: in other words, the unit of account is created by and is an extension of the "value" of the body politic, and not a thing in itself.

Around 5% of GDP was controlled by the state in 1900, in the sense that the state raised such taxes and issued fiat money on this scale. This was not enough to generate the needed money supply, so gold and other sources were needed. In addition to the fiat money of the state, there were many other monies in use. Despite the monopoly powers of the Federal Reserve, for example, and even guarded by the basilisk of the Secret Service, the US had 1700 private currencies in the 1930s, issued by cities and companies in lieu of public money supply. The state, by contrast, controlled about half of GDP in most industrial countries by the turn of this century. Private currencies had been eliminated in all but obscure theatres such as multi-user on-line gaming. That said, the WTO estimates that 25-40% of trade is nonmonetary (does not appear in state figures) and it is clear that the international arena is undergoing intense change. Might this also be true of national money(ies) as a result of the current crisis? Elements of this are in place, as the text below on the Swiss WIR banks show.

Money that the state emits (fiat money) is, in a sense, a token of the overall value that is the nation, understanding "value" to mean something above and beyond formal GDP. MMT sees the state - fiat - money as defined by what the government will accept as payment for tax obligations. This is a very different notion to a currency that is some way pinned to an external standard, such as gold or to baskets of other currencies.

The agents in this system are the state - including central banks - and the remainder of the economy, including the external sector. There is thus a clean accounting relation - valid only in equilibrium, and not at all restricted to MMT - that:

(savings - investment) + (state income - state spending) + (exports - imports) = 0

It is easy to see that if the last term - the balance of trade - is zero, then there is an inverse relationship between private (savings - investment) and the state deficit. As the net of private savings or expenditure is reflected directly in the non-state banking sector, the state balance must be reflected in the state banking sector - that is, through the central bank.

Consider how this might work. Daily balances between private banks and the central bank - the interbank market - set short term interest rates. It is not controversial that central banks should manage short term interest rates by creating or destroying liquidity, thus pushing up or down the rates that private banks pay each other to reconcile their accounts. Conventionally, central banks achieve this by selling or buying bonds; but whilst it does not argue with this as a fact, MMT sees this as the creation and destruction of fiat money. The conventional view would expect the central bank to emit bonds when there is a shortage of liquidity and buy them back when there is a surplus. However, that is not at all what the equation suggests.

The view from MMT is that when there is a private sector surplus - when (saving - investment) is positive number - then this is to be reduced by the central bank. It does this selling bonds which individual agents of course buy, using - and so soaking up - money from the private sector banks. By contrast, when there is a shortage of liquidity, the central bank reverses the process and buys bonds from private agents, which action deposits cash into the banking system. Central banks are not financed in any way, for as agents of the state they generate fiat money; crucially, a matter disconnected from whatever spending or buying decisions the overall state may be making. The central bank's activities are decoupled from those of the rest of the state in respect of short term balances. In the longer run, when the term private (savings - investment) goes positive, state (income - spending) has to go negative. A surplus of saving implies either a decrease in taxation or an increase in state spending, whilst net investment implies high tax or low state spending.

Foreign sector transactions are viewed in similar terms. From the equation, if the external sector is in deficit, imports are larger than exports, then either a public or a private surplus is needed to balance this. Not that this is not a primarily foreign balance. A deficit consists of foreign rights to buy locally, and a foreign sector surplus is simply local consumption, as use is made of imported goods.

A net importing nation has a proportion of its currency which is held by foreigners. The money in question must - through local saving or local purchases - devolve to local banks. To maintain a balance, the central bank should remove these funds. A simple balance of trade deficit could also be met if the state strives to reduce its deficit, by taxing more or spending less. A net exporter, by contrast, is taking money from local banks and placing it in overseas ones, reducing money supply and requiring the state to print money, which is equivalent to saying that it can increase its deficit. It follows that a country with a poor balance of trade and a government deficit - a common enough picture today - suggests a prescription for increased private saving, that is, private bank liquidity. That not at all the usual view, which is that firms should be encouraged to start investing in these circumstances.

These are not intuitive ways of thinking.

So what does this view prescribe?

