Positive Money and MMT (continued)

I have been reading Positive Money (PoMo)’s most recent comments on Modern Monetary Theory (MMT), whose latest New York conference they attended.

I’m worried that they appear to have returned from that conference with a rather confused set of views.

They suggest that:

There is a significant difference between money issued as debt by commercial banks, and money issued by the state like a central bank digital currency (CBDC).”

There is certainly interest bearing money as debt issued by commercial banks, but that doesn’t change the fiver in your pocket. All money is money. Interest free, or interest bearing, it is still money. That fiver could be part of your overdraft or part of your lottery win but it is still a government debt. Or even and, of course, also, a personal credit for the holder (against government taxes).

Any difference is just the source of the money. Once the ‘issue’ is made they are equivalent.They have to be equivalent because having more than one type of the same money becomes chaotic – how would you know if the type you have will be accepted when you need it to be?

PoMo say  “publicly created money comes with no obligation for any private actor to repay.” This seems to be the same idea that instead of letting commercial banks create money by lending it into existence, we could have the state create all the money in the economy and then spend it into existence. That is fine but PoMo are completely incorrect when the say “there is no obligation to repay.” Simply creating money for ever is not feasable.PoMo are ignoring tax. Publicly created money always comes with an obligation to pay tax. If it did not then, it would be simply ‘taxed’ by high inflation reducing its value instead.

They seem to justify this thinking with:

Positive Money’s communication strategy combines an analysis of the problems currently associated with bank lending with the allure of an alternative form of finance provided by the public money circuit.

Rather than economics this is pretty much marketing speak for a sales pitch. (It cannot be often that analysis and allure appear in the same sentence). Yes, there may be a private money circuit and a public money circuit and, as Charles Adams has pointed out, whilst there is a ‘duopoly of money creation‘ serving individual and common needs, it is all the same money!

If PoMo is to be an effective campaigning organisation it should be offering much better clarity. If it is now to be a think tank it should have a definite and considered policy direction regarding money and its purpose.

By considering that tax is not part of their remit, (with even current ‘austerity’ government spending at around 38% of GDP) unless they take tax into account they are by design, abdicating control of a ‘Positive Money’ monetary system either to everlastingly high inflation or regular stagnation because state income will always be considered as limited.

In the end it’s our money system and, in a democracy, it has to work for the benefit of everyone. PoMo seem to take the piecemeal view often so typical of the ‘practical’ British that they are not going back to first principles but just tweaking the system to try to make it work better.

In those terms, to effect some change, they could be correct, but they are open to the criticism like mine, that they do not properly understand money and indeed any reforming message is made much more comprehensible by going back to first principles and, when these are properly stated their communuication becomes automatically more effective.

Sloppy, imprecise and incomplete thinking only confuses the message and certainly does no good whatsoever for PoMo’s desire to consider themselves a think tank on money.

Comments

  1. Sean Danaher -

    I might be worth contacting a few Positive Money people to get a clarification or a response

    1. Peter May -

      They will be getting a link!

  2. Vince Richardson -

    PoMo understand money perfectly well.

    Tax is a political issue, so it is not the remit of PoMo to dictate what level it should be. What they are pointing out is that the state can create even money as and when it wants to without having to raise tax, as does MMT,so to say there that Pomo policies would be a limit is incorrect. They advocate increased spending when it is needed.

    The debate about whether this is a debt or not seems academic to me, who cares? Call it what you will, it makes no difference, the main point being the state can and should create some when it needs to. Pomo just likes to call it “debt-free” money to distinguish it from interest-bearing money produced by our private banks. It is not worth getting into a major debate about that the labeling. Besides what kind of debt can be written off at will?The state can just print more of it and the debt reduces, that’s not a debt as we normally understand it.
    PoMo are just putting the emphasis on private money creation as the problem we are facing rather than public money creation.

  3. Peter May -

    I get that PoMo considers debt free money to be the same as interest free money though I don’t really understand why?

    Of course tax is a political issue but then so too is creating money. In fact the two go together. Tax is negative money.

