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There is now widespread understanding among those who have been introduced to MMT that:
1. There is a fundamental difference between the currency-issuer and the currency-user, such that the former has no intrinsic financial constraints on its spending.
1. There is a fundamental difference between the currency-issuer and the currency-user, such that the former has no intrinsic financial constraints on its spending.
2. Such a government can always meet any liabilities that are denominated in the currency it issues.
This also means that such a government can purchase anything that is for sale in the currency it issues, including all idle labour.
This also means that such a government can purchase anything that is for sale in the currency it issues, including all idle labour.
3. Which means that the government chooses the unemployment rate. An elevated unemployment rate is always a political decision rather than anything that is forced on a nation by ‘market forces’ or the choice of individuals/households.
4. The governments ability to spend is prior to any revenue it might receive in the form of taxation. Taxation revenue comes from funds that the government has already spent into existence.
5. Central banks are monopoly creators of ‘central bank money’, while commercial banks create ‘bank money’ out of thin air – through “balance sheet extension”.
6. Central banks set the interest rate but cannot control the broad money supply or the volume of ‘central bank money’ in circulation.
The central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability.
The central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability.
7. Mainstream ‘crowding out’, which posits that government borrowing absorbs scarce funds that would otherwise be available for private firms, is erroneous. Commercial banks will make loans to any credit-worthy borrower on demand. There is no scarcity of credit (loanable funds).
8. The National Accounts tell us that a government deficit (surplus) is exactly equal to the non-government surplus (deficit).
The non-government sector is comprised of the external and private domestic sectors.
The non-government sector is comprised of the external and private domestic sectors.
9. If the external sector is in deficit and the private domestic sector desires to save overall, then the government sector has to be in deficit and national income changes will ensure that occurs.
Which means that fiscal surpluses squeeze non-government wealth.
Which means that fiscal surpluses squeeze non-government wealth.
10. Mainstream concept that fiscal surpluses represent ‘national saving’ is erroneous. A currency-user, such as a household saves (foregoes current consumption) in order to enjoy higher future consumption possibilities (via interest income on the saving).
11. A currency-issuing government never has to store up money in order to spend in the future. They can always purchase whatever is for sale in that currency at any time they choose. If there are enough skills and real resources to purchase.
12.Fiscal policy is not to deliver a particular fiscal outcome (surplus or deficit).It is to ensure that the discretionary government policy position is sufficient to ensure full employment and price stability, given the spending and saving decisions of the non-government sector.
13. If from a particular level of national income, the private domestic sector, desires to save more overall and cuts its spending, then unless there is more net export spending coming in, the govt will have to increase its deficit to avoid rising unemployment and a recession.
14. A flexible exchange rate regime maximises the policy space for government to pursue domestic objectives. If a nation adopts a currency peg (fixed exchange rate, dollarisation, currency board, etc) it loses its sovereignty and compromises domestic policy aspirations.
15. The external account might be in surplus, which would add to aggregate demand, while the private domestic sector might be spending more than it is earning, that is, in deficit overall. So Discretionary adjustments in spending and taxation rates might be required.
16. In these situations the government would have to ensure it ran a surplus of sufficient size to ensure that the economy did not overheat and exhaust its productive capacity. With robust tax revenue growth, which would help the government achieve its surplus.
17. Sectoral balances show that the private domestic sector cannot sustain deficits permanently. The flows of spending which deliver deficits must be funded. Private domestic deficits ultimately manifest in an increasing stock of debt.
18. This process of debt accumulation is limited the susceptibility of the balance sheet to cyclical movements (rising unemployment) increases and the risk of default rises. In the long term, the only sustainable position is for the private domestic sector to be in surplus.
19. If we were to impose fiscal rules on such a government (such as the 3 per cent threshold in the EMU Stability and Growth Pact) the sustainable fiscal space would shrink significantly. Nobody should instruct a sovereign govt how to utilise its skills and real resources.
