Stephanie Kelton

Professor of Economics
University of Missouri-Kansas City
Minsky Summer School
June 11, 2016
 What is MMT?
!!
•  The components of
the theory are not
new, but their
integration toward a
coherent analysis is

•  MMT is now widely

recognized as a more-
or-less coherent
alternative to
conventional macro
 Modern Money Theory
!!
Descriptive Theory/Prescriptive

•  Money •  Functional Finance

•  What is money? •  Full Employment and Price
•  Taxes drive money Stability
•  Fixed vs. Floating FX •  Sector Balance Analysis
•  Monetary operations •  Godley/Minsky
•  Hierarchy •  Sustainability/Fragility

•  Sector Balance Analysis •  Employer of Last Resort

•  Buffer stock price anchor
•  Stock-flow consistent
The Descriptive Backdrop
 Modern Money Theory
!!
Descriptive Theory/Prescriptive

•  Money •  Functional Finance

•  What is money? •  Full Employment and Price
•  Taxes drive money Stability
•  Fixed vs. Floating FX •  Sector Balance Analysis
•  Monetary operations •  Godley/Minsky
•  Hierarchy •  Sustainability/Fragility

•  Sector Balance Analysis •  Employer of Last Resort

•  Buffer stock price anchor
•  Stock-flow consistent
 What Is Money?
!!
•  All money exists as an IOU
•  The “I” is the debtor
•  The “U” is the creditor
•  Anyone can create money
•  Money is a record-keeping
device, invented to keep track of
fees, fines and taxes owed by
subjects or citizens to rulers or
states
•  A. Mitchell Innes
•  G. F. Knapp
•  J.M. Keynes
•  Abba P. Lerner
•  James Tobin
•  H.P. Minsky
•  Hudson/Forstater/Wray/Bell/
Henry/Semenova
•  Graeber
6
 Modern Money Theory
!!
Descriptive Theory/Prescriptive

•  Money •  Functional Finance

•  What is money? •  Full Employment and Price
•  Taxes drive money Stability
•  Fixed vs. Floating FX •  Sector Balance Analysis
•  Monetary operations •  Godley/Minsky
•  Hierarchy •  Sustainability/Fragility

•  Sector Balance Analysis •  Employer of Last Resort

•  Buffer stock price anchor
•  Stock-flow consistent
 'Taxes Drive Money'
!!
•  As long as the state has the power to enforce its tax
laws, the people will need the government’s money

•  The currency will have value, and people will sell

things (goods and services) to the government in order
to get government’s money

•  Whatever the government accepts in payment to itself

will become the “definitive” money in the system

•  It becomes the only final means of settlement

 Some Examples
• 
!!
Business card economy (Mosler)
•  British colonization of Africa (Hudson,
Forstater, Wray, Graeber)
•  Buckaroo economy (UMKC)
•  Dennison DVDs (Kaboub)
•  All are Redeemable tokens imposed by
authority with power to make & enforce tax
laws (Wray)
•  Could do it all without even using a ‘thing’
just by keeping accounting (spreadsheet)
records
 Implications?

"As the government has the sovereign right to

Issue fiat money, government debt is safe from danger
Of default of either interest or principal when due."
H.P. Minsky, 1959
 Modern Money Theory
!!
Descriptive Theory/Prescriptive

•  Money •  Functional Finance

•  What is money? •  Full Employment and Price
•  Taxes drive money Stability
•  Fixed vs. Floating FX •  Sector Balance Analysis
•  Monetary operations •  Godley/Minsky
•  Hierarchy •  Sustainability/Fragility

•  Sector Balance Analysis •  Employer of Last Resort

•  Buffer stock price anchor
•  Stock-flow consistent
I Learned that Here!
!!
MMT Can Describe Any of These
!!
 “Policy Space”
!!
•  The descriptive side of
MMT is not just for the US
or other large, open
economies
•  Argues domestic policy
space is maximized with
floating FX
•  Exogenous vs.
Endogenous interest rates
 Russia: An Example
!!
•  Was operating fixed FX
against US$
•  Marginal holders of
rubles could:
•  1. Hold rubles at the
central bank, earning 0
•  2. Convert rubles into:
•  A.)GKOs
•  B.) US$ at fixed FX
16
 Modern Money Theory
!!
Descriptive Theory/Prescriptive

•  Money •  Functional Finance

•  What is money? •  Full Employment and Price
•  Taxes drive money Stability
•  Fixed vs. Floating FX •  Sector Balance Analysis
•  Monetary operations •  Godley/Minsky
•  Hierarchy •  Sustainability/Fragility

•  Sector Balance Analysis •  Employer of Last Resort

•  Buffer stock price anchor
•  Stock-flow consistent
 Stadium Analogy
!!
•  Suppose you’re watching a football match

•  Think of the government as the scorekeeper

•  Question: Where does the scorekeeper get the points he

gives out when one team scores?

