Ben Bernanke and MMT

23 Oct, 2012 at 20:08 | Posted in Economics | 5 Comments

In this interesting video Federal Reserve Chairman Bernanke basically says that idle balances don’t chase goods and services and that a fortiori we don’t have to be overly afraid that quantitative easing will spill over into inflation. And – which actually is the most interesting part of the speech – he also confirms the Modern Monetary Theory view that the financing of these operations is made possible by simply crediting a bank account and thereby – by a single keystroke – actually creating money.

One of the most important reasons why we’re still stuck in depression-like economic quagmires is that people in general – including most mainstream economists – simply don’t understand the workings of modern monetary systems. The result is totally and utterly wrong-headed austerity policies, emanating out of a groundless fear of creating inflation via central banks printing money, in a situation where we rather should fear deflation and inadequate effective demand.


  1. So, the Fed does not print money, but creates electronic money that does not increase the effective demand in the economy? But is not the Keynesian solution just that – to create the demand that is lacking in the economy? So, should you not as a Keynesian recommend printing “real” money, cash, that chases goods and services? But what about inflation then?

    • Cash is a complete red herring. It can end up under the mattress in savings the same as electronic money.

      The key is spending. Money only has power to do good in the real economy when it is moving.

    • In a situation characterized by enormous amounts of unused labour (unenmployment) an capital we have to have a both monetary and fiscal policy oriented at creating effective demand. And in a liquidity trap the problem is not inflation, but – as already Fisher and Keynes showed in the 30s – deflation. If the demand is created by the printing press (of minor importance in a modern “credit economy”) or any other means is actually only of secondary importance. What is important is to get the wheels spinning!

    • The issue is *how* the money that is created is injected into the real economy. If the government sends a check to Joe Consumer, Joe deposits the check in his own bank account. His bank adds $1000 to his deposit balance in return, and then passes the check on for payment. The result is that money is moved from a Treasury account to the bank’s reserve account. Upshot: Treasury has $1000 less; Joe has $1000 more; bank has both a new $1000 liability and $1000 asset for no net change. Joe, who has a high propensity to spend, takes his $1000 to market to chase goods and services, and stimulate their sale and production.

      Now suppose the government simply sends $1000 to a bank reserve account instead. Maybe they do this by having the Treasury sell the bank a $100,000 security for $99,000 and then having the Fed buying it back from him for $100,000. Treasury then pays Fed $100,000 to redeem the security and fed returns the $1000 profit to treasury. End result: no change in treasury balance, $1000 increase in bank assets, and $1000 meaningless “liability” entered on Fed books.

      There is no impact on Joe Consumer. The old picture was that the bank was eager to lend to Joe, but had to acquire some additional reserve assets first in order to make the loan. But that’s not how it works these days. If the bank thought it could make money by loaning money to Joe, it would have loaned money to Joe, and then acquired any needed additional reserves late. All it cares about is the spread between the price of the reserves and the expected return on the loan. Right now, as we know, banks are swimming in excess reserves, so clearly there is no pinch on lending due to the inability to acquire reserve balances or their high cost. Joe Consumer doesn’t want to borrow, and banks don’t want to lend to him.

      So unless you think you can stimulate the economy purely by getting banks to buy more office furniture, company cars and ATM machines, there is no reason whatsoever to be supplying money to banks rather than directly to Joe Consumer.

Sorry, the comment form is closed at this time.

Blog at
Entries and Comments feeds.