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The use and abuse of MMT (Part 2)

Michael Hudson, Dirk Bezemer, Steve Keen and Sabri Öncü

The first part of this article appeared in the previous issue of ERA Review.

MMT, Public and Private Debt

All money is a financial liability, and much of it is created as debt. Government money creation for public purposes – to pay for employment and output – spurs prosperity. But in its present form, private-sector debt creation has become largely extractive, and thus leads to the opposite effect: debt deflation.

Governments can pay for public debt without defaulting, as long as this debt is denominated in their own domestic currency, because the governments can always create the money to pay. To the extent that public debt results from spending that supports output, employment and growth, this process is not inflationary. The government gives value to money by accepting it in payment of taxes. So the monetary

system is inherently bound up with fiscal policy. The classical premise of such policy has been to minimize the economy’s cost structure by taxing mainly unearned income (economic rents), not wages and profits in the production-and-consumption sector.

The problem nowadays is private debt. Most such debt is created by banks.

This bank credit – debts owed by bank customers – tends to increase faster than the ability of debtors to earn enough income to pay it. The reason is that most of private debt is not used for productive, income-generating purposes, but to finance the transfer property ownership (affecting asset prices in proportion to the rate of growth of credit for such purposes). That use of credit – not associated with the production-and-consumption economy – leads to debt deflation. Instead of providing the economy with purchasing power (as in running government budget deficits), private debt works over time to extract interest and amortization from the economy, along with servicing fees.

The typical mortgage, including its interest charges ends up exceeding the value that the property seller received. As a result of compound interest, the mortgage debt is repaid several times to the bank. The effect of this makes banks the main recipient of rental income (as mortgage debt service) and ultimately the main beneficiaries of “capital” gains (that is, asset-price gains).

What gives bank credit its monetary characteristics – and enables debt to be monetized as a means of payment – is the government’s willingness to treat banks as a public utility and guarantee bank deposits (up to a specified limit) and ultimately to guarantee bank solvency.

A budget deficit resulting from a financial bailout reflects the inability of the economy to carry its exponentially growing debt overhead. Because this overhead increases as a result of the mathematics of compound interest, the size of bailouts must increase – and with it, the budget deficit (plus swap agreements) to subsidize this debt overgrowth as an alternative to imposing losses by banks and financial investors.

That is what we have seen since the financial crisis of 2008, both in Europe and the United States. Led by the financial sector, much of the economic mainstream finally has come to embrace the idea of budget deficits – now that these deficits are benefiting primarily the financial and other parts of the FIRE sector, not the population at large, that is, not the “real” economy that was the focus of both Keynesian economics and MMT.

This kind of endorsement for government money creation thus should not be considered an application of MMT, because its policy goal is almost diametrically opposite. Much as the budget deficits of the Reagan era were used as the first part of a one-two punch to roll back social spending (Social Security, Medicare, education, etc.), so the Obama-Trump deficits were used to warn that the economy must preserve fiscal “stability” by rolling back social programs in order to bail out the financial economy. Wall Street magically has become transmogrified into “the economy”. Both labour and industry are now viewed simply as deadweight expenditures on the financial sector and its attempted symbiosis with the central bank and Treasury.

The Financial Sector, Private Capital and Austerity and Central Planning

If Wall Street is bailed out once again at the expense of the “real” economy of production and consumption, America will have turned decisively away from democracy into a financial oligarchy. Ironically, the initial logic is the claim that an active state is inherently less efficient than the private sector, and thus should be shrunk (in the words of lobbyist Grover Norquist, “to a size so small that it can be drowned in a bathtub”). But relinquishing resource allocation to the financial sector leads to its product – that is, debt – creating a crisis that requires unprecedented government intervention to “restore order,” defined as saving banks and financial investors from loss. This is only achievable by shifting the loss onto the economy at large.

Today, the financial sector – the banks and financial investors – play the role that the landlord did in the 19thcentury. Its land rents made Britain and continental Europe high-cost economies, as prices exceeded cost-value. And that is what classical economics was all about – to bring market prices in line with actual, socially and economically necessary costs of production. Economic rent was defined as unnecessary costs, which were merely payments for privilege: hereditary landownership, and monopolies that creditors had carved out of the public domain or won as legal compensation for financing public war debts.

