Thank you, Richard, for such a clear description of MMT. I'm not an economist or ever studied economics but this does make sense. What I would dearly like to hear about is what are the constraints on money creation apart from inflation? Is there an influence from the global financial markets, for example? I look forward to further videos!
It should not be described as MMT... but MDT.... Modern Debt Theory.. They still lie within its title!!! And a professor has no business not pointing that out!!!
@@clementattlee6984 I guess currency value is the obvious way in which markets might express disapproval of running a high deficit although if the state is willing to endure some short term pain an improving economy would redress that in time.
@@legalfictionisfraud you seem to not under stand that a) one person/entity’s credit is another persons debt; b) fiat money has been a way of issuing credit/debt tokens for 5000 years. The only new bit is the state taking control of this. When central governments spend into the economy, they make what’s known as vertical or high powered money, the currency tokens are exchanged for real resources in the private economy, the resources flow to the state and the new currency tokens stays in private economy until such time as any of them are used to pay as tax to the central govt, at which time they cease to exist any longer. (they literally used to burn paper notes at US Post Offices received as tax receipts at US Post Offices in the form of tax receipts, so long as the payment of tax obligation is accounted for the currency tokens no longer serve a purpose, more can be issued by the central govt any time). Another form of money creation happens in private banks and is known as credit money, or horizontal or broad money. Private banks create currency when they issue a loan to anybody. They dont go searching in the bank vaults for cash or gold or anything else to issue a loan. The mark it up as per double entry account keeping as credit to themselves, your debt is their financial asset, sometimes they’ll even package that up with a bunch of other debt assets and sell that- hello GFC! - and mark it up the cash account they made for you to the load amount as their debt, since you’re ;likely to draw against it. it balances out. And you get a loan (cash account is an asset, loan contractual obligation is a debt instrument) and these two cancel each other out.
@@RichardBergson take a look at the short-position takers who took on the bank of Italy, prior to Euro - shorting the lira and betting that Italy would be forced to devalue the currency in the face of so many short traders on bonds. It was called the widow maker trade for a reason. The Italian Government understood they could continue to bury back their own bonds at whatever yield they desired it to be, short traders could never outgun the reserve bank who issue that currency they’re trading in. Warren Mosley bet against them and made his first fortune.. He went on to outline the main lines of MMT theory, not totally original in economic thought, but he wasn’t trained in economics, just finance, so he invented the understanding for himself. Impressive. Look at what the Bank of Japan has been doing for two decades with regard to setting the rate on ten year Bond trading, while the Govt fiscal position has been high for two decades and up to and above 200%to GDP for a decade.Just because you don’t understand something doesn’t mean it doesn’t make sense, just means it doesn’t make sense to you, and maybe you need to work harder to educate yourself rather than tell people MMT makes no sense. no credible economist today can raise objections to the MMT lens for macroeconomic analysis.
The barrier to full employment is not economic, it’s political. Business prefers a non-zero unemployment rate. It makes hiring easier and keeps wages lower. As long as there are lobby groups paid for by business, and politicians needing money to run for office, there will be unemployment.
💯💯 As Karl Marx said, "the reserve army of labour", aka the unemployed. Only really made full use of when the nation is at war, or something like that..
Full employment would require- - forcing those who do not need the income to still work - creating 'make work' jobs for those not capable of output worth the minimum wage. Not sure how society, or citizens, would benefit from this...
@DewiSant-o3y It is inherent in free movement of labour systems. And there are many sorts of unemployment. 1) Benefits are an acceptable level 2) Person cannot create value of at least minimum wage. 3) Has sufficient resources that current offers are not worth the effort 4) Past record does not encourage employers and many more 'Employment' ( engaged in economic activity to a level that results in the majority of income) is not, in itself, a certain good. 'Heaven' does not, I am sure, involve employment.
@@Tensquaremetreworkshop As I understand it, the unemployment number is the number of people who want a job but can’t get one. So, nobody would be forced to work in a system with a 0% unemployment rate.
Well said Richard. Saying MMT is hocus pocus implies MMT is a system we could move to if we wanted to. However MMT actually describes how the economy really works not some theoretical alternative. It's not a ponzi scheme, but a description of the way the economy actually functions now.
@@Tom-771 If its functional please explain the boom and bust cycles we have experienced all of my life? Please explain the wealth transfers from poor to rich? Also explain why where experiencing capital consumption! MMT is a fraudulent system, magic money tree! If that’s how the economy works why is it such a mess?
So what mechanism would be used to guarantee full employment then? The government says here is a job, just do it or what? Guarantee of full employment needs to a be very specific? What would the benchmark be to measure full employment in this context?
More people would work if training was provided and acute health issues were treated ( investment in uk business too)before becoming chronic. Modern governments prefer short term goals instead, which requires a stick to beat workers into submission, rather than long term strategies that would work, and create wellbeing.
Congratulations, you're the first person to convince me that there might actually be something to MMT. (And I've watched several videos on the subject). I didn't fully appreciate the implications of a government using a self-created fiat currency as opposed to using a fixed resource like gold as money. I particularly like the idea that taxation is better for controlling inflation than interest rates because it directly ties the amount of taxes people have to pay to government spending. If the government runs too big a deficit and inflation goes up then people will either have to pay more in taxes to "balance" (cancel out) government overspending or government will have to reduce the deficit. (And as you point out, low and stable interest rates are good for everybody). The only downside would be that tax rates and/or government spending would have to change as often as interest rates do now under such a system of inflation control. (I also don't understand why so many Leftists seem to think that MMT means that government can just spend as much as it wants without consequences when this is clearly not the case). I also like knowing that governments don't need to borrow from capital markets when they can just borrow from their own central banks instead. This is good because it means that governments can also pay 0% interest on their debt if they need to. Therefore the national debt can just go on increasing forever without causing any problems. The most important comment I can make about a jobs guarantee/full employment is that this will ONLY work if the wage that people get is commensurate with the real economic value their work produces. Paying people more than the new economic value their work creates would mean that value is being siphoned off from elsewhere in the economy (and from a more efficient economic use at that). So minimum wages would have to go and wages would have to be determined by market forces alone.
@@RobinHarris-nf4yv Realistically it's the asset price bubbles that are more of a problem. Tax on 'high-enders' needs to be high enough to stop them speculating up real estate and stocks, which ought to rise in value at about the same rate as CPI inflation, not massively outstrip it as they have done for many years. Reason being: Owners of assets expect (say) 8% yield on the book-price of assets, so if the book price increases faster than CPI, so does profit share of the total economy. Rich get richer, poor get poorer- simple. Also, it looks like inflation, but the standard remedy- using interest rates to crush consumer demand- has no effect on the real cause- because the real cause isn't demand, it's pure profiteering 'greedflation'.
@@marcusmoonstein242 your JG comment is a bit disingenuous and/or naive. how do we determine the value of someone’s labor? who determines what ten hours of brain surgery is wroth c.f. ten hours of driving a street sweeping vehicle or caring for your partner as they become senile in a care facility? or teaching your child to do art or walk with a disability? I ask this because one of the central defining myths in neoclassical economics is that we can a) reduce human values to an eequivalent money index values all the time in some kind of invisible and magical way that is somehow invisible but objectively true or accurate all the time. from here the Neoclassical economist assumes that markets are the perfect way to find that money index value, that supply and demand of goods and services are best mediated by prices, that money is a proxy for solving the complications of batter (Metal-theory) and thus has natural scarcity and competition for money lending will see money and resources flow to the most optimal areas of the economy. All of this is completely nonsense, read the book Steve keen is writing at the moment chapter by chapter on. Patreon for as little as A$2 a month or a bit more on Substack, or any of the academic papers, books and other resources that show how empty the neoclassical theoretical claims to reality are. Price theory alone is completely backwards to how forms really set to your original point, the value of labor, that is determined by how it is priced and that is determined by legislation and other institutional factors. There’s not correct value, only subjectively argued value. The big take away you need to get past your confusion is that the government effectively sets the minimum wage through their purchasing power for labor and goods requiring labor to produce and also their tax regime. The central government determine the value of labor in terms of what they are prepared to pay to remove resources and labour from the private economy into the public economy. a JG would be a much fairer and better way to set minium wage that what exists today, because the pantomime of Monetary Policy at the Reserve Bank pulling their overnight cash rate lever is that they attempt to make more people unemployed in a vain attempt to slow or reverse interest rate increases. that;s just cruel, why do the most marginally employed deserve to be made destitute just because the government can figure out that they can manage interest rates and the economy through fiscal powers and taxation powers way more effectively than the reserve bank can (and reserve banks around the world while maintains the pretence of neoclassical nonsense have been hinting that fiscal policy ways the only way out for the covidé economic disaster). The USA and UK came out of the GFC ten times faster post-covid and it did far more damage to the real economy than the GFC ever did.Because governments have finally woken up (again, the new deal politicians knew it) to the power of fiscal policy. now we dont even have a global gold standard so it frees the hand of governments even more, one of the several important reasons it was abandoned first by USA then nearly all nations.
@@marcusmoonstein242 paying interest on loans is just more currency creation, not a problem, but it’s also means the wealth is distributed to the wealthy, rather than spending directly into the economy at the grassroots roots with Universal Basic/Public Services ;like education services, health services, national parks and public gardens, legal aid for people caught up0 in the justice system, where money (and racial/gender privilege) buys justice every day of the week.Bill Mitchell calls Government Bonds Social Security for the Rich.
@@alastairleith8612 I'm really struggling to understand your argument. Let me see if I've got you correctly. You seem to say that free markets are a bad way of determining wages (especially minimum wages), and that a better way would be for the government to have a jobs guarantee. This government JG would guarantee anybody who asked a minimum wage government job. The specific minimum wage would be determined by whatever the government feels it needs to pay to clear the labor market and produce full employment. Since anybody could get one of these government jobs, the government wage would effectively become the national minimum wage because nobody would work for a private business that offered a lower wage than the government. Is this a fair summary of your argument?
@@marcusmoonstein242 not quite, you seemed to add some of your own thoughts into that. Firstly I'll provide some historical context: the commodification of human labour into labour markets for the convenience of employers was not something that just happened naturally. there's a lot of propaganda esp. in the "socialist fearing" USA suggesting it is natural sate of things that it be this way. its completely unnatural and very much organised by elites for centuries to have it this way. Labour markets were constructed through means of legislation so that they could exist. For e.g., movement between cities and towns by labourers was not even permitted in England until the desire to pull labour from the land to these new human powered factories of the early ind. rev. meant industry owners (classical capitalist era) changed the laws to allow it. they also enclosed the land labourers were living a free existence on feeding themselves as crofters and local workers. enclosure both privatised the commons and removed free people from the commons, not for any failure of the commons as is often alleged, but for the sole purpose of indenturing a great labour force in the industrial revolution and giving land in commons to aristocrats and the new aspiring bourgeoisie who wanted aristocratic lifestyles without the responsibilities of maintaining the lives of their subjects.
Resistance of MMT is motivated by keeping power in the hands of banks for the imposition of austerity. No politician (in office) in Britain is brave enough to embrace it.
Why does nobody ask the question? If the government is creating debt on everybody's behalf? Why don't we all just create the debt ourselves individually? be far more efficient no? I Promise to pay!!! The government then becomes the surety and administrator and book keeper? What's the problem?
@@legalfictionisfraudWe each have the right to issue IOUs. Allowing private commercial banks to issue their IOUs as the nation’s money supply is highly irresponsible and has led to where we are and can only get worse with time. The Bank of England Q1 Bulletin explains how money is now created. Private banks are way ahead in this game of power play and politics.
@@gordonwilson1631 Allow me to correct your post! We each have the right to issue IOUs. Allowing private commercial banks to issue their IOUs as the nation’s DEBT supply is highly irresponsible and has led to where we are and can only get worse with time. The Bank of England Q1 Bulletin explains how DEBT is now created. Private banks are way ahead in this game of power play and politics.
This such an important comment that it should be pinned. The current narrative around government spending is manufactured by the financial sector, to ensure their continued wealth and influence. It's not in their interest to educate the population a out how the monetary system actually works, because they won't profit if this happens. It's not a coincidence that Hank Paulson and Rishi Sunak worked for Goldman Sachs (a corporate investment bank). There's a revolving door between politics and the banking sector...
