Center for Strategic Assessment and forecasts

Autonomous non-profit organization

Home / Economy and Finance / New technologies in the financial markets / Articles
Khazbi of Budanov: Who gave us the money? What is modern monetary theory and why it is important for Russia
Material posted: Publication date: 08-09-2019
In the beginning of the year the General public in the USA thanks to Congresswoman Alexandria Ocasio-Cortez learned about the strange economic theory that Americans will finally be able to create not only a universal health insurance system, but also to implement an ambitious environmental program "Green new deal" (The Green New Deal). We are talking about what the economic rationale is reinforced through the so-called Modern monetary theory (Modern Monetary Theory, MMT hereafter), offering a completely unusual response to the perennial question: "Where did the money come from?"

With Feb in media and political fields (not only the US but also Europe and Japan) do not cease passion about this yet marginal theory, sheds light on what money is, and generally monetary and fiscal policy of modern governments. About it spoke major economists and politicians, and even well-known financiers -billionaires. It is worth mentioning that one of the founders of MMT Warren Mosler is also a successful investor and billionaire ray Dalio, the founder of one of the largest hedge funds, Bridgewater Associates, arguesthat the victory of the principles of MMT in the future is almost inevitable.

Republicans believe the theory of almost new left-wing conspiracy that undermines the foundations of the capitalist economy, even took to Congress a resolutioncondemning MMT. In my opinion, this has not happened in American history, even the Marxist economic theory was not condemned at the legislative level.

What is money

MMT is part of a broader post-Keynesian economic theory, which derives its origin from the writings of radical economists such as Michal Kalecki and Joan Robinson. In other words, it is a modern post Keynesian theory of money.

The main question that is answered by MMT, is, of course, the question of what money is and how they arise. Now the dominant macroeconomic performance suggest that money is a commodity, and originated from barter — roughly speaking, it is a universal product, simplifies the procedure for the exchange of goods and services at the global fair. MMT holds the opposite view: money is not a commodity, and the debts created by the state. With their help, above all, paid the taxes that every citizen of the country in advance "should" state. In fact, anthropologists have never found evidence of the existence of barter economies. On the contrary, there is increasing evidence that the money came through the state even before the birth of market economy.

Table: Bloomberg Businessweek

Almost all modern monetary systems are Fiat (from the Latin. fiat — decree, note), that is, the value and stability of currency provided by the state. This means that the state that produces its own currency can never experience a lack of money and become insolvent.

Real mechanics of money creation as follows: the government first makes expenditure, creating money in the process, and then collects the taxes, and not Vice versa.

Now the question arises: why would the government collects taxes? They needed to give money value. In other words, the government issues the money and says that they can pay taxes, thereby increasing the demand for money among the population. This demand caused by the need to look for a currency for taxes, and gives value to money. For example, the Russian ruble strengthened in periods when the export companies pay profit tax to the budget: they sell foreign currency and buy the Russian to pay taxes. If taxes in Russia began to pay, say, USD, the dollar would become the actual currency in Russia, and the demand for the ruble would fall to zero. If taxes did not exist, currency stability would be questionable. The high volatility of bitcoin and other cryptocurrencies confirms this thesis. In other words, as said in one of the dedicated MMT materials, the government imposes taxes on people "not to take their money, but rather, in order to reduce their purchasing power, which is converted into economic and political power", and thus to ensure the stability of money.

This, in particular, that the financing of large-scale government programs, especially in a situation of full employment, it is absurd to raise taxes (de facto this is just a redistribution of money and will not lead to the expansion of the economy). Logical to print money, and not, say, to raise the retirement age or VAT. But this does not mean that the government can print money in unlimited quantities — limit here are real resources: labor resources, equipment, raw materials.

A deficit or surplus?

The MMT view on fiscal policy is based on the concept of sectoral balances, developed by the British economist Wine Godley. The economy of any modern country consists of three sectors: public, private (households and firms) and external (foreign trade). The amount of the income and expenditure of all sectors is equal to zero. The macroeconomic equality can be easily verified empirically on statistics (see figure 1). From this it follows that to ensure the surplus of the private sector either public sector deficit, or surplus in the external sector (i.e. balance of payments).

