Semantics of MMT

One good thing about joining Douglas the MMT Trader is that I get exposed now to trolls and critics who want to debunk MMT. This might be fodder for several posts, so this is a Part-1. I am not going to launch into esoteric philosophy and money crankery, so don’t be scared. My approach is more mathematical. In the sciences, and let’s be generous and call macroeconomics a social science (there is theory and empirical data to test it, just not always conclusively), so we can formulate definitions, and theorems using the definitions, and then test them.

((If you think we cannot then you are on another planet like Yanis Varoufakis, and we cannot easily communicate my friend. Seriously though, what Yanis says is that we cannot replicate trials, so economics is not like other sciences. But social sciences have always been this way, you cannot lab replicate an entire human culture. Science is however not defined by “needs replicated control trials”. RCT’s are only one method available to a science, if RCT’s are not available you have to test theories and models in other ways, which can be done, it is just not as easy. Besides which, RCT’s are controlled, and the real world is often not, so RCT’s cannot ever constitute all of empirics in science.))

Is Economics a Science?

What Varoufakis gets correct is that a lot of professional economists are in fact not engaged in any science. In this he would agree with someone like Steve Keen who would also say the mainstream Neoclassical school of economics is not a science. What is it then? The answer is that it is a mathematical theory. If formulated consistently it violates common presumptions in the real world (real people are not rational, and have poor capacity to maximize their subjective utility (utility as a Neoclassical must non-circularly define it)).

When it is formulated with idealized axioms the Neoclassicals want to believe are true in the real world the theory can in fact become inconsistent (neoclassical axioms imply there is no stable price vector${}^\dagger$). And so for these, and a few other reasons, Neoclassical economics is a fictional fantasy. If consistent, it is not applicable to the real world. If inconsistent then it is invalid in every possible world.

That is what you call a diabolical piece of mathematics and a waste of human intellect. Like String Theory that proves Strings are inconsistent.

${}^\dagger$See John Blatt Dynamic Economic Systems .

Definitions Give Formal Semantics

The idea of a definition is to convey meaning, but this is only possible if we are communicating with some sentient conscious “knower”. If not, then we are just formalising our thinking for ourselves, but that can be a worthwhile thing to do. Define what you mean, make it a record, then you can have what Wittgenstein thought was impossible: a private language.

If someone uses a different definition for a word, say “money”, to us, then we have the possibility of needless debate and argument. I do not wish to engage in that sort of thing. So if you are going to communicate meaningfully with us as MMT aware activists, you will need to either accept, temporarily, our definitions, or lay-out your own and beg us to temporarily explore yours.

In MMT we have a simple enough definition of “money”:

• Money is an IOU of the issuer. Whatever the issuer promises in redemption for the IOU dictates (perhaps subjectively) the value of the money (what it is worth to you, how much effort you will be prepared to obtain their IOU.)

Notice no such thing as a “bank” is yet mentioned. Money can indeed exist without banks, but an IOU does require some sort of record keeper, even if it is you keeping the record in your head. In the real world these are normally banks, or one of the functions of banks.

We then have a new term to define, for state currency or state money:

• State currency is an IOU of the state, which for normative purposes MMT defines to be the tax credit (that which is accepted as redemption for payment of tax liabilities).

The state owes you redemption of one unit of tax liability when you receive their currency tokens, this is one reason (among others, but the primary reason) why you accept the state’s currency in payments.

((I am not talking about psychologically why you accept dollars rather than gold or bitcoin. Most of you accept dollars because “everyone else does” so to understand that you have to know the macroeconomics, because there is no way as a whole a society will accept worthless bits of paper for payments. The system as a whole “knows” something backs the state currency, and as soon as they learn it is not gold stored in Fort Knox, they realize it is pure state power. It is not by genial “social agreement”. The state can use the gold as a fig leaf of course, to hide the naked reality of their fiat currency, should they feel the need to do so. An MMT’er would not need them too, enjoying the full naked splendour. Bloody perverts.))

The phrase “the money” is ambiguous, since it can refer to the tokens, or the account records, or the units of the records (unit of account). Provided you appreciate there is this ambiguity we will allow you to talk to us using the word “money” if it is clear enough from context which meaning you are employing.

