SDT - The modern monetary theory (MMT - Modern Money Theory)

2019: The first lecture about SDT in Russian

The countries which policy corresponds to SDT

• Economy of the USA
• Economy of China
• Economy of Japan
• Economy of Great Britain
• South Korea
• Australia
• Canada

Theory

Savings of the private sector should be compensated by inflow (deficit) of the state or inflow from the external sector

The main postulate of MMT is that financial savings of the private sector (surplus), natural by the nature, are outflow from total expenses and should be provided with inflow of expenses (deficit) of other sectors – the state or the external sector. Without this inflow the private sector will not be able to receive purely financial assets, and will be able to save only in itself – for the accumulation account of a private debt.

This postulate concerns any countries – both sovereign, and not sovereign.

Select three options of macroeconomic policy:

1) allow to save debts to the private sector;

2) allow a certain budget deficit;

3) provide a foreign exchange inflow from the external sector due to surplus of foreign trade or a foreign debt.

MMT inclines to option 2 as the most optimal.

The sovereignty of the state is necessary for SDT

The countries make the choice for benefit of not sovereignty, placing a debt in foreign currency and not having own sources for its repayment, or assuming obligations for maintenance of a certain rate of the currency to others.

If in macroeconomic policy you act as not sovereign country, threatening the solvency, then you are not sovereign. In this sense Russia, for 2019 it seems answering criteria of the sovereignty (flexible currency rate and practically lack of a debt in foreign currency), works in many respects as not sovereign country.

The USA, really, the sovereign country, but even the sovereign countries has no opportunity to have any budget deficit because of inflation effects. They are connected not with quantity of money or debts, and with limitation of real resources in economy.

Not sovereign countries, except real, have also financial restrictions – solvency in others currency or accomplishment of obligations for maintenance of a certain currency rate. Naturally, the sovereignty does not come to an end with the first release of a debt in foreign currency or sales of a debt to foreigners, but if the country let out him and received a foreign exchange inflow, then she should expect a possibility of attraction of this currency at the time of debt repayment with the corresponding converse effect on the balance of payments and a rate of the currency.

Both the sovereign, and not sovereign countries at first should purchase something in the currency or to release it a different way that then it was possible to withdraw back it taxes or issue of state bonds.

Risk of part-time employment

The central problem of MMT - risk of part-time employment and a way of its achievement without increase in inflation, and other questions, for example, options of fiscal policy or a method of budget deficit financing – are secondary. Critics draw the wrong conclusion as if MMT suggests to have unlimited budget deficit and to finance it from the Central bank. No, MMT always begins with a question of inflation effects, and finishes with a monetary question.

According to MMT, direct budget deficit financing from the Central bank is not more inflation, than bond issue. The extent of budget deficit, but not a method of its financing is important. Direct financing – only an option to which a system itself will come at a zero rate of percent. Yes, MMT considers natural a rate of 0% at a status of full employment, but does not exclude that the Central Bank can set any rate higher than 0.

And recipes of MMT – in how to provide full employment (it is understood as unemployment less than 2%) in the absence of inflation effects. The most efficient recipe use of automatic stabilizers in fiscal policy is considered. The existing stabilizers - a dole and the progressive system of taxation (it is not in Russia, but there are, for example, taxes on oil which withdraw the main part of profit from increase in prices for oil).

Sense of automatic stabilizers - not to allow the excess growth or decrease in demand in economy. Instead of a dole and the big buffer of the unemployed for restriction of inflation MMT suggests to employ with the minimum wage to everyone for social needs (Job Guarantee or Employer of Last Resort).

