Debt, credit and financial instability

21 March, 2016 at 16:11 | Posted in Economics | 1 Comment


In a blogpost the other day, Simon Wren-Lewis was airing some misgivings about MMT. According to Wren-Lewis there’s basically nothing new about MMT — everything has been ‘well known long before MMT.’ And, argues Wren-Lewis:

Some have commented that my recent discussion of fiscal rules ignores the fact that governments can finance investment, or anything else, by creating money. What would happen if the government started doing exactly that: stopped issuing debt and just created money. Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why.

‘Stopped issuing debt and just created money’?

Hmmm …

If there’s one single thing MMTers have been very adamant about and stressing all the time, it is that creating money is nothing but a form of debt that has to — as emphasized in the Bezemer-video above — show up on the liability side of the central bank accounts. One agent’s assets is always another agent’s liabilities. Although Wren-Lewis admits never having ‘heard of MMT’ before starting his blog, this, however, I thought, was common knowledge …
Added 18:30 GMT: Obviously yours truly is not alone in wondering about modern Oxford scholarship …

He suggests that he (and his ilk) knew all of the propositions advanced by MMT all along anyway – so ‘there is nothing new about it’.

Which then begs the question as to why they are still teaching things like:

1. The money multiplier.

2. Crowding out.

3. Fiscal deficits cause higher interest rates.

4. Central bank controls the money supply.

5. Inflation is higher if governments ‘print money’ to match their deficits relative to issuing debt …

So they knew all of the myths in the mainstream macroeconomics textbooks all along but still choose to teach them in their courses …

These characters have built an image of MMT in their own minds from some garbled accounts etc and choose to hide behind a few crude and incorrect propositions that they attribute to MMT academics (such as, ‘deficits do not matter’) to make themselves feel comfortable that they know everything anyway and still have a body of economics that is relevant.

The lack of scholarship is astounding – but then what would you expect when you examine the course material they offer their students and the sort of statements they make on the public record.

Bill Mitchell


1 Comment

  1. Very instructive videos by Dirk Bezemer. His proposals for entering a more productive world should be studied by Western politicians who just compensated lack of competitiveness with increased household debt. An interesting description of debts is written by Ray Dalio, Bridgewater:

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