With a few other definitions and axioms (simple postulates that we agree need not be proven) which I will not belabour by writing them all down (see Theory ), MMT can now claim a few corollaries.

One is that it now matters a great deal whether you can get the tax credits only from government, or only from private banks, or both. Because bankers can be tiny little assholes about their tightness on credit. Why? Because governments deem them insolvent if they cannot cover their liabilities (how frickin’ dare that government encroach upon the beautiful efficiency of the private sector! All going and making the currency valuable and all.)

It matters also because if governments allow themselves to emit their own tax credits then the demos has some measure of protection from predatory bankers, and also the government itself is now not beholden to the pecuniary interests of private bankers. It seems to me this is sociologically extremely important!

((Note to Positive Money activists: why would a government — as in the governors — refuse to allow themselves the ability to issue their own tax credits? Why am I even bothering to ask the question!?))

MMT is thus not “merely accounting.” The Money Story , which is a political story, makes a huge f-ing difference. If you get it wrong you can get mired in austerity politics and all sorts of other abuses and crimes against humanity (allowing involuntary unemployment) and all for no good reason but ignorance.

I can give you Warren Mosler’s pithy summary of the Money, Treasury Bond, and Price stories, all in a nutshell, which is as succinct a statement that I can find pointing out MMT is much more than “mere accounting.” Warren wrote:

It’s [MMT] recognizing the currency as a public monopoly and the implications thereof.

To see the implications are truly profound you only need to dip your toe in the MMT literature, then you will see there is a whole lot of depth to that pool. You cannot grok it all in a day. Just at least take a look at Mosler's Proposals here for starters.

What about “bank money”?

Let’s see. Banks issue credit, which is your promise to repay, not the bank’s. The bank allows you to create your own official IOU, and amazingly you can pay your tax liabilities with it! Even better, some idiot down the road running a grocery store will accept this and give you groceries for it! Aren’t banks marvellous?

Also, the unit is the state currency, which means what the bank issues is always an IOU of the state (we are not talking about corporate paper here either, but even that is also denominated in the state’s unit of account: “dollar”, “yen”, “euro”,…)

So banks are offering you a YOM — You Owe Me, which is functionally just the inverse of an IOU. How the heck can they do this?

It is because they are licenced to use the state’s unit of account. So when you take the bank credit, now being in debt to the bank, you are nonetheless in credit to the government, who will always accept your currency in receipt of tax payment. This is why you can always use your “bank money” to purchase goods (why else do you take on the debt to the bank?). A seller will take your filthy “bank money” because to them it is functionally exactly the same as clean green government issued currency. They may indeed pay off their tax liabilities with a fraction of your purchase.

The problem here is the commercial banking system, the private banks, are not the currency monopoly. So you can certainly pay off your tax liabilities, but then you still owe the bank, or they’ll take your house off you (or whatever you implicitly or explicitly offered as collateral).

But why? Why can the bank not pay itself?

Do I really have to say why? They are licenced and regulated by the state. Anyone heard of jail for fraud laws? Anyone?

So this is very different to the state’s currency operations, but it is using the same unit of currency.

The bank cannot operate without the government around to impose liabilities that, by force, drive demand for the otherwise worthless state currency. They can then issue their YOM’s, but only because the state permits this.

Now some MMT’ers say this means the private banks are acting as “agents of the state”. This is true, but it is only a definition of what it means to be one type of “agent”. People get all uptight and lose their marbles over this, but it is just a definition. If you do not like saying banks are agents of the state, then call them something else. It does not change the reality of the monetary system operations.

Banks cannot function by issuing their own money. If they try to issue an IOU they’ll pretty soon run out of takers. Try it yourself — is a possible taunt (to every cryptocurrency nutter ever).

((The tragedy of that is that the cryptocurrency early adopters did make billions, all at the expense of the late-comers. It was, and continues to be, a bit of a tragedy, like going to the casino, a tax on stupidity, but a big gain for borderline criminals and modern day Charles Ponzi’s.))

