Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

322 Pages·2015·3.05 MB·English

by  L. Randall Wray (auth.)

Modern Money Theory

Modern Money Theory
A Primer on Macroeconomics for Sovereign
Monetary Systems
2nd edition
L. Randall Wray
Professor of Economics, University of Missouri-Kansas City, USA, and
Senior Scholar, Levy Economics Institute of Bard College, New York, USA
© L. Randall Wray 2012, 2015
Softcover reprint of the hardcover 2nd edition 2015 978-1-137-53991-5
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First edition published 2012
Second edition published 2015 by
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ISBN 978-1-137-53990-8 ISBN 978-1-137-53992-2 (eBook)
DOI 10.1057/9781137539922
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Library of Congress Cataloging-in-Publication Data
Wray, L. Randall, 1953–
Modern money theory : a primer on macroeconomics for sovereign
monetary / L. Randall Wray, University of Missouri-Kansas City, US. – 2nd
edition.
pages cm
Revised edition of the author’s Modern money theory, 2012.
Includes bibliographical references and index.
1. Monetary policy. 2. Fiscal policy. 3. Macroeconomics. I. Title.
HG230.3.W73 2015
339.593—dc23 2015018349
Contents
List of Figures viii
Preface to the Second Edition ix
Definitions xiv
About the Authorr xvi
Introduction: The Basics of Modern Money Theory 1
1 T he Basics of Macroeconomic Accountingg 9
1.1 The basics of accounting for stocks and flows 9
1.2 MMT, sectoral balances, and behavior 1 5
1.3 Stocks, flows, and balance sheet: a bathtub analogyy 20
1.4 G overnment budget deficits are largely nondiscretionary:
the case of the Great Recession of 2007 23
1.5 Accounting for real versus financial (or nominal) 2 8
1.6 Recent US sectoral balances: Goldilocks and
the global crash 34
2 Spending by Issuer of Domestic Currency 4 1
2.1 What is a sovereign currency? 41
2.2 W hat backs up currency and why would anyone
accept it? 45
2.3 Taxes drive moneyy 48
2.4 W hat if the population refuses to accept the domestic
currency? 51
2.5 Record keeping in the money of account 55
2.6 Sovereign currency and monetizingg real assets 59
2.7 Sustainability conditions 62
3 T he Domestic Monetary System: Banking and
Central Bankingg 71
3.1 IOUs denominated in the national currencyy 7 1
3.2 Clearing and the pyramid of liabilities 76
3.3 Central bank operations in crisis: lender of last resort 81
3.4 Balance sheets of banks, monetary creation by banks,
and interbank settlement 83
3.5 Exogenous interest rates and quantitative easing 89
3.6 The technical details of central bank and treasury
coordination: the case of the Fed 90
v
vi Contents
3.7 Treasury debt operations 98
3.8 Conclusions on the central bank and treasury roles 101
4 Fiscal Operations in a Nation That Issues Its Own Currencyy 103
4.1 Introductory principles 103
4.2 E ffects of sovereign government budget deficits on
saving, reserves, and interest rates 106
4.3 G overnment budget deficits and the “two-step”
process of saving 111
4.4 What if foreigners hold government bonds? 117
4.5 C urrency solvency and the special case of the
US dollar 123
4.6 S overeign currency and government policy in the
open economyy 129
4.7 What about a country that adopts a foreign currency? 134
5 T ax Policy for Sovereign Nations 137
5 .1 Why do we need taxes? The MMT perspective 137
5 .2 What are taxes for? The MMT approach 141
5 .3 Taxes for redistribution 145
5.4 Taxes and the public purpose 147
5.5 Tax bads, not goods 149
5.6 Bad taxes 153
6 Modern Money Theory and Alternative Exchange
Rate Regimes 158
6.1 The gold standard and fixed exchange rates 158
6.2 Floating exchange rates 160
6.3 Commodity money coins? Metalism versus
nominalism, from Mesopotamia to Rome 162
6.4 C ommodity money coins? Metalism versus
nominalism, after Rome 167
6.5 Exchange rate regimes and sovereign defaults 172
6.6 The Euro: the set-up of a non-sovereign currencyy 1 76
6.7 The crisis of the Euro 180
6.8 Endgame for the Euro? 187
6.9 Currency regimes and policy space: conclusion 191
7 Monetary and Fiscal Policy for Sovereign Currencies:
What Should Government Do? 193
7.1 Just because government can afford to spend does
not mean government ought to spend more 193
7.2 The “free” market and the public purpose 196
7.3 Functional finance 199
Contents vii
7.4 Functional finance versus the government budget
constraint 202
7.5 The debate about debt limits (US case) 206
7.6 A budget stance for economic stability and growth 211
7.7 Functional finance and exchange rate regimes 214
7.8 Functional finance and developing nations 217
7.9 Exports are a cost, imports are a benefit: a
functional finance approach 218
8 Policy for Full Employment and Price Stability 221
8.1 Functional finance and full employment 221