Thank you Richard….just what I’m needing in my ongoing understanding. I’m ok with a lot of it…but I’ll be listening to this again…and again I suspect to try to clarify it for me. So…following on from that….a bit about what is wrong with what the government’s economic processes as they are. Thank you again
The only problem I have with the abbreviation MMT is the last letter, T which stands for theory. Given that MMT is a description of factual (real world) monetary operations in a fiat currency economical system, MMT transcends the theory stage and should be abbreviated as MMP, for Modern Money Principles.
In science, "Theory" is the highest level of authority that can be assigned to a model of the real world. The theory of Relativity for example is one of the most heavily tested and proven models in modern science. An untested idea would be called a proposition or a postulate. "Theory" is as good as it gets.
It is exactly a theory, as a theory is about a precise description of a phenomenon and its mechanism People tend to understand the term theory as an "idea". They should learn how to discern
I am attracted to the concept of MMT but this video made no mention of the country's trade abroad. If the British government printed lots of money to fund high government borrowing wouldn't the exchange rate for foreign currencies fall and so the cost of exports wouild increase and the value of exports would decrease? Haven't we seen this in Turkey where the government resolutely resisted raising interst rates and the value of the Turkish lira plumetted? I can see how MMT could work well in a closed system but not in an international one... but I'd love to be convinced.
MMT assumes countries have full control over their currency. When in reality most of the newly created money comes from the private banking system, and since 1981 banks in the UK have no restraint on how much money they're allowed to create.
Indeed, but the privatisation of money creation is allowed because it benefits the financial elite, not because it is an economical necessity. The enormous economical development phase between 2000 and 2015 in the PRC was funded pretty much exclusively by the People's Banc of China. In fact, Japan did pretty much the same when the BoJ provided the funds to make Japan rise from its ashes after WW2 to become the second largest economy by 1980.
@@Mitjitsu when the central government spends into the economy in exchange for real resources (stuff or services) it;’s known in MMT as vertical money, others call it high powered money, when they spend that currency they issue it, seemingly from thin air but it’s actually from legislated authority so called “full faith and credit”. the vertical currency stays in the private economy, being exchanged variously all over the place bw parties until such time as it is used to meet someone’s or some businesses federal/national tax obligation at which time it is accounted for and then ceases to exist. Digitally wiped from existence, other than record keeping at the tax agency. Bank issued currency is known as credit-money (also known as horizontal or brad money). and it’s different to vertical money in that it’s only around so long as the loan remains unpaid. As the loan is repaid the credit money expansion gets contracted back to the same position, so its impact on the economy is quite different in some ways to vertical money. But yes an over expansion of private credit can put the world into a financial crisis and put the global banking system into melt down… it;’s happened more than once, the most recent being the GFC.
@@Mitjitsu MMT doesn’t assume anything, it observers certain realities, I assure you the credit-money you talk about, currency issuance in the private banking and derivatives instruments in the finance/shadow banking sector around bonds etc are well understood by MMT economists just as public spending being currency creation is understood. Both types of currency, vertical currency as it[‘s known by CGCB and credit-money by banks have a process that deletes them from existence too. MMT observers the nature of these creation and destruction processes and how they interact with the broader macroeconomy. Tax destroys vertical money and loan repayments retires credit-money, it’s all just accounting,double entry accounting at that.
The only real pragmatic meaning of a currency is what global purchasing power it has. Countries have very limited control over the purchasing power of their currency - if China does not want dollars, they stop buying them, and imports of Chinese goods cease and dollar collapses. MMT is based on two basic assumptions. A: assume that the currency is dollar. B: assume that there is infinite global demand for petrodollars ad infinitum. Without those assumptions MMT collapses. And meanwhile, IRL the dollar empire is collapsing.
I'm not an economist and I'm in no position to either agree with or criticise MMT but this was a very clear and useful introduction to a way of thinking about money that I hadn't heard of before. Thank you for posting.
Good video, and easy to understand the principles of MMT. What I would like to see is an explanation of how a country's trade balance impacts on issuing of currency. Clearly the UK imports more than it exports, so more currency (sterling) is flowing out of the country to pay for products/imports, than currency (foreign) flowing in. Some of those pounds sterling flow back to the country by foreign central banks buying UK government bonds, but how does that money get cancelled? i.e. through taxation? Its not clear.
Excellent video. I would love to show this to American voters. When over I would ask how long it had taken for them start day dreaming about something else. I'd try to explain to them that an understanding of this subject, and a hundred others, is needed to be an educated voter. We have to stop voting based on a vibe, and start based on an understanding of policies that actually affect their lives.
Great presentation Richard, and very positive in the comments. Question on Bonds: The private sector likes them but why is that a good reason to issue them? If I want secure storage for my valuables I have to pay for it- not the other way round. Steve Keen says "bond interest compensates the banks for running the payments system". I say " payments system costs should be transparent and charged to users to make them subject to competition").
Clear introduction to macro economice - thanks. I am still not clear on how MMT differs from Keynsian economics or on how it incorporates velocity of circulation.
A very good explanation of the theory: But It raises the question do the banks or the government create more money? Its appears to be a simplified theory for part of the economy
Depends if you have a fiat currency or not. In Europe it will be the European central bank that decides for the likes of France, Germany etc.Somewhere like the UK, my understanding is it's the government through the bank of England.
Most of the misunderstanding of MMT by critics is that they forget that governments and households are fundamentally different. Governments can create money. Households cannot. Most critics use the analogy of a household spending beyond its means to also claim that governments cannot run deficits because then nations would be in debt. But they cannot answer to whom that debt is owed to, since it is also that same government that prints the money which it owes. What is ironic here, is that people who believe that cryptocurrencies---like BTC and USDT---are better than US Dollars or fiat currency because BTC and USDT are not inflationary do not really understand that BTC and USDT are actually even more of a fiat money than the USD. BTC and USDT are themselves proof that fiat currencies do not need to be backed by commodities such as gold to be used as money.
I’ve two important questions I don’t understand after that (to me) rather challenging video: - was Gordon Brown correct in giving BoE independence over interest rates and controlling inflation? - can the present (now Labour) govt simply reduce the amount of interest it pays to BoE as some commentators claim?
Thank you for a very clear but none the less complicated explanation of MMT for an untrained mind like mine. How does MMT work in the Eurozone where there are theoretical restrictions on national deficits? ( The deficit limit was 3% at one stage. I don’t know what it is now). And when different countries in the Eurozone may have different economic policies depending on their political outlook? And what is the relationship between the Central Bank and individual countries since individual countries have no control of their Central Bank since it is a supra national entity?
Very informative. I have always been surprised that the supermarket allows me to take away some of their food, as long as I hand over this bit of paper my employer gave me. Cashless payment with a card is even more abstract.
Great summary. What does MMT have to say about a future economy where a significant portion of the population is permanently unemployed due to automation? Would it advocate for a government funded UBI?
@@travis1759 most MMT informed economists caution about a UNIVERSAL Basic Income because for one thing (of many) the universal part of it means it is likely to be hugely inflationary, rentier ca;italians already control the food supply for us all and rental accomodation for many people, prices are determined by the ability to pay and very single adult gets a minium wage that is liveable and sustainable to a healthy life, then what we’ve seen with property prices and rents will happen across every sector of the economy where businesses think they can raise prices to help sponge up some of that massive e injection of new currency. there’s all kinds of social contract issues with it, and our social order is already under strain and polarisation around ideas about the share of wealth and distribution of incomes. I can see a UBI being used to heighten inequality not restore equality, there’s not much empowerment in a system of Lords and Serfs. They tried a similar thing in the middle ages with the local magistrates setting the value of labour around cost of bread etc to feed a family. It backfired terribly and had to be abandoned. read more about it from the brilliant polymath chemist/economist Karl Polanyi in The Great Transformation, i asked ChatGTP two summerise here and you can read about the introduction and subsequent abandonment of the Poor Law here: chatgpt.com/share/67015ae1-c5c0-8006-b8bb-0ae77447f567
Spot on as far as it goes but a country like the Uk which has a persistent propensity to consume more than it consumes needs foreigners to buy pounds to balance the books. Here lies the problem of MMT. Insufficient demand for pounds by foreigners means pound depreciation means imported inflation.
Yes, the two most important things you need to know about Modern Monetary Theory are that it's not modern and not a theory. 🙄 So much more than a theory. Can we start calling it Evidence Based Economics instead? 🤔 Thank you for a particularly clear and thorough explanation. Everybody in the UK should be sending a link to this video to their MP.
It makes sense in a closed system but issues arise when one closed system trades with another. The Chinese system with 2 currencies is one option where one currency is asset backed with say gold.
Very helpful video. Thank you. But I think that these ideas would be even better communicated via animation. Mike Booth, who had done many of the ‘School of life’ films would be perfect.
The big problem with MMT is that its entire validation is that money is created to balance what is in the economy. Ie if you create more money than stuff to buy you create inflation. Not a massive problem but it relies on the people running the system to adhere to that. Where it will go wrong is that it relies on politicians to behave and not create money to prop up their failed policies. Chance of politicians to behave is zero. So MMT won’t work.
politicians in Australia and UK, Labor parties in particular - those same parties Tories always are telling us you can trust to run the economy - are already obsessed with achieving budget surpluses. so if such politicians who were always told by extreme neoliberals can be trusted to "run the economy" understood MMT and understood the need for deficit spending where is the evidence that they'd overspend to create hyper-inflation? apart from the fact that hyprerinflation is usually not associated with overspending by govts int eh first instance, thats a reaction. If you look at the always talked about the post-WWWI Weimar Republic, Venezuela and Mugabe's Zimbabwe in al three cases, it the sheer collapse of productive capacity in the economy that drove price escalation, Zimbabwe's Agricultural production fell off a cliff because he chased out most of the white farmers and killed or disappeared most of the skilled, indigenous farm-workers and gifted much of the farmland to higher ranking army veterans and cronies. Some MMT economists say the "natural rate of inflation" should be zero. Why do you assume deficit spending raises interest rates when there is so much evidence to show it can reduce inflation, as is the case today in USA under the Inflation Reduction Act putting billions into clean energy solutions and the like which will reduce the cost of power in USA and improve crumbling national infrastructure. If Biden or Harris introduced medicare for all, think of the cost saving to American business owners not having to run medical insurance schemes for their employees! If they waived high-ed fees and made university study free or extremely low-cost, think of all the extra income people would have to spend elsewhere in the economy. We need to governments to deficit spend into the economy not just to keep economies out of recessions, but to redirect economic activity towards climate change solutions which are not being deployed fast enough to save us, and to redirect away from elites who give zero shits about climate change; want as much war as possible; and control out economies and politics through finanicalisation of everything.
Please get your terminology right when it comes to this important issue. The guy even told you that it’s a debt based system. Only gold and silver is MONEY!
@@garryallison4716 clearly you have no idea what money is to say that only silver & gold are Money. You probably dont even understand how the gold Standard created the geopolitical tensions that resulted in WWI. You also dont understand why USA could no longer maintain a gold Standard.
@@garryallison4716 LOL, depends what you mean by reading books. You read Austrian economics books and believe that nonsense. even thought it's demonstrably wrong. MMT has the evidence of predictive power on its side, while Austrian and neoclassical economists have consistently failed to predict economic collapse, recessions and so on. The Federal Reserve didn't even see the GFC coming or know it was happening as the world banking and shadow banking system was melting down around them. Because NCE doesn't consider money and banking to be relevant to macroeconomics. Their assumptions about money and finance are why the didn't see the GFC as it was happening around them. There isn't enough silver and gold in the world to backstop the scale of global finance as a reserve currency, so apart from not understanding that money is always a debt/credit relationship and always has been, your proposed solution is a fantasy. Read Karl Polanyi about why the gold standard used by the European empire states directly created the geopolitical tensions that precipitated World War One. I've read more credible macroeconomics papers and book chapters than you've even heard of it would seem. MMT has its theoretical roots in some of the greatest work on century economics in the 20th century, names that mainstream economics has shunned for obvious reasons, the myths of orthodox economics are exposed. Names like Hyman Minsky, Wynn Godley and current economists like Bill Mitchell, (and non-academic co-founder of MMT Warren Mosler), Scott Fullwiler, Randal Wray, Stephanie Kelton, many others.
Richard what would be the correlation between MMT and Credit Rating could you please expand? Thanks in advance. My guess if we get a higher return than cost of capital then the debt ratio would be reduce (very simple view) . Hence, the rating would be increase.