The reason why banks are not running ponzi schemes (aside from the fraudulent bankers) is because they are government regulated, they must satisfy solvency and capital requirements, or the state shuts them down. This is very strongly enforced. One thing governments are finicky about enforcing (as with counterfeit). If the state loses this power, then Its currency demand drops to zero. But then so will the bank’s.

Why People Troll MMT — Positive Money and All That

One reason we find a lot of trolls making rude or obnoxious comments on MMT related content on social media is because they are using different semantics, different definitions.

If you define “money” as the account records emitted by private banks, and only by private banks, then it is debateable whether this can be considered state currency.

However, if the state accepts the bank created records as redemption for tax liabilities, then the state is in cooperation with the private banks making it be so (by law) that the bank credit is state currency. Or, the state might say you need 2 units of bank credit to redeem one unit of their tax liabilities. (They usually do not, but they could.) That would then be a dual money system, but trivially so, a conversion factor. You could very well just assume you have to pay double the tax you used to, denominated in the “private money” tokens. Total bananas, but I guess pigs could grab jet packs and fly.

Trolling Over Definitions

People troll MMT because they think their definition is the one and only true definition.

It is a bit infantile, because definitions only matter when they are employed to theorize or model. So if you can come up with a model where the dominant monetary form in a region is the bank credit, issued only by private banks, and the governments are only getting in on the action by imposing tax liabilities denominated in the bank currencies, then you have some grounds to argue against MMT theory.

MMT says the state currency is a unit of account of the state created by the law of the land, not by banks. Banks can however obtain licences to operate credit facilities from the state. This is in fact objectively true, if one examines the law in any nation that has a state currency driven by taxation, and a banking payments system.

It is not only by law either, the old fashioned ledger books conformed, and today the software systems the banks use have to be licenced and they implement MMT operations, pure and simple. (This can be empirically tested, and it has been .)

So now we have the opportunity for departures in theories based upon the definitions.

We can ask,

1. Do governments need to borrow credit from banks, which they have to repay with interest, in order to get the state currency into the government account books?
2. Why do banks allow the government to vote to issue more of the bank’s currency? Or rather, why does a government with an army and police force permit private weakling banks to dictate the credit supply? To even pose these questions is conceding the principle! These are not applicable questions! You can ask them, but the answers are trivial.

The answers are that (1) governments never borrow from banks, and (2) governments never take orders from banks. It is the other way around. But if you want to appear insane, and test your sanity, we can examine the software and accounting law and practices and check to see if you are posing a sensible question. You will find you are not. Governments, of any reasonable sized population, define their currency, and permit banks to operate as private payments and deposit holding services. Like our bus system (in Wellington, New Zealand) which is publicly licenced, but privately run for profit — they could not operate without our city council’s approval.

((Philosophically, is a private public service provider really “in the private sector”, or are they really in the public sector? The answer is, it depends upon your definitions. So do not be a nerd if someone says otherwise to what you think here. One definition: Public service contractors are in the private sector when they clock off work, and in the public sector when they are on the job if the government is contracting them. This might not be your definition. To see if it matters, you have to check what is legally enforceable: what workers rights do the contractors have? Are they civil service protections, or the private sector wild west?))

Notice we have already crossed over into MMT land, because we are talking about account records, not gold. Governments (most of them anyway) have no interest anymore in gold. Fort Knox in the USA viewed as a backing for the US dollar is a charade. It is a store of gold, that might be used for future space travel optoelectronics. But that is all. These days it never gets shipped around in any significant amounts to back any payments system, and this was signed by law in the 1930’s when the USA stopped redeeming for gold domestically, then again in 1972 when the USA stopped the charade of Bretton-Woods (a quasi gold standard, but really based on the US dollar, but the USA was technically still promising redemption in gold up until 1972. No longer.).

I will concede ground to our frenemy “Rob” on the comments sections${}^\ddagger$, that gold is moved around. How about that, people do elevator it up out of Fort Knox, and back down in a hole in the ground in Moscow. Why the F? If it is not for an electrical engineering or high-end consumer electronics factory?