in the conditions of a depression the aggregate demand is insufficient. Speaking more precisely, the total quantity of goods and services which all participants of economy are consumers, the companies and the governments — are ready to purchase it is, less, than a total quantity of goods and services which producers would be ready to make. Therefore demand, but not production capacity, limits production volume. Let's assume, for example, that you want that the government constructed more infrastructure facilities — new roads, bridges, a railway tunnel near Hudson River in New York. Usually we would tell that in order that to make it, it is necessary not to do something — or consumers it is necessary to convince of that they consumed less, or the public expenditures had to "force out" private investments. If the economy is in a depression, then such compromise is not required: tunnels can be under construction workers who differently would be the unemployed, using the equipment which differently would stand idle. If you ask from where funds for payment of this work undertake, then they can be attracted due to sale of government bonds — however such loan does not compete with other options of use of means because the act of expenditure in itself of the state money raises income, some part of this raised income is preserved and, thus, these expenses create savings which go for purchase of those government bonds. Paul Krugman, the Nobel Prize laureate on economy

Shock of the balance of payments

Shock of the balance of payments can arise as at a lack of real resources of economy (export less import), and at sudden changes in capital movement in the conditions of open economy. Result of shock – significant change in the exchange rate of currency.

"Recipes of MMT" do not aim to increase beyond all bounds expenses over economy potential, so cannot lead to shock of the balance of payments in itself. Moreover, MMT always supported floating exchange rate – he adapts to change of external conditions and does not allow tough currency crises.

For protection of domestic market MMT considers normal use of elements of control of capital flows (capital controls) that is relevant for many developing countries.

There is such property of developing countries – residents save not only internal, but also external assets. For this purpose the positive trading balance or a gain of an external debt is required. The competent macroeconomic policy should consider all risks and to be directed to restriction of risk transactions of the private sector, whether it be active increasing import, an external debt or sharp deviations of currency rate. Both the private sector, and the Central bank for protection against crises can save foreign assets, but foreign currency reserves are not necessary to the sovereign Government.

Printing of money

The private sector in the same way creates a debt and money from nothing, and in much bigger sizes, than the state. These new debts of some provide savings of others. Savings arise irrespective of - there is an inflation, or not, there is economic growth or not what a status of the balance of payments... A part of income always goes to financial savings. Why economic growth should be limited to the fact that the private sector is financially limited and is not ready to increase the debt?

The credits create deposits

This seemingly simple macroeconomic dependence raises doubts even at those who work in a banking system. Of course, if to consider it from a position of separate bank or the client of bank which came for the credit (i.e. proceeding from the micro bases) then can seem that deposits are primary or the primacy is not clear as at chicken and egg.

Example: I sold goods by installments and by that automatically created a debt at the buyer and a financial asset at myself – without any money, reserves in the Central Bank or liabilities. Similar to everything happens in a system to money and banks. The banking system does not need to look for money for issuance of credits. Each separate bank can face this problem, but a modern monetary system in general – is not present.

Potential outflows in cash, required reserves do not limit a possibility of banks on issuance of credits because in a system there is always a Central Bank which is responsible for maintenance of sufficient level of liquidity and rates on which it provides this liquidity to banks.

Solution of the problem of inequality due to budget deficit

For 2019 most of modern socialists suggest to solve a problem of inequality, having faced superrich with an additional tax.

Let's consider a view of Modern Monetary Theory of inequality problem.

On the chart are shown the current extent of inequality (the first column – black color) and three options of its reduction.

Option A assumes taxation of the superrich (a gray part of a column). This option does not raise a material wealth of low layers of society, but squeezes distribution therefore inequality decreases.

Option B is a standard system Robin of Goode. Money of the rich is assessed with a tax and invested in programs for increase in welfare of low layers (a blue part of a column). The distance between the rich and the poor remained to the same, as well as in option A, but this time tops lost, and bottoms received.

Option C. At last, think of what will occur if we simply invest in programs which bring benefit rather poor (debt relief, free care of children, free medicine and education, etc.), without considering the superrich as our moneybox.  So financing is performed due to budget deficit. Option C is good for all as the income of the rich does not decrease, and the welfare of the poor improves.

It should be noted that MMT does not oppose a progressive scale of taxation, and only says that increase in taxes for reduction of inequality at the balanced (surplus) budget will lead to an economic crisis.