Could this be why Rachel Reeves increased employer national insurance? 1) Directly decrease the private demand for labour. Also private companies might invest in productivity technology instead, which the UK needs. 2) So the government can then use builders for infrastructure and houses, and also employ more public sector workers.
If that's the case then she explained it poorly. The issue with taxation at this level is that it deflates the economy by forcing allocation with government and discourages external investment as well by telling the economy that aggregate demand will fall since people will have less money in their pockets to spend. If you really want to spur growth you need to improve demand and make investing easier, what she did was the total opposite.
I don't believe most criticism of MMT are about it's accuracy in describing fiat money systems of today, but rather about the sensibility of such a system, which I would argue is by far it's biggest struggle. If you're not ideologically aligned with big gov/nanny state management, it's really not a good way of handling people's medium of exchange.
Dear Richard, thank you for your explanation. Frankly not too difficult to understand. If I understand it, the order of any MMT approach is to reverse the order of things. Create the tax liability first, then a currency issued by the state, and a monopoly rule that the only way to meet the tax liability is to pay in the issued currency. My (very dry) liberal brain however, is still extremely cautious of "trust me I'm from the government", thinking. If the printer is no longer the boogie man, that it has been in the past, governments with a high time preference (democratically elected or not), may well become too tempted to hit the print button to excess. Governments are not historically known for their fiscal restraint when under pressure. Finally, I remain cautious of coercive monopolies, which MMT governments must be by definition. If they're elected they're answerable to the people, but in the MMT world there is no "outside", there is only the state hands on the levers. If it does go wrong it will do so calamitously.
There is no point being wary of that. It already exists and has existed in most countries for decades. Even if your country's central bank has nominal independence, in practice government has more than enough options to make them do what is needed at any time. So any sovereign state with own currency anywhere in the world already has full control over print button even if officially they do not exercise it
Thanks Richard - you say that “this is the way that central banks agree that money works within the economy” but I’ve yet to find any reference to government created money in Bank of England literature. All it refers to is the creation by commercial banks when lending. Am I missing something?
The government creates money by creating bonds and the Bank of England buys them. At about 2012 the Bank of England issued a paper, that a central bank always creates money, when someone demands money. So the creation of bonds is how money is created. The rest is an automatism. And last but not least: the state creates the rules by which all those organisations operate. And since money and debt are the same thing, the money creation starts even earlier: by demanding a tax. This indebts the citizens, which forces them to create a sufficient supply, which will be demanded by the state. Money is not a token or a thing but a bookkeeping system of debt.
Something I don’t understand is why was the UK bailed out by the IMF in the 1970’s after allegedly running out of money? MMT suggests that this shouldn’t happen.
@@SteveHannah-h5w I believe Richard addressed this in a previous video. My recollection is that the UK did not, in fact, need to seek a bail out from the IMF. Or at least it would not have needed to do so if it had understood MMT!
(~5:30-6:40) It's not clear what 'Inflation' means in terms of money/currency availability such that taxation is the answer to the problem. Is it a micro/macro/whole system problem? In particular, does (modern example) the hoarding of money by non-domiciled 'rich' individuals who aren't paying tax help cause the very 'inflation' that their zero taxation won't solve? I.e. money being taken out of reach of the very government that's meant to control it (hence folks wanting a return to asset based money that is traded)
I mentioned this on your previous MMT piece. I'd be interested to hear your analysis on how MMT applies to wealth taxes. Wealth taxes would only deflate assets. Therefore, funding government spending with wealth taxes is inflationary in regard to consumer prices (?)
Wealth taxes apply to the sort of assets that make one extremely wealthy, not commodities or consumer products. Large amounts of land for example, hedge funds, country estates with tenant farmers, valuable works of art (worth millions by themselves). The sorts of things that 99% of the population simply don't have. Not a 3 bedroomed terraced house in Lincoln (a commodity) nor a mercedes e class (a consumer good).
My point exactly. Coverting assets to money spent by the government increases money in the consumer economy, hence inflationary pressure on consumer goods.
What needs to be realised is that government does most spending into the consumer economy, not on assets. Therefore (MMT says) taxes need to target the consumer economy to negate the effect of government spending, NOT target assets.
Wealth taxes have other benefits (redistribution) but not the principal MMT benefit of reducing inflation, not consumer inflation anyway, which is what most people are concerned with.
Which changes does the UK government need to fully implement Modern Monetary Theory (MMT)? Fiscal control is necessary to manage inflation, but can the UK government react or respond quickly enough? It seems that more frequent budget adjustments would be necessary, as acting only once or twice a year would be insufficient.
What if there has been some secret use of money? E.g. corruption or damaging use of Bank Of England money? My question is, is it possibly that deals have been done, in secret, that affect UK finnancial stability? Do you or anyone know the whole truth about what is going on between government and the BOE?😊
Interesting video. Any chance you could compare and contrast USA and Germany monetary policies? The former has an ever-growing budget deficit, the latter has a constitutionally binding mandate for balanced budgets, and these appear to be polar opposites. Also of course the former has a unique privilege as the preferred currency of international exchange, and the latter memories of hyperinflation. Views?
I would like to ask you Richard if this works the same in the US, since the Federal Reserve is technically independent of the government and a public/private entity.
@@michaelhurley3171 It is the same in the US and any other country with a fiat currency - that is not pegged against gold or another currency or commodity.
As well as governments creating money, don't banks also create money when they give a loan? Is that money/debt also cancelled by taxation or does the government have to cancel it by interest rates?
@@mikenewey3949 You are correct about retail banks creating money when making loans (under licence from the central bank). I believe this money is cancelled by taxation and/or when the loan is repaid by the borrower.
@mikenewey3949 Governments, certainly UK and USA, do not create the vast majority of money. Most money is created by private banks when they make loans. For a clear explanation, seek out the Werner Economics video on the subject. I'm not entirely sure who actually issues new notes and coin currency, maybe the central bank, but it only represents about 5% of the total money supply. The debt is cancelled out when the borrower pays back the loan, and the bank, of course, captures the interest for their own profit after covering the small cost of administering the loan. What an amazing privilege the banks are given, especially if they get bailed out when they make imprudent loans. Interest rates are said to control spending, though there is no empirical proof they do any such thing. Their main purpose is to encourage people to purchase the government debt in the form of gilts and to prevent the sovereign currency from devaluation. They also generate the profit to oil the machinery of the banking system. The global monetary system is based on debt, and providing there is always a demand for money, the system will keep running. The national debt will never be repaid and will almost certainly keep increasing. It is nothing more than a legalised Ponzi scheme, but people are powerless to do anything to change it, and the elite have no desire to do so because they get more wealthy precisely because of it.
Great talk and explanation. Just one thing I disagree with - neither the government nor the Bank of England create most “money”, most of it is created by banks as they lend money.
Thank you for confirming to people that creating too much money causes inflation. Too many people believe inflation is caused by prices rising, when in fact that is just a consequence of inflation devaluing the currency. Using taxation to control inflation seems to have been implemented in a very unfair way, and what happens if all, or much, of the credits issued are called in by the lenders domestic and foreign? Is this when taxation shoots to the moon as per the 1960s?
@@Vroomfondle1066 Inflation by definition refers to inflating something, in this case the volume of money, nothing else. If you are talking about prices rises, they nearly always rise as a consequence of inflation, sometimes for other reasons such as a temporary supply shortage for a specific thing.
@@legalfictionisfraud I've only done that because Richard was using the word "money" and sometimes people get confused otherwise. But, you are correct, it is a fiat currency, a credit note, a promissory note .. of nothing. Money is specie.
My understanding is that MMT developed as an idea in the mid 90s and was perhaps adopted by the UK 20-25 years ago. If this is true, on the face of it, things have not gone well.
You have not understood that MMT simply describes how the economy actually works when a government, like the UK or the US, has its own currency. It is not an idea to be debated, or experimented with. It is a fact that needs acknowledgement by those in charge of our economy. It makes a nonsense of the claim that there's no money, that we have maxed out the credit card, or that we need fiscal rules to balance the budget. All of those ideas are political gambits to give the government a rationale for austerity. And why do they do that? Because they are in hock to the city, the wealthy, and the plutocrats, who always benefit from austerity.
@@helenheenan3447 Your comment is rather patronising, MMT is one way an economy with a fiat currency can work, and is easily abused as shown by the deep financial doo-doo the UK and other countries are in. Of course MMT should be debated, all theories and ideas should.
I don't think so. Money is a bookkeeping system of debt. If you don't require the debtor to settle the debt, debt is no debt at all. The government creates debt and debtors by demanding a tax. So the debt does already exist before the money is created and spent. This construct would not work without really collecting the money later. The citizens now owe to the state to accept the money the state spends and to produce and sell for it to the state. Without collecting the money, they just could ignore the state. Only thinking in terms of quantities fails to understand what money is all about. Since money is debt and since it also origins in private debt, we are talking about the plans of the debtors and the plans of the savers and the timespans of their plans. Both must match each other. This is far more complex than thinking only in quantities.
And what happens to the idea of a government seeking full employment when, very soon, if not already, such a thing will not be possible with the growing application/s of AI? Does MMT have any theories about how best to control the money supply going forward with AI?
Do crypto-currencies have potential to interfere with this due to being "outside the loop" of government control, or are they irrelevant since they are only worth something if someone will trade you pounds (or whatever) for them? I'm guessing that the tax dodging possibilities could have some impact.
Great video. Two questions arise for me: 1/ based simply on this thesis, what went wrong with the Liz Truss approach? Logic please, not political spin… 2/ why then does the current government simply not invest more in the myriad of infrastructural projects the country desperately needs to move it forward?
The government is a terrible decision maker. There are no sound criteria for infrastructure investment. Truss proposed the wrong sort of tax cuts and capped it by failing to understand the benefits even they would have brought.
@@Vroomfondle1066He's a regular here. A bit like the drunken bore who's always droning on about something irrelevant when the adults in the room are talking.
@@RichardJMurphy Yanis Varoufakis still disagrees and he knows a thing or two about these matters. You know the ex-Greek Finance Minister? Who to believe?
It’s the experiment currently being carried out in almost all developed countries . The recent hiccups in England and France are a bit worrisome. It will work until it doesn’t .
Thanks Richard, smashing explanation. One issue tho. During the course of your videos It appears to be accepted that creating money from nothing (and I'm not doubting that principle) is a valuable tool which it undoubtedly is, but is also to be avoided as it leads directly to inflation. Surely it cant be both? I'm having a difficulty getting my head round this.
My understanding is that additional money can be created without being inflationary if there is spare productive capacity in the economy (eg - unemployed people who are willing and able to work). Once full productive capacity is reached, additional new money will tend to be inflationary. However, there are other drivers of inflation such as international oil and commodity prices, trade tariffs etc.
@@Goldmangun I don't understand that at all? The use of the word unemployed is being used to define something that seems to mean different things to different people? (eg - unemployed people who are willing and able to work) does not take into account the following dynamics... Willing and able to work does not mean work that will PAY? or the specific skills required to obtain work that will PAY?, or Productive work that will PAY? The age of the unemployed who are willing and able work but cant due do a myriad of factors, region, skills, circumstance, ect, ect.. In reality, all these terms people use to justify how the economy is working is just laterally fantasy.........
@@Goldmangun ". . . .additional new money will tend to be inflationary." BUT WHY! I keep hearing time and time again that under certain circumstances, creating new money will lead unquestionable and directly to inflation. But nobody seems to be able to explain exactly why. The best attempt I've seen so far is that if you TELL people there's a risk of inflation, they behave differently. But that cant be it, can it?
@@andielines the reason for the confusion is the terms being used... Inflation is the government CREATING new DEBT!!! NOT printing more money!!!!!! That is total LIE!!!!! When the government CREATES new debt, that causes inflation... Not prices to RISE!!!!! Inflation is DEVLAUING the debt based currency! We all use a debt based currency... and as a result, taxs need to rise!!! BUT HOW CAN YOU PAY WITH DEBT THAT IS BEING DEVALUED? Who does that help? IT DOESNT HELP YOU, BUT IT HELPS THE GOVERNMENT. THE COST OF DEBT DOES NOT DECREASE IT INCREASES FOR US?
