MMT part II: a synthesis, an olive branch, and a defence of Twitter

This is a short follow-up to my previous post, ‘MMT – sophistry or substance?’, and Simon Wren-Lewis’s ‘Why is MMT so popular?‘.

Summarising, I suggest the two defining characteristics of MMT are: (1) a theory of public finance, which identifies inflation as the constraint on deficits, and advocates fiscal dominance; and a belief that (2) money is a liability of the state. The latter is false. One feature of a liability is that in order to transfer it voluntarily to another party you must pay them a positive sum. According to MMT, the supposed ‘liability’ money confers on the government is that it is accepted in payment for taxes and other government services. Funnily enough, everyone else accepts the same money as payment, without further inducement.

The reasoning used to argue that money is a liability is usually a variant of the “Randall Wray Fallacy” (RWF) I have discussed before: use the same word to describe distinct phenomena and conclude they are the same. (See my exchange with Randall Wray.)

Twitter can be very useful. The debate that followed this post provides lots of supporting evidence of the repeated use of RWF. Frequently, inverted commas are used to signal that the same word is being applied to identify something different. It also provides evidence of the ‘football team’ approach to thought. In a debate with thoughtful individuals on both sides, beware those that cede nothing, or ‘like’ only one side of the debate. Bias can be revealed by behaviour.

Twitter is also a rapid dialectical device. Where else can one discuss a school of thought, where the main protagonists are also pitching in? I have learnt a lot from these exchanges. And although certain entrenched extremes rarely budge, a majority of opinion tends to be in the centre and is open-minded. It’s not a waste of time.

A synthesis

From my perspective, the most flawed aspect of MMT is the dogma that money is a liability of the state at book value. Accounting as religion is something I have addressed before – and no one, other than Nick Rowe, Simon Wren Lewis and Brad DeLong [correction: and Stephen Kinsella] – have substantively considered the implications, to my knowledge. Think of it like this: what if the accounting standards for base money change? Would it stop being a liability of the state? The legal or accounting treatment of an economic phenomenon is neither the first nor the final word. In ethics and jurisprudence what is written in law is far from uniformly what is ethical or moral. That’s one reason why laws and accounting conventions change. That’s one reason why market values and book values differ. You dismiss Warren Buffett at your peril.

That said, many economists are very ignorant of much economic history (myself included). And reading economic history does change how one thinks economies work. However, history cannot alter a logical inconsistency. And historians are often profoundly biased – Niall Ferguson on bonds and fiscal policy springs to mind. He martialled lots of evidence from history on the probability of a bond collapse and runaway inflation post-GFC. Deductive reasoning and a smaller sample suggested the opposite, and was right.

Important questions emerge from the chartalist analysis of the history of monetary institutions.

But which of the following does historical evidence prove:

(1) That the state plays a central role in establishing a monetary monopoly;

(2) That once established, the survival of a monetary network depends on taxation (or some other compulsory government revenue);

(3) That the theoretical question – ‘is money a liability?’ – can be answered in the affirmative?

My synthesis proceeds like this: The historical evidence is very helpful at supporting (1), although there are exceptions. The three dominant networks identified by Hume – money, language and the law – are all frequently established with state intervention.

Regarding (2), I see no compelling evidence to support this. There is an obvious reductio ad absurdum problem: Let’s say the use of money in a society did depend on the government forcibly raising revenue, through taxes etc. What happens if the government starts cutting taxes? At which point do we suddenly stop and say ‘the government has stopped generating revenues from selling postage stamps – panic!’

That said, Warren Mosler has pointed out a very intriguing fact – super-low tax regimes seem to have (quasi-) fixed exchange rates. This is interesting. Obviously, super-low tax economies typically have other features. But at least Warren provides a testable hypothesis: if one of these currencies floats, taxation will matter less than he thought. I think it already proves that taxation matters not a lot once a network is established, and the idea that if Saudi floated its exchange rate there would be panic until they introduced income tax seems equivalently unlikely.

Finally, the latest tweet storm reveals that there is a legal equivalent to accounting as religion, it is law as religion. A liability in law, is precisely that. It can be an asset in reality.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

26 Responses

  1. Gary Anderson

    You said in the first MMT article that base money is not backed by collateral but you said in the article about accounting as a religion that reserves cannot be issued until the central bank buys bonds. That is the collateral security I was talking about when I said that base money must be backed by collateral. Congress has imposed a law one the Fed requiring bonds in exchange for reserves. That rule would have to be waived for real fiat helicopter money to be issued. Right?

    • Eric Lonergan

      Thanks Gary. Central banks typically add reserves by either buying bonds or paying an interest rate on reserves, but they don’t have to. They could just transfer the money and exchange it for nothing.

      • Gary Anderson

        Sometimes I wish they would just transfer money without collateral! Btw, I found the link to what the Fed does about collateral from their faqs page:

        “The Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts in to circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities.”

  2. Denys

    US Cash is just a receipt for Treasury Bonds held by the Fed.
    We could get rid of the Fed and just set up a special purpose vehicle that buys Treasury bonds and issues dollar notes. (OK we need someone to cover the interest rate risks).
    So cash, as opposed to money, is a securitisation of debt. The advantage over the underlying debt is the ease of transfer. The downside is you get no interest!