The key thought is, perhaps, that states are not embedded in an abstract financial framework, in which their currency is defined and valued by others. Naturally, there are external influences on the value of the currency. However, money is a token of the value of the national enterprise, not a spin off of some abstract structure over which the state has no control. It is a "charta", a token of that worth. Money is dethroned as the store of value, and seen as a measure of it.

MMT is, therefore, unkind to the notion that saving is intrinsically good, Saving as money-under-the-mattress (even if dressed up as bonds or other instruments) is altogether bad for the economy. Saving, in the sense of having put the money to work in tangible things is, however, good. We should not look to abstract savings to generate interest. Indeed, they should depreciate over time. The state should encourage savers to put their money in tangible things, not funds. As the current crisis has resulted in a huge net transfer from savers to those in debt, this is a lesson that may stick.

Second, many of the prescriptions that MMT offers are counter-intuitive, to say the least, and the opposite to the reflexes that most states have shown in recent decades of monetary management. One key element that effects current circumstances is that of deficit reduction as a goal, and as a goal set by this abstract world of money and markets that MMT partially rejects. A state deficit does indeed matter, but it is a "partner" in the balance with the private (savings - investment) term, and with the balance of trade. If attempts to reduce a deficit drive either of these terms to undesirable extremes, then that is a bad outcome. The three terms have to be managed together, and in ways that are unconventional.

An example can be drawn from the tsunami disaster in Japan. Currency traders increasingly look to tax supply-demand balances, and a disaster implies that the state will have to raise money. That sets a likely driver to local interest rates, and so to the currency valuation. A bad event raises the value of the currency: again, counter-intuitive.

Similar considerations suggest that state fiscal balance are less a balance between tax and spending and more a tool through which to manage employment and inflation. MMT is "just as Keynesian as other branches of Keynesianism, or perhaps even more so."

Chartalism is a rich topic, intertwined with Austrian, Keynesian, the various Monetarist Schools and so forth. To sort out your own views, you might find this quick test rather interesting. Everyone who takes it learns something and few are purely "Austrian".

(Ed: A completely fascinating test. It appears that I am 65% Austrian and a 30% Chicagoan. The 5%? - Keynes. An austere member of the team came out 85% Austrian.)

Charles Holt Carroll is an often overlooked but penetrating 19th century writer on the subject who provides a solid underpinning for Chartalism.

Money In A Time Of Cholera: Basel Blows The Bubbles (Mainelli 2011)

Journal of Risk Finance, Volume 12, Number 4, Emerald Group Publishing (August 2011), pages 348-350.

Let There Be Tax Risk: Currencies, Interest Rates and Tax Rates (Mainelli 2011)

Journal of Risk Finance, Volume 12, Number 3, Emerald Group Publishing (June 2011), pages 242-245.

The Swiss WIR Banks

One model for future finance is that currencies will proliferate in order to serve either specific bilateral transactions or specific risks and other variables. The WIR is a working example of such a structure.

WIR is a cooperative bank facilitating multilateral trading between, and extending credit to, member SMEs. It has been operating for over 75 years and is based in Switzerland. Founded by 16 entrepreneurs in 1934, the WIR Wirtschaftsring-Genossenschaft (economic circle cooperative) was set up as a result of the adverse economic and monetary conditions resulting from the Great Depression. It was conceived as a way to stimulate trade and create purchasing power between participants, primarily SMEs, thereby enabling local economic growth and reducing unemployment.

Since its inception, the WIR economic circle has undergone a number of reforms and structural changes and now resembles a commercial bank driven by cooperative interests (favouring SMEs and local/national economic growth and with strong economic foundations). For example, it went from issuing interest-free credit to providing credit lines at advantageous rates compared to market rates (approximately 1.75% for members); and from charging a "demurrage" (or penalty) fee to members holding on to their WIR francs (CHW) to simply not paying interest rates on CHW deposits, thereby encouraging constant money circulation. The organisation has also expanded the range of banking services to include Swiss franc-based services rather than WIR francs alone; and has evolved from a customer base comprising primarily SMEs to opening up to the public in 2000.