@@andielines the reason for the confusion is the terms being used... Inflation is the government CREATING new DEBT!!! NOT printing more money!!!!!! That is total LIE!!!!! When the government CREATES new debt, that causes inflation... Not prices to RISE!!!!! Inflation is DEVLAUING the debt based currency! We all use a debt based currency... and as a result, tax's need to rise!!! BUT HOW CAN YOU PAY WITH DEBT THAT IS BEING DEVALUED? Who does that help? IT DOESNT HELP YOU, BUT IT HELPS THE GOVERNMENT. THE COST OF DEBT DOES NOT DECREASE IT INCREASES FOR US?
So under MMT what is the need or justification to increase internet rates? Why not just have them low the whole time? What is the role of interest rates at all?
To keep the old duffers happy as they have been brain washed all their lives into thinking they get paid with MONEY not debt, and they expect to earn interest on their hard earned money/savings... Save a pound and the pennies will look after themselves?
So under MMT the more the government borrows from its central bank the more it has to tax the population to stop inflation, meaning its citizens either have less money from devalued currency if they dont pay enough tax or they lose money through taxation ?
@Moving2Winyou cannot slow inflation this way. The money, the gov spends, is the income of somebody. If with gov spending all resources are in use, when those, who got the money start spending the income, you will have inflation. Money does not vanish after being spent. What limits inflation in this case is demanding a tax. So the income generated this way into the private sector will be planned by the private sector for paying the tax but not for spending.
In our current system though government deficits do not create money because gov debt is issued. In a system where debt wasn’t issued we would create a system where some money is created without debt. This would undermine the value of money, turning money from a gold standard to a debt standard to a standard based solely on trust in the gov to tax and control inflation.
Hi Richard . Since most money is created in the form of debt by high st banks, why is it that the government do not need to be more in control of that lending ? Thanks
@@RichardJMurphy Thanks for the reply . It doesn’t seem as hands on as one might presume necessary since this is 90 something percent of money created. This leaves the government/BofE with very little control over the amount of money spent on mortgages versus goods , and therefor demand, apart from the blunt tool of interest rates which is a little like closing the gate after the horse. I’m just a housewife so sorry if my questions are a bit stupid. If anyone else can shed light please reply. I sound like I’m arguing for CBDC. LOL
@@SarahWalker-Smith It has not been 90% since before 2008. Now it is 60% and vastly more regulated. Your claim is very out of date, like most made re money.
@@RichardJMurphy Richard... I invite you to correct me on the following? They create DEBT under licence from the BOE.. We are using a DEBT based currency are we not? I am not being pedantic here... It is impossible for the BOE to create money.... They create DEBT (Promises to pay)
I agree that heterodox pundits may confuse MMT for (failing) incumbent politics. A dialectic is that incumbent politics refuse to let MMT reveal policies’ practical outcomes or more importantly - the possible economic agency of government. So, we’re back to how fiscal arguments go in our parliaments, our “non-government national bank” monetary policy, and how media doesn’t help us at all. I.e. by not putting MMT to work (!) for understanding and describing what already happens.
My sense is that printing money is somewhat similar to borrowing money: You can do it to fund productive investments. Or to tide the country over during a temporary crisis. But if you try and use it to patch fundamental holes in the economy, you'll pay for it with inflation.
Your earlier video on obsession with inflation appeared to downplay inflation. It would be better to add some of this context to that earlier video. However, this video downplays the role of private debt which also creates money. Taxation does not easily stop high inflation of asset prices which are inversely linked to interest rates. High tax on trade can drive people towards holding assets for capital gain instead which delays tax and increases asset prices. Interest rates do play a crucial role. 5% and 0.25% both seem utterly crazy.
A good question. The BoE is following neoliberal economic policies, as is Rachel Reeves and all Tory Chancellors and Prime Ministers back to Margaret Thatcher. It is a failed policy, but does make a lot of wealthy people even richer.
Interest rates are the cost of capital, so if that goes up so does cost of private borrowing, so demand drops off and in turn price increases ie inflation. Costly mortgages brings a decrease in housing demand and prices.
@@nickbarton3191 Allow me to interject? Interest rates are the cost of DEBT, not capital? So if that goes up so does the cost of PUBLIC DEBT, so demand drops off, government instructs the Bank Of England to create (Not Print) more debt which causes inflation, eroding the value of government DEBT and our DEBT based currency that you depend on to survive. The government then taxes even more...They call this austerity, but really it is called trimming the heard, putting people into penury and poverty because they can? All because of climate change? There is no such thing as private capital, just privately held DEBT
Love the movie "Seabiscuit" Charles Howard, at his job says "They ought to make a better spoke" and his boss says "Yeah, then what would you do" It then turns to Charles and his son bantering about the future. What are parents saying to their children now? They after all are the future.
I would suspect that Magic Money Tree is, in fact, a not-so-veiled slam at MMT. I doubt very much that it’s a coincidence, even if there is the phrase “money doesn’t grow on trees.”
@richard j murphy The job gaurantee (and i wish it had another name) IS core to the theory. It replace a Phillips Curve NAIRU construction of an unemployment buffer. And it helps set the minimum living wage within the economy and would likely replace minimum wage legislatin limits to private sector employment. Bill Mitchell at least, is emphatic about this. Mosler et al less so.
Good question, SS. All of those countries forfeited their sovereign currencies when they joined the EU, including Greece. Big mistake, in my opinion. In a nutshell, MMT does not really apply to them anymore. I hope that makes sense.
Central Bank is _not_ the only source of new money creation; all commercial banks create new money when they give out new loans. MMT completely ignores the role of commercial banks in new money creation. Interest rates play a key role in controlling inflation because they impact demand for new loans by private parties and hence new money creation by commercial banks.
For MMT to work as described and as the theory posits requires the government to create at least 90% of the fiat currency in circulation however private banks effectively generate 90% of fiat money through loans ie debt on which they charge interest. Such money then disappears when the loan is repaid. From a utility point of view it makes little difference who creates the money but from an adequate control perspective it is vital that money creation should be in the hands of government but historical vested interests will no doubt continue to block that.
Interesting explanation of MMT but it still sounds like a system that can be made to work in theory and not in the real world. Politicians have an incentive to overspend (borrow from central bank) while minimizing tax levels. This creates conditions for prolonged higher levels of inflation. The public will be unhappy with high levels of taxation coupled with high inflation and low economic growth. Just look at the 1970s in the West. Money creation in this way has lead to asset prices booming due to the Cantillion effect and helps drive inequality. It also creates an over financialised economy with less emphasis of the creation of goods & services in the "real economy".
The government can always repay it's debts, but what isn't guaranteed is the value of currency when the repayment is made. Many times, in many countries, the safety of "saving" with a treasury/government has had a high cost, when the currency became worth very little. Hopefully that will never happen in the UK 🤞
@@Vroomfondle1066 Historically, many public sector investments seem to have been poor value for money or catastrophes. They may have been started with the best of intentions. The government is very excellent at spending money though.
Question without an agenda: In 2022 inflation in the US got up to around 9%. Would raising taxes alone in 2022 have been sufficient to reduce inflation? The Fed didn't really need to do anything? Inflation at that time was largely due to supply chain disruptions. How would raising taxes have addressed supply imbalances? (Let's disregard, for the sake of argument, the almost certain massive political blowback that would have occurred had the government raised taxes in 2022.)
Is Rachel Reeves an advocate of MMT? I suspect not. Labour's fiscal policy includes a requirement to reduce UK debt by their fifth year in government. Won't this happen automatically with quantitative tightening regardless of whatever else they are likely to do?
There’s a constant battle over long time periods about creating a country’s money supply. The private central bank and private commercial model dominates for now, from the US Federal Reserve Act of 23rd December 1913. I know The Bank of England is State owned but it is made to run along similar lines as the domineering FED. This is the Crime of the Centuries.
Central banks are stuffed to the gills with former private-sector bankers who see the CB as a facilitator for private banking rather than as an arm of the state. Basically, highly paid traitors.
Yes MMT describes a lot of econ things, that debt doesn't have to be repaid and that over time more debt has to be created to increase the money supply. But the MMTers always skip over what happens when small countries go crazy printing money. Yes that would be hard of a country like the US but not so hard for the UK or Canada which are trading nations. MMT has happened in the US for decades , huge spending on war and defense while at the same time tax cuts or low taxes. The question is how far can it go. Can gov't spending be limitless? MMT states that when you have inflation then you reduce the money in circulation by taxes or reducing spending. Can or would any democratic country do that? What we have seen is the opposite. High inflation people are suffering so lower consumption taxes, carbon taxes, boost benefits to seniors etc. Interest rates are the only policy option left.
I watched an Australian program on TH-cam the other day in which Mervyn King (former BOE Governor) was being interviewed and the interviewer was quite scathing about MMT. King's response was that there are two problems with MMT. Firstly, he said it is not 'modern' (which I took to mean that it has always worked that way) and secondly it is not a 'theory' (which I took to mean that it was not a theory in the sense of hunch or a guess waiting to be proven). It appeared to go completely over the head of the interviewer who only heard what he wanted to hear and 'Merv the Swerve', as he was sometimes called when Governor, cleverly called glossed over it.
The definition of "money" is a matter of political ideology, at least for those who insist on defining money as A) Debt and/or B) Means of taxation. In common sense meaning and practice we have no ideological blinders against a means of exchange, a distributed information network that informs participants about supply and demand, about needs and how to satisfy those, "money". In that common sense synergetic meaning, money is also called a market platform. MMT is indeed just a political manifestation of neoliberal monetarism of Central bank tyranny of monopoly money aimed to prevent fair competition between market platforms, which is absolute necessity for an even playing field with self-correcting dynamics. What makes MMT "speshul" is that it can only work for a central bank fiat that does not need to care about trade imbalance with other currencies, but has access to global market of goods and services by just printing more numbers - and backing those numbers with biggest meanest army which the central bank tyranny regurarly uses to murder and maim millions of people around the globe. Without such enforcement of a MMT, your fiat currencly loses quickly it's purchasing power on the global market, and unless the real economy of a MMT nation is self-sufficient, the people go hungry.
Thank you, Richard, for such a clear description of MMT. I'm not an economist or ever studied economics but this does make sense. What I would dearly like to hear about is what are the constraints on money creation apart from inflation? Is there an influence from the global financial markets, for example? I look forward to further videos!
It should not be described as MMT... but MDT.... Modern Debt Theory.. They still lie within its title!!! And a professor has no business not pointing that out!!!
@@clementattlee6984 I guess currency value is the obvious way in which markets might express disapproval of running a high deficit although if the state is willing to endure some short term pain an improving economy would redress that in time.
@@RobinHarris-nf4yv That was my understanding, too.
@@legalfictionisfraud you seem to not under stand that a) one person/entity’s credit is another persons debt; b) fiat money has been a way of issuing credit/debt tokens for 5000 years. The only new bit is the state taking control of this. When central governments spend into the economy, they make what’s known as vertical or high powered money, the currency tokens are exchanged for real resources in the private economy, the resources flow to the state and the new currency tokens stays in private economy until such time as any of them are used to pay as tax to the central govt, at which time they cease to exist any longer. (they literally used to burn paper notes at US Post Offices received as tax receipts at US Post Offices in the form of tax receipts, so long as the payment of tax obligation is accounted for the currency tokens no longer serve a purpose, more can be issued by the central govt any time). Another form of money creation happens in private banks and is known as credit money, or horizontal or broad money. Private banks create currency when they issue a loan to anybody. They dont go searching in the bank vaults for cash or gold or anything else to issue a loan. The mark it up as per double entry account keeping as credit to themselves, your debt is their financial asset, sometimes they’ll even package that up with a bunch of other debt assets and sell that- hello GFC! - and mark it up the cash account they made for you to the load amount as their debt, since you’re ;likely to draw against it. it balances out. And you get a loan (cash account is an asset, loan contractual obligation is a debt instrument) and these two cancel each other out.
@@RichardBergson take a look at the short-position takers who took on the bank of Italy, prior to Euro - shorting the lira and betting that Italy would be forced to devalue the currency in the face of so many short traders on bonds. It was called the widow maker trade for a reason. The Italian Government understood they could continue to bury back their own bonds at whatever yield they desired it to be, short traders could never outgun the reserve bank who issue that currency they’re trading in. Warren Mosley bet against them and made his first fortune.. He went on to outline the main lines of MMT theory, not totally original in economic thought, but he wasn’t trained in economics, just finance, so he invented the understanding for himself. Impressive.
