How MMT is NOT printing money!

This is a guest/adapted post from a series of tweets by Scott Fullwiler.

From the very beginning, in the 1990’s, MMT has NEVER argued that ‘printing money’ was necessary. Anyone saying MMT = “print money,” even if they (correctly) incorporate an inflation constraint, is getting MMT dead wrong.

The argument from the earliest days in Warren Mosler’s “Soft Currency Economics,” Wray’s “Understanding Modern Money,” or Stephanie Kelton’s “Can Taxes & Bonds Finance Government Spending?“–the MMT argument is that ALL government deficits are ‘printing money’ ALREADY (!).

These and other early foundational pieces on MMT argue that the choice to issue bonds or not is about monetary policy – how to set the CB’s interest rate target, not whether to ‘finance’ a deficit or ‘print money.’

The argument across literally dozens of publications is consistent–whether or not government issues bonds when it runs a deficit, the macroeconomic impact of ‘bonds vs. money’ is nil.

What matters for macro impact is the deficit itself, and how it is created (spending/taxing priorities), since the deficit is creating net financial wealth in the private sector (note I did NOT say ‘real‘ wealth (!)).

The choice to issue bonds or not in the face of a deficit is simply about 1 risk-free government asset (say, T-bills) vs. another risk-free government asset of perhaps slightly longer maturity (but that’s also a policy choice).

This is also partly why we predicted back in the 2001 that Japan’s QE (Quantitative Easing) wouldn’t be inflationary, and predicted the same for the US in 2008. QE & ‘monetization’ of government debt is about an asset swap–it’s the deficit itself that has the ‘quantity’ effect, not the financing.

Similarly, in the real world, Central Banks (CB) are defending their national payments systems every minute of every day. This means they accommodate banks’ demand for CB liabilities always at or near their current interest rate target.

From an MMT perspective, it’s really weird that people believe a government running a deficit via overdraft at the CB is inherently inflationary, but the current system, where government runs a deficit while CB guarantees market liquidity for bond dealers to buy government bonds, isn’t.

So, from the beginning 20+ years ago, MMT said the ‘choice’ to issue bonds when running a deficit was about how to set CB’s interest rate target. With bond sales, CB accommodates banks at its target rate. Without bond sales, CB sets rate at ZIRP (0%) or uses interest on reserves – IOR=target rate to set target rate <> 0.

This is just supply and demand from ECON 101. If you push out the supply curve beyond the entire demand curve, either the price falls to 0 or you have a price floor set at <> 0. Those are the only 2 possibilities when ‘printing money’ to run a deficit.

Neoclassicals actually agree with this for different reasons. For them, if we ‘monetize’ government debt & CB rate = 0, ‘monetization’ isn’t inflationary. Or, if CB sets rate <> 0 via IOR=target rate, still not inflationary.

In both cases, CB’s reserves are considered effectively equivalent to holding, say, T-bills. So, ‘monetization’ or ‘printing money’ is effectively equivalent to ‘printing’ T-bills. In other words, if you blend neoclassical model w/ actual CB ops, ‘printing money’ isn’t inflationary.

Putting this all together . . . MMT has NEVER argued that ‘printing money’ as conventionally interpreted is necessary to carry out MMT policy proposals. All deficits create net financial wealth for private sector, regardless of ‘finance’ method.

Choice to issue bonds or not when running a deficit is about how to set CB’s target rate, not ‘financing’ a deficit. This means that interest on national debt is a policy variable, or at least can be (for monetary sovereign, of course).

So, choice to issue bonds or not is not about ‘quantity’ impact of a deficit, but about ‘how’ CB chooses to achieve its target rate. Hitting interest rate target by overdraft to government & pay IOR=target rate=2% has no difference of macro significance from hitting interest rate target by government instead issuing T-bills while CB ensures market liquidity at target rate = 2% to banks & bond dealers.

Now, there are places where MMT scholars argued for no bond issuance, government gets CB overdraft, & CB sets target rate= 0 (permanent ZIRP).

Note, though, that this is:

(a) not arguing in favor of ‘printing money’ even in neoclassical view
(b) and is therefore, simply a policy proposal for low interest rates on government debt.

It is also NOT arguing for ZIRP in a neoclassical world–Wray did his Ph.D. under Minsky. Minsky was against manipulating short term rates; instead favored credit regulations/margins of safety.

That is, when MMT proposes ZIRP, it is proposing it for ONLY the government debt, NOT for the economy overall as in a New Keynesian model. There are dozens of MMT publications on regulating credit, and more on the way. MMT was about macroprudential before that was a thing.

Minsky was adamant that manipulating short-term interest rates was actually destabilizing (he blamed the rise of money manager capitalism on Volcker’s high rates). Raise margins of safety to slow credit rather than raising the overnight, risk-free rate.

A benefit of margins of safety is that raising interest rates to slow credit leads to higher hurdle rates that can only be met by riskier projects, while raising margins of safety slows credit by favoring the LESS risky loans.

Particularly given that the problem of a debt bubble is that credit QUALITY is bad, it’s really weird from an MMT perspective that it’s mostly MMT arguing in favor of macro policy that target credit quality while neoclassicals go to lengths to NOT talk about credit quality–use a Taylor rule to manipulate short-term rates, increase liquidity requirements, increase capital, but little to nothing about underwriting. (Shocker–we now have a corporate debt bubble.)

So, MMT is NOT arguing for ‘printing money’ and ‘ZIRP’ in the conventional, neoclassical world. MMT is arguing for stabilizing demand side of the economy with a mix of government’s budget position (at low rates, however ‘financed’) & credit quality/margins of safety.

Further Reading
A walk-through of government financing
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