MMT ≠ QE
MMT is not and has never been about getting central banks to "print money" for the government
I have to teach a class soon, but I wanted to quickly comment on a media clip that drew some attention yesterday.
The clip is from Bloomberg TV, and it features the host of Bloomberg Surveillance, Tom Keene, talking with Bob Michele, the CIO at JPMorgan Asset Management. Tom starts off the segment by saying:
“Stephanie Kelton at Stony Brook [University] has changed the world. She came out with Modern Monetary Theory. We are in an MMT experiment of some type as well, and the financial media is not talking about this enough because everybody sort of wishes the theory would go away which is unfair to something that has had such an impact.”
The conversation continues with both men suggesting that the MMT “experiment” involves not just an embrace of substantial fiscal support (and large deficits) to fight the pandemic—which I accept—but also monetary support in the form of central bank bond-buying (QE) to keep the spending “affordable.”
While I’m happy to accept credit for helping to shift the terms of the debate in the realm of macroeconomics, especially with respect to the mechanics of government finance and the limits on government spending, it is Warren Mosler who deserves credit for “coming out with” MMT (although the MMT label came many years later).
My first encounter with many of the core tenets of MMT came from reading Mosler’s Soft Currency Economics about 25 years ago. In the years that followed, a small number of economists—myself included—worked to build on Mosler’s early insights. For me, one of the most fascinating arguments in Warren’s book had to do with the sequencing of the government’s taxing, borrowing, and spending.
Like almost everyone, I had been brought up to think of taxes and borrowing as two competing ways for the government to gets its hands on the money it needs to finance its spending. Taxing And Borrowing came first. Spending came last.
In my book, The Deficit Myth, I offered this simple pneumonic to describe the conventional model: (TAB)S
This model is affirmed in all mainstream macro textbooks, where students are presented with the concept of a government budget constraint. It teaches students that, much like a household, the government is financially constrained, so it must find a way to secure financing before it can pay the bills. There’s often a passing reference to a third financing option—”printing money”—but that one gets quickly dismissed as inherently inflationary, leaving students with the idea that the government must rely on either tax revenue or borrowed funds to pay for its spending.
Mosler flipped all of that on its head. He explained that not only did everyone have the sequencing backwards but that we were thinking about taxes and bond sales the wrong way as well. The funds to pay taxes and buy government bonds, he explained, come from the prior act of government spending (or lending). Here’s Mosler:
“The government spends money and then borrows what it does not tax, because deficit spending, not offset by borrowing, would cause the fed funds rate to fall.”
The mental model we should keep in our heads, then, is the one that sequences the spending first: S(TAB)
The point I’m making here is that from the very beginning, MMT has offered a (superior) descriptive framework, one that explains the actual mechanics of government finance. It was never a proposal to “print money” or to encourage central banks to engage in large-scale asset purchases (LSAPs). In fact, MMT scholars were some of the earliest skeptics of Quantitative Easing (QE).
The reality is that when it comes to covering the government’s bills, there is only one way to pay, as I explained in this recent Substack:
Unlike the rest of us, Congress never has to check the balance in its bank account to figure out whether it can afford to spend more. As the issuer of the currency, it doesn’t have to worry about running out of money. It can afford to buy whatever is available and for sale in its own currency. That might involve spending on roads and bridges, a military arsenal, or hospitals and schools. Finding the votes to pass a spending bill can be hard, but finding the money is never a problem. They just create it.
Here’s how it works. Whenever Congress and the president agree to spend more, the government’s bank—the Federal Reserve—works with the rest of the financial system to get that money into our accounts. Everything happens electronically, so there’s no physical “printing” of money involved. If you got a $1,400 check from the federal government earlier this year, or if your company received money to help cover payroll and other expenses, then you got some of the newly-minted digital dollars that were created to support our economy. No taxpayers were involved in the process. It was all done using nothing more than a computer keyboard.