8.2 The JG/ELR for a developing nation 229
8.3 Program manageabilityy 2 32
8.4 The JG/ELR and real world experience 235
8.5 The JG and inequalityy 2 40
8.6 Conclusions on full employment policyy 2 43
8.7 MMT for Austrians: can a Libertarian support
the JG? 2 44
9 Inflation and Sovereign Currencies 2 48
9.1 Inflation and the Consumer Price Index 2 48
9.2 Alternative explanations of hyperinflation 2 53
9.3 Real-world hyperinflations 258
9.4 Conclusions on hyperinflation 262
9.5 Quantitative Easing and inflation 263
9.6 Conclusion: MMT and policyy 2 66
10 Conclusions: Modern Money Theory for
Sovereign Currencies 2 70
10.1 MMT got it right: the Global Financial Crisis 270
10.2 MMT got it right: the Euro Crisis 272
10.3 Creationism versus redemptionism: how a
money-issuer really lends and spends 276
10.4 Growing recognition of the need for Job Guarantee 281
10.5 MMT and external constraints: to fix or to float,
that is the question 286
10.6 A meme for moneyy 290
Notes 293
Bibliographyy 295
Index 301
List of Figures
1.1 F ederal government tax receipts, consumption
expenditures, and transfer payments 2 4
1.2 P ropensity to save out of disposable income 2 5
1.3 Sector financial balances as a percentage of GDP, 1952q1
to 2010q4 35
3.1 Case 1a: government imposes a tax liability and buys a jet
by crediting an account at a private bankk 91
3.2 Final position, Case 1a 92
3.3 Case 1b: government deficit spends, which creates private
net wealth 93
3.4 Final position, Case 1b 9 3
3.5 Case 2: government must sell bond before it can
deficit spend 94
3.6 Government buys jet, writing check on private bankk 94
3.7 Final position, Case 2 9 4
3.8 Case 3: treasury can write checks only on its central bank
account 95
3.9 Treasury moves deposit to central bank account 9 5
3.10 Treasury buys jet 96
3.11 Final position, Case 3 96
4.1 Treasury securities ownership and net exports, 1975–2013 118
4.2 Foreign holdings of US Treasuries 2000–2013, total
percentage held by foreign countries 119
6.1 Government debt as a percentage of GDP, 1995–2010 181
6.2 General government deficit, 1995–2010 181
6.3 Sectoral balances as a percentage of GDP: Euro area 183
6.4 Sectoral balances as a percentage of GDP: France 184
6.5 Sectoral balances as a percentage of GDP: Spain 184
6.6 Sectoral balances as a percentage of GDP: Italyy 185
8.1 Average hours worked annuallyy 238
8.2 Distribution of average income growth during expansions 241
viii
Preface to the Second Edition
In recent years an approach to macroeconomics has been developed
that is called “modern money theory” (MMT). The components of the
theory are not new, but the integration toward a coherent analysis is. My
first attempt at a synthesis was in my 1998 book, Understanding Modern
Money. That book traced the history of money as well as the history of
thought undergirding the approach. It also presented the theory and
examined both fiscal and monetary policy from the “modern money”
point of view. Since that time, great strides have been made in applica-
tions of the theory to developing an understanding of the operational
details involved.
This book is a substantially revised version of the Modern Money
Theory Primer first published in 2012. The purposes of the revision are
to take account of comments on the earlier edition and of developments
of the approach over the past few years; to extend the analysis in various
directions (inflation, taxes, the crisis in Euroland, exchange rates, trade,
and developing economies); and to improve the exposition in some
chapters (Introduction, Conclusion).
Since the first edition was published, MMT has received a lot of
attention in the press, on the internet, and even in popular political
movements. Warren Mosler had long predicted, adapting an aphorism
attributed to Arthur Schopenhauer, that MMT would go through three
phases: First, it is ridiculed. Second, it is violently opposed. Third, it is
accepted as being self-evident. Many of the tenets of MMT have already
entered the third stage – with former critics now claiming they knew it
all along.
The findings have been reported in a large number of academic
publications. In addition, the growth of the “blogosphere” has spread
the ideas around the world. “Modern money theory” is now widely
recognized as a coherent alternative to conventional views. However,
academic articles and short blogs do not provide the proper venue for a
comprehensive introduction to the approach.
This Primer seeks to fill the gap between formal presentations in the
academic journals and the informal blogs. It will provide the reader with
the basics to build to a reasonably sophisticated understanding. We begin
with a quick overview: what is MMT and why does it matter? We then
ix