There has been much discussion both here on Progressive Pulse as well as at Tax Reseach UK on where money comes from and what has come to be known as Modern Monetary Theory – usually referred to as MMT.
I am far from alone in thinking that this basic outlook is not a theory but actually a testable conclusion as to how the money system currently works. It would be much better described as Modern Monetary Practice.
Indeed when even John Redwood is pretty much on board we can presume, I think, that MMT is here to stay and the liberating idea that the government can print money until it runs out of people willing to sell it goods or services for the money which it prints, is the way things work. You just need to counter inflation through taxation.
So far, so encouraging. The worry is about the lack of attention given to to the balance of payments within this outlook (and MMT followers in general) – mind you it has to be said that even within the current government economic view it is rare to hear anything about the balance of payments, a complete obsession with the deficit predominates. Yet Professor Steve Keen says, if you are a net exporter you are outsourcing your money creation and conversely, you are outsourcing your borrowing when you are a net importer.
Two things follow, I suggest:
First, in a country with a stable constitution and where the rule of law pertains, there should be little difficulty in persuading other countries to invest in your own country either by buying bonds or some of your physical assets.
Second, if you import too much, eventually your currency is likely to devalue, because it will cease to be attractive to hold or you may run out of assets others consider worth investing in.
Does this matter?
Arguably not. But Britain is unique in that it cannot eat if it does not import so it really must have a government that ensures that it can either promote exports to compensate or ensure sufficient economic coherence to enable reasonable self sufficiency. For example, Cheddar cheese has a worldwide profile (and is extensively copied) but, if we want pineapples, we are never, realistically, likely to be able to grow them. Even when tiny Holland has become a big food exporter, I doubt there is much appetite in the UK to ‘greenhouse’ the countryside as they do, and while I, too, have bought those Dutch tomatoes I don’t ever remember being impressed with their flavour. So we will probably remain with a requirement to import 40% of our food.
That implies we will need to export other things. I consider we would be unwise to concentrate on financial services, when they have spectacularly crashed our economy once. Indeed we should avoid undue specialisation of any sort as we see here. It is conducive to an unequal and poorly working economy, which reduces prosperity. So we need plurality and diversity. Some companies will be exporting, some satisfying just domestic demand. This is why we desperately need an industrial strategy – both to replace imports and to encourage original ideas. That is why Mariana Mazzucato’s ‘The Entrepeurial State’ is important. A National Investment Bank together with other state capital projects are likely to increase economic activity, enable import substitution and are ulimately likely to increase exports. So this recipe, particularly for a net food importer, like Britain, is important and should form a part of the so called ‘MMT’ prescription.
Thus the corollary of knowing the government creates money is that we have to try and make more effort to get the balance of payments generally balanced. Obviously a country with a solid legal system such as the UK should not have difficulty in selling bonds or assets to foreigners but the interest rate to encourage them is interest that would not otherwise have to be paid, so is likely to represent a net loss to the country.
It is not a case of panic, it is just a case of knowing that with a net importer, like Britain, without a so-called reserve currency like the US (and with China’s economic development the reserve status of the American dollar is unlikely to last long), we need to embrace the basics of MMT whilst still taking on board the basics of the balance of payments.
Of course we can sell bonds to different countries but are we comfortable selling physical assets?