Ep. 128 The Destructive Idiocy of “Modern Monetary Theory”

5 March 2018     |     Tom Woods     |     41

Modern Monetary Theory (MMT) is gaining traction. Its adherents think it’s just common sense, but it’s actually destructive nonsense. Why, governments can never “run out of money,” because they have a printing press! OK, it’s a little more sophisticated than that, but not nearly as much as they think it is.

More inanities smashed courtesy of Contra Krugman.

Krugman Article

MMT, Again” (August 15, 2011)

Articles Mentioned

The Radical Left-Wing Theory That the Government Has Unlimited Money,” by Tom Streithorst
Does “Depression Economics” Change the Rules?,” by Bob Murphy
The Upside-Down World of MMT,” by Bob Murphy

Other Resources

Need More Episodes?

Tom and Bob have their own podcasts! Check out the Tom Woods Show and the Lara-Murphy Report.

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  • Allenbard Woodison

    These oh-so-subtle hints about the next cruise are just killing me. I can’t wait to book a cabin…

    • João Paulo Bochi

      have you tried contracruise.com yet?

  • Allenbard Woodison

    Capitalism rests on production, not spending. To spend, you have to have something to buy. Things to buy are produced. This entails work. It’s very simple. Also, we haven’t had authentic economic freedom since 1912.

    • Bob_Robert

      Not just things to buy, but something to buy it with. In order to consume, I must also produce, even if that is just to consume my own production.

    • http://2vnews.com 2VNews

      You can not feed until you seed.

  • Steve Ladd

    You missed this argument against MMT. Kindleberger provides it in “Manias, Panics, and Crashes”. Since the advent of fiat currencies there have been more banking system collapses,
    financial crises, foreign exchange crises, hyper-inflations, asset bubbles, and external
    debt defaults than in any previous comparable time span in history. Several of these, like the S&L collapses of the 80s, occurred in the U.S., home of the world’s reserve currency. If national deficits and monetary inflation are so innocuous, why so many bad things been happening since they became popular?

    • martinbrock

      That’s not an argument against MMT. It’s an argument against fiat money. MMT is a theory of how fiat money operates, not an argument in its favor. People discussing MMT typically argue in its favor, but most people generally argue in its favor.

      • Steve Ladd

        Don’t MMT theorists typically favor more deficit spending facilitated by money creation? If so, they advocate expanded fiat money. Their theory supports their recommendations.

        • martinbrock

          Most people discussing MMT favor deficit spending, but the theory does not assert the virtue of deficit spending. It doesn’t support this recommendation. Fiat money is what it is. That it exists and operates according to certain rules is not a defense of it.

          When a state monopolizes money, deficit spending is a practical necessity. That’s no defense of a state monopolizing money.

          • Steve Ladd

            Surely they must think their theory supports their recommendations. So what do you mean there? You happen to know it really doesn’t?
            States have often monopolized money yet avoided deficit spending, so what do you mean there?
            Granted I don’t know much about MMT. What do you suggest I read?

          • martinbrock

            They think that their theory supports their recommendations in one sense. If a state monopolizes money, then it must also deficit spend to avoid destructive economic imbalances. That’s not saying that a state should monopolize money. It’s saying that a state should deficit spend if the state monopolizes money. The state’s monopolization of money is taken for granted. MMT is a theory of fiat money, not a prescription for “the right thing to do” in any general sense.

            I don’t have a book recommendation, but the debate linked above is very good. I don’t think that Mosler won it because I favor a fiat money system. He won it, because he explained a fiat money system better than Bob and because he better addressed the question being debated, which was how the fiat monetary authority should react to the great recession. “There should be no fiat monetary authority” is a legitimate position, and it’s my position, but it doesn’t address the question.

  • Jim Catalano

    MMT in action!
    ‘We will print more money and give it to the unemployed to end poverty in South Africa’, Says new minister of Finance

  • http://2vnews.com 2VNews

    Who regulates the regulators at the Federal Reserve to keep the people safe from it and its mistakes? Only real regulator possible is the market.