WIR Bank performs different and complementary functions. First, it acts as a "central bank" issuing its own currency - the WIR franc (CHW), which is pegged to the Swiss franc (CHF) and released to members through loans and mortgages backed by collateral. The WIR franc comes into being on the strength of the contract with the borrower plus the willingness of a community to accept the money as a payment for goods and services, rather than through state/central bank authorisation.[1]

The bank regulates the amount of WIR francs in circulation - WIR francs accounted for 0.2 % of CHF M1 in 2009[2]; it also defines the rules of participation and the usage of WIR credits - e.g. WIR credit cannot be redeemed for Swiss francs; and sanctions members for illegal behaviour through exclusion - e.g. such as discounted market trading of WIR francs for Swiss francs.[3] [4]

Second, it acts as a "commercial bank" and as such has been subject to relevant banking regulations in Switzerland since 1936 when it was first given the status of a bank. In this capacity, WIR bank provides a range of banking products (including business loans and mortgages) to its clients in Swiss francs, WIR credits or a combination of both. WIR francs are used by participants to exchange goods and services within the WIR exchange. Since every WIR credit is matched by an equal and opposite debit, the system as a whole must net to zero.[5]

Third, WIR bank acts as a "trade facilitator" by providing the WIR platform or system through which WIR members can exchange goods and services with each other using the WIR franc as a partial or full means of payment. In this context, WIR bank also provides a range of marketing and communication services (e.g. web listings, WIR fairs) and advisory services (e.g. workshop, advice on the set-up of a WIR budget) to members to enable them to trade within the system. The WIR system is also supported by independent local members' groups (e.g. Groupement WIR Suisse Romande) that act as local networking and discussion forums throughout Switzerland.

Today, circa one in five SMEs in Switzerland is a WIR member[6], resulting in over 60,000 SMEs trading with each other within the WIR system, of which one third are from the construction industry. The value of WIR franc-based transactions amounted to CHW 1.627 billion[7] in 2010, representing circa 0.3% of Swiss GDP for the same year[8]. Prices are denominated in Swiss francs and can be paid using WIR credits, Swiss francs or a combination of both. While some participants accept WIR francs as 100% of the payment for their goods and services, the minimum rate of WIR francs for every transaction is 30% up to a value of 3,000 CHF; and subject to agreement between the parties beyond that threshold. The average rate of acceptance is usually between 30% and 40% of the total amount.[9] Through partial acceptance, participants meet costs and liabilities that cannot be met through WIR credits such as salaries, tax and social contributions. As a result, trading within the WIR system results not only in an increase in turnover in WIR credits but also in Swiss francs. [10] [11]

The WIR multilateral exchange is underpinned by a strong feeling of community and trust. An obvious advantage lies in the mutual benefits arising from trading with someone that is part of the system rather than an outsider. Moreover, given its history, it is often seen as a trading mechanism sustaining local economic development and SME growth, especially as SMEs account for 98% of all companies in Switzerland.[12]

Researchers have analysed the counter-cyclical nature of the CHW. Using 56 years of WIR data on participants, CHW in circulation, turnover and credit, Stodder (2009) demonstrates the counter-cyclical nature of WIR credit, showing that WIR credits are most likely to be accepted when ordinary money is in short supply and suggesting that the purchasing power created through WIR could become an instrument of effective macroeconomic stabilisation.[13] Recent media pieces[14] have explored the relevance of WIR exchange in the recent crisis and highlighted how participants' turnover in CHW in a variety of sectors has remained stable or increased relative to their turnover in CHF (which decreased as a result of the financial crisis).

Implications for other countries

On what might the Swiss WIR mean elsewhere, here is a report the City of London Corporation: Summary Findings - Capacity, Trade and Credit: Emerging Architectures for Commerce and Money (December 2011 - PDF)

The full report is 200 pages and it offers numerous recommendations about using new currencies and exchanges to increase economic growth. Lord Sassoon participated in the launch and a number of other senior officials are exploring the implications of the report. For the City of London, this has been their most commented-upon report since the Global Financial Centre Indices began in 2007. This in turn gave impetus to more discussion, via Long Finance and editorials, and it will lead to a Forum convening later this year.

The notion of introducing a WIR equivalent to Britain is interesting or, perhaps now having seen your paper, for Europe. To the Swiss, it's a clear success comprising a fifth of Swiss firms and about £3.2 billion of trading (an average trade is half Swiss francs and half WIR francs).