•  Answer: The points don’t come from anywhere

•  Spreadsheet entries created by fiat

 How Does a Government with Sovereign
Currency Spend?

!!
•  By directing its bank (usually the central bank) to credit
someone’s account

•  This frequently happens without even a writing a check

•  In the Modern Money era, government spending is

accomplished through keystrokes

•  The monopoly issuer of the currency can never run out of

money
 Monetary Operations
!!
•  Under a fiat money system, the government
spends money and then borrows what it does not
tax
•  Before IOR, bond sales were needed to drain the
excess reserves (created by G>T)
•  Otherwise the FFR would fall below target
•  Bond sales drain reserves, regardless of whether
it is the Treasury or the Fed doing the selling
•  In contrast, bond purchases (by Treasury –
retiring debt – or Fed) inject reserves
 Taxes and Bonds
!!
•  Neither taxes nor bonds “finance” government
spending

•  Sovereign issuers don’t need money from us in order

to spend

•  And they can’t spend what they collect in any case

 Vertical Money
!!
•  The state spends by issuing new government money
(High-Powered Money or HPM)

•  Payment of taxes destroys money (HPM)

•  Taxes can only be paid using government money

•  Currency issued by the Treasury (coins)
•  Notes issued by the Central Bank (Federal Reserve
notes in the US)
•  Bank reserves (electronic liabilities of the central bank)
 Horizontal Money
!!
•  Most transactions that do not involve the government take
place using privately-issued credit money

•  This can be thought of as "leveraging" of state money

•  In all modern monetary systems, the central bank targets

an overnight interest rate

•  It supplies reserves on demand (horizontally) at the policy

rate

•  Historically, it drained any excess reserves by selling

bonds
 Interest Rates
!!
•  Bond are used to coordinate the reserve “add” from
spending with the reserve “drain” from taxing

•  The Treasury and the Fed have a complex way of

coordinating their operations

•  All else equal, deficits tend to drive interest rates down

•  Deficits trigger bond sales to soak up reserves

•  Surpluses trigger bond purchases to add reserves

•  The short-term interest rate is set by the Central Bank

 Vertical
Treasury Spending

HPM

Horizontal
Banks Leveraging Loans
HPM M1, M2

Fed
HPM
HPM Fed, Treas

Tax Payments
Bonds
Drain
The Orthodox Theory is Wrong
!!
•  Conventional wisdom holds that governments finance
their spending with money collected through taxation or
borrowed by selling bonds

•  Argues that “monetary finance” is necessarily inflationary

•  “Bond finance” leads to crowding out

•  All incorrect for a sovereign nation that issues the

currency
 The National Debt
!!
•  Total number of dollars that have been drained to
maintain the FFR
•  Might be better referred to as IRMA
•  Accounting record of amount of interest-bearing securities
offered as alternative to untaxed money spent by
government
•  Government cannot borrow or tax what it has not already
spent (or lent) into existence
•  All about decision to maintain positive overnight rates
•  Now accomplished via IOR
•  No longer need bonds for IRM purposes
 Modern Money Theory
!!
Descriptive Theory/Prescriptive

•  Money •  Functional Finance

•  What is money? •  Full Employment and Price
•  Taxes drive money Stability
•  Fixed vs. Floating FX •  Sector Balance Analysis
•  Monetary operations •  Godley/Minsky
•  Hierarchy •  Sustainability/Fragility

•  Sector Balance Analysis •  Employer of Last Resort

•  Buffer stock price anchor
•  Stock-flow consistent
 The Money of Account
!!
•  The money of account is abstract
•  Like a “meter,” a “kilogram” or a “hector”

•  It cannot be seen or felt

•  It is representational, a name assigned by humans

•  In any modern nation, the money of account is

chosen by the national government
 The Power of the State
!!
•  MMT emphasizes the state’s power over money

•  Recognized as far back as Aristotle, through Adam Smith and

into the modern era

•  John Maynard Keynes told us:

“The age of Chartalist or State Money was reached when the

State claimed the right to declare what thing should answer as
money to the current money-of-account … To-day all civilised
money is, beyond the possibility of dispute, chartalist.”
 A Sovereign Government
!!
•  Defines the money of account

•  Imposes taxes, fees and other obligations

•  Decides what it will accept in payment to itself

•  Chooses how it will make its own payments

 Sovereign Money
!!
•  Most governments choose their own unique
money of account and issue their own unique currency

•  One Nation, One Money

•  US dollar bills and coins
•  Mexican peso bills and coins
•  British pound notes and coins

•  Most governments also require that taxes be paid in a currency that

the state has the exclusive power to issue

•  These currencies are “sovereign money”

 "For fiat money to be generally acceptable and
valuable there must be a set of payments units must
make for which this money will do. Taxes are such
payments, thus fiat money really should not be
introduced without introducing a government
with taxes and expenditures.