The rentier class not only was the major income recipient of the economic surplus, it controlled government, via the upper house – the House of Lords in Britain, and similar houses across continental Europe. Today, the Donor Class controls electoral politics in the United States, via the Citizens United ruling. Political office has become privatized, and sold to the highest bidders. And these are from the financial sector – from Wall Street and financialized corporations.

The post-2008 stock market and bondmarket boom raised the DJIA from 8500 to 30,000. This gain was engineered by central bank support far in excess of what a “free market” would have priced stock at. Before QE, U.S. shares had fallen only slightly below the market average for the previous century. QE drove it to its highest level outside the 1929 and 2000 bubbles.

Even after the Corona crash, shares were still overpriced compared to pre“Greenspan Put” prices.

The result is best thought of as a blister, not a bubble. Its only hope of surviving without bursting is for the government to continue to support it in the face of a drastically shrinking postcoronavirus economy.

So the question is what will be saved: The economy’s means of livelihood, or an oligarchy of predators living in luxury off this shrinking livelihood?

All this was explained by classical economists in their labour theory of value, which was designed to isolate economic rent and other non-production overhead charges (perceived to be mainly services in the 18th and 19th century, especially by the wealthy classes).

The Hudson Paradox: Money, Prices and the Rentier Economy

Without distinguishing between the FIRE sector and the “real” economy there is no way to explain the effects of government budget deficits on asset-price inflation and commodityprice inflation.

Here is a seeming paradox. The credit money issued by banks is created mainly against collateral being bought on credit – primarily real estate, stocks and bonds. The effect of increasing loans against these assets is to raise their prices – mainly for housing, and secondarily for financial securities.

Higher housing costs require that new home buyers take on more and more debt in order to buy a home. Their higher debt service leaves less disposable income to spend on goods and services.[2]

The asset-price inflation effect of money creation by banks is thus to exert a downward impact on commodity prices, to the extent that the carrying cost on bank credit reduces the net purchasing power of debtors to buy goods and services. This deflationary effect of bank money ends in a baddebt crash, to which the government responds by bailing out the banks with a combination of money creation and central bank swaps (which process does not appear as money creation). This is just the reverse of the MV = PT tautology, which only measures the volume of new money (M) without considering its use – i.e. what it is spent on. By failing to distinguish the use of bank credit to buy assets (hence, adding to asset-price inflation) as compared to government deficit spending, both the old monetary formulae and the frequent MMT contrast between public and private sectors neglect the need to distinguish the FIRE sector’s “wealth and debt” transactions from how wages and profits are spent in the production-and-consumption economy.

  1. Real estate was given a fictitiously short accelerated depreciation allowance – as if a building lost its entire value in just 7½ years, providing all rental income to be charged as an expense and even to generate a fictitious tax-accounting tax loss. This catalysed the great conversion of rental properties to co-ops. Landlords (called “developers”) took out a mortgage equal to the entire market price of the building, and then sold apartments at a price not only greater than zero, but typically equal to the

    entire mortgage. It was one of the great “wealth creation” ploys in modern history. And it was left out of the National Income and Product Accounts (NIPA), which used “realistic” depreciation – which still pretended that buildings were losing value, despite the maintenance and repair expenditures to prevent such loss.

  2. Higher stock and bond prices lower the yield of dividend income. (Most such income is spent on new financial assets, not goods and services, so the effect of lower yields probably is minimal, and may be offset by a “wealth effect” of higher asset prices and net worth.)

Source: Michael Hudson blog 10 Apr 2020

Michael Hudson is a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College.

Dirk Bezemer is a Professor of Economics at the University of Groningen in The Netherlands.

Steve Keen is a Professor and a Distinguished Research Fellow at the Institute for Strategy, Resilience and Security of University College London (

Sabri Öncü ([email protected]) is an economist based in İstanbul, Turkey.

This article is licensed under a Creative Commons Attribution-NonCommercialShareAlike 3.0 United States

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