20. Why is this important? An unconstrained sovereign government can always utilise the available space to ensure aggregate demand is sufficient to maintain full employment and price stability. Set the interest rates it chooses.Can decide how to use its skills and real resources
21.Not every nation can run an external surplus because an external surplus has to be matched by external deficit(s) in other nations. The allowable fiscal deficits when running an external surplus under a fiscal rule may be insufficient to maintain and sustain full employment.
22. Nations which run external deficits who have to operate under fiscal rules becomes even more http://restrictive.It is highly likely that they will experience enduring recessions as a result of the artificial fiscal rules (restrictions) that are placed on its government.
23. When such an economy experiences a negative economic shock that drives the private domestic sector to reduce its spending and then target a sectoral surplus, the extent to which the fiscal deficit can be used to absorb the loss of overall aggregate demand is very limited.
24. A flexible exchange rate frees monetary policy from having to defend some fixed exchange rate parity. Fiscal policy can solely target the spending gap to maintain high levels of employment and other desirable policy objectives.
25. While there is no such thing as a balance of payments growth constraint in a flexible exchange economy, the external balance still has implications for foreign reserve holdings via the level of external debt held by the public and private sector.
26. A nation facing continual current account deficits, should reduce its dependence on imports. Build sustainable growth through high employment with stable prices and appropriate productivity improvements to stabilise the exchange rate and ignore the mainstream advice.
27. A low wage, export-led growth strategy sacrifices domestic policy independence to the exchange rate – a policy stance that at best favours a small segment of the population. fiscal discipline has not helped developing countries to deal with financial crises
28. There are also inherent conflicts between maintaining a strong currency and promoting exports – a conflict that can only be temporarily resolved by reducing domestic wages, often through fiscal and monetary austerity measures that keep unemployment high.
29. The research evidence is clear – ‘pass through’ estimates are highly variable and depend on many factors including how much spare capacity there is in the economy, the degree of import competition, etc.
30. Changes in overall consumer price inflation respond to changes in import prices. So ‘pass through’ might be high and rapid but the second impact low and drawn out, making the overall impact inconsequential.
31. So if imports are a relatively small proportion of goods and services included in the inflation measure, even if the ‘pass through’ is high, the overall impact on the domestic inflation rate will be small. As we have seen during the virus.
32. How long these separate effects take to impact. In many studies, the sum of the two impacts can take years to manifest.empirical research on this question suggests that ‘pass through’ effects are weak in most nations for which coherent empirical research has been conducted.
33. The reality is that a nation facing a lack of ability to purchase imports, for whatever reason, has to either increase its exports or reduce its imports.Then adjustments in the flow of real goods and services sourced from foreigners are required.
34. For less developed countries faced with currency crises, there is probably no short-run alternative but to urgently restore reserves of foreign currency either through renegotiation of foreign debt obligations, international donor assistance or default.
35. A national government should always aim to to design its fiscal policy with a view to the economic effects desired, rather than target a deficit or surplus. Balance the economy not the budget. Targetted spending can create domestic activity which replaces imports.
36. A fully employed economy with skill development structures, first-class health and education systems, and political stability, is likely to attract FDI in search of productive labour. Which helps with currency management.
37. Even if the higher growth is consistent with a lower exchange rate this is not something to worry about. Lower currency parities stimulate local employment (via the terms of trade effect) and the distributional consequences tend to be more onerous for higher income earners.
38. Finally, where a dependence on imported food or other essentials exists – then the role of the international agencies should be to buy the local currency to ensure the exchange rate does not price the poor nations out of these goods and services.
39 The MMT lens shows it is preferable to the current practice of forcing these nations to run austerity campaigns just to keep their exchange rate higher
The full employment white paper from 1945 shows
They had a very good grasp of the 39 steps above
http://www.billmitchell.org/White_Paper_1945/index.html
The full employment white paper from 1945 shows
They had a very good grasp of the 39 steps above
http://www.billmitchell.org/White_Paper_1945/index.html