    • Bob_Robert

      Oh, but with a static quantity of commodity money, the government couldn’t inflate! That would be so terrible!

      • http://2vnews.com 2VNews

        fractions and interest

        • Bob_Robert

          Two things he ignores.

  • Bob_Robert

    I watched the video of Mr. Mosler, and I am astounded at how utterly disconnected from reality he is.

    No, his business card is not money, because it is not fungible. No, government does not have a monopoly on money, because ONCE SOMETHING IS USED AS MONEY lots of people have it, and spend it, and accept it, and everything else.

    What government has is a monopoly on the issuance of money, and Mosler completely avoided the fact that money is not dumped by government equally into the entire economy at once.

    I also found his religious attachment to the idea inflation reverses unemployment to be completely unsupportable, since the “stagflation” of the 1970s proved once and for all the relationship is FALSE.

    • martinbrock

      Mosler seems remarkably connected to reality to me. He doesn’t confuse his business card with money. He uses it to illustrate fiat money, and he explicitly acknowledges that fiat money gains its value from the coercive force of the state, i.e. people use it rather than alternatives because they fear the state. He clearly understands that fiat money circulates through the economy after a state spends it.

      Mosler doesn’t claim in the debate that inflation reverses unemployment. A state can employ people, and the employment can be inflationary. The state can also inflate without employing people.

      • Bob_Robert

        “He clearly understands that fiat money circulates through the economy after a state spends it.”

        Yet that directly refutes what he said, so no, he does not understand it.

        “Mosler doesn’t claim in the debate that inflation reverses unemployment.”

        Yes, he did. Over and over again he says unused resources are because of a lack of money. Not just repeatedly, it’s central to his thesis.

        • martinbrock

          Money circulating through the economy doesn’t refute anything Mosler says in the debate.

          Mosler says that unemployed resources are because of a lack of authority to buy them. A state monopolizing money constrains this authority. Ending the monopoly is a solution to this problem, but Mosler doesn’t discuss this solution, because he’s discussing a theory of fiat money, the monetary system we have now in the United State for example, not the universe of utopian possibilities.

          • Bob_Robert

            “Unemployed resources can exist because of a lack of authority to buy them”

            You clearly have no idea what I’m talking about.

            “A state monopolizing money constrains this authority.”

            False. There is no such “authority”. It only controls the quantity of currency, not what people do with it. Perverting things like interest rates can warp what people do by changing the incentives, but not “constrain”.

            You are making exactly the same mistake Mosler makes over and over again, as I stated earlier.

          • martinbrock

            That state controls what people do with money in countless ways, but controlling the quantity of money constrains the authority to buy things with money regardless.

            The mistake is in your interpretation of my statements, not in the statements themselves. I never anywhere suggest that inflation reverses unemployment or anything similar. A state may employ people. A state may eliminate unemployment by employing people. Everyone could then be poorer than they’d otherwise be, but that’s a separate issue.

          • Bob_Robert

            “but controlling the quantity of money constrains the authority to buy things with money regardless.”

            This is a false statement. The quantity of a currency is irrelevant. Prices adjust. That’s why there was penny candy before the great inflationary period since 1970, and now there is no penny candy.

            “I never anywhere suggest that inflation reverses unemployment or anything similar.”

            No, Mosler did. Repeatedly.

          • martinbrock

            Austrians generally agree that an authority controlling the money supply can benefit persons receiving new money first. An expanding money supply doesn’t simply raise all prices uniformly at the same rate, so controlling the money supply does constrain the authority to buy things. It gives more purchasing power to persons closer to the center of monetary authority; otherwise, states wouldn’t bother to monopolize money. As Mosler puts it, a government monopolizes money to provision itself. An inflationary monetary policy is a form of taxation.

            Again, if Mosler says it, give us the minute in the debate. I listened to it again yesterday, for at least the third time, and i didn’t hear him say that inflation, generally, reverses unemployment. He believes that, in the context of a fiat money system, a monetary authority can employ people by issuing money, but that’s not equivalent to a general relationship between inflation and unemployment. A state can also employ people through direct taxation without monopolizing money.