In summary though, all the Swiss did in 1934 was to push their regulator to manage two currencies rather than one. They removed the "monopoly" on money that most nations believe fiat currency requires. The national currency retains its supremacy, based on the universality of tax and its monopoly on the use of force, but also in competition for credit. It bypasses the crazy and unstated assumption among far too many, that fiat tax scrip plus leveraged banking will magically equal the trust and credit of the national economy. The monopolies do fight back.

Lots to ponder, therefore. Current UK thinking is hardly innovative and so concerned with the art of the practical (i.e. what the "in" community of UK thinkers might accept that other UK people might accept) that London is in serious danger of being sidelined.

[1] W. Wüthrich, "Cooperative Principles and Complementary Currency," Current Issues (Zeit-Fragen), article 1: topical questions # 30, August 9, 2004, 1, translated by Philip Beard (Sonoma State University).

[2] In 2009, CHW 876.3 million were in circulation (WIR Bank, 2010). For the same year, the Swiss Central Bank reported M1 amounting to CHF 377,199 million in 2009.

[3] WIR Bank, "Bénéfice de la banque WIR en hausse a 11,9 millions," Wir Bank press release, March 11, 2011, accessed August 18, 2011

[4] Wüthrich, "Cooperative Principles and Complementary Currency", 1.

[5] James Stodder, "Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring," Journal of Economic Behavior & Organization 72 (2009): 82.

[6] Based on 60,000 SME WIR members (WIR Bank, 2011) out of 297,692 SMEs censored in 2005 in Switzerland (OFS, 2005).

[7] WIR Bank, "Bénéfice de la banque WIR en hausse a 11,9 millions," Wir Bank press release, March 11, 2011, accessed August 18, 2011

[8] In 2010, Swiss GDP amounted to CHF 546.619 billion according to OECD statistics, accessed August 19, 2011.

[9] Wüthrich, "Cooperative Principles and Complementary Currency."

[10] WIR Bank, "Bénéfice de la banque WIR en hausse a 11,9 millions."

[11] Stodder, "Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring," 82.

[12] Swiss Federal Office of Statistics (OFS), "Recensement fédéral des enterprises," accessed August 18, 2011

[13] Stodder, "Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring," 82.

[14] RAI TV documentary, "WIR Bank," broadcast May 30, 2010, accessed August 18, 2011

Papers on financial reform

On reform, these articles may interest - particularly the one on "utility banking":

Four years into a succession of crises and still no reform; Time for some Long Finance Michael Mainelli 2011 City AM (4 November 2011), page 24

Small Enough To Fail: A Systems Approach To Financial Systems Reform Michael Mainelli and Bernard Manson Journal of Risk Finance, Volume 12, Number 5, Emerald Group Publishing (October 2011), pages 435-444.

Banking on Confidence: Rethinking Audits of Financial Institutions Michael Mainelli Securities & Investment Review, Securities & Investment Institute (September 2011), pages 22-23.

This Economist article warms us up to alternative economists.

Silvio Gesell is covered in this lecture (PDF). His notions of about the nature of money, Freiwirtschaft, are rather penetrating . He is an important figure in the development of MMT, focusing on the importance of embodying savings in productive things, and not in abstract under-the-mattress instruments. He proposed instruments to reflect the lower social utility of cash savings. Gesell's Freiwirtschaft mantra was "free trade, free land, free money". The Wörgl experiment on some of his ideas which led to the Swiss taking Freiwirtschaft seriously. (This has been discussed under the WIR entry: Ed.)

His are controversial ideas that defy simple summary, but he disputes the idea that money should be a long-term store of value. There are references to online materials on him at the end of the lecture. Here is Keynes quote:

I believe that the future will learn more from the spirit of Gesell than from that of Marx. - Book 6, Chapter 23, Section 6, p. 355

Comment 1

I do think that there is a limited, slippery, case for more currencies. The Greek state is running out of euros. It might move to using the new drachma (ND), which instantly devalues by 50% against other currencies. Leaving aside chaos, bank failures, etc, the benefit to the Greek state of the ND is that it means a sudden sharp reduction in the real value of the Greek state's debts, and a sudden sharp reduction in real Greek wages and welfare benefits. The ND is a way of 'fooling' people into accepting some necessary one-off adjustments - the other way is to force through cuts in nominal euro wages etc via austerity.