Look at what the Bank of Japan has been doing for two decades with regard to setting the rate on ten year Bond trading, while the Govt fiscal position has been high for two decades and up to and above 200%to GDP for a decade.Just because you don’t understand something doesn’t mean it doesn’t make sense, just means it doesn’t make sense to you, and maybe you need to work harder to educate yourself rather than tell people MMT makes no sense. no credible economist today can raise objections to the MMT lens for macroeconomic analysis.
The barrier to full employment is not economic, it’s political. Business prefers a non-zero unemployment rate. It makes hiring easier and keeps wages lower. As long as there are lobby groups paid for by business, and politicians needing money to run for office, there will be unemployment.
💯💯 As Karl Marx said, "the reserve army of labour", aka the unemployed. Only really made full use of when the nation is at war, or something like that..
Full employment would require-
- forcing those who do not need the income to still work
- creating 'make work' jobs for those not capable of output worth the minimum wage.
Not sure how society, or citizens, would benefit from this...
@@PhilipMatthewsPAEACP Bruiting clichés again?
@DewiSant-o3y It is inherent in free movement of labour systems. And there are many sorts of unemployment.
1) Benefits are an acceptable level
2) Person cannot create value of at least minimum wage.
3) Has sufficient resources that current offers are not worth the effort
4) Past record does not encourage employers
and many more
'Employment' ( engaged in economic activity to a level that results in the majority of income) is not, in itself, a certain good. 'Heaven' does not, I am sure, involve employment.
@@Tensquaremetreworkshop As I understand it, the unemployment number is the number of people who want a job but can’t get one. So, nobody would be forced to work in a system with a 0% unemployment rate.
Well said Richard. Saying MMT is hocus pocus implies MMT is a system we could move to if we wanted to. However MMT actually describes how the economy really works not some theoretical alternative. It's not a ponzi scheme, but a description of the way the economy actually functions now.
@@Tom-771 If its functional please explain the boom and bust cycles we have experienced all of my life? Please explain the wealth transfers from poor to rich? Also explain why where experiencing capital consumption! MMT is a fraudulent system, magic money tree! If that’s how the economy works why is it such a mess?
this doesn't work in the EU. We also have the "fiscal compact" limiting choices
@@Alberto-k6tWell most of the EU has one single currency, doesn't it?
So what mechanism would be used to guarantee full employment then? The government says here is a job, just do it or what? Guarantee of full employment needs to a be very specific? What would the benchmark be to measure full employment in this context?
Is that the Magic Quantitative Money Easing Tree?
I really like this summary explaining in 20 minutes what MMT is, what it isn't, what are its key assumptions and implications.
More people would work if training was provided and acute health issues were treated ( investment in uk business too)before becoming chronic.
Modern governments prefer short term goals instead, which requires a stick to beat workers into submission, rather than long term strategies that would work, and create wellbeing.
No they wouldn’t
Excellent video. Always heard about mmt but never really understood it till now.
Congratulations, you're the first person to convince me that there might actually be something to MMT. (And I've watched several videos on the subject). I didn't fully appreciate the implications of a government using a self-created fiat currency as opposed to using a fixed resource like gold as money.
I particularly like the idea that taxation is better for controlling inflation than interest rates because it directly ties the amount of taxes people have to pay to government spending. If the government runs too big a deficit and inflation goes up then people will either have to pay more in taxes to "balance" (cancel out) government overspending or government will have to reduce the deficit. (And as you point out, low and stable interest rates are good for everybody).
The only downside would be that tax rates and/or government spending would have to change as often as interest rates do now under such a system of inflation control. (I also don't understand why so many Leftists seem to think that MMT means that government can just spend as much as it wants without consequences when this is clearly not the case).
I also like knowing that governments don't need to borrow from capital markets when they can just borrow from their own central banks instead. This is good because it means that governments can also pay 0% interest on their debt if they need to. Therefore the national debt can just go on increasing forever without causing any problems.
The most important comment I can make about a jobs guarantee/full employment is that this will ONLY work if the wage that people get is commensurate with the real economic value their work produces. Paying people more than the new economic value their work creates would mean that value is being siphoned off from elsewhere in the economy (and from a more efficient economic use at that). So minimum wages would have to go and wages would have to be determined by market forces alone.
@@RobinHarris-nf4yv Realistically it's the asset price bubbles that are more of a problem. Tax on 'high-enders' needs to be high enough to stop them speculating up real estate and stocks, which ought to rise in value at about the same rate as CPI inflation, not massively outstrip it as they have done for many years. Reason being: Owners of assets expect (say) 8% yield on the book-price of assets, so if the book price increases faster than CPI, so does profit share of the total economy. Rich get richer, poor get poorer- simple. Also, it looks like inflation, but the standard remedy- using interest rates to crush consumer demand- has no effect on the real cause- because the real cause isn't demand, it's pure profiteering 'greedflation'.
@@marcusmoonstein242 your JG comment is a bit disingenuous and/or naive. how do we determine the value of someone’s labor? who determines what ten hours of brain surgery is wroth c.f. ten hours of driving a street sweeping vehicle or caring for your partner as they become senile in a care facility? or teaching your child to do art or walk with a disability? I ask this because one of the central defining myths in neoclassical economics is that we can a) reduce human values to an eequivalent money index values all the time in some kind of invisible and magical way that is somehow invisible but objectively true or accurate all the time. from here the Neoclassical economist assumes that markets are the perfect way to find that money index value, that supply and demand of goods and services are best mediated by prices, that money is a proxy for solving the complications of batter (Metal-theory) and thus has natural scarcity and competition for money lending will see money and resources flow to the most optimal areas of the economy. All of this is completely nonsense, read the book Steve keen is writing at the moment chapter by chapter on. Patreon for as little as A$2 a month or a bit more on Substack, or any of the academic papers, books and other resources that show how empty the neoclassical theoretical claims to reality are. Price theory alone is completely backwards to how forms really set to your original point, the value of labor, that is determined by how it is priced and that is determined by legislation and other institutional factors. There’s not correct value, only subjectively argued value. The big take away you need to get past your confusion is that the government effectively sets the minimum wage through their purchasing power for labor and goods requiring labor to produce and also their tax regime. The central government determine the value of labor in terms of what they are prepared to pay to remove resources and labour from the private economy into the public economy. a JG would be a much fairer and better way to set minium wage that what exists today, because the pantomime of Monetary Policy at the Reserve Bank pulling their overnight cash rate lever is that they attempt to make more people unemployed in a vain attempt to slow or reverse interest rate increases. that;s just cruel, why do the most marginally employed deserve to be made destitute just because the government can figure out that they can manage interest rates and the economy through fiscal powers and taxation powers way more effectively than the reserve bank can (and reserve banks around the world while maintains the pretence of neoclassical nonsense have been hinting that fiscal policy ways the only way out for the covidé economic disaster). The USA and UK came out of the GFC ten times faster post-covid and it did far more damage to the real economy than the GFC ever did.Because governments have finally woken up (again, the new deal politicians knew it) to the power of fiscal policy. now we dont even have a global gold standard so it frees the hand of governments even more, one of the several important reasons it was abandoned first by USA then nearly all nations.
@@marcusmoonstein242 paying interest on loans is just more currency creation, not a problem, but it’s also means the wealth is distributed to the wealthy, rather than spending directly into the economy at the grassroots roots with Universal Basic/Public Services ;like education services, health services, national parks and public gardens, legal aid for people caught up0 in the justice system, where money (and racial/gender privilege) buys justice every day of the week.Bill Mitchell calls Government Bonds Social Security for the Rich.
@@alastairleith8612 I'm really struggling to understand your argument. Let me see if I've got you correctly.
You seem to say that free markets are a bad way of determining wages (especially minimum wages), and that a better way would be for the government to have a jobs guarantee. This government JG would guarantee anybody who asked a minimum wage government job. The specific minimum wage would be determined by whatever the government feels it needs to pay to clear the labor market and produce full employment.
Since anybody could get one of these government jobs, the government wage would effectively become the national minimum wage because nobody would work for a private business that offered a lower wage than the government.
Is this a fair summary of your argument?
@@marcusmoonstein242 not quite, you seemed to add some of your own thoughts into that.
Firstly I'll provide some historical context: the commodification of human labour into labour markets for the convenience of employers was not something that just happened naturally. there's a lot of propaganda esp. in the "socialist fearing" USA suggesting it is natural sate of things that it be this way. its completely unnatural and very much organised by elites for centuries to have it this way. Labour markets were constructed through means of legislation so that they could exist. For e.g., movement between cities and towns by labourers was not even permitted in England until the desire to pull labour from the land to these new human powered factories of the early ind. rev. meant industry owners (classical capitalist era) changed the laws to allow it. they also enclosed the land labourers were living a free existence on feeding themselves as crofters and local workers. enclosure both privatised the commons and removed free people from the commons, not for any failure of the commons as is often alleged, but for the sole purpose of indenturing a great labour force in the industrial revolution and giving land in commons to aristocrats and the new aspiring bourgeoisie who wanted aristocratic lifestyles without the responsibilities of maintaining the lives of their subjects.
Thanks for a clear and concise description of the workings of MMT.
Resistance of MMT is motivated by keeping power in the hands of banks for the imposition of austerity. No politician (in office) in Britain is brave enough to embrace it.
Yes, but also by the rich elites that ride the gravy train of the private loan business.
Why does nobody ask the question? If the government is creating debt on everybody's behalf? Why don't we all just create the debt ourselves individually? be far more efficient no? I Promise to pay!!! The government then becomes the surety and administrator and book keeper? What's the problem?
@@legalfictionisfraudWe each have the right to issue IOUs.
Allowing private commercial banks to issue their IOUs as the nation’s money supply is highly irresponsible and has led to where we are and can only get worse with time.
The Bank of England Q1 Bulletin explains how money is now created.
Private banks are way ahead in this game of power play and politics.
@@gordonwilson1631 Allow me to correct your post! We each have the right to issue IOUs. Allowing private commercial banks to issue their IOUs as the nation’s DEBT supply is highly irresponsible and has led to where we are and can only get worse with time. The Bank of England Q1 Bulletin explains how DEBT is now created.
Private banks are way ahead in this game of power play and politics.
This such an important comment that it should be pinned.
The current narrative around government spending is manufactured by the financial sector, to ensure their continued wealth and influence.
It's not in their interest to educate the population a out how the monetary system actually works, because they won't profit if this happens.
It's not a coincidence that Hank Paulson and Rishi Sunak worked for Goldman Sachs (a corporate investment bank). There's a revolving door between politics and the banking sector...
I like this channel. He's a good teacher. I can't help think of how much he sounds like Lord Varys 😅
Just because he has a British accent doesn't mean he sounds like Varys lol.
Thank you Richard….just what I’m needing in my ongoing understanding. I’m ok with a lot of it…but I’ll be listening to this again…and again I suspect to try to clarify it for me. So…following on from that….a bit about what is wrong with what the government’s economic processes as they are. Thank you again
The only problem I have with the abbreviation MMT is the last letter, T which stands for theory.
Given that MMT is a description of factual (real world) monetary operations in a fiat currency economical system, MMT transcends the theory stage and should be abbreviated as MMP, for Modern Money Principles.
In science, a "theory" is a much stronger term than when used in general conversation. It's use in MMT seems fine to me.
In science, "Theory" is the highest level of authority that can be assigned to a model of the real world. The theory of Relativity for example is one of the most heavily tested and proven models in modern science.
An untested idea would be called a proposition or a postulate. "Theory" is as good as it gets.
Do you think Darwin's theory of evolution is not factual? The meaning of the word differs from your expectation...
@@colin_e It is "Philosophiæ Naturalis Principia Mathematica", not "Philosophiæ Naturalis Theoria Mathematica"
It is exactly a theory, as a theory is about a precise description of a phenomenon and its mechanism
People tend to understand the term theory as an "idea". They should learn how to discern
I am attracted to the concept of MMT but this video made no mention of the country's trade abroad.
If the British government printed lots of money to fund high government borrowing wouldn't the exchange rate for foreign currencies fall and so the cost of exports wouild increase and the value of exports would decrease?
Haven't we seen this in Turkey where the government resolutely resisted raising interst rates and the value of the Turkish lira plumetted?
I can see how MMT could work well in a closed system but not in an international one... but I'd love to be convinced.
MMT assumes countries have full control over their currency. When in reality most of the newly created money comes from the private banking system, and since 1981 banks in the UK have no restraint on how much money they're allowed to create.