${}^\ddagger$I do not want to slander the real Rob, so I hereby make a strawman Rob, who I will name Niels Rob, or Niels Bor in Danish, or Niels Bohr. He takes the Copenhagen Interpretation of quantum currency (it’s gold) and I am Einstein taking the realist account of state currency (a tax credit). Notice we are already stupid both, since we have different definitions. But the idea is to determine if there are real world consequences that can be tested, like the EPR experiment. (Bohr is considered to have won this debate, ok Rob?) ((Apologies to physicists who would recognize I have Einstein and Bohr backwards in this analogy. Credit is entangled with debt. Gold cannot be entangled. But read my T4GU pages to see why Einstein knew about entanglement better than Bohr in the ultimate end. ER=EPR my dudes.))

Partly, rubes need this charade that something physical (real stuff, man!) “backs” the currency. You know…. otherwise they might not find someone willing to purchase their wares. Someone’s promising gold for redemption,… right?

Satisfying the rubes is a time-honoured tradition. It is unknown whether Putin understood any of this. He might be one of those rubes thinking Moscow better stick gold under the ground or the rouble might collapse. The permafrost, you see. In any case, gold bullion does get shipped around from time-to-time to keep these rubes sleeping at night. I mean… the horror! What if people lost all the credit records??? Haven’t you seen Mr Robot? You can’t be a giga-chad if you do not own gold my dudes.

Ultimately though, there could be method to Putin’s madness. If you have some idea the gold price is going to go up in dollar units, you can meddle with your foreign exchange rate by selling gold you bought cheaper with your currency (yen, euro, rouble,…). Again I can give some battle ground to Niels Bohr here. If Russia desires a fixed exchange rate, and thereby signal they want to help their export oligarchs and screw their domestic workers over, than they’ll try to maintain some foreign exchange rate target they decide is satisfactory for the exporters. This will not help them win a military conflict however, so I really do not know what Putin is thinking. He has workers, energy, steel, they can make bullets. Why do they give a toss about the forex rate? They could be rubes. Or they could think this is a form of psychological warfare, because the foreign state officials also believe gold is currency rather than a buffer stock. Who knows.

It is possible some utter catastrophe could destroy all branches of the US government, then the IRS might stop functioning and the demand for the USD collapse to zero, and water or coffee beans or gold might become a medium of exchange for a while until a new government with tax authority and enforcement is formed. Before then Fort Knox might get raided, and whoever raids the most might find themselves as the new monopoly issuer of a private currency (records that it promises to redeem for gold). Adults not being adults and making misery for the masses.

I love, or love to laugh at, pedants who say this is why MMT is false. When exactly do they think the USA will collapse? Sure it could happen, but until it does the US dollar system is well-described by MMT. Same here in New Zealand for the NZD. I mean seriously, when the Aussies run out of fertile soil and desalinated water… “We will fight on the beaches…”

Trolling Over Positive Money

I class the Positive Money cranks as a different sort of troll. They tend to have their hearts in the right place, but their conceptions of “money” are so poor they can be a hazard to the public good consciousness.

But here I have to create a strawman, because I have failed to meet a Positive Money theorist in the wild. I had one roped online for a day, but they gave up on me! Gave up on me!!! Hell, I must be in a non-redeemable cult.

However, I am prepared to build this strawman out of Wikipedia . This one is for the UK, but substitute “Bank of England” for any central bank, and you get Positive Money for any country.

Positive Money’s historical backbone proposal is to introduce a “sovereign money system”. Under such a reform, private banks would be deprived from their ability to create money by extending credit into the economy. In turn, the Bank of England would regain the monopoly over money creation, by financing the government’s budget (monetary financing) or distributing a citizens’ dividend (“helicopter money”). The group however refutes any affiliation with Modern Monetary Theory.
— (downloaded 2023-01-02) .

They are right to refute affiliation with MMT, because MMT would say, “LOL! The UK already have sovereign currency,” they just do not know it, and act like they do not have BOE created money. It is fair, I think, to say the UK monetary system looks like a private bank mafiosi, but appearances are deceptive. It is a bankers mafia only because the government wants it to be. Why does any foreign power accept the LIBOR?

Warren Mosler’s suggestion was to steer the Fifth Fleet up the Thames and tell them what the interest rate will be.