However, although the Greek state can print as many ND as it wants, this is not an unlimited real resource. People have a limited willingness to hold ND - the more rapidly the Greek state hands them out, the more rapidly people will try to get rid of them. In the limit, you get Weimar or Zimbabwe.

Comment 2

This is new, and I have learned much from its reading. But I come into the "so what"? question. Maybe we get lots of currencies, but what problem do they solve? You kind of say that the state is not big enough to fund commerce by fiat money, and you somewhere say that the state is too greedy for tax for commerce to do well. But where is the evidence? Real issue maybe is state is too big, meaning too much bread and circuses. But that doesn't need lots of different monies to solve.

Comment 3

About micro-currencies. The core requirement for state money is that it be accepted broadly enough to allow the state to provision itself using the money it issues. That still leaves plenty of room for micro currencies to exist along side the state's currency. The point about limited domain and tax evasion is critical though. As long as the user of micro currency is within the scope of a higher sovereign authority, the need to obtain state money to satisfy tax obligations is still a constraint that makes the micro currency subordinate to the state's money.

MMT likes to describe it in terms of a hierarchy of authority. Anyone can issue IOUs and those IOUs might circulate as currency but only the state can impose involuntary obligations denominated in its own IOUs, putting the state at the top of that hierarchy.

Comment 4

The central issue of micro currencies is the notion that fiat money is essentially for the state's own use, with general circulation as secondary consideration. Central banks are now rebuilding their foreign-exchange reserves as fast as any time since 2004. This is crowding out private investors seeking U.S. dollars. The IMF says that dollar's share of global reserves rose 1.6 percentage points to 62.1 percent in December 2011, having previously touched an all-time low (of 60.5%) earlier in the year. The capture which this implies leaves the private sector with a deficit of $2 trillion,according to Morgan Stanley. This gap has expanded from $400 billion in 2008, and in 2002 there was a dollar surplus of $900 billion.

One thought doing the rounds at Davos this year was that private financial institutions could issue their own fiat money, taking the form of the usual timed obligations to pay. In essence, Bank A would hold the debt of Bank B, and vice versa. I asked how this would differ from what they do anyway: the answer was that it would not be much different, but that it would be better accounted for and more explicit. Would this result in the effective printing of money, I asked, mindful of the CDO nonsense that in effect did just that - by securitising debt - and I was greeted by a universal mumble. This seems a deeply toxic notion and one that should be resisted.

Comment 5

A notion that is down to amongst others, Bernard Lietaer, is that a plethora of exchangeable securities - and specifically money that is not rooted in the state - would increase systems resilience. The argument seems to be that more complex - that is, mutually connected - systems are more resilient to the damage to any one part of them. I have to say that this has yet to be proven for either ecologies or electronic or social networks, so the connection may be a very loose one indeed.

A resilient system is one that tends to return to balance, whatever variables are changed, or where "balance" means a steady state or a flow or a cycle that remains constant, or changes slowly and without encountering a discontinuity. Cyclical behaviour counts as volatility in a financial assessment, but is actively desirable when you are designing a clock, a filter or when you are composing music: the analogy is simply not portable.

The problem for the network theory that stability comes with complexity is that stability of this form is found most strongly in simple systems - for example, the supply and demand curve - than it is found in highly complex and multiply connected ones - say, a gene network or a wide area network. They are, perhaps, talking about a completely different kind of resilience, in which a section of the network is removed. Here, if you take a platoon out of the army, the army remains. If you lose the supply curve, demand has a problem. These are not the same things and the compatibility between the two is minimal.

Then you have the third consideration, which is whether the network is self-contained or not. The example often quoted is that of a flock of turkeys, These are fed, housed and protected by a beneficent farmer who, one day and without warning, kills the lot. This is inexplicable to the turkeys' network of interactions - up until now entirely stable - but is the core logic of the farmer's enterprise. Not a risk or an instability, but a certain end to the process.

So, I guess my take on this is that simplest is bestest. Particularly in an industry that makes a buck when it makes the clear into a muddle.

Comment 6

Like Comment 5, I hate that idea. (In Comment 4: Ed.) Consider the impact of "print your own" credit default swaps, or CDS. These started life as insurance against a bond issuer not repaying the principal. Unlike the insurance industry, where heavy regulatory requirements controls natural exuberance, CDS are (still) not regulated in the US. There was even a measure inserted into an appropriations bill in December 2000 prevented any regulatory agency from doing so. In the absence of regulatory requirement for underpinning assets, banks could emit as many CDS as they chose.

