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Where MMT may have gone wrong?

February 23, 2013
Where MMT may have gone wrong?
BUT with due examination, there is a reply in which MMT claims TWO DIFFERENT types of sovereign currency are in action. ONE: “horizontal”, and TWO: “vertical”. Here is where MMT may have a fatal flaw.This is also the “flaw ” of modern capitalism as well as the “systemic failure” being mentioned.

The claim: “Vertical money is a zero sum game,this money ‘printed’ out of thin air is temporary and upon its return it is extinguished: Money out minus money returned equals zero”
The fact: Vertical money may at times not be a  zero game.
Vertical money does capture horizontal money and redistributes that portion for its own purposes.Any net loss of vertical money must be replaced by MS ‘printing’ horizontal money.
BEWARE:Vertical money over time will gain all horizontal money created.period. Perhaps we are even now beginning to see Gresham’s Law : Bad money (Vertical) will drive Good money (Horizontal) out of circulation.
Why use cash ? Use a card..debit or credit?

Use PFPB vertical money, while at the same time storing cash (horizontal money)

Excerpt from :”Financial assets created in the non-government sector are different. They can never be base money per se, but claims on base money. There is an implicit assumption that they can be converted to base money at maturity. For example, regular bank deposit accounts do not hold actual base money but claims on it – sometimes called “bank money”, “credit money” or “deposit money”. The claim is resolved whenever the bank money is used, for example when it is withdrawn by the deposit holder as physical currency.”

When is this ‘vertical’ money ever not converted into ‘horizontal’ money. Who would make a loan with a bank and pay interest on that loan and just leave it in the bank?

How does MMT account for the conversion?
How do you expect to have people believe you are correct when you consider valid questions as frivolous and or simple ignore any questions?
Even believers have difficult defining what is MMT belief?
Will Wray, Mosler, and dozens of others agreed to the same answer?

1. Must a Monetary Sovereignty be the sole issuer of the sovereign currency?
2. A Monetary Sovereignty can issue all the currency that it needs or desires, but is constrained by moral hazard, or by its ability to control the quantity or quality of that currency?
3.Must all sovereign currency be fiat (as the actual value-goods and services are not per se electronically transferable)since the currency is merely a legal representation of all goods and services of the entire social group?
Can you get a definitive answer from 51% or more of believers, or even get a website where the questions can be asked?

February 22, 2013 at 5:45 PM

Tom Hickey said…

Well, you should ask the MMT pros. Mosler is out the loop now that comments are shut down at his place, but the rest of the MMT economists blog at New Economic Perspectives.1. Must a Monetary Sovereignty be the sole issuer of the sovereign currency?Every sovereign govt is sovereign in its currency, unless it chooses to use another currency by treaty, as in the EZ, where the common currency is the euro, or by voluntary choice, e.g., Ecuador has chosen to use the USD as the unit of account and medium of exchange. Since the govt cannot issue the currency it gives up currency sovereignty for as long as that choice lasts.

Convertibility and fixed rates limit the capacity of the sovereign to control its currency, i.e., limit currency sovereignty. The govt accepts conditionality in the use of currency that limits currency sovereignty.

The currency sovereign can also delegate all or some of its authority to agents, such as an independent central bank that is privately own and to private commercial banks. when govts do this they usually maintain control through imposition of law and regulation. These choices of the sovereign are always reversible since sovereignty is absolute. As long as the govt maintains control over the currency its remains fully sovereign. To the degree it subjects itself to conditions, it limits sovereignty.

Govt may also decide to limit its sovereignty by allowing other money things to be used in payment of taxes. If it accepts other money things rather than its own currency in payment of taxes it has forfeited sovereignty as long as this lasts.

The choices the currency sovereign makes in this regard affect the policy space available to it. Limitations on sovereignty limit policy space.

2. A Monetary Sovereignty can issue all the currency that it needs or desires, but is constrained by moral hazard, or by its ability to control the quantity or quality of that currency?

The limitations on issuance are availability of real resources for purchase in the currency, price stability, and the fx rate.

3.Must all sovereign currency be fiat (as the actual value-goods and services are not per se electronically transferable)since the currency is merely a legal representation of all goods and services of the entire social group?