All private banks in the UK have all obtained their UKP equity from past UK government deficits. So “the money” all came from the UK government. It was never silver or gold.

The political issue the Positive Money activists have correct is that the UK monetary system is heavily influenced by the private banks and their credit creation authority. That authority comes from the UK government, not the private bank cartel. But this is only legal business. It is the UK government permitting all these bank credit facilities to be operated on UK soil. (We are not talking about Shadow Banking here, which may also not be sufficiently regulated, but whatever Shadow Banking is, it is not credit creation, it is strictly loaning deposits, which is not bank credit creation.)

Thus if Positive Money activists are only arguing that the UK government should better assert it’s actual existing power as a currency monopolist, to help stop lower income people from going into bank debt, then they can be affiliated with MMT, because all MMT aware people I know would agree that is the objective of all enlightened current activism over the injustices of the banking system (but you have to then also understand the MMT Job Guarantee to truly see the proper fix for the base problem).

Unfortunately, the (strawman) Positive Money activists go overboard with the conspiracy story${}^\ast$ , and also fail to understand that there is always a debtor whenever there is a creditor, and so “positive money” is a fiction. You cannot create “positive money” it is an inapplicable notion, because all money is an IOU of the issuer, otherwise it is not “money”. The issuer has the debt obligation (promise to redeem) the receiver has the credit.

${}^\ast$ I do not quite see how a government that wants to empower private banks and credit creation, rather than government issue, is a conspiracy. It is at least a conspiracy conducted in broad daylight, and a crime against humanity (I am possibly even more insistent it is a human rights crime than the Positive Money people — because I know the government does not need any new laws to stop the banker mafia). If you cannot see in broad daylight, how am I to aid you?

If there is no promise to redeem you have not got a currency, you have a ponzi scheme. Like Bitcoin.

Giving Back the Bank of England the Monopoly? LOL

MMT (and Law scholarship — an integral part of MMT) reveals the central banks are already branches of government, and governments are already the currency monopolists. They regulate the private banks. They just need to do it better, so people in need are never in debt (a Job Guarantee policy). No private bank ever should have a seat at the JG policy table, the private bankers interest is in getting people into debt. That serves no public purpose unless a firm wants to be in debt (to expand their green sustainable business — should be the rule, and here the Positive Money people would agree, hooray!).

Somehow the Positive Money theorists got the spurious idea in their heads that governments are beholden to private banks. Perhaps that is due to the perverse way the government Treasury Departments play smoke and mirrors to conceal the fact that on the balance sheets they are already creating currency, every time they spend. No private bank in sight. But in the USA at least, they put a private bank (bond dealer) in the middle of the road as a fake. This is truly how money creation by government is run. It is a charade. the government is the currency sovereign, already.

We know the reasons for this too, it is ideological. Neoliberals and conservatives can never countenance the thought the government issues currency by marking-up bank accounts. They want rich people to be privileged, with the “tax-payer funded” myth (see Raúl Carrillo’s superb piece here or youtube discussion here ).

To be fair, it easy to write the spurious notion that “governments are beholden to private banks” into your head — simply read an orthodox economics textbook. Fake knowledge.

Yet, how the currency operations are abused matters, and I doubt governments wanting to abuse the monetary system would ever dream of voting in Positive Money proposals. This is the same criticism MMT “enjoys” — even if MMT describes the system well, who is there to force governments to run a Job Guarantee and lower interest rates to zero? No neoliberal I know of, for damn sure.

If we thus want the Bank of England to use the monopoly power it already has in conjunction with the UK Parliament, we have to use the force of democracy, and an educated population, and presently that means understanding MMT.

You can also take a look at the Positive Money proposals and see which seem reasonable, but they do not describe the fair use of the current monetary system, that is why they are “reforms”, but they need no change in the existing monetary system!

The proposals,

• more targeted public investments,
• better accountability (eliminate fraudulent lending),
• green economy fiscal targetting (tax polluters, invest in sustainable firms),
• digital cash,

are all fine, I have no issue with them. But where the heck is the guarantee of employment for anyone seeking the positive money? What is the PM buffer stock? Sparkling mineral water?

