October 17, 2011


Debt, Deficits, and Modern Monetary Theory: An Interview with Bill Mitchell (Winston Gee Bookmark and Share, 10/16/11, Harvard International Review)

Bill Mitchell is the Research Professor in Economics and the Director of the Centre of Full Employment and Equity at the University of Newcastle, Australia. The following is an edited transcript of the interview, conducted August 15, 2011.

Thanks for joining us, Professor Mitchell. I wanted to talk with you today about Modern Monetary Theory (MMT)--the theoretical approach you've been integral in developing--and its relevance to current debates over public finances. I know you've been quite scathing of mainstream economic discourse. For example, you wrote in your blog recently that "the economics media is dominated with financial issues - too much public debt; debt ceilings; fiscal sustainability; sovereign risk; and all the rest of the non-issues that have taken center-stage." Could you take a moment to explain why MMT renders these things non-issues?

The most important misperception is that MMT is in some way outlining an ideal or a new regime that could be introduced. The reality is that MMT just describes the system that most countries in the world live under and have lived under since 1971, when the US president at the time, Richard Nixon, suspended the convertibility of the US dollar into gold. At that point, the system of fixed exchange rates--in which all countries agreed to fix their currencies against the US dollar, which was in turn benchmarked in price against gold--was abandoned. So since that day, most of us have been living in what we call a fiat currency system.

In a fiat currency system, the currency has legitimacy because of legislative fiat: the government tells us that's the currency and then legislates it as such. The currency has no intrinsic value. What gives it value, what motivates us to use the currency that the government suggests, is the fact that all tax obligations are denominated in and have to be extinguished with that currency. We have no choice. If you live in America, for example, you have to pay American taxes to the IRS with American dollars. So demand for the currency, otherwise worthless bits of paper, is driven by the fact that all tax obligations have to be extinguished with that currency. Once you consider that, then you immediately realize that the national government is the monopoly issuer of that currency. That means that the national government in such a system can never be short of that currency; it can never run out of money. It doesn't need you or I to lend it money or you and I to pay taxes to get more money. It can never run out of money. That's the first basic insight of MMT: governments are not constrained in their spending by a need to raise revenue.

If you extend that logic a little further, you might ask, "Well, don't we pay taxes and buy bonds so that the government can spend?" Well, you first have to ask yourself the question, "Where do you get the money to pay taxes and buy bonds?" And the answer is that we can't get our hands on the currency until the national government spends it. Spending is the prior act in a fiat monetary system; taxing and borrowing are following acts. In effect, the government is only taxing what it has already spent, and it's only borrowing back money that it has already spent. Once you start pursuing this logic, you realize that most of the propositions that are occupying the current debate around the world are based upon false premises.

Another basic premise of MMT is that we now live in a world of floating exchange rates, so all of the imbalances in the foreign exchange market are resolved by the price of the currency fluctuating. What that means is that domestic policy instruments--the central bank and fiscal policy--are free to target domestic policy goals knowing that the exchange rate will resolve the currency imbalances arising from trade deficits, trade surpluses, et cetera.

I want to touch on a few things there. The first is MMT's basic insight that governments don't have to tax or borrow in advance of spending. Given the recent furor over credit rating downgrades, one might wonder: if that's true, why do governments continue to issue debt and bother themselves with the discipline of the bond markets and the credit rating agencies?

Yes, it's an interesting question, and it's one of the things that really trips people up in trying to understand MMT. Under the so-called Bretton Woods system--the fixed-exchange rate system that prevailed in the post-WWII period until 1971--governments were revenue-constrained because the central bank could only allow so much money in the economy according to its holdings of gold and the currency value. So if the government wanted to spend more, it had to make sure that it took money from someone else in the economy so that the overall money supply would be constant. In that sort of monetary system, the government had to tax or borrow to spend. This sort of reasoning has crept into the modern monetary system, where it no longer holds because we use fiat currencies instead of convertible currencies.

But there's probably more to it than that. One set of explanations is that the profession hasn't worked out the implications of a fiat monetary system. I don't subscribe to that because people aren't that silly.

Posted by at October 17, 2011 3:28 PM

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