          • Bob_Robert

            “so controlling the money supply does constrain the authority to buy things”

            This is a false statement, again. You are using the word “authority” where it simply does not work. You are making a lie of your words.

            “An inflationary monetary policy is a form of taxation, according to Milton Friedman.”

            Correct. It devalues savings in favor of the first spenders of the newly printed currency. Robbery.

            “and i didn’t hear him say that inflation, generally, reverses unemployment”

            He says it several times. Specifically, he says unutilized resources require inflation so that people then have the money to utilize them.

            If you can’t hear him, that’s not my problem.

  • martinbrock

    I’m not an MMT fan, but Mosler won the debate. The theory is not juvenile. It’s not anything but a theory of fiat money attributable to Georg Knapp. It’s not a political program for spending money on infrastructure or anything similar. It doesn’t deny that expanding the money supply is inflationary. Fiat money is desructive, but it’s not a fairy tale. A theory describing it is not an ideology advocating it.

    A state issuing fiat money is not constrained in the same way that a state not issuing fiat money is constrained. That’s just a fact. It has nothing to do with the virtue of fiat money. A state issuing fiat money is not unconstrained. It can devalue the money and ultimately destroy it altogether. Mosler freely concedes this point.

    • Tyler Folger

      I think the undercurrent of the whole video was that MMT doesn’t contribute anything to economics. It makes trivially correct statements that we already knew, which its proponents use to try to justify juvenile policy proposals. I understand the need to separate the descriptive parts of the theory from the ideology of its proponents, but the descriptive parts of the theory aren’t news, and don’t require our consideration. The ideologues ARE effectively the MMT movement.

      • martinbrock

        If the theory is so trivial, you need to explain why Bob predicted much more inflation (of consumer prices) following QE than MMT theorists predicted and why Bob’s prediction didn’t pan out.

        Mosler explains this outcome well. QE did not expand the supply of money available to consumers. It only moved bank assets from a “savings account” (holding Treasury bonds and other Federally guaranteed bonds) to a “checking account” there (a reserve account at the FED now yielding interest). This move enables more bank lending to consumers in principle, but it need not have this effect and has not had it in practice. Unsecured, consumer lending is very risky.

        Mosler also emphasizes a point that Austrians (particularly non-economists on the web) often gloss over. The only interest rate that the FED controls is the nominally riskless rate on Treasury obligations (including Federally guaranteed mortgages and student loans). Ideally, Mosler wants this rate set to zero permanently, i.e. he wants no riskless rate, i.e. he wants no Treasury bonds or Federally guananteed bonds at all. Mosler is no libertarian, but this position is libertarian, and I agree with it.

        • Tyler Folger

          I don’t think you have to explain that. Prediction is messy business.

          If the only thing MMT can contribute is to remind practicing Austrians of what they already know, but haven’t given adequate weight to in their predictions, than they should just become Austrians.

          • martinbrock

            MMT does not contradict Austrian economics. Again, MMT is a theory of fiat money, not a general theory of economics. It doesn’t deny that fiat money can be inflationary and distort price signals. Mosler himself routinely makes this point. He makes it in the debate linked above.

          • Tyler Folger

            I didn’t say that it did contradict. I’m saying that Austrians have nothing to gain by studying MMT, because we’ve already known for nearly a century what they’re declaring to be a glorious new revelation. You’d be better off reading contemporary Austrian economists than trying to separate the wheat from the chaffe from the writings of economists who are both MMT people and Keynesians.

            No, I rather think the MMT people should read us so they can stop being wrong about the rest of economic theory.

          • martinbrock

            I haven’t declared anything to be a glorious, new revelation. Above, I explicitly attribute MMT to an economist (Georg Knapp) writing in the late nineteenth century.