Indeed, but the privatisation of money creation is allowed because it benefits the financial elite, not because it is an economical necessity.
The enormous economical development phase between 2000 and 2015 in the PRC was funded pretty much exclusively by the People's Banc of China.
In fact, Japan did pretty much the same when the BoJ provided the funds to make Japan rise from its ashes after WW2 to become the second largest economy by 1980.
@@Mitjitsu when the central government spends into the economy in exchange for real resources (stuff or services) it;’s known in MMT as vertical money, others call it high powered money, when they spend that currency they issue it, seemingly from thin air but it’s actually from legislated authority so called “full faith and credit”. the vertical currency stays in the private economy, being exchanged variously all over the place bw parties until such time as it is used to meet someone’s or some businesses federal/national tax obligation at which time it is accounted for and then ceases to exist. Digitally wiped from existence, other than record keeping at the tax agency.
Bank issued currency is known as credit-money (also known as horizontal or brad money). and it’s different to vertical money in that it’s only around so long as the loan remains unpaid. As the loan is repaid the credit money expansion gets contracted back to the same position, so its impact on the economy is quite different in some ways to vertical money. But yes an over expansion of private credit can put the world into a financial crisis and put the global banking system into melt down… it;’s happened more than once, the most recent being the GFC.
@@Mitjitsu MMT doesn’t assume anything, it observers certain realities, I assure you the credit-money you talk about, currency issuance in the private banking and derivatives instruments in the finance/shadow banking sector around bonds etc are well understood by MMT economists just as public spending being currency creation is understood. Both types of currency, vertical currency as it[‘s known by CGCB and credit-money by banks have a process that deletes them from existence too. MMT observers the nature of these creation and destruction processes and how they interact with the broader macroeconomy. Tax destroys vertical money and loan repayments retires credit-money, it’s all just accounting,double entry accounting at that.
That is a political choice.
The only real pragmatic meaning of a currency is what global purchasing power it has. Countries have very limited control over the purchasing power of their currency - if China does not want dollars, they stop buying them, and imports of Chinese goods cease and dollar collapses.
MMT is based on two basic assumptions. A: assume that the currency is dollar. B: assume that there is infinite global demand for petrodollars ad infinitum.
Without those assumptions MMT collapses. And meanwhile, IRL the dollar empire is collapsing.
Superb explanation
Excelkent video Richard! Thank you. Hit all the points
Excellent - thank you.
Aren't gilts (government bonds) effectively borrowing from money markets?
I'm not an economist and I'm in no position to either agree with or criticise MMT but this was a very clear and useful introduction to a way of thinking about money that I hadn't heard of before. Thank you for posting.
Good video, and easy to understand the principles of MMT. What I would like to see is an explanation of how a country's trade balance impacts on issuing of currency. Clearly the UK imports more than it exports, so more currency (sterling) is flowing out of the country to pay for products/imports, than currency (foreign) flowing in. Some of those pounds sterling flow back to the country by foreign central banks buying UK government bonds, but how does that money get cancelled? i.e. through taxation? Its not clear.
Amazing video. Thanks mate. Really clear and understood. Can we get references to do our own reading on some of this please?
Excellent video. I would love to show this to American voters. When over I would ask how long it had taken for them start day dreaming about something else. I'd try to explain to them that an understanding of this subject, and a hundred others, is needed to be an educated voter. We have to stop voting based on a vibe, and start based on an understanding of policies that actually affect their lives.
Amercian voter here. Between blissful ignorance and a lack of using brain power I dont know if it would even help.
Great presentation.
Great presentation Richard, and very positive in the comments. Question on Bonds: The private sector likes them but why is that a good reason to issue them? If I want secure storage for my valuables I have to pay for it- not the other way round. Steve Keen says "bond interest compensates the banks for running the payments system". I say " payments system costs should be transparent and charged to users to make them subject to competition").
I have a question;
What does MMT say about economies without a FIAT currency, eg Greece?
When has Greece left the Euro?
And money is still FIAT even when you mint gold coins.
Clear introduction to macro economice - thanks.
I am still not clear on how MMT differs from Keynsian economics or on how it incorporates velocity of circulation.
A very good explanation of the theory: But It raises the question do the banks or the government create more money? Its appears to be a simplified theory for part of the economy
Depends if you have a fiat currency or not. In Europe it will be the European central bank that decides for the likes of France, Germany etc.Somewhere like the UK, my understanding is it's the government through the bank of England.
Thank you, Major Douglas.
Most of the misunderstanding of MMT by critics is that they forget that governments and households are fundamentally different. Governments can create money. Households cannot. Most critics use the analogy of a household spending beyond its means to also claim that governments cannot run deficits because then nations would be in debt. But they cannot answer to whom that debt is owed to, since it is also that same government that prints the money which it owes.
What is ironic here, is that people who believe that cryptocurrencies---like BTC and USDT---are better than US Dollars or fiat currency because BTC and USDT are not inflationary do not really understand that BTC and USDT are actually even more of a fiat money than the USD. BTC and USDT are themselves proof that fiat currencies do not need to be backed by commodities such as gold to be used as money.
I’ve two important questions I don’t understand after that (to me) rather challenging video:
- was Gordon Brown correct in giving BoE independence over interest rates and controlling inflation?
- can the present (now Labour) govt simply reduce the amount of interest it pays to BoE as some commentators claim?
Thank you for a very clear but none the less complicated explanation of MMT for an untrained mind like mine. How does MMT work in the Eurozone where there are theoretical restrictions on national deficits? ( The deficit limit was 3% at one stage. I don’t know what it is now). And when different countries in the Eurozone may have different economic policies depending on their political outlook? And what is the relationship between the Central Bank and individual countries since individual countries have no control of their Central Bank since it is a supra national entity?
Thanks for your wisdom
Very informative. I have always been surprised that the supermarket allows me to take away some of their food, as long as I hand over this bit of paper my employer gave me. Cashless payment with a card is even more abstract.
Great summary. What does MMT have to say about a future economy where a significant portion of the population is permanently unemployed due to automation? Would it advocate for a government funded UBI?
@@travis1759 most MMT informed economists caution about a UNIVERSAL Basic Income because for one thing (of many) the universal part of it means it is likely to be hugely inflationary, rentier ca;italians already control the food supply for us all and rental accomodation for many people, prices are determined by the ability to pay and very single adult gets a minium wage that is liveable and sustainable to a healthy life, then what we’ve seen with property prices and rents will happen across every sector of the economy where businesses think they can raise prices to help sponge up some of that massive e injection of new currency. there’s all kinds of social contract issues with it, and our social order is already under strain and polarisation around ideas about the share of wealth and distribution of incomes. I can see a UBI being used to heighten inequality not restore equality, there’s not much empowerment in a system of Lords and Serfs. They tried a similar thing in the middle ages with the local magistrates setting the value of labour around cost of bread etc to feed a family. It backfired terribly and had to be abandoned. read more about it from the brilliant polymath chemist/economist Karl Polanyi in The Great Transformation, i asked ChatGTP two summerise here and you can read about the introduction and subsequent abandonment of the Poor Law here: chatgpt.com/share/67015ae1-c5c0-8006-b8bb-0ae77447f567
that is why I subscribed. Bravo
Spot on as far as it goes but a country like the Uk which has a persistent propensity to consume more than it consumes needs foreigners to buy pounds to balance the books. Here lies the problem of MMT. Insufficient demand for pounds by foreigners means pound depreciation means imported inflation.
I've subscribed, great piece
And low interest rates have increased inequalities by inflating asset prices
Only in tandem with a lack of political willingness to take money back out through tax, clearing the debt to the issuing bank.
Yes, the two most important things you need to know about Modern Monetary Theory are that it's not modern and not a theory. 🙄 So much more than a theory. Can we start calling it Evidence Based Economics instead? 🤔
Thank you for a particularly clear and thorough explanation. Everybody in the UK should be sending a link to this video to their MP.
WARNING. Scammers in the comments!!!
It makes sense in a closed system but issues arise when one closed system trades with another. The Chinese system with 2 currencies is one option where one currency is asset backed with say gold.
Very helpful video. Thank you. But I think that these ideas would be even better communicated via animation. Mike Booth, who had done many of the ‘School of life’ films would be perfect.
The big problem with MMT is that its entire validation is that money is created to balance what is in the economy. Ie if you create more money than stuff to buy you create inflation. Not a massive problem but it relies on the people running the system to adhere to that. Where it will go wrong is that it relies on politicians to behave and not create money to prop up their failed policies. Chance of politicians to behave is zero. So MMT won’t work.
politicians in Australia and UK, Labor parties in particular - those same parties Tories always are telling us you can trust to run the economy - are already obsessed with achieving budget surpluses. so if such politicians who were always told by extreme neoliberals can be trusted to "run the economy" understood MMT and understood the need for deficit spending where is the evidence that they'd overspend to create hyper-inflation? apart from the fact that hyprerinflation is usually not associated with overspending by govts int eh first instance, thats a reaction. If you look at the always talked about the post-WWWI Weimar Republic, Venezuela and Mugabe's Zimbabwe in al three cases, it the sheer collapse of productive capacity in the economy that drove price escalation, Zimbabwe's Agricultural production fell off a cliff because he chased out most of the white farmers and killed or disappeared most of the skilled, indigenous farm-workers and gifted much of the farmland to higher ranking army veterans and cronies.
Some MMT economists say the "natural rate of inflation" should be zero. Why do you assume deficit spending raises interest rates when there is so much evidence to show it can reduce inflation, as is the case today in USA under the Inflation Reduction Act putting billions into clean energy solutions and the like which will reduce the cost of power in USA and improve crumbling national infrastructure. If Biden or Harris introduced medicare for all, think of the cost saving to American business owners not having to run medical insurance schemes for their employees! If they waived high-ed fees and made university study free or extremely low-cost, think of all the extra income people would have to spend elsewhere in the economy. We need to governments to deficit spend into the economy not just to keep economies out of recessions, but to redirect economic activity towards climate change solutions which are not being deployed fast enough to save us, and to redirect away from elites who give zero shits about climate change; want as much war as possible; and control out economies and politics through finanicalisation of everything.
Please get your terminology right when it comes to this important issue. The guy even told you that it’s a debt based system. Only gold and silver is MONEY!
@@garryallison4716 clearly you have no idea what money is to say that only silver & gold are Money. You probably dont even understand how the gold Standard created the geopolitical tensions that resulted in WWI. You also dont understand why USA could no longer maintain a gold Standard.
@@alastairleith8612 yes I do. Go and read a couple of books on it and stop spouting all this MMT shit
@@garryallison4716 LOL, depends what you mean by reading books. You read Austrian economics books and believe that nonsense. even thought it's demonstrably wrong. MMT has the evidence of predictive power on its side, while Austrian and neoclassical economists have consistently failed to predict economic collapse, recessions and so on. The Federal Reserve didn't even see the GFC coming or know it was happening as the world banking and shadow banking system was melting down around them. Because NCE doesn't consider money and banking to be relevant to macroeconomics. Their assumptions about money and finance are why the didn't see the GFC as it was happening around them. There isn't enough silver and gold in the world to backstop the scale of global finance as a reserve currency, so apart from not understanding that money is always a debt/credit relationship and always has been, your proposed solution is a fantasy. Read Karl Polanyi about why the gold standard used by the European empire states directly created the geopolitical tensions that precipitated World War One.
I've read more credible macroeconomics papers and book chapters than you've even heard of it would seem. MMT has its theoretical roots in some of the greatest work on century economics in the 20th century, names that mainstream economics has shunned for obvious reasons, the myths of orthodox economics are exposed. Names like Hyman Minsky, Wynn Godley and current economists like Bill Mitchell, (and non-academic co-founder of MMT Warren Mosler), Scott Fullwiler, Randal Wray, Stephanie Kelton, many others.
Richard what would be the correlation between MMT and Credit Rating could you please expand? Thanks in advance. My guess if we get a higher return than cost of capital then the debt ratio would be reduce (very simple view) . Hence, the rating would be increase.
What about the effect on exchange rates?
Could this be why Rachel Reeves increased employer national insurance?
1) Directly decrease the private demand for labour.
Also private companies might invest in productivity technology instead, which the UK needs.
2) So the government can then use builders for infrastructure and houses, and also employ more public sector workers.