Everything but use of commodities, e.g., bullion weight, in exchange for commodities involves fiat, which means “let it be,” e.g. if seigniorage is involved. So a government can declare a metal coin to be valued at face value instead of the value of the metal. IN this sense, “fiat” currency means any unit of account the government declares necessary that for payment of taxes of which it is the sole provider, although it can delegate this power to agents, such as a central bank, under terms that it controls.

Central banks are only independent to the degree that chooses and only for as long as govt chooses. For example, the Bank of England was privately owned until it was nationalized in 1946. But Britain still had a sovereign currency.

Generally speaking tho, “fiat currency” means currency that is not convertible into a real numeraire like gold or silver at a fixed rate of exchange, i.e., has no “real” (commodity) backing.


Questions and answers re MMT
1.. Is a MS limited as to the amount of currency it can print?
Is your response,”The limitations on issuance are availability of real resources for purchase in the currency, price stability, and the fx rate.” correct? It states there is a limitation?
Isn’t that contrary to it MMT ?
2.”Everything but use of commodities, e.g., bullion weight, in exchange for commodities involves fiat, which means “let it be,” e.g. if seigniorage is involved. So a government can declare a metal coin to be valued at face value instead of the value of the metal.” IF the MS ‘declares its value’ it is fiat currency and no longer a commodity since its value is now dependent upon redemption by the ‘good faith and credit of the sovereignty.
Most important, after having read:  MMP BLOG #6: WHAT IS A SOVEREIGN CURRENCY? one must go back to the question, Why are legitimate questions un answered ?
Excerpt:

“The sovereign government, alone, has the power to determine which money of account it will recognize for official accounts (as discussed, it might choose to accept a foreign currency for some payments—but that is the sovereign’s prerogative). Further, modern sovereign governments, alone, are invested with the power to issue the currency denominated in its money of account.
If any entity other than the government tried to issue domestic currency (unless explicitly permitted to do so by government) it would be prosecuted as a counterfeiter, with severe penalties resulting.
Please note comments and questions …..unanswered.