 

The sectoral balance of the Russian FederationSchedule: HSE/CBR

 

Unprecedented budget deficit supported the longest economic expansion in U.S. history (see figure 2).

 

The unemployment rate and Federal deficit of the USChart: J. P. Morgan/CBO

 

In Russia, economic stagnation has been accompanied by record surplus: during the seven months of the budget surplus exceeded 2 trillion rubles, or 3.4 percent of GDP. The government, guided by mainstream economic theory, shut down private sector access to this "festival of swings". Households and firms are trying to maintain the level of spending by Bank lending, which has already reached alarming proportions.

What causes inflation

According to mainstream macroeconomic theory, between the money supply and the volume of goods in the economy there is a direct relationship (the equation of exchange Fisher). If the money supply grows faster than the commodity, then begins the inflation (rising prices). In practice, however, this relationship is not confirmed. After the 2008 crisis, the fed under quantitative easing, hoping to accelerate inflation increased money supply by 4 trillion dollars. You can also recall the "quiet" printed $ 16 trillion that were identified during the audit of the fed. With all this US inflation is at historically low levels for more than a decade.

Even the Bank of Russia periodically prints hundreds of billions to rescue banks or by order of the Ministry of Finance, however, this does not lead to sudden bursts of inflation, as predicted by menestrina economic theory.

The problem is that menestrina theory is based on simple vlasovskih the General equilibrium equations that describe the non-monetary barter economy, where "all transactions are made for the same day." How ironic, noted American economist Hyman Minsky, modern economists describe the real capitalist economy as a "village fair".

The MMT approach is more realistic. The modern capitalist economy is a complex production and financial structure with two levels of prices: for consumer goods and for investment goods. In the real economy, where monopolies exist, concentrating in the hands of its huge market power, the law of supply and demand cease to operate. In each country the inflation is caused by set of different factors — from market power of monopolies, constantly improve prices, to growing faster than labour productivity wages. The government should carefully analyze the causes of inflation and then to adopt responsible macroeconomic decisions.

Criticism of MMT

One of the first to criticize MMT American economist, Nobel prize winner in Economics Paul Krugman. Influential economist Larry summers called the MMT theory of voodoo. In fact, criticism of Krugman was the only attempt at serious analysis of the MMT, which eventually led to the fact that the Krugman agreed with some principles of this theory. And then, summers, and Krugman in one day said about the necessity of rethinking macroeconomics: "We came to the agreement that has long been stressed by post-Keynesian economists". Not calling MMT, they began to "rediscover" some of the MMT ideas that were described in the 1990-ies.

Thus the mainstream is trying to develop "new" theory with a pinch of MMT. This has happened before, when the theory of Keynes threw out the most important and original ideas and created the present neoclassical synthesis.

Criticism of the left is based on the fact that allegedly this theory is most applicable to US. They somehow represent the global financial system as a hierarchical structure with the dollar on top. In fact, any government issuing its own currency, is a monetary sovereign. But this does not mean that the issue of its own currency makes a country rich. Money is just a tool to run economic processes.

MMT and recommendations for Russia

MMT says that governments should print money, it says they are already doing. It also is not about how to go to the MMT mode, because it only describes how to actually work in a modern monetary system. Therefore, the economic policy of the country should be based on a thorough examination of current realities: economic, political, institutional and even cultural.

The Russian economy may be described in the framework of MMT. Recently the CBR has published an analytical note about how modern money is created, the content of which is consistent with what MMT says about it.

However, the economic policy of the Central Bank and the government fully supports mainstreaming ideas about the economy and monetary system: the huge budget surpluses, incomprehensible foreign exchange reserves, the credit bubble in the private sector are all causes that the Russian economy is stagnating.

Formally, Russia — the monetary sovereign country, but practical solutions in the field of monetary policy makes it dependent on the external sector.

In this sense, the recommendations of the MMT should contain the following items:

1. A thorough analysis of the existing situation of the economy from the perspective