I did think similar at the time. Thank you for confirming I'm not alone lol
If that's the case then she explained it poorly. The issue with taxation at this level is that it deflates the economy by forcing allocation with government and discourages external investment as well by telling the economy that aggregate demand will fall since people will have less money in their pockets to spend. If you really want to spur growth you need to improve demand and make investing easier, what she did was the total opposite.
I don't believe most criticism of MMT are about it's accuracy in describing fiat money systems of today, but rather about the sensibility of such a system, which I would argue is by far it's biggest struggle. If you're not ideologically aligned with big gov/nanny state management, it's really not a good way of handling people's medium of exchange.
I'm surprised this channel doesn't have millions of subscribers. Bonkers what most people decide to do with the time.
Dear Richard, thank you for your explanation. Frankly not too difficult to understand. If I understand it, the order of any MMT approach is to reverse the order of things. Create the tax liability first, then a currency issued by the state, and a monopoly rule that the only way to meet the tax liability is to pay in the issued currency. My (very dry) liberal brain however, is still extremely cautious of "trust me I'm from the government", thinking. If the printer is no longer the boogie man, that it has been in the past, governments with a high time preference (democratically elected or not), may well become too tempted to hit the print button to excess. Governments are not historically known for their fiscal restraint when under pressure. Finally, I remain cautious of coercive monopolies, which MMT governments must be by definition. If they're elected they're answerable to the people, but in the MMT world there is no "outside", there is only the state hands on the levers. If it does go wrong it will do so calamitously.
There is no point being wary of that. It already exists and has existed in most countries for decades. Even if your country's central bank has nominal independence, in practice government has more than enough options to make them do what is needed at any time. So any sovereign state with own currency anywhere in the world already has full control over print button even if officially they do not exercise it
Thanks Richard - you say that “this is the way that central banks agree that money works within the economy” but I’ve yet to find any reference to government created money in Bank of England literature. All it refers to is the creation by commercial banks when lending. Am I missing something?
The government creates money by creating bonds and the Bank of England buys them. At about 2012 the Bank of England issued a paper, that a central bank always creates money, when someone demands money. So the creation of bonds is how money is created. The rest is an automatism.
And last but not least: the state creates the rules by which all those organisations operate.
And since money and debt are the same thing, the money creation starts even earlier: by demanding a tax. This indebts the citizens, which forces them to create a sufficient supply, which will be demanded by the state.
Money is not a token or a thing but a bookkeeping system of debt.
Something I don’t understand is why was the UK bailed out by the IMF in the 1970’s after allegedly running out of money? MMT suggests that this shouldn’t happen.
Good question
@@SteveHannah-h5w I believe Richard addressed this in a previous video. My recollection is that the UK did not, in fact, need to seek a bail out from the IMF. Or at least it would not have needed to do so if it had understood MMT!
@@Goldmangun Yeah, right!
(~5:30-6:40) It's not clear what 'Inflation' means in terms of money/currency availability such that taxation is the answer to the problem. Is it a micro/macro/whole system problem?
In particular, does (modern example) the hoarding of money by non-domiciled 'rich' individuals who aren't paying tax help cause the very 'inflation' that their zero taxation won't solve? I.e. money being taken out of reach of the very government that's meant to control it (hence folks wanting a return to asset based money that is traded)
I mentioned this on your previous MMT piece.
I'd be interested to hear your analysis on how MMT applies to wealth taxes.
Wealth taxes would only deflate assets. Therefore, funding government spending with wealth taxes is inflationary in regard to consumer prices (?)
Is it?
Wealth taxes apply to the sort of assets that make one extremely wealthy, not commodities or consumer products. Large amounts of land for example, hedge funds, country estates with tenant farmers, valuable works of art (worth millions by themselves). The sorts of things that 99% of the population simply don't have. Not a 3 bedroomed terraced house in Lincoln (a commodity) nor a mercedes e class (a consumer good).
My point exactly. Coverting assets to money spent by the government increases money in the consumer economy, hence inflationary pressure on consumer goods.
What needs to be realised is that government does most spending into the consumer economy, not on assets. Therefore (MMT says) taxes need to target the consumer economy to negate the effect of government spending, NOT target assets.
Wealth taxes have other benefits (redistribution) but not the principal MMT benefit of reducing inflation, not consumer inflation anyway, which is what most people are concerned with.
Which changes does the UK government need to fully implement Modern Monetary Theory (MMT)? Fiscal control is necessary to manage inflation, but can the UK government react or respond quickly enough? It seems that more frequent budget adjustments would be necessary, as acting only once or twice a year would be insufficient.
What if there has been some secret use of money? E.g. corruption or damaging use of Bank Of England money?
My question is, is it possibly that deals have been done, in secret, that affect UK finnancial stability?
Do you or anyone know the whole truth about what is going on between government and the BOE?😊
Interesting video. Any chance you could compare and contrast USA and Germany monetary policies? The former has an ever-growing budget deficit, the latter has a constitutionally binding mandate for balanced budgets, and these appear to be polar opposites. Also of course the former has a unique privilege as the preferred currency of international exchange, and the latter memories of hyperinflation. Views?
I would like to ask you Richard if this works the same in the US, since the Federal Reserve is technically independent of the government and a public/private entity.
@@michaelhurley3171 It is the same in the US and any other country with a fiat currency - that is not pegged against gold or another currency or commodity.
As well as governments creating money, don't banks also create money when they give a loan? Is that money/debt also cancelled by taxation or does the government have to cancel it by interest rates?
@@mikenewey3949 You are correct about retail banks creating money when making loans (under licence from the central bank). I believe this money is cancelled by taxation and/or when the loan is repaid by the borrower.
@mikenewey3949 Governments, certainly UK and USA, do not create the vast majority of money. Most money is created by private banks when they make loans. For a clear explanation, seek out the Werner Economics video on the subject.
I'm not entirely sure who actually issues new notes and coin currency, maybe the central bank, but it only represents about 5% of the total money supply.
The debt is cancelled out when the borrower pays back the loan, and the bank, of course, captures the interest for their own profit after covering the small cost of administering the loan. What an amazing privilege the banks are given, especially if they get bailed out when they make imprudent loans.
Interest rates are said to control spending, though there is no empirical proof they do any such thing. Their main purpose is to encourage people to purchase the government debt in the form of gilts and to prevent the sovereign currency from devaluation. They also generate the profit to oil the machinery of the banking system.
The global monetary system is based on debt, and providing there is always a demand for money, the system will keep running. The national debt will never be repaid and will almost certainly keep increasing. It is nothing more than a legalised Ponzi scheme, but people are powerless to do anything to change it, and the elite have no desire to do so because they get more wealthy precisely because of it.
Great talk and explanation. Just one thing I disagree with - neither the government nor the Bank of England create most “money”, most of it is created by banks as they lend money.
Why not provide the link to the PDF directly from here?
Thank you for confirming to people that creating too much money causes inflation. Too many people believe inflation is caused by prices rising, when in fact that is just a consequence of inflation devaluing the currency. Using taxation to control inflation seems to have been implemented in a very unfair way, and what happens if all, or much, of the credits issued are called in by the lenders domestic and foreign? Is this when taxation shoots to the moon as per the 1960s?
@@Vroomfondle1066 Inflation by definition refers to inflating something, in this case the volume of money, nothing else. If you are talking about prices rises, they nearly always rise as a consequence of inflation, sometimes for other reasons such as a temporary supply shortage for a specific thing.
@@foxmoongaze You have used the word money? We don't use money...?
@@legalfictionisfraud I've only done that because Richard was using the word "money" and sometimes people get confused otherwise. But, you are correct, it is a fiat currency, a credit note, a promissory note .. of nothing. Money is specie.
@@foxmoongaze YES! Perfectly said and described!!! I bow to you!🤩
My understanding is that MMT developed as an idea in the mid 90s and was perhaps adopted by the UK 20-25 years ago. If this is true, on the face of it, things have not gone well.
You have not understood that MMT simply describes how the economy actually works when a government, like the UK or the US, has its own currency. It is not an idea to be debated, or experimented with. It is a fact that needs acknowledgement by those in charge of our economy. It makes a nonsense of the claim that there's no money, that we have maxed out the credit card, or that we need fiscal rules to balance the budget. All of those ideas are political gambits to give the government a rationale for austerity. And why do they do that? Because they are in hock to the city, the wealthy, and the plutocrats, who always benefit from austerity.
@@helenheenan3447 Agree with all that... One word you missed out tho.... has its own "DEBT" based currency...🤐
@@helenheenan3447 Your comment is rather patronising, MMT is one way an economy with a fiat currency can work, and is easily abused as shown by the deep financial doo-doo the UK and other countries are in. Of course MMT should be debated, all theories and ideas should.
Does taxation, taking money out of the economy, require Monetarism being valid in order for it to be a mechanism for avoiding inflation ?
I don't think so.
Money is a bookkeeping system of debt. If you don't require the debtor to settle the debt, debt is no debt at all.
The government creates debt and debtors by demanding a tax. So the debt does already exist before the money is created and spent. This construct would not work without really collecting the money later.
The citizens now owe to the state to accept the money the state spends and to produce and sell for it to the state. Without collecting the money, they just could ignore the state.
Only thinking in terms of quantities fails to understand what money is all about.
Since money is debt and since it also origins in private debt, we are talking about the plans of the debtors and the plans of the savers and the timespans of their plans. Both must match each other.
This is far more complex than thinking only in quantities.
Yes. Unfortunately we have a toxic tax system.
@@physiocrat7143 toxic?
This analysis came from a person obviously "all-in" on its use. Would like to hear him debate w opponents of MMT
And what happens to the idea of a government seeking full employment when, very soon, if not already, such a thing will not be possible with the growing application/s of AI?
Does MMT have any theories about how best to control the money supply going forward with AI?
You have push full employment by shrinking the work week. In the next century you could be looking at a 10 hour work month, quarter, year.
@Jesus-o7v9x that's helpful. Thank you
how does MMT work in eurozone countries?
@@zwimipo1828 Not so well at the country level, hence the problems Greece experienced. At the EU level MMT works the same way.
Do crypto-currencies have potential to interfere with this due to being "outside the loop" of government control, or are they irrelevant since they are only worth something if someone will trade you pounds (or whatever) for them? I'm guessing that the tax dodging possibilities could have some impact.
Great video. Two questions arise for me:
1/ based simply on this thesis, what went wrong with the Liz Truss approach? Logic please, not political spin…
2/ why then does the current government simply not invest more in the myriad of infrastructural projects the country desperately needs to move it forward?
The government is a terrible decision maker. There are no sound criteria for infrastructure investment. Truss proposed the wrong sort of tax cuts and capped it by failing to understand the benefits even they would have brought.
How does this work when the individual government does not control the central bank, as in the EU?
@@nicksutton7377 It’s harder - but actually, these governments do still have their own central banks, so it’s ultimately much the same.
@@Vroomfondle1066He's a regular here. A bit like the drunken bore who's always droning on about something irrelevant when the adults in the room are talking.
@@RichardJMurphy Yanis Varoufakis still disagrees and he knows a thing or two about these matters. You know the ex-Greek Finance Minister? Who to believe?
@@200405InVision Simple answer to that one….
@@RichardJMurphy I think we've discovered Richard's Achilles Heel here?
It’s the experiment currently being carried out in almost all developed countries . The recent hiccups in England and France are a bit worrisome. It will work until it doesn’t .
Thanks Richard, smashing explanation. One issue tho. During the course of your videos It appears to be accepted that creating money from nothing (and I'm not doubting that principle) is a valuable tool which it undoubtedly is, but is also to be avoided as it leads directly to inflation. Surely it cant be both? I'm having a difficulty getting my head round this.
My understanding is that additional money can be created without being inflationary if there is spare productive capacity in the economy (eg - unemployed people who are willing and able to work). Once full productive capacity is reached, additional new money will tend to be inflationary. However, there are other drivers of inflation such as international oil and commodity prices, trade tariffs etc.
@@Goldmangun I don't understand that at all? The use of the word unemployed is being used to define something that seems to mean different things to different people? (eg - unemployed people who are willing and able to work) does not take into account the following dynamics... Willing and able to work does not mean work that will PAY? or the specific skills required to obtain work that will PAY?, or Productive work that will PAY? The age of the unemployed who are willing and able work but cant due do a myriad of factors, region, skills, circumstance, ect, ect.. In reality, all these terms people use to justify how the economy is working is just laterally fantasy.........
