modern monetary theory -- 10/26/20
Today's selection -- from The Deficit Myth by Stephanie Kelton. Stephanie Kelton’s new book, The Deficit Myth, is a highly readable overview of modern monetary theory (MMT), an economic theory increasingly embraced by policymakers and politicians:
"Cities (Detroit) and states (Kansas) can run into big trouble when they're not bringing in enough money to cover their expenses. Every family sitting around the kitchen table understands these realities. What they don't understand is why the federal government (Uncle Sam) is different.
"To understand why, we go right to the heart of MMT. MMT takes as its starting point a simple and incontrovertible fact: our national currency, the US dollar, comes from the US government, and it can't come from anywhere else -- at least not legally. Both the US Treasury and its fiscal agent, the Federal Reserve, have the authority to issue the US dollar. This might involve minting the coins in your pocket, printing up the bills in your wallet, or creating digital dollars known as reserves that exist only as electronic entries on bank balance sheets. The Treasury manufactures the coins, and the Federal Reserve creates the rest. Once you appreciate the significance of this reality, you will be able to unravel many of the deficit myths on your own.
"Even though you may not have given it much thought before, something inside you probably already understands this basic truth. I mean, think about it. Can you create US dollars? Sure, you can earn them, but can you manufacture them? Maybe with high-tech engraving equipment you could set up shop in your basement and produce something that looks very much like the US dollar. Or maybe you could hack into the computer at the Federal Reserve and type up some digital dollars. But we both know you'll end up in an orange jumpsuit if you get caught trying to counterfeit the currency. That's because the US Constitution grants the federal government the exclusive right to issue the currency. As the Federal Reserve Bank of St. Louis put it, the US government is 'the sole manufacturer of dollars.'
"The term monopoly refers, of course, to a market in which there is only one supplier of some product. Since the federal government is the sole manufacturer of US dollars, we can think of it as having a monopoly over the dollar itself. It's kind of like a being given a super copyright (one that never expires) over the ability to make additional copies of the dollar. It's an exclusive power, articulated by our founders. It's not something households, businesses, or state and local governments can do. Only the federal government can issue our currency. Everyone else is merely a currency user. It's a special power that must be exercised with great care. …
"The distinction between currency users and the currency issuer lies at the heart of MMT. And as we will see in the pages ahead, it has profound implications for some of the most important policy debates of our time, such as health care, climate change, Social Security, international trade, and inequality.
"To take full advantage of the special powers that accrue to the currency issuer, countries need to do more than just grant themselves the exclusive right to issue the currency. It's also important that they don't promise to convert their currency into something they could run out of (e.g., gold or some other country's currency). And they need to refrain from borrowing (i.e., taking on debt) in a currency that isn't their own.
"When a country issues its own nonconvertible (fiat) currency and only borrows in its own currency, that country has attained monetary sovereignty.
"Countries with monetary sovereignty, then, don't have to manage their budgets as a household would. They can use their currency-issuing capacity to pursue policies aimed at maintaining a full employment economy."