This made them the tool of choice for people who wanted to bet on the possibility of the failure of a company, or a derivative based on a population of companies. You could bet that a company was going to fail to pay its bond holders, and sell the CDS at a profit if the did do so. This quickly became a favourite tool amongst banks who wanted to speculate amongst themselves, and the estimate for 2007 was that the face value fo the CDS market was around US$ 60 trillion.

In 2008, there were still, of course, CDS for traditional insurance cover on, for example, corporate debt. However, much larger sums had been committed to mortgage-backed securities and CDOs - that is, amalgamated revenue streams that had been sliced into usually three tranches based on their riskiness. These last were handled in vast numbers, often iteratively, in such a way that it was impossible to know what was contained in a package that might stretch back through ten or more sellers. A mechanism for supposedly assessing risk had triggered the CDO boom in the first place, and the growth in CDS followed this. Events quickly proved that the CDS had been sold much to cheaply, that the insurers could not meet the losses now being registered and the entire system imploded. Arguably, CDS were the main way that losses on US sub-prime mortgages triggered a swarm of write-downs at other financial institutions.

This may be detailed and tedious, but there are two points to draw from it. First, in the absence of firm regulatory links between what financial traders are prepared to sell and their underlying assets base, ludicrous imbalances appear. Second, exotic instruments utterly blind us to what is going on. The notion of banks issuing their own equivalent of fiat money is simply nightmarish.

Comment 7

MMT is not at all the same thing as neo-Keynesian economics, which has been tested in this crisis and has evidently worked, at best, only partially. "Austrians" - followers of Mises and Kayek, amongst a host of others - advocate an approach which aims to alow markets to clear, debt to resolve itself and - other than fiscal balance reduction - minimal state activity. Central banks are seen as a source of inflation, and money should be tied to a standard that politicians cannot effect. MMT implies broadly the precise opposite.

One of the reasons why MMT has become popular is that some of those emotionally connected to state spending have been looking for a new home as neo-Keynesianism wanes in popularity. Indeed, Austrians and related factions want deficits cut immediately, and Keynesians want "virtue, but not yet", which is to say, equivalent cuts in the future, when 'things will be better'. MMT tell us that both models are wrong. Fiat monetary systems have specific properties which currencies linked to gold, or to a basket of other currencies, do not. Specifically, the state can print as much money as it needs. Economic recovery is then limited by our timorous failure to understand modern money. If this were to be true, how fine it would be: we can simply print our way out of trouble. If it were both adopted and proved false, how quickly we would all turn into Weimar.

MMT typically proposes that "deficits don't matter" so long as a sovereign government can issue its own fiat currency. MMT relates the external sector to state spending ans saving, and suggest that a nations such as the US, with its major trade deficit, allows saving only if the Government is itself in deficit. Austrian proposals to cut the state deficit would tank private saving. This is a connection that mainstream economics does not support, Austrian or no.

The core MMT relationships have been explained in the main text. If we assume an external balance, the relationship reduces to:

Government Budget Deficit = Net Private Saving

However, there is a serious confusion in the use of words. By "net private saving", MMT means that people collectively save more than people collectively invest. It is certainly true that for a fixed size GNP, with a balance of payments of zero, "private saving net of private investment" cannot grow without a government budget deficit, simply by the standard accounting relation. This is equivalent to the standard critique of state spending, which is that it crowds out private activity, either saving or investment. But, taken like that, it weakens the MMT claim to a new perspective: it is just the established view, in new words.

State deficit spending will, in the Austrian view, reduce private consumption, generate rising interest rates, and will suck real resources out of private investment and into state spending projects. If the state projects generate the same returns as the private sector ones that they replace, then this partially offsets the problem. If they are pork, or designed artificially to boost employment, then it does not.

However, the main point to make is that the claim by MMT that rebalancing ("austerity") pushes in the wrong direction, and that states should spend without constraint, is plainly mistaken. It is mistaken for the reasons just mentioned: that MMT uses "saving" in a peculiar way. Austrian views, Keynesian views and even Teapot State-hating are all consistent with the same relationship.

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