Symmetrically, money as a liability of a...

bank acquires value in the market because
there exist units, the debtors to the banks, which have
payments to make for which this credit money
will be acceptable.

and value of a money depends upon the existence of payments denominate

Minsky, 1970
 The Hierarchy of Money
!!
•  The private sector “leverages”
the government’s money
Govt
•  Banks, business firms and
households all issue their own
money IOUs Banks

•  Results in a debt pyramid

Businesses
•  Where some IOUs are more
acceptable than others
Households
•  As the only means of final
payment, the Government’s
money sits at the top
 The US Hierarchy
!!
Operates with its own
fiat money
$

Collects taxes in dollars

& Issues the
Spends in dollars currency

Not a
convertible
currency

United States Government

The Benefits of Sovereignty
!!
•  The government can never “go broke” or “run out” of money

•  It can afford anything that is for sale in the domestic unit of

account

•  It does not need to borrow its own currency in order to spend

•  It can set the policy interest rate at any level

•  It has an expanded policy space

 Under a Gold Standard
U.S. 1870-1914
!!
Spending had to be limited

Promised to
convert US
dollars into gold US Dollar was
$ subordinate
at a fixed price

United States Government

 Fixed Exchange Rates

Vulnerable to speculative
!! Spending had to be
attack
limited

Sacrificed control
US$
of interest rates
Ruble or Peso

Could not Could not

issue issue

Both heavily
dependent on trade
surpluses

Russian and Argentina

 What About the Euro?
!!
•  EMU is an exceptional case

•  Where the currency is divorced from the nation

•  The Euro is effectively a “foreign” currency from the

perspective of the individual nations

•  The EUR-18 are users of the currency

•  They lack the powers of a sovereign issuer

The Euro is NOT a Sovereign Currency

!!
•  EUR-18 must borrow the
currency
€
•  Must pay market interest Does not
rates issue

•  Can “run out” of Euros

•  Lacks the policy space of

a sovereign issuer
Italy
 Money Matters
!!
•  A sovereign government should be in control of the
currency that sits at the top of its pyramid

•  Otherwise, it lacks the power to keep its domestic

economy on track

•  “By virtue of its power to create or destroy money by fiat

and its power to take money away from people by
taxation, [the State] is in a position to keep the rate of
spending in the economy at the level required to [maintain
full employment]”
~Abba P. Lerner, 1947
The Prescriptive Side
Of MMT
 Modern Money Theory
!!
Descriptive Theory/Prescriptive

•  Money •  Functional Finance

•  What is money? •  Full Employment and Price
•  Taxes drive money Stability
•  Fixed vs. Floating FX •  Sector Balance Analysis
•  Monetary operations •  Godley/Minsky
•  Hierarchy •  Sustainability/Fragility

•  Sector Balance Analysis •  Employer of Last Resort

•  Buffer stock price anchor
•  Stock-flow consistent
 Warren Mosler
!!
“Policymakers have been
grossly misled by an obsolete
and non-applicable fiscal and
monetary understanding.
Consequently, we face
continued under-
performance.”
 Abba P. Lerner
!!
•  Made most of the key arguments found in SCE in the
1940s
•  Money as a Creature of the State (1947)
•  Knew the value of money derived from its acceptance at state pay
offices
•  Functional Finance and the Federal Debt (1943)
•  Knew taxes functioned to remove spending power, not to
raise revenue per se
•  Knew bond sales were about interest rate maintenance, not
“financing”
•  The Economics of the Steering Wheel (1941)
•  Knew the policy space was available to achieve full
employment
Functional Finance
!!
 Two “Laws” of FF
!!
•  First, keep the total rate of spending in the economy at
the level “where it will be enough to buy the goods that
can be produced by all who want to work”
•  Without concern for budget outcome
•  Focus was to be on economic outcomes

