“A concept is a brick. It can be used to build a courthouse of reason. Or it can be thrown through the window.”

Gilles Deleuze

A reader ‘Joyce' sent an email to me today, and rather than just provide a complete answer to her I thought I would take the opportunity to expand on this to further explain what I said about Modern Monetary Theory yesterday.  

There were more responses from those from the fiscally conservative economic right, who support MMT as a rationale for eliminating the income tax. The progressive voices speaking out for MMT as a cure for austerity ought to think long and hard about this. 

They would propose using MMT printing rather than progressive direct taxation.  This is a more regressive taxation of currency depreciation, or monetary inflation, that would adversely impact those without resort to holding inflation senstive assets as a store of wealth.   I might write something more about this later, 

Joyce's observations are in italics, with my reactions to them just below.

“I am just learning about MMT myself but I see that you are conflating the value of the currency with the use of the currency (no matter what its valuation is). MMT just describes the way money works in a sovereign country with its own currency. MMT makes no claims for the goodness of the politicians that are elected to the government that spends money into the economy.”

The method of how a currency is created and used is intimately involved with its valuation.  As a medium of exchange and a store of value, the method in which money is created, distributed, and valued impacts every transaction that occurs within an economy, and in trans-economic (international if you will) commerce.

To say that assuming that printing money at will by the government without limit can have no effect on value flies in the face of historical experience.   MMT seems to be based on this assumption and a few others that do not hold up well to practical examination.

“The government has to spend money into the economy in order for the public and private sectors to “save” or use that money. The people accept the currency that is spent into the economy because they use it to pay their debts, such as income tax, to government. I suppose the valuation can change but it remains true that the sovereign government can afford to pay for anything that it needs or wants to as long as it is in their own currency and is available.”

The government manages the currency.  It provides it to the economy under certain sets of economic rules.  ‘Government spending' is one of them.   There are others. These are not particularly germane to my major objection to MMT, but they do serve to divert the discussion from it so I will let that go for now.

But it is not true that ‘the sovereign can afford to pay for anything that it needs or wants as long as it is in their own currency and is available.'   There must be an agreement on value for an exchange to occur between entities.  This is easier to see if you assume that one of the parties is another sovereign government.

What troubles me about some of the unspoken assumptions in MMT is that individuals within an economy are not ‘sovereign' or free actors.   What comes out in discussions with MMT believers is that government rules by force, that individuals are compelled to accept the currency, presumably at some valuation well above worthlessness.