    If you create all money without taxing then, with government expenditure comprising almost 40% of GDP, without tax this is not sustainable for economic stability.

    1. Vince Richardson -

      Any money created by the state(Treasury and central bank)would regarded as interest-free (or debt free) because it costs nothing to create it and we would owe nothing to anyone to have it. Unlike now where we borrow at interest.
      That said there will always be some demand for Government debt,as a safe haven. So they do not rule out all Gov debt.

      This money, then spent into the economy, would in effect be debt free There would then be more money in peoples pockets and they would, therefore, have to borrow less from the banks, reducing private debt levels(and the amount of interest paid to banks).This is something the BoE has been stressing of late but is unable to achieve within the current financial system.

      Positive Money is not proposing the state create all the money without taxing. All they are suggesting is that if we need an economic boost in a recession, state money creation in a controlled fashion could be used as a tool to get us out of it.
      What they also suggest is that only the BoE (via a reformed Monetary Policy Committee)actually decides on the amount of money but not where that is spent, that is left to the politicians as it is a political issue. This way the central bank does not decide on fiscal policy and politicians do not get access to the printing press.
      This maintains a healthy separation of fiscal/monetary powers. I have read that Ben Bernanke even considers it a possible solution.

  4. Peter May -

    So ” all [PoMo] are suggesting is that if we need an economic boost in a recession, state money creation in a controlled fashion could be used as a tool to get us out of it.
    Yet ” only the BoE (via a reformed Monetary Policy Committee)actually decides on the amount of money” means that the bankers are in charge – no wonder Bernanke likes the idea – not our democratically elected representatives. So the bankers once again get to decide on all money creation? That also means we are back to tax and spend which if you believe that money creation is part of democracy http://www.progressivepulse.org/economics/our-money-is-actually-part-of-democracy that means that you have legislated yourself out of spend and tax – through the rule of law.
    Why on earth would you do that?
    Is there any more control you think democracies should give up?

  5. Vince Richardson -

    That’s a loaded question : ), like how often do I beat my wife?

    Of course, I do not want any democratic powers conceded.
    By bankers, you mean central bankers, which is different, we can appoint those.

    Currently, on top of gov spending, private banks create nearly all the money we use, 97 % of it prior to 2007.(all bank deposits) Thus private credit creation is very damaging to our economies because it diverts investment into non-productive areas, property and shares. (accounting for 85 % of all bank lending). Business lending gets a measly 8%, which is the real wealth generating part of our economy, not the banks. We have no say democratically how much gets created nor where it goes.

    A transparent mechanism, democratically accountable to a cross-party committee would be far better on a democratic score on how any extra money is created (on top of what is already done via gov spending). We would also like to ban private bank money creation, which the banks will hate.

    If you believe the banks did a great job, fine, but many do not and Positive Money just want an open honest debate.One where everyone can see what has been going on and what alternatives we have.

  6. Peter May -

    “We have no say democratically how much gets created nor where it goes.”
    But we could do – they have banking licences granted by the government! We could tell them who/why/where to lend. Otherwise we could just say that if they didn’t comply, any loans would be unenforceable!
    Now a select committee on bank lending may well be more democratic than just telling banks who/why/where to lend to and that would be certainly worth a try.
    But you still haven’t told me why you think it is a good idea to legislate yourself out of spend and tax – through the rule of law.
    It is a loaded question only in the sense that it is a complete relinquishment of democratic power.
    As I say why would you do that?

  7. Vince Richardson -

    Bank guidance does not have a good record, banks are adept at getting around rules and regulations. It is also very difficult to supervise and enforce. The banking sector is currently far too large and far too unstable as a result.

    We are proposing an easier simpler regulation.

    Sorry I do not understand why you think we would legislate ourselves out of tax and spend. Government spending and taxation would carry on as normal under a PoMo plan,so nothing to stop a gov raising/lowering taxes or spending if it wishes.

    It would be critical to get the Treasury and central bank working together on this,something we are not seeing.

