MMT - Almost a Primer - Interview with Warren Mosler

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Warren Mosler offers a lot of food for thought in sketching some of the main tenets of Modern Money Theory (MMT).

Get a flavour from these starters:

MN: Let’s begin with a question that might seem obvious, and yet is something that so few people actually understand. What is money, and how is it actually created?

WM: If you talk to different economists they’ll give you different definitions of what money is. I actually don’t even use the word, but our currencies, such as the euro, the dollar, the yen, those are just the things that are needed to pay taxes, they’re tax credits. They’re no different than a tax credit you might get for solar energy, where the U.S. government might give you a million dollar tax credit. It’s no different than getting a million dollars. So the currencies we generally talk about are basically just tax credits.

I had a little difficulty with the analogy of a tax credit. So let us ponder the meaning of a tax credit. According to Investopedia a tax credit is :

An amount of money that a taxpayer is able to subtract from the amount of tax that they owe to the government.

Assume, I have a tax liability of € 1. That is to say: I owe the government € 1. What is the situation like if I have that liability coming due, and I have no money? Well, I have taxes outstanding, and if I do not redress the problem, I may end up in jail. What do I need to avoid the hardship of it? I need the means to somehow "subtract from the amount of tax that I owe to the government." One of the most common means of achieving precisely this is to earn money (here at least € 1) and thus have € 1 which can be surrendered to the government so as to subtract that amount from the tax liability. I suppose, what makes the analogy less straightforward, at least to me, is that I reflexively associate a tax credit with a (windfall) bonus ( = tax relief) granted to me, rather than with my ability to honour my tax debt by redirecting money I have earned to the government.

MN: Another topic that is often misunderstood, and it relates to this first question, is the role of the central banks, such as the ECB or the Federal Reserve. What are they, who operates them, how do they operate, and do they actually create money, or tax credits?

WM: They are like the scorekeeper for the currency, and they are the government’s fiscal agent. They have a spreadsheet, just like you set up a spreadsheet on your computer, and they put in debits and they open up accounts for the member banks, for foreign governments and a few others. When the government spends, they put credit into the appropriate account, when it taxes, they debit the appropriate account, and they also generally regulate and supervise the banking system to some degree.

Those are the two roles they generally have, and as part of the operation of the spreadsheet, the scorekeeper so to speak, they’ve also been given the job of determining what’s the appropriate interest rate. There’s no such thing as the marketing [[sic] - I think, "the market" is the intended terms] determining rates. The government has to set some rate, or the rate will just sit there as zero.

In a floating exchange rate the natural rate of interest, the rate without government intervention, is zero, and then it’s up to the government, if it wants to support a higher rate, to take some kind of action to do that, and that comes in the form of either paying interest on balances at the central bank, interest on reserves, or selling treasury securities, which are just interest-bearing accounts at the central bank.

MN: Now, having discussed this, what, then, is public debt?

WM: What we call the public debt are, for example in the U.S., the dollars spent by the government that haven’t yet been used to pay taxes. When the government spends these dollars, they credit bank accounts, they get into various bank accounts, and when they sell treasury securities, which is called borrowing, dollars shift from one type of bank account to another type of bank account called a government bond. A government bond is just a bank account at the central reserve bank, they call it securities accounts, it’s just like a savings account at a normal bank. The same is true in the Eurozone, all the government debt in the Eurozone is nothing more than savings accounts in the central bank system. You give them euro, you get them back with interest, with negative rates you have to pay a little interest, it’s the same as a savings account. That’s true in Japan and the UK and in any country that has its own currency and issues bonds.

The public debt is the money the government has spent that hasn’t been used to pay taxes and it sits in what are best thought of as either checking accounts or savings accounts at the central bank, or some of it might sit in cash. That’s the public debt.

Read the entire interview at the source.