But it does me no good in the eyes of a Positive Money activist to tell them these policies could already be implemented. Any way you look at it, if the votes in Parliament are there, twill be done.

There is no need to hinder those votes by also asking for other crankery monetary reforms that try to turn “money” into something “positive” when money is always and everywhere has been, for over 5000 years, a record of credits and debits.

And I do wonder if the Positive Money people realize, their system would still be tax-driven, so their “money” would still be a tax credit, so their money would still be an IOU of the state, a debt of the state. A “negative” on the Treasury balance sheet. (Or for you and me, an overdraft.) Oh dear! The integers!

Bridging a Semantic Gap

There might be some semantics issues that can help overcome the argy-bargies between MMT activists and Positive Money activists.

• Could we first establish a definition: Credit = $-$Debt. Money = Credit. Money is a claim on real resources (you can pass it on in an exchange to someone who desires to be in credit).
• Then we can ask what the Positive Money people think defines “money” and their “positive”.
• Bank reserves facilitate payments, but still a bit of a charade. (This might be hard to gain agreement upon, but the banking software is where we can go to see banks never lend their reserves — even if they think they do, the software won’t let them).
• Failing inspecting the software, some countries, like New Zealand and the USA, permit Freedom of Information Act requests (FOIA). We could use a few of those.

((Yah, getting a Positive Money activist on-board can take a while.))

In brief, there is no need for fractional reserve banking${}^\S$. There is a need for accurate accounting (which is already performed) and so that only leaves the need to understand the monetary system and stop it from being abused.

It is being abused. Using an unemployed buffer stock of human labour is a human rights crime, by any fair account of the matter.

If not abused it does not need reform. The managers of the system are the ones needing the reform. If we do the Positive Money reforms, what’s to stop the banking mafia from just getting government to give them other ways to screw over workers? So let’s focus on the real issue, which is proper just governance of the existing monetary system. It is fit for purpose. The people presently running governments are not. But we can help educate them so they are, or the next generation at least. This will likely shut down our current DougBot project, requiring a reboot, since we’d be in a new regime. But I will not be complaining.

${}^\S$ Fractional reserve banking is an artificial self-imposed constraint on credit. Also known as artificial austerity. If Positive Money people have a defence to avoid needless austerity, then why the extra complication and rules that requires resources to enforce? I will admit I am a bit vague on why some of the Positive Money people want fractional reserve banking to be a thing.

Caveats

Steve Keen defines Credit as rate of change of debt. I cannot honetsly tell if this is standard usage, it seems economists lack some standards.

If “Credit” on the FRED H.8 tables is the amount of credit isssued over a year by banks, then that’s a flow, not a stock, it is the stock of money from bank credit divided by $1,$year. That agrees with Prof Keen.

However, as an outsider to econ academia, I find this terribly confusing.

What we should be talking about is opposite sides of a balance sheet or Godley table: entity $A$ has “rising credit” equals entity $B$ having “rising debt” not just “debt”.

But in macroeconomics debt is a stock. The government debt accumulates year on year. It is the government deficit that is the flow ($\Delta$Debt$/\Delta t$, with $\Delta t $ = $1\,$year.)

When a bank debits an account it always credits another, by the same amount. No rate in time is involved. And is I have state notes then I have a tax credit,, not a flow of anything like a wage. Wages are rates of change of my tax credits $\Delta$credit$/\Delta t$.

The interest rate and the time span of the credit factors in a time dimension. (You have to return the credit after some time.) But in this case debt should also be a flow too, not a stock, if you want to be consistent.

Having “‘credit” be rate of change of another’s debt would then conflict with what I believe is standard semantics for the government sector. Government deficit (or surplus) is the flow. Government debt is the accumulated deficit over all time, a stock = all the outstanding tax credits.

MMT Usage:

This is just my vote:

• Credit $=$ $-$Debt.
• $\Delta$Credit = $-\Delta$ Debt.
• Rate of change of debt is deficit, and when positive is surplus (=rate of change of net credit). The time period is usually taken as one year.

So sort it out you econ nerds. Geesh! What… is writing an ISO standard document too beneath your poncy assets?