  8. Peter May -

    Before the so called big bang, bank guidance had a very good record!
    Now we might consider another system such as this http://www.progressivepulse.org/economics/a-new-role-for-the-bank-of-england

    And “Sorry I do not understand why you think we would legislate ourselves out of tax and spend.” I much regret I said SPEND AND TAX – which is OF THE ESSENCE.
    Sorry for the capitals but that is pretty much the basis of why and where PoMo has lost the plot…

    1. Vince Richardson -

      In the 70s’? the banks tried so-called bank “corsets”, to stop banks lending (on property again)but it was soon abandoned as banks worked around it with foreign money. We have several property-led boom and bust since then(and even a share-based one in 2000s). Governments soon tire and get distracted, awed and bewildered by the banking lobby.

      The banks certainly lobby hard to water down rules, spending vast amounts on lobbyists in the UK, EU,and globally at the Basel level. Regulators in the UK cannot even properly supervise self-assessed UK bank capital buffers with any competence. Mervyn King pointed out how many breezed past stress tests only to fail in the 2008 crisis. We would need armies of civil servants to properly regulate banks like this , even King himself says it is a hopeless task.

      I understand the “spend then tax” issue, so point taken. Without wishing to get sucked into that. This is probably OK at very low/zero interest rates,(governments being obsessed with balancing budgets)but that is not always going to be the case. What we want is a policy that allows this under any economic conditions.PoMo are currently advocating we use QE for direct spending into the economy in a recession,much as the current BoE uses QE but we want it in the non financial sectors of the gov’s choosing. We are also against the £10bn it created for corporate bond buying(some of them foreign-owned tax evading companies) We could put this money to far better use. What you suggest is maybe much the same, so I am not against the idea per se.

      But what we worry about is that once a proper recovery is underway(if we get there) there is every chance the banks will let rip on the non-productive lending again and we go back to where we were.

  9. Peter May -

    “In the 70s’? the banks tried so-called bank “corsets”, to stop banks lending (on property again) but it was soon abandoned as banks worked around it with foreign money.”
    Perhaps they did – I don’t know.
    It is probably less difficult now but the risks of volatility are probably also greater.
    And foreign money is money we don’t control so if there was a major problem with that we should have introduced capital controls.

    “King himself says it is a helpless task” But, if government wanted really to be in control of banking and any repayments it would surely be insurance based as here http://www.progressivepulse.org/economics/a-new-role-for-the-bank-of-england
    Then we would know if loans were not authorised and insured they were not repayable. Simple really. And no civil servants neccessary – though some police might be.
    Certainly PoMo’s idea of nationalising the payment system is essential! And for both, I’m sure the banks would kick up!
    But as we know, without a government sanctioned banking licence they are nothing….
    So, regret that “banks will let rip on the non-productive lending again” just suggests that not only the banking sector seems to have captured the government, but also, increasingly, and regrettably, PoMo

    1. Vince Richardson -

      PoMo is not taken up by Gov as yet,not by a long way. We are working as a group to get a better public understanding of money, finance and the economy.That sadly also applies to our politicians. Pomo held a poll of our MP’s and found 85 % of MP’s did not know how money is created in a modern economy.

      https://positivemoney.org/press-releases/mp-poll/

      It would be a start if we had legislators who understood money.

      Capital controls is something Martin Wolf suggests in his recent book. Hot international money is not always good for an economy.He says it is about what type of country we want to live in. So would not oppsoe soem restrictions,free movement of capital has its dark side.

      The US has FDIC insurance but the amounts required in the last crash would swamp any insurance pot. The gov is always the backstop at the end of the day.The banks here cried enough having to pay the bank levy(which was dropped). Besides if you give them the ablity to carry on creating our money we will still run into major problems at some point.

      This is “our” money as a nation and if we are to backstop the banks when they mess it up,we have a right to a say in how they are run. The banks have always been allowed to do this for about the entire 400 year history of banking.Time for a change.

  10. Mike W -

    Thanks gents, this has been a very instructional thread. In trying to get my non-economist head around money since 2008, I’ve reached the conclusion:
    Banks are the problem
    Banks are the solution
    And PoMo & MMT have the answers. But I still don’t get what your differences are. But this has helped.