Anonymous | July 13, 2011 at 10:48 am | Reply
“If any entity other than the government tried to issue domestic currency (unless explicitly permitted to do so by government) it would be prosecuted as a counterfeiter, with severe penalties resulting.”Is the monetizing of private bank debt created on a ledger accounted for in the MMT model?My understanding is that banks issue checks denominated in the sovereign’s currency by creating the money from nothing but the asset/liability basis of the debt instrument and the collateral, summing both together to zero on their account. This is a privilege granted by the sovereign government to a private entity which endangers economic stability. When money supply is diminished by saving during a recession by paying up debts, while at the same time issuance of new money is dependent upon the banks judgment that new borrowers have sufficient collateral and income to assure their profit, money supply becomes dependent upon these private banks. How is the seigniorage of a “trillion dollar coin” not issued through bank debt accounted for? Does MMT show a public benefit to treasury issued money, not passing through a private bank system, but spent directly into circulation?
economicresearchdump | July 13, 2011 at 9:38 pm | Reply
When you write “currency”, you refer to coins and paper notes. Only the government issues those. So far so good.Later, you write:”Most modern sovereign governments make payments in their own currency, and require tax payments in the same currency.”I pay taxes using a checking account, not with coins and paper.To me, as customer of a private bank, it appears as if, not only the government, but also a private bank can issue the thing with which I pay taxes: when a bank grants a loan and credits my checking account, I can use the credits to pay taxes.
Anonymous | July 14, 2011 at 8:36 am | Reply
“I pay taxes using a checking account, not with coins and paper.”Most people do, but the key point is that the denomination in which you pay taxes is in your domestic currency (in the US you pay $X out of your checking account etc.).”To me, as customer of a private bank, it appears as if, not only the government, but also a private bank can issue the thing with which I pay taxes: when a bank grants a loan and credits my checking account, I can use the credits to pay taxes.”That’s very true. And this is where the whole thing ties into the sectoral balances in the previous posts. The private sector — i.e. you — can indeed get access to money that is, in all essentials, created by the banking system. However, this means that the private sector as a whole takes on more debt.
LRWray | July 14, 2011 at 8:36 am | Reply
Note to commentators: We’ve got a techie problem so my response did not get up last night and we have been unable to post it so far today. Should be up later today. Meanwhile I will paste it in here, but be assured it will be properly formatted and posted later.SOVEREIGN CURRENCY, MEDIUM OF EXCHANGE, AND SECTORAL BALANCES: Response to Comments on MMP Blog #6Thanks for comments. As you may have noticed, I kept the blog shorter this week so that we could focus on a smaller range of topics. That seems to have helped—the comments this week are also well-focused. I think I can hit the main concerns by addressing three topics. due to space limitations, these will be in next 3 comments.
LRWray | July 14, 2011 at 8:38 am | Reply
1. Relation between the sovereign currency and the medium of exchange: We first introduced the money of account: the Dollar in the US and the Pound in the UK. This is a unit of account, a measuring unit like the “inch”, “foot” and “yard”. It does not exist even as an electronic entry; not even a bloodhound could sniff it out. It is representational, something only a human could imagine. Next we introduced the concept of “money things”—denominated in the money of account. (Similarly, our unit used to measure length cannot be sniffed by dog, but it does have physical things that can be sniffed and measured: the inch worm is an inch in length, my foot is a foot—more or less, and the football field is 100 times the distance from Henry the first’s nose to thumb. Probably more, actually, as we know those kings exaggerated the size of their anatomical features, like rap stars today.) This can include paper, notes, and electronic entries. We’ll say a lot more about the nature of those things that get measured by the money of account. This week we introduced the sovereign currency—the national money of account adopted by a sovereign government. While a money of account could—in theory—be created and adopted by private entities, the sovereign currency is adopted by the sovereign government; and the sovereign currency is usually at least the primary money of account if not the only money of account used within a sovereign nation. The word “currency” is frequently used to designate not only the money of account adopted by sovereign government, but also to designate a money thing issued by the sovereign government and denominated in the money of account. In the US it is the coin issued by the Treasury and the note issued by the Fed. In other words, we use the term “Dollar” to indicate both the sovereign currency (money of account) and the money thing (paper note or coin) issued by the US government. We have not yet got to the “medium of exchange”. Most textbooks begin with the medium of exchange (Crusoe and Friday look about for handy sea shells to function as convenient media of exchange). I reject that story and purposely wait to introduce the concept. But to jump ahead a bit, yes the “money thing” currency issued by government generally functions as a medium of exchange. Other privately issued money things also frequently function as media of exchange. That is a function of money things, and really does not help us to understand much about the nature of money. When you walk into a relatively new diner or any other “mom and pop” firm, there usually is a frame hanging on the wall, with a Dollar bill and some sort of statement like “the first dollar we ever earned”. Here, money functions as a momento—reflecting the pride of the owner of the establishment. Two decades ago, there were lots of stories of Wall Street traders using hundred Dollar bills functioning as cocaine delivery devices. I don’t think it is useful to put undue emphasis on the various functions of money. Let us at least first try to understand its nature.
LRWray | July 14, 2011 at 8:39 am | Reply