            Self-described Austrian economists (particularly the non-professionals online) continually predict hyperinflation and economic collapse that never occurs, and the Austrian school has a correspondingly poor reputation. If its adherents weren’t so dismissive of other systems, they might advance their own more effectively.

            Specifically, how is Mosler wrong about the rest of economic theory? I doubt that you’ve listened to him closely enough to know.

          • Tyler Folger

            You haven’t, but that’s how the MMT people talk from what I’ve seen.

            I haven’t seen evidence that the Austrians are dismissive of other systems. Most of the academic Austrian Economists are all versed in mainstream economics, since they had to be for their degree programs. And I’m not trying to be dismissive. That’s why I like talking with you (hopefully not making a nuisance of myself in the process). But in this case, what is there for us to incorporate from MMT?

            As for the faulty doom and gloom predictions, it is definitely a problem. And I suspect there’s some truth to the crass criticism from mainstream economists that the fear-mongering is its own cottage industry. But to me, the solution is just to tell those people to read more advanced Austrian Economics so they can better understand the devil within the details. It would be unnecessarily confusing to have them read MMT because their pedagogy is wrapped up in Keynesianism.

          • Tyler Folger

            I’m curious what you’d have to say about an exchange I had awhile back on the mises.org forums:


            Here, I felt the critic, Dwain Dibley, if their facts were correct, might have been hitting on a real weakness in how Austrians explain the fractional reserve banking system, and maybe even in Austrian Business Cycle Theory, at least in terms of its applicability to our present day.

          • martinbrock

            I’m not sure I agree, in a general sense, with Dibley that “you can’t spend credit”. Promissory notes (IOUs) can circulate as money. He may only be saying that the U.S. monetary system doesn’t really work this way, but I’d say it does work this way in some sense, though I’m not being an MMTer when I say it. The state’s “IOUs” differ fundamentally from other IOUs, because the state can’t default, but we still use this language to describe them. We could also say that “spending an IOU” is really spending the collateral securing the IOU, but again, that’s only a difference in semantics.

          • Tyler Folger

            Yes, Dibley is very picky about words. God help you if you ever say that the Fed increases the money supply. I think he didn’t even like me saying banks lend money. He insisted on calling them pseudo-loans.

            I thought it was interesting, because the usual story the academic Austrian economists tell about fractional reserve banking is that banks are allowed to loan out about 10x what they’re holding in reserves at any time. But if what he’s saying is correct about how modern banking regulations on lending is setup, this doesn’t seem to be any longer the case. It also calls into question whether the Austrian conception of the money multiplier is applicable anymore. And that might help explain why many economists saw that banks weren’t lending after QE, and as a result, we didn’t experience higher inflation. After all, if Austrians have an outdated belief that private banks exacerbate fed inflation 10x, it’s understandable why they might overstate the danger of inflation from QE and the likes.

          • https://airforce.togetherweserved.com/usaf/servlet/tws.webapp.WebApp?cmd=ShadowBoxProfile&type=Person&ID=173567 Daddio
  • BobMurphy9

    Hey everyone I haven’t read all of the comments, but FYI people on Twitter were pushing back on the idea that MMT thinks only taxation can support a currency. E.g. Randall Wray has a talk on this: https://www.youtube.com/watch?v=0C0_XUuQaRU

    • martinbrock

      Right. MMT says that taxes are sufficient for a currency’s acceptance, not that taxes are necessary for a currency’s acceptance.

  • BobMurphy9

    Also there is an eyewitness account of a new money emerging spontaneously in a POW camp. No taxation necessary. http://icm.clsbe.lisboa.ucp.pt/docentes/url/jcn/ie2/0POWCamp.pdf

    • martinbrock

      A POW camp was necessary, and even in this small, highly isolated context, the article states, “Credit entered into many, perhaps into most, transactions, in one form or another. Sam paid in advance as a rule for his purchases of future deliveries of sugar, but many buyers asked for credit, whether the commodity was sold spot or future.” So even while cigarettes became a standard of value, cigarettes were not a pure, commodity money. The POWs used credit money in many, perhaps most, transactions.