    1. Vince Richardson -

      Yes I felt the need to have this conversation. I agree with a lot of what MMT says ,it is a good thing they are doing.

      PoMo’ head economist has written 3 articles on the simliarities/differences if you are interested.

      Basically, he says the two movements do have agreements and also quarrels…..

      “Some of those quarrels are important, as they impact on our choice of path for introducing reforms. For instance, while both groups agree that public money creation is possible, there is less consensus over which institutions would be best to make it happen.”

      https://positivemoney.org/2018/09/modern-monetary-theory-and-positive-money/

      positive-money-part-ii-money-and-debt-1/
      https://positivemoney.org/2018/10/modern-monetary-theory-and-

      positive-money-part-2-money-and-debt-2/ is summed up by our head economist

    2. Vince Richardson -

      Yes I felt the need to have this conversation. I agree with a lot of what MMT says ,it is a good thing they are doing.

      PoMo’ head economist has written 3 articles on the simliarities/differences if you are interested.

      Basically, he says the two movements do have agreements and also quarrels…..

      “Some of those quarrels are important, as they impact on our choice of path for introducing reforms. For instance, while both groups agree that public money creation is possible, there is less consensus over which institutions would be best to make it happen.”

      https://positivemoney.org/2018/09/modern-monetary-theory-and-positive-money/

      https://positivemoney.org/2018/09/modern-monetary-theory-and-positive-money-part-ii-money-and-debt-1/

      positive-money-part-ii-money-and-debt-1/
      https://positivemoney.org/2018/10/modern-monetary-theory-and-

    3. Peter May -

      Mike W, there’s a fairly short but good summary of MMT here https://www.facebook.com/green.modernmoneytheoryandpractice/posts/1966249743458159?__tn__=K-R
      The difference between MMT and PoMo as far as I can see is basically that PoMo doesn’t want to talk about tax whereas MMT thinks, as do I, that in fact, in a stable economy, tax is integral to the whole process of money creation. Without tax you end up here
      http://www.progressivepulse.org/economics/lets-try-and-abolish-tax
      It also means you spend first and tax after. PoMo thinks, as I understand it that you spend out of thin air only in extremis. Otherwise it’s back to tax and spend, which doesn’t have the liberating appeal.

  11. Peter May -

    “Besides if you give them the ablity to carry on creating our money we will still run into major problems at some point.”
    Not if they are properly directed and controlled. So I agree they need to be under tighter and more democratic control but I think centralising the creation of money gives bankers even more control, and more importance than they think they have already. We need more and local banks which cannot merge. Germany manages well with that system.
    The insurance pot would not be designed strictly to raise enough money to cover defaults – that is tax and spend again, but it would be a method of ensuring the banks and shadow banks always disclosed what they were doing

    1. Vince Richardson -

      Well, you still are left with the “moral hazard” problem, banks will take risks knowing the state will ultimately bail them out.

      And banks lie all the time about their finances they never get caught until too late.

      As Tim Geithner stated,you cannot bail out one bank at a time in a panic. One big bank going down tends to effect general confidence, which is the essence of our banking system. When it goes, the banks are all finished collectively.
      The German banking system is better to an extent ,they still had to rescue property loan based banks ;Commerzbank and Hypo Real Estate Bank group. Deutsche bank was heavily involved in CDO selling,had to take US/ECB emergency funds, has been heavily fined and is still struggling by all accounts.Merkel was also trying to exclude the smaller German banks from the supervision of the new EU banking regulator,one wonders what is hidden in there?

      Smaller/public banks would be a good option however,but we need to start growing them. Breaking up the big banks would be difficult maybe as difficult as what PoMo are campaigning for.But we must start it for sure.
      Unfortunately the banks we have are still doing what they did pre 2008…creating most of their money for property and share loans. Very little they do is of value to the wider economy ,in fact research has shown the bigger the finance sector the more unstable a nation’s economy becomes. As Adair Turner said “most of what banks do is socially useless”. We have little to lose by stopping this banking model.