2. That leads us to the question about “bank money”. Again, we will get into this in detail in coming weeks. However, to break the suspense, banks (and other institutions as well as individuals) can issue IOUs denominated in the money of account. We do not call these “currency”. They are not issued by sovereign government. They are “money things”. Yes, some are more “special” than others: the IOU of the Bank of America (a private bank—not Uncle Sam’s bank) is more “special” than the IOU that you issue. Yes, it can function as a medium of exchange. The reasons for the “specialness” will be examined later. But an obvious one is that to some degree Uncle Sam stands behind BofA—for example, he guarantees demand deposits (your checking account). So, yes I do understand the worry that Uncle Sam has essentially licensed BofA to “counterfeit” Dollars—if the bank goes bust, Uncle Sam will pay out nice new Dollar bills to depositors. This raises many issues of concern, and some of those are directly relevant to the global financial crisis we are going through—in which Uncle Sam has effectively done just that. But for right now, that really would take us too far afield. Please be patient.
lrwray | July 14, 2011 at 8:41 am | Reply
3. Currencies and balances. Recall that we have discussed (briefly) unsold inventories. Suppose it is the end of the year 1974 and we are Ford motor company and we produce 1000 Ford Pintos (remember those—the ones with exploding gas tanks?) that we cannot sell. Unsold inventory gets counted as investment. Ford carries the inventory at its market price—let us say, the average price of Pintos that it actually did sell in 1974. Assume it cannot sell them in 1975, either (deep recession, bad publicity about the tanks, and so on). How to value them? All things equal, Ford would prefer not to book a loss of value—it carries them at original value, otherwise, the value of its inventory declines impacting 1975 profits and net worth. Now in 2011 it is still carrying those Pintos in inventory. You see the problem. We have to assign a dollar value to them. Now let’s address the problem of dual currencies. Suppose Ford produces cars in America but sells them in America and Japan. It imports all the electronic components from Japan. It can keep two sets of books—one for Dollars and one for Yen. It has income and outgo in each currency. Clearly it could run a deficit in one and a surplus in the other (or surpluses in both, or deficits in both, etc—you get the picture). All other firms, households, and levels of government can do the same in Dollars and Yen. Adding up all the sectors, we get to our three balances in each of the currencies. But Ford’s shareholders do not want to know that it has a surplus in Dollars of 1 billion and a deficit in Yen of 1 trillion—it wants the overall balance for Ford’s income. Just as we have to convert Pintos to Dollars, we have to convert those Yen to Dollars. We need an exchange rate. Yen and Dollars float—changing every day in relative value. It is going to make a huge difference what exchange rate we use.
lrwray | July 14, 2011 at 8:42 am | Reply
So, yes I am sympathetic to “Tobinesque’s” comments. The cleanest way is to keep the accounts separate and there will be sectoral balances in each currency that do balance. But, yes, a government as well as a firm needs a budget in one currency (generally it is going to be the domestic currency) and so if income and outgo occur in more than one, exchange rates must be used to get everything into that currency of denomination. This is true even if the government/firm/household actually has bank accounts denominated in the foreign currency. This complicates matters because now the sectoral balances will not balance (exactly) unless everyone uses the same exchange rate all the time—which would happen if we pegged. This issue has come up before—there are variations in estimates of the three balances. One reader pointed out that one of the graphs I used showing—say—the private deficit during the Clinton years differed a bit from a later one I showed here on the MMP. The reason was due to updated data and different sources (the older one came from Wynne Godley and the later one from Scott Fullwiler). As they say, economics is not an exact science! More seriously, you should not think that aggregate economic data like GDP or the CPI (consumer price index), or the sectoral balance are measured precisely. These are estimates, using data that is constructed. What is important is consistency. I know this always shocks students the first time they hear it. But the CPI does not come from heaven. It is constructed, it is revised, and it is subject to great debate among wonky people with thick glasses. And believe it or not, it does matter exactly how these data are constructed. But do not get misled by that. Certainly at the level of logic, the three balances do balance. If we could measure things exactly, they would balance in practice. Knowing that they should balance, the statistician who puts them together ensures they do balance—by construction. This is not easy; a “statistical discrepancy” is added to ensure they do—and if you need a big one of those, that is not good. And, yes, dealing with valuing those inventories is a big headache—I can remember when Wynne Godley used to fret over that, and I didn’t understand why. Now I do.

Justaluckyfool asks,” This raises many issues of concern, and some of those are directly relevant to the global financial crisis we are going through—in which Uncle Sam has effectively done just that. But for right now, that really would take us too far afield. Please be patient.”
Yes,it does just that also raises more questions.
BUT with due examination, there is a reply in which MMT claims TWO DIFFERENT types of sovereign currency are in action. ONE: “horizontal”, and TWO: “vertical”. Here is where MMT may have a fatal flaw.This is also the “flaw ” of modern capitalism as well as the “systemic failure” being mentioned.
Vertical money is not a zero game.
Vertical money does capture horizontal money and redistributes that portion for its own purposes.Any net loss of vertical money must be replaced by MS ‘printing’ horizontal money.
BEWARE:Vertical money over time will gain all horizontal money created.period. Perhaps we are even now beginning to see Gresham’s Law : Bad money (Vertical) will drive Good money (Horizontal) out of circulation.
Why use cash ? Use a card..debit or credit?

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One Comment
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