Daily Archives: March 10, 2020

MMT is a Political Problem: Part 1

New Economic Perspectives has the article MMT is a Political Problem: Part 1.

Developers and promoters of MMT have seen their task as a teaching problem; explaining how America’s sovereign money system works to those who still believe that money is a scarce commodity that restricts what the country can do. Their assumption has been that when more people, particularly political leaders, see that scarce money is not a true constraint, a new world of possibilities will open up for building a brighter future.

But what if those who seem impervious to the new knowledge are resisting because they see very clearly how it can lead in directions counter to their interests? Evidence that they have wanted to keep money scarce and under their control goes back at least a hundred years. (And longer if you consider the Civil War.)
From what I have read, MMT promoters have not discussed the role of banks very much. But the number of dollars they create by making loans is many times greater than the number of new dollars the government creates by paying out more than it takes in with taxes. Banks see large government public funding operations as competitors.

A better explanation of the difference between private bank “money” and Federal Reserve Bank money is that private banks do not create money. They create promises of money. When they make a loan to you, it is a promise that if you should need real money, they will fulfill their promise. As long as you use your loan money to pay someone who deposits it in the same bank, no real money is involved. The bank only transfers its promise to you to the person you paid. They only need real money to cover the net outflow from the bank. Some of that real money comes from the Federal Reserve Bank and some of it comes from other sources in the private sector (including interest payments on their loans they made to you, and service fees, selling mortgages to investors). Because of fractional reserve banking and the fact that thee are only 6 major banks in the USA, the need for real money by the banks is very small compared to the obligations on their books.

If MMT would explain the difference between high powered money and private bank created promises of money, I think it would lift a big cloud from everybody’s minds.