      But short of a PoMo soution being realised, I think I would settle for smaller banks only lending to productive sectors(not proeprty or shares). Any resultant shortfall in credit nationwide can easily be picked up by increased gov spending,so we would probably agree with on that.

  12. Peter May -

    I have been reminded by looking at the Gower Initiative for Modern Money Studies website (also a good source of MMT knowledge) that for example, poverty in the U.K. is, in effect, a deliberate government policy choice. Because the Gower Initiative know we spend and tax.
    That is probably the nub of the issue that PoMo has to answer….

    1. Vince Richardson -

      You would say there is a good argument for that being a deliberate policy. Mary Mellor calls it “idealogical”.

      PoMo certainly argue it is unnecessary. In the last 10 years while the banks got bailed out the rest of the economy got sold out. Inequality worsening,wage rises worse since the Napoleonic war.

  13. jan b -

    Earlier in the thread banks using foreign money to get round lending restrictions was mentioned. Is there somewhere I can find out where this fits into the MMT framework? Similarly inward and outward foreign investment.

    1. Peter May -

      If the banks use foreign money to get round lending restrictions in one currency and the lend in the borrower’s currency then the risk is all theirs (until they fail in a major way in which case, if it’s a British bank, then the UK gov creates money to prevent their failure in the UK).

      Balance of payments is MMT’s blind spot – Bill Mitchell treats it like a household and suggests that anything that you export is a deficit because it is something that you might use – but are the Germans really missing the use of all those Audis and VW’s? I doubt it.

      Effectively inward and outward investment is an MMT very grey area but if you have the rule of law, as the UK does, then people will accept paper (ie gilts – govt bonds) if they have spare sterling because they feel legally assured of their investment /repayment.
      That’s not MMT, that’s – fairly – common sense…
      But I think you could also ask the same question of PoMo and the Gower Initiative for Modern Money Studies.
      Because with Britain importing half its food and having a trade deficit it is an important point!

    2. Vince Richardson -

      It is up to the central bank in its own jurisdiction. Though there have been quite a bun fights over this issue in the last few years. The USA, in particular, has been quite strict on foreign banks, insisting they now have only well-capitalized foreign branches on their soil, something that most central banks had become lax about pre-2008.

      As far as a PoMo system is concerned all bank lending would no longer be covered by deposit insurance. So bad loans would be a loss for the bank concerned with no state intervention. Which is as it should be.

      Under their Sovereign Money system, national banks could only lend money they actually have on accounts(or borrow). So they would be only allowed to offer investments accounts to fund any loans, where depositors would get a return of interest based on the risk of the loans . If the investment fails then depositors and the bank take the risk and may lose their money. Current accounts in the meanwhile would not be invested onwards and thus be kept 100 % safe. , but not gaining any interest or even run at a fee.
      In this scenario, any foreign bank lending in the UK would also have to face losses on bad loans. Any UK bank arranging a loan using foreign funds would also not receive a bailout.

      End result would be banks could potentially fail but the national payments system stays intact . This is currently the major reason central banks prop up failed banks. CB’s are tasked with upholding “financial stability” in their jurisdiction, which really involves keeping the payments system(i.e the banks) going at all costs. CB’s are historically not concerned about where the national banks get their funding from,but that has now changed a tad. Take that backstop away and the banks are left rather naked.

      This is an opportunity for national sovereignty to make a strike back against globalism and free movement of capital,which I believe has undermined national sovereignty. Capital has become an unregulated sector. Sadly most of it ends up in the UK or UK dominions. We have a bloated/ corrupt financial sector that is well overdue bringing to heel.

      As an inside view here is an interview by Michael Hudson, one of the progenitors of Modern Monetary Theory expressing his vast experiences in the world of international finance,well worth a watch for anyone

      https://www.nakedcapitalism.com/2018/08/michael-hudson-life-thought-autobiography.html

  14. jan b -

    Thanks Peter and Vince for your replies and for the Michael Hudson link. Plenty there to try and get my head round, especially as a relative beginner!

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