MMT or Money Matters noT

I'm really very sorry to inflict this on my readers but I simply have to talk a little bit about this MMT stuff. I was reading an article today on BillyBlog and part of it nearly made me cough out my own uvula.

It starts well:

The essential idea is that the “money supply” in an “entrepreneurial economy” is demand-determined – as the demand for credit expands so does the money supply.

It goes on:

As credit is repaid the money supply shrinks. These flows are going on all the time and the stock measure we choose to call the money supply, say M3 (Currency plus bank current deposits of the private non-bank sector plus all other bank deposits from the private non-bank sector) is just an arbitrary reflection of the credit circuit.

OK, no problem with that so far ...

So the supply of money is determined endogenously by the level of GDP ...

Pardon my French but WHAT THE FUCK? MMT is constantly throwing up rubbish like this that just makes you think you've gone mad. He is arguing that the central bank does not determine the money supply, it is determined by the amount of credit lent out of banks. I actually have no beef with that as a statement of truth, I mean I hate it with a passion but it's still just as true. But the other real problem here is that he seems to be saying that the central bank does nothing that affects the money supply, which is plainly false and he must know it. The central bank determines interest rates for the entire economy, and thereby directly controls the amount of money that is lent out, since low interest rates will result in more lending (in the short term) and high interest rates less. The reason for that is that the interest rate it sets is fairly arbitrary, but whatever it is the economy can only support x number of dollars borrowed at some interest rate and it can support only fewer dollars lent out at a higher interest rate, since the only projects getting loans at the higher rate will be those that are forecast to provide a higher return, allowing the interest to be paid off. The actual number of dollars in bank reserves is irrelevant, only the interest rate those reserves produce is relevant.
So the money supply is determined by the interest rate, and the interest rate by the amount of bank reserves (rather, by the percentage change of those reserves), and the bank reserves are controlled by central bank ... so how is that not the central bank determining the money supply? Yeah it doesn't actually go, we need $5T this year, we'd better print it up, but it has every intention of changing the money supply when it changes interest rates, because it's targeting inflation, so why not call a spade a spade?

He also seems to assume that the amount of money in the economy is supposed to increase with GDP. This is one of the more pervasive myths of economics. The quantity theory of money says, broadly, that the money supply at one time t has some value x. It would have value x no matter what the total number of dollars actually was, since money's only function is to enable trade and it will serve that function whether a cent buys a paperclip or a nuclear power station. Decimalised currency can be divided into arbitrarily small units so we can always make change no matter what we buy. Bill seems to completely ignore that by assuming that the money supply should grow with the economy. In fact it does not have to, all that matters is how exactly it changes in size. If a market amount of labour is required to produce it then all is well. If the cost of producing it is way below its "value" in the economy, then the first spenders get by far the most benefit from its creation. The latter state is the current situation in every country on earth and is 90% of the reason we are in so much debt right now. Governments and banks create the money and they get the benefit.

Later he continues:

To repeat, bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards. If they are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank.

Again, no arguments there, but there is a little fly in the ointment called the interest rate. As I have argued previously, fewer people will be credit-worthy at a higher interest rate than at a lower one, so while banks are not technically reserve constrained they have to raise interest rates if their reserves are being persistently depleted, both in order to increase profits and to decrease the number of people making demands on their reserves. If they do not they will always have to borrow reserves and that is more expensive than having them in the form of demand deposits, their profits will fall relative to the other banks and they will be driven out of the market.

More than anything else the MMT school totally ignores the movement of real wealth in the economy, which is the whole point of the thing. Economics is not just about making the numbers work, it's about real people trading real things for real benefits. The MMT model places the central bank and the government firmly in control of the economy, and as such is really another form of statism, which all economic models are at some level apart from the laissez faire Austrian school. In a way it is the worst because it understands the full implications of state control of the money system. It encourages the state to use its power for good but never questions whether the state ought to have the power at all, which I believe with all my heart it should not.

We must bring back market money. It has been totally abandoned and we are blessed with the collapse of our economy as a result. We must bring back sound money, sane interest rates determined by the market, end fractional reserve banking forever, and abandon the idolatry of a government solution to every private problem.