•  Second, carry out Law #1 without raising taxes or

borrowing unless it is considered desirable for the public
to have less money or more bonds
•  Could be used as a tool to fight inflation or induce higher
interest rates
Focus on Effects
!!
•  Stabilize the purchasing
power of the dollar
•  Alter the distribution of
income and wealth
•  Discourage bad behavior
(“sin”)
•  Isolating to emphasize
costs of specific programs
to the beneficiaries
(highways and SocSec)
 Modern Money Theory
!!
Descriptive
•  Money
•  Taxes drive money
•  Fixed vs. Floating FX
•  Monetary operations
•  Hierarchy
•  Sector Balance Analysis
•  Stock-flow consistent
Theory/Prescriptive
•  Functional Finance
•  Full Employment and Price
Stability
•  Sector Balance Analysis
•  Godley/Minsky
•  Sustainability/Fragility
•  Employer of Last Resort
•  Buffer stock price anchor
 Some Universal Elements
!!
•  Apply equally well to all nations, regardless of size/
openness of economy or currency regime

•  Analysis is Stock-flow consistent (Godley)

•  Sector Balance Approach (SBA)
•  Deficits of one are the accounting record of surpluses of
another
•  Deficits (flow) accumulate to financial debt (stock)
•  Surpluses (flow) accumulate to financial assets (stock)

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

 Sectoral Balances
!!
•  You cannot examine the government’s budget in isolation

•  The government is only one sector

•  It’s useless to focus on a single sector when the economy is

multi-sectoral

•  We need to understand how the government’s budget is

related to the rest of the economy

•  A basic understanding of sectoral balances is all we need

 What They Show
!!
•  In any given period, sectoral balances show whether
a particular part of the economy is:
•  Spending more than its income
•  Running a Deficit

•  Spending less than its income

•  Running a Surplus

•  Spending just equal to its income

•  Balancing its Budget
53
“Government interventions stabilize the
economy by stabilizing profits. With
profits sustained, a collapse of income,
employment, output prices, investment
and asset values does not occur.”

~Hyman P. Minsky

54
“The public is unaware of the relation between the size of
government and the well being of the economy….Those
who are aware of the importance of big government to
successful capitalism need to forever be questioning the
wisdom and the aptness of the taxing and spending policies
in place.”

–HPM, 1995

 “[I]t would be irresponsible for the
government to reduce its outstanding
indebtedness when households and
firms are attempting to increase their
savings.” ~Jan Kregel, 2010
Beware Swings in Private Net Saving
 Modern Money Theory
!!
Descriptive Theory/Prescriptive

•  Money •  Functional Finance

•  What is money? •  Full Employment and Price
•  Taxes drive money Stability
•  Fixed vs. Floating FX •  Sector Balance Analysis
•  Monetary operations •  Godley/Minsky
•  Hierarchy •  Sustainability/Fragility

•  Sector Balance Analysis •  Employer of Last Resort

•  Buffer stock price anchor
•  Stock-flow consistent
 What Kind of Deficit?
!!
•  Lerner was not explicit

•  He focused only on government’s ability to choose: tax cuts or

increased spending

•  But tax cuts for whom?

•  Government spending for what purpose?

•  MMT advocates a wide range of policies and programs

•  The most important, perhaps, is the job guarantee

 Minsky’s ELR
!!
•  Government becomes the Employer of Last Resort

•  Guarantees a job for anyone ready, willing and able to work

who cannot find alternative employment

•  Government sets minimum wage and benefits package

•  Can be designed not to compete with private sector
•  Can be designed to force private sector to match the offering

•  Government takes workers where they are and as they are

(i.e. no discrimination based on age, geographic location, skill
set, etc.)
 Every Government Must
Choose Which One to Accept

!!
•  Pure Unemployment
•  Labor Buffer Stock with zero wage and no tasks

•  Unemployment Compensation
•  Labor Buffer Stock with a wage and no tasks

•  Transition Job/Job Guarantee/ELR

•  Labor Buffer Stock with a wage and a task
 Buffer Stock
!!
•  ELR provides a transition job

•  Performs the job of a true automatic stabilizer

•  Absorbs workers into the ELR pool when the

economy turns down

•  Releases workers from the pool when the economy

improves
 The New Deal
!!
•  Roosevelt’s WPA, CCC, NYA and others

•  Built hospitals, schools, parks, bridges, roadways,

airports, stadiums, etc.

•  Employed millions in productive and socially useful

jobs

•  Hired builders, architects, engineers, painters, poets,

actors
Democratizing Our Money
!!
•  With a sovereign currency and a commitment to
Functional Finance, people can design a democracy
that works for them

•  Eliminates the primary excuse for inaction: “The

government doesn’t have the money to do it.”

•  Whatever is physically possible is financially feasible

 The Real Constraints
!!
•  The issuer of the currency can mobilize resources to achieve
public purpose

•  In a democracy, the people decide what that means

•  As long as the real resources are available, the government can

mobilize them for public purpose

•  Requires some level of planning by the state

•  How to Pay for the War (Keynes)