  3. Denys

    In fact banks could buy their reserves not from the Fed but from this same special purpose vehicle. They deposit their reserves and the vehicle buys an equal amount of Treasury Bonds. So the reserves, like the cash, are money good (or at least as good as the US government.).
    So we can abolish the Fed and just use a special purpose vehicle to create cash and reserves. The government doesn’t need to be involved at all – except to issue debt from time to time.

  4. griffo

    terrible article that starts by asking questions about mmt but dors not answer them. this would not even rate a pass mark at an undergraduate course. complete waffle.

  5. Wayne McMillan

    Hi Eric, What does it matter if taxation doesn’t drive money. If a government decides that a certain currency will be legal tender and its accepted by the populace, then the government controls the issue of that currency. When a sovereign government controls the issue of a fiat currency through its central bank than it can buy any available goods and services for sale. When the populace believe that the currency in question has no value due to hyperinflation than that changes everything.

  6. Stephen Ferguson

    “MMT … belief that (2) money is a liability of the state”

    Not sure MMT says that. Proponents often quote Minsky’s take e.g. this Randy Wray (a student of Minsky) blog post…

    “Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted”. You must understand that “money” is by nature an IOU. You can create a dollar-denominated “money” by writing “IOU five dollars” on a slip of paper. Your problem is to get someone to accept it. Sovereign government has an easy time finding acceptors—in part because millions of us owe payments to government.”

    Private bank money only gets generated by an exchange of IOUs (their ‘money’, handed to Joe Public, and Joe Public’s ‘money’ aka a loan agreement, handed in return to the bank). Net zero at inception.

    PS The notion of money being an IOU is exactly the that used to describe it by anthropologists such as David Graeber.

    • Eric Lonergan

      He’s absolutely right up to the point he starts talking about IOUs. Just because IOUs can be used as money doesn’t make money an IOU. It’s an IOUN. But yes, taxes are used to establish a monopoly. Once established, no longer relevant.

      • Stephen Ferguson

        IOUs, in other words debt, comprises the deepest relationships in human society. Was there ever an older communication than the one cavemen waving to another to signify ‘I owe you one’? It could even be claimed the debt (not merely monetary) we all owe each other defines society and even our belief system (e.g. the debts we owe to god that led to the practice of sacrifice seen in many religions). Which is why we should take the findings of anthropologists on the role of debt & money such as David Graeber very seriously (certainly far more so than the ‘noddy’ models of the role of debt & money developed by economists – well, at least the mainstream ones!).

        I doubt you agree, but here’s Graeber on the subject in article in The Guardian …

        By the way, just read one of your previous posts. I absolutely agree when you say “To non-economists, the suggestion that money is a debt makes little sense.”. Its certainly a brain twister that helps no one, but when its put to people that money is an IOU, people get that the IOU ‘thing’ (e.g. a Tesco voucher) has value.

  7. Stephen Ferguson

    “What happens if the government starts cutting taxes? At which point do we suddenly stop and say ‘the government has stopped generating revenues from selling postage stamps – panic!’”

    Again, I think you’re selling MMT proponents a little short here. Unless I’m missing something, they aren’t saying what you think they are. From “Modern Money Theory 101: A Reply to Critics” Éric Tymoigne and L. Randall Wray (NB: I’ve capitalised words that are italicised in original text) ….

    “But to be clear, MMT does not argue that taxes are NECESSARY to drive a currency or
    money—critics conflate the logical argument that taxes are SUFFICIENT by jumping to the
    conclusion that MMT believes there can be no other possibility. In truth, MMT is agnostic as it
    waits for a logical argument or historical evidence in support of the belief of critics that there is
    an alternative to taxes (and other obligations). We have not seen any plausible alternative. The
    orthodox-Austrian Robinson Crusoe story is unacceptable as it contains several logical flaws
    (Gardiner 2004; Ingham 2000; Desan 2013). The other common explanation relies on an infinite
    regress story: Billy-Bob accepts currency because he thinks Buffy-Sue will accept it (Buchanan
    2013). In our view, that is less than satisfying. If Palley, Rochon, or Vernengo has an alternative
    story, we would love to see it. ”

    • Eric Lonergan

      Choice of words is odd. ‘Drive’? My argument: taxes help establish network, then irrelevant. The infinite regress argument belies a basic misunderstanding of network effects. On this basis no one would ever have used a fax machine: they’re only useful if someone else has one. Or email … or language!

      • Stephen Ferguson

        When the FA zeros all the team’s league points at the end of the football season (and ranks the best teams) that act is what ‘drives’ the values of the league points. Conversely, if the FA failed to do so, the Arsenals of this world would accumulate more and more points every season and always win the league. The value of league points would probably not immediately abandon their use but the ever-stratifying league positions will inevitably ensure their value converges to zero.

        For both the FA and the government, as ‘currency’ issuers, they must keep on collecting the unique thing they issue in order to retain its value.

        Your argument that ‘collection’ need only be transitory and then all will be OK isn’t supported by the football example.

