There is absolutely no proof that Modern Monetary Theory (MMT) can replace the global financial system, argues
WHEN the first coloured telly arrived to the housing estate, it was like a spacecraft had landed.
Joyous Brazil in exotic yellow, white and blue. All my pals got invited to watch the 1970 final. Think it was showing at one of those neighbours who harboured memories of something precious I’d broken. So, I sat outside on the wall.
Looking around, few houses had cars. Money was tight. Everyone knew. We picked strawberries in the summer to make a few bob, held comic sales, sold jam, did odd jobs, mowed lawns. We learned to be careful with cash.
Still, my favourite story was Jack & the Beanstalk. I loved the bit where he ran off with the goose that laid the golden eggs, because he gave the eggs to his Mum and she got back the cow. I thought that was cool. These days the giant would have civil rights but, I always kind of knew that money didn’t grow on trees. Not in The Lough in Cork, anyway.
But some folk still think there is a money tree, that anyone can have a coloured telly, you just need to know the spell, like Ali Baba did at the treasure cave.
These days they give these fables of abundance a new name. It’s called Modern Monetary Theory (MMT) but it’s really not modern at all. Jack & the Beanstalk has been entertaining kids for five thousand years.
In the new version, the Government whistles up whatever amount of money it likes. The money comes from the Central bank as a loan. The Central bank doesn’t earn the money, it just magics it up on the keyboard and flashes it over. The twist is that the central bank becomes an arm of Government. The accounting is super cool.
The Government can forgive its own loan, so no one gets hurt when it doesn’t pay it back. Magic There is no limit to what the Government can whistle up, whatever it likes so the total national debt relative to GDP becomes a thing of the past, the Government a thing of beauty because it guarantees employment for all. This is founded on the principle that complete trust of Government competence forms the bedrock of our democracy.
Now in this world, when all the money created out of nothing causes any type of inflation because there’s too much of it, the Government kills it by raising taxes. You don’t need to raise interest rates at all see, just raise taxes instead. This has the effect of taking cash out of the economy and cooling it down, so we swap interest rates for tax rates, swap decisions by the ECB with decisions by the Minister for Finance and all the lobbyists.
Since taxes can only be paid in the currency of the Government everyone in the realm is obliged to use it, so the currency can’t be substituted. That’s the MMT trick.
But MMT really comes into its own when the private economy falters, because all that’s required is for the Government to print whatever it likes to fill the hole. The scale of Government debt becomes irrelevant, it is owed back to its own bank.
The assumption is that the Government won’t starve the private sector by abusing the golden goose. MMT is great when you want to change the world in a hurry, like the new green deal wants, to prevent the end of the world in ten years or thereabouts. People in the USA like Bernie Sanders and Alexandria Ocasia-Cortez love it. Need money, just print it. See inflation, just tax it. National Debt limits don’t matter.
But on this side of the pond there’s a fly in the ointment. It is called EU law. Now call them picky, but the founders of the Euro weren’t too gone on the idea of member States instructing central banks to print Euros and lend it to themselves for nothing. That’s why the Treaty of the Functioning of the European Union -TFEU- directly addresses the money tree.
TFEU prohibits central banks providing overdrafts to member state or their agencies in the easy-to-remember Article 123. But if you need more, Article 127 requires central banks to snitch on any attempt by national governments to run a Euro money tree. Article 129 makes it clear that institutions like the Central Bank of Ireland report to the ECB, its Governing Council and Executive Board. Not to the Oireachtas.
So MMT can’t work in the Eurozone, not without a new Treaty for Europe. That’s why it is odd to see calls on the Irish Central Bank to print as if MMT wasn’t bounded by laws to prevent it. At the centre lies Germany with a folk memory of the incineration of their currency in the Weimar Republic and what all that lead to, so it is hard to blame them being a bit touchy.
Since I was a young fella, the laws of money haven’t changed. There isn’t a golden goose, fairy godmother or good witch, there is just debt and the capacity to repay it.
You want money; make jam, sell comics, cut grass. There is no proof that MMT can replace the global financial system but remains a lab rat occasionally wheeled out to fill column space.
No harm there, just don’t mix the rat up with the goose or, the fable of abundance with the reality of scarcity.