RWER 66: “Modern Money Theory and New Currency Theory”

The Real World Economics Review issue 66 is out for a while already and includes a number of interesting, high-level papers. One of which I hoped for some additional clarification of MMT is titled “Modern Money Theory and New Currency Theory”.


first I am not an economist, so I might have misunderstood things. Second, I got most of my understanding of MMT from Bill Mitchell, who might be an outlier in the community, although I’ve found nothing in the writings of Kelton, Wray, Mosler (on, for instance) that contradicts him.

But with this background, the paper seemed to misrepresent some MMT positions that it criticized, in some cases stating pretty much the opposite of MMT via Mitchell. This is nowhere clearer than in:

The emphasis is on pointing out that for net government debt in the
public sector there are corresponding net fortunes in the private sector[.]

The way Mitchell describes it is that for government deficits there are corresponding surpluses in the private sector.
Public “debt”, however, takes the form of riskless interest-bearing assets and can or cannot be issued by government. This decision is independent of the decision to perform deficit spending (
So it seems to me that the author conflates government deficits and public “debt” in the same way that orthodox economists do, assuming that because currently issuance of interesting bearing assets happens together with deficit spending there is a necessary relationship. That this assumption is indeed the case becomes clear when the author refers to the Eurozone countries as “sovereign” even though they can precisely not issue their own currency and the entity that can, the ECB, is forbidden from financing Eurozone government spending directly, contrary to the US Federal Reserve ( This conflation is of the Reinhart-Rogoff-type and somewhat surprising to find here.

The effect of this misconception propagates through large parts of the paper:

First off, it means that MMT, contrary to the author’s claim, is not only aware of the fact that money can simply be spend into existence but claims that currency-issuing governments do exactly that.

Second, the relationship the author describes by

Primary credit and debt creation only happens when government takes up additional debt with banks; and this – it should be noted – happens as long as the banks want it to happen. If banks and bond markets turn thumbs down, the would-be sovereign-money game is over.

is in fact reversed: It is the government that decides how many interest-bearing assets to issue and no matter how much the banks pine for such assets, if the government turns thumbs down, the riskless asset game is up. (

Third, while the author’s description is correct that bond-issuance makes the rich richer (Mitchell uses the phrase “corporate welfare” to describe this), since the bond issuance is voluntary, it is a political decision that is in no way inherent to the functioning of the monetary system. Furthermore, this means that interest payments do not automatically require additional bond issuance, and, since the government can spend money into existence, such payments can be performed independently from the level of taxation (whether they should be performed is once again, a political discussion).

Fourth, and related to this, this means that decisions regarding taxation don’t have anything to do with the ability of the government to spend, but everything with the goal of reducing purchasing power (or not), depending on how close to full capacity the economy is. In fact, this is a point that every MMTler that I’ve ever read never tires of repeating, hence making clear reference to the “anchor of relative” scarcity the authors desires. The

trust in free markets

and the references to Fama and Hayek that the author ascribes to MMTlers, on the other hand, is not something I have encountered.

What this leaves me, as a reader, with is criticism of the fractional reserve banking system.

I would like to point out that

MMTers today express no less admiration for what they see as a smoothly run and benign system, apparently unimpressed by the long list of dysfunctions of fractional reserve banking that has been drawn by so many scholars over the last two centuries

seems to be another mischaracterization to me. In fact, Mitchell, while taking care to point out that

  • these are prescriptive remarks, not descriptive ones, and
  • his personal ones and not necessarily representative of the entire MMT community,

has repeatedly stated that he sees banks as institutions akin to utilities, which should therefore be publicly managed, and that the speculative parts of current banks should be split off from the savings-and-loans operations. The former would fulfill the desire of the author for money creation in the hand of the government, the latter solve the problem of banks spending money into existence and fueling bubbles. All within the framework of MMT!

Notwithstanding this, I am left with a criticism of fractional reserve banking system. Now it might be true that this system has problems that MMT misses or disregards but since this criticism is deeply entangled with a number of misrepresentations and wrong conclusions, it is pretty much impossible for me to see whether this particular criticism is valid or an artifact of the author’s understanding of MMT like the others.

This entry was posted in debt, macroeconomics, MMT, public debt, wealth distribution. Bookmark the permalink.

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