  8. Nick Edmonds

    “One feature of a liability is that in order to transfer it voluntarily to another party you must pay them a positive sum.”

    I don’t really have much of a view of whether currency is “really” a liability, but I’m just trying to process this statement in relation to notes and coin.

    Let’s imagine that the UK government wanted to transfer its obligations in relation to part of the monetary base, for example paper £10 notes. To do this it would have to refuse to ever again accept any of these notes, either in exchange for currency in other forms or, critically, in settlement of any amounts owed to it including taxes. To make this a transfer rather than just a repudiation, it would need to find another party who would agree to accept those notes in perpetuity. So let’s say it persuades a private company – Tesco, say – to agree to this.

    At the moment this may not make such a difference, as Tesco is accepting paper £10 notes anyway. But at some point (quite soon for these notes) they will cease to be legal tender and at that point, people are likely to start offloading them on to Tesco. They may be worth something as long as Tesco accepts them, but they will become increasingly less liquid than £10 in other forms. Critically, if Tesco were to get into financial difficulties, there would likely be a rush to dump them on it.

    I can’t really see that it would agree to take on this role without being paid a (sizeable) positive sum.

    • Eric Lonergan

      This is a very curious comment! What does this mean ‘To do this it would have to refuse to ever again accept any of these notes, either in exchange for currency in other forms or, critically, in settlement of any amounts owed to it including taxes.’? That is not transferring a liability! That is refusing payment. A liability can clearly be transferred, and a voluntary transfer requires compensation. There is no equivalent for money. The government accepts money as the means of payment and so does the private sector. The government saying ‘I won’t accept $10 bills’ is neither a default nor a transfer of a liability, it is an act of eccentricity. ‘Liability’ means something concrete. And it’s not something you want to have.

  9. PrisonerOne

    Money is a liability, just not a liability of the state. Money is a liability of whoever owes a debt of money. If the government creates a currency and demands payment of taxes in that currency, then the citizenry must accept the government’s currency when that government spends money and acquires real resources. The citizenry needs the money in order to pay the tax. MMT gets the second part correct, but for some reason misses on the liability issue. If we accept the notion of endogenous money creation by banks, then we have to accept that the money is not a liability of bank – and instead is the liability of the borrower who, by taking a loan, now has a debt of money. The government need not be involved, and mostly isn’t.

    Take bitcoin for example. Bitcoin doesn’t have a government demanding taxes in the unit, but it doesn’t necessarily need one. For bitcoin to survive as a currency, it only needs to have debt issued in its unit. It can survive for a while by the traditions of a user community – the effect of inertia, but survival is really guaranteed by debt which forces bitcoin’s use. In a very real way, the ransoms imposed by criminals who demand to be paid in bitcoin are creating the bitcoin’s guaranteed usage.

    • Eric Lonergan

      If you have a liability it costs you something. Money doesn’t cost anyone anything, it’s a property of various things which allows us to buy things. Remember, if you EVER hear anyone argue that money is a ‘liability’ you know for certain that they do not mean it is a liability, they are using the word ‘liability’ to describe something else. We know this because the two things are totally distinct.

      • PrisonerOne

        Correct. My wording should’ve been different. Money is a liability if you owe it, and an asset if you own it.

    • Mike

      MMT is based on the Credit Theory of Money. Basically, all money is credit.

      So what’s your beef? Other than a lack of understanding the liability/credit paradigm?

  10. Derek McDaniel

    Good comments. As for “accounting as religion”, I couldn’t agree more. It is easy to prove the accounting identities are wrong by destroying money or making a perfect counterfeit. Accounting rules are just an ideal we try to follow and enforce, and accounting identities hold when these rules are followed, but they aren’t natural law. While I agree that “money is not a liability”, I’m still not clear on certain issues, like what it means when debt is used as money, or what makes accounting information a liability. In programming there is an idea of “technical debt”, where failing to use a best practice leads to costs down the road. Qualitative descriptions of debt like this make more sense to me than the quantitative approach used by balance sheets. How do qualitative descriptions of debt relate to quantitative balance sheet assessments? Is it arbitrary? These are questions I ask myself.

  11. Bob

    I wonder if you could address this 2016 statement by Neil Wilson:

    “Being British this is never a question that arises.

    On all my paper money the facts are written in ink. It says on a Bank of England £10 note “I promise to pay the bearer on demand the sum of ten pounds”.

    The note is a promissory note. A receipt for the Bank’s liability to deliver ten pounds. That promise is why its an asset in my hands.

    People just need to get used to the idea that bank accounting is backwards from other entities. This should be clear from the notion of being ‘in credit’ with a bank. ‘in credit’ is a description of an accounting liability!

    For banks currency and deposits are liabilities and loans are assets. They are the yang to the ying of commerce.”

    • Eric Lonergan

      It’s a very odd observation. What’s written on a pound note is an aesthetic choice. Lots of things are written on notes and coins. The very fact that a ten pound note says ‘the bearer is owed ten pounds’ which is circular, tells you all you need to know. A ten pound note is something you buy things with, it is money, it isn’t a debt – which is almost the opposite: an obligation someone has to pay you.


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