There’s just no other way for it to work. It has nothing to do with QE ! So please, don’t conflate MMT with QE. And raise a red flag whenever you hear anyone present MMT as a proposal to “print money.”
Correct me if I'm wrong. Are you saying QE requires the government to pay interest because you are selling debt in the form of treasuries, and the Fed depositing (spending directly with key strokes) does not cost the government interest payments?
When people say MMT advocates government financing spending by 'printing money' they're not referring to literal printing presses or physical banknotes. They're referring to the creation of new base money. They will not be swayed by the response that we're not making new cash we're crediting accounts at the fed. Whether a keyboard is used to issue new reserves or new cash is printed at the mint, it will be described using the phrase 'printing money'. We can't disavow 'printing money' because it is being used to describe the principle of expenditure that involves creating new money and spending it. We imagine we would be disavowing a specific outdated process for issuing money, whereas they would interpret it as a fundamental disavowal of governments creating money from nothing, which is where all money comes from and in the long run can't be avoided.
The correct rebuttal isnt to go after the phrase 'printing money': when we say the money is actually created by keystrokes it comes accross as though we are using technicalities and jargon to disguise opinions we felt might be shameful (that governments creating money from thin air isn't only routine, it is where all money comes from originally). If we insist that MMT does not support 'printing money' it implies acknowledgment that issuing new money is fundamentally wrong. We shouldn't be tackling critics by saying that we're not printing money. Instead we should be combatting the principle being advocated that spending by creating money rather than taxing it is inherently distructive. Rather than disavowing printing money (which sounds like we're disavowing issuing it), we should emphasize that all money had to be 'created' at some point, that borrowing, by creating government liabilities is a form of 'printing money', that all deficits involve issuing/printing new money that flows to the private sector and that to avoid doing so on principle is dangerous and deflationary. We should challenge the idea that issuing/printing money leads to inflation in an economy with unemployed resources, and point out that the hyperinflation they fear isn't the outcome of 'money printing', it's follows a collapse of the tax system.
As I understand it MMT has no reason to object to printing money any more so than it objects to crediting deposits held at the fed. Rather if one takes the functional finance stance, the view that MMT holds on 'printing money' depends on whether there is sufficient demand in the economy that all goods produced find a buyer (indicated by inflation) or whether it is operating below capcity (indicated by constant or falling prices, unemployment and unsold inventory). If deficits are necessary and they can be achieved by keystrokes at the fed, printing cash or issuing bonds, objecting specifically to the act of printing is a red herring that fails to address the fundamental criticism: the argument should be over the principle of issuing money, not the mechanism by which it happens.
By focusing on repudiating 'printing money', we concede by implication all the intellectual baggage behind the objection to creating money from nothing. A listener would assume we agreed that money creation should or (in the long run) could be avoided, or that the process that leads to money creation (expenditure beyond tax revenue) is reckless and unsustainable (when the reverse is true). If we overtly reject 'printing' it will be assumed we are doing so for the same reasons as our critics: that governments issuing money would lead to high levels of inflation. One fundamental error they make is that when we issue liabilities if they are called treasuries we call it 'borrowing' but when we call them 'cash' we call it 'printing', when we call them reserves we are 'crediting' when all these are examples of issuing money. Anyone MMT gained favour with by the repudiation of 'printing money' would be under the misapprehension that we are repudiating 'creating money', and that we agree with the arguments usually given for avoiding money issuance. Rather than mask our beliefs to sound more sensible we ought to make it clear that 'printing money' is the reason we have money, and that a variant of printing money has been the policy of almost every modern government.
Objecting to 'printing', a phrase people interpret it to mean creating money from scratch obscures numerous fundamental truths about MMT: that all government deficits are financed by creating money from scratch, that in the long run governments must create money first if they intend to tax it, that much as with a printing press, all money is issued from nothing. Most significantly, people are wary of duplicitous intellectuals and looking for reasons to discredit MMT. When people hear us object to the term 'printing' on the basis that we don't use actual printing presses to create base money, we look disingenuous.