@@Goldmangun ". . . .additional new money will tend to be inflationary." BUT WHY! I keep hearing time and time again that under certain circumstances, creating new money will lead unquestionable and directly to inflation. But nobody seems to be able to explain exactly why. The best attempt I've seen so far is that if you TELL people there's a risk of inflation, they behave differently. But that cant be it, can it?
@@andielines the reason for the confusion is the terms being used... Inflation is the government CREATING new DEBT!!! NOT printing more money!!!!!! That is total LIE!!!!! When the government CREATES new debt, that causes inflation... Not prices to RISE!!!!! Inflation is DEVLAUING the debt based currency! We all use a debt based currency... and as a result, taxs need to rise!!! BUT HOW CAN YOU PAY WITH DEBT THAT IS BEING DEVALUED? Who does that help? IT DOESNT HELP YOU, BUT IT HELPS THE GOVERNMENT. THE COST OF DEBT DOES NOT DECREASE IT INCREASES FOR US?
@@andielines the reason for the confusion is the terms being used... Inflation is the government CREATING new DEBT!!! NOT printing more money!!!!!! That is total LIE!!!!! When the government CREATES new debt, that causes inflation... Not prices to RISE!!!!! Inflation is DEVLAUING the debt based currency! We all use a debt based currency... and as a result, tax's need to rise!!! BUT HOW CAN YOU PAY WITH DEBT THAT IS BEING DEVALUED? Who does that help? IT DOESNT HELP YOU, BUT IT HELPS THE GOVERNMENT. THE COST OF DEBT DOES NOT DECREASE IT INCREASES FOR US?
So under MMT what is the need or justification to increase internet rates? Why not just have them low the whole time? What is the role of interest rates at all?
To keep the old duffers happy as they have been brain washed all their lives into thinking they get paid with MONEY not debt, and they expect to earn interest on their hard earned money/savings... Save a pound and the pennies will look after themselves?
Why delete that response? lol
And we’ve been seeing considerable crowding out of private sector investment and job creation in the US by fiscal largesse
So under MMT the more the government borrows from its central bank the more it has to tax the population to stop inflation, meaning its citizens either have less money from devalued currency if they dont pay enough tax or they lose money through taxation ?
@Moving2Winyou cannot slow inflation this way. The money, the gov spends, is the income of somebody. If with gov spending all resources are in use, when those, who got the money start spending the income, you will have inflation. Money does not vanish after being spent.
What limits inflation in this case is demanding a tax. So the income generated this way into the private sector will be planned by the private sector for paying the tax but not for spending.
In our current system though government deficits do not create money because gov debt is issued. In a system where debt wasn’t issued we would create a system where some money is created without debt. This would undermine the value of money, turning money from a gold standard to a debt standard to a standard based solely on trust in the gov to tax and control inflation.
But why does the government provide a safe savings vehicle? Why does the government take on the cost of doing so? What's in it for the government?
Government is the collective decision making process of the people. The people want consistency and predictability.
Hi Richard . Since most money is created in the form of debt by high st banks, why is it that the government do not need to be more in control of that lending ? Thanks
They create money under licence from the BoE.
@@RichardJMurphy Thanks for the reply . It doesn’t seem as hands on as one might presume necessary since this is 90 something percent of money created. This leaves the government/BofE with very little control over the amount of money spent on mortgages versus goods , and therefor demand, apart from the blunt tool of interest rates which is a little like closing the gate after the horse. I’m just a housewife so sorry if my questions are a bit stupid. If anyone else can shed light please reply. I sound like I’m arguing for CBDC. LOL
@@SarahWalker-Smith It has not been 90% since before 2008. Now it is 60% and vastly more regulated. Your claim is very out of date, like most made re money.
@@RichardJMurphy Thanks could you cover the changes since 2008 more in the vids ? Thanks
@@RichardJMurphy Richard... I invite you to correct me on the following? They create DEBT under licence from the BOE.. We are using a DEBT based currency are we not? I am not being pedantic here... It is impossible for the BOE to create money.... They create DEBT (Promises to pay)
Why do they use interest rate then? I have long thought it was a ruse if not ineffective.
Good stuff but have central banks embraced MMT and, if so, why have they raised interest rates?
The game is QE Infinity, keep devaluing the dollar and play the debt off as dilution of money
I agree that heterodox pundits may confuse MMT for (failing) incumbent politics. A dialectic is that incumbent politics refuse to let MMT reveal policies’ practical outcomes or more importantly - the possible economic agency of government.
So, we’re back to how fiscal arguments go in our parliaments, our “non-government national bank” monetary policy, and how media doesn’t help us at all.
I.e. by not putting MMT to work (!) for understanding and describing what already happens.
My sense is that printing money is somewhat similar to borrowing money: You can do it to fund productive investments. Or to tide the country over during a temporary crisis. But if you try and use it to patch fundamental holes in the economy, you'll pay for it with inflation.
Your earlier video on obsession with inflation appeared to downplay inflation. It would be better to add some of this context to that earlier video.
However, this video downplays the role of private debt which also creates money. Taxation does not easily stop high inflation of asset prices which are inversely linked to interest rates. High tax on trade can drive people towards holding assets for capital gain instead which delays tax and increases asset prices. Interest rates do play a crucial role. 5% and 0.25% both seem utterly crazy.
Link to pdf missing
So why does the BoE increase interest rates to supposedly control inflation?
A good question. The BoE is following neoliberal economic policies, as is Rachel Reeves and all Tory Chancellors and Prime Ministers back to Margaret Thatcher. It is a failed policy, but does make a lot of wealthy people even richer.
Interest rates are the cost of capital, so if that goes up so does cost of private borrowing, so demand drops off and in turn price increases ie inflation. Costly mortgages brings a decrease in housing demand and prices.
@@karlkerr7348 I understood that, but it's not what was said in the video.
@@nickbarton3191 Allow me to interject? Interest rates are the cost of DEBT, not capital? So if that goes up so does the cost of PUBLIC DEBT, so demand drops off, government instructs the Bank Of England to create (Not Print) more debt which causes inflation, eroding the value of government DEBT and our DEBT based currency that you depend on to survive. The government then taxes even more...They call this austerity, but really it is called trimming the heard, putting people into penury and poverty because they can? All because of climate change? There is no such thing as private capital, just privately held DEBT
Love the movie "Seabiscuit" Charles Howard, at his job says "They ought to make a better spoke" and his boss says "Yeah, then what would you do" It then turns to Charles and his son bantering about the future. What are parents saying to their children now? They after all are the future.
I cant be the first to notice that MMT can also be short for Magic Money Tree
Then you have missed the point. World markets and inflation are always present and relevant
@@davidmcculloch8490Nevertheless it still produces money out of thin air. 🧙🌳
Yeah ,unfortunate but not a description of MMT
I would suspect that Magic Money Tree is, in fact, a not-so-veiled slam at MMT. I doubt very much that it’s a coincidence, even if there is the phrase “money doesn’t grow on trees.”
@@jeff__w if creating bank reserves are leaves and trees are the central bank then yes it does i guess with regards to your metaphor
@richard j murphy The job gaurantee (and i wish it had another name) IS core to the theory. It replace a Phillips Curve NAIRU construction of an unemployment buffer. And it helps set the minimum living wage within the economy and would likely replace minimum wage legislatin limits to private sector employment. Bill Mitchell at least, is emphatic about this. Mosler et al less so.
So how would this work in the EU? The EU central bank isn't controlled by one country like Greece? So how would this effect EU countries?
Good question, SS. All of those countries forfeited their sovereign currencies when they joined the EU, including Greece. Big mistake, in my opinion. In a nutshell, MMT does not really apply to them anymore. I hope that makes sense.
Central Bank is _not_ the only source of new money creation; all commercial banks create new money when they give out new loans. MMT completely ignores the role of commercial banks in new money creation.
Interest rates play a key role in controlling inflation because they impact demand for new loans by private parties and hence new money creation by commercial banks.
For MMT to work as described and as the theory posits requires the government to create at least 90% of the fiat currency in circulation however private banks effectively generate 90% of fiat money through loans ie debt on which they charge interest. Such money then disappears when the loan is repaid. From a utility point of view it makes little difference who creates the money but from an adequate control perspective it is vital that money creation should be in the hands of government but historical vested interests will no doubt continue to block that.
So what happens when BoE created capital leaves the country and goes to another jurisdiction? How is that capital canceled out?
Interesting explanation of MMT but it still sounds like a system that can be made to work in theory and not in the real world.
Politicians have an incentive to overspend (borrow from central bank) while minimizing tax levels. This creates conditions for prolonged higher levels of inflation.
The public will be unhappy with high levels of taxation coupled with high inflation and low economic growth. Just look at the 1970s in the West.
Money creation in this way has lead to asset prices booming due to the Cantillion effect and helps drive inequality.
It also creates an over financialised economy with less emphasis of the creation of goods & services in the "real economy".
The government can always repay it's debts, but what isn't guaranteed is the value of currency when the repayment is made. Many times, in many countries, the safety of "saving" with a treasury/government has had a high cost, when the currency became worth very little. Hopefully that will never happen in the UK 🤞
@@Vroomfondle1066 Historically, many public sector investments seem to have been poor value for money or catastrophes. They may have been started with the best of intentions. The government is very excellent at spending money though.
Question without an agenda: In 2022 inflation in the US got up to around 9%. Would raising taxes alone in 2022 have been sufficient to reduce inflation? The Fed didn't really need to do anything? Inflation at that time was largely due to supply chain disruptions. How would raising taxes have addressed supply imbalances? (Let's disregard, for the sake of argument, the almost certain massive political blowback that would have occurred had the government raised taxes in 2022.)
Is Rachel Reeves an advocate of MMT? I suspect not. Labour's fiscal policy includes a requirement to reduce UK debt by their fifth year in government. Won't this happen automatically with quantitative tightening regardless of whatever else they are likely to do?
There’s a constant battle over long time periods about creating a country’s money supply.
The private central bank and private commercial model dominates for now, from the US Federal Reserve Act of 23rd December 1913.
I know The Bank of England is State owned but it is made to run along similar lines as the domineering FED.
This is the Crime of the Centuries.
Central banks are stuffed to the gills with former private-sector bankers who see the CB as a facilitator for private banking rather than as an arm of the state. Basically, highly paid traitors.
You have just explained why MMT is wrong. Bravo.
Yes MMT describes a lot of econ things, that debt doesn't have to be repaid and that over time more debt has to be created to increase the money supply. But the MMTers always skip over what happens when small countries go crazy printing money. Yes that would be hard of a country like the US but not so hard for the UK or Canada which are trading nations. MMT has happened in the US for decades , huge spending on war and defense while at the same time tax cuts or low taxes. The question is how far can it go. Can gov't spending be limitless?
MMT states that when you have inflation then you reduce the money in circulation by taxes or reducing spending. Can or would any democratic country do that? What we have seen is the opposite. High inflation people are suffering so lower consumption taxes, carbon taxes, boost benefits to seniors etc. Interest rates are the only policy option left.
I watched an Australian program on TH-cam the other day in which Mervyn King (former BOE Governor) was being interviewed and the interviewer was quite scathing about MMT. King's response was that there are two problems with MMT. Firstly, he said it is not 'modern' (which I took to mean that it has always worked that way) and secondly it is not a 'theory' (which I took to mean that it was not a theory in the sense of hunch or a guess waiting to be proven). It appeared to go completely over the head of the interviewer who only heard what he wanted to hear and 'Merv the Swerve', as he was sometimes called when Governor, cleverly called glossed over it.
The definition of "money" is a matter of political ideology, at least for those who insist on defining money as A) Debt and/or B) Means of taxation.
In common sense meaning and practice we have no ideological blinders against a means of exchange, a distributed information network that informs participants about supply and demand, about needs and how to satisfy those, "money". In that common sense synergetic meaning, money is also called a market platform.
MMT is indeed just a political manifestation of neoliberal monetarism of Central bank tyranny of monopoly money aimed to prevent fair competition between market platforms, which is absolute necessity for an even playing field with self-correcting dynamics.
What makes MMT "speshul" is that it can only work for a central bank fiat that does not need to care about trade imbalance with other currencies, but has access to global market of goods and services by just printing more numbers - and backing those numbers with biggest meanest army which the central bank tyranny regurarly uses to murder and maim millions of people around the globe.
Without such enforcement of a MMT, your fiat currencly loses quickly it's purchasing power on the global market, and unless the real economy of a MMT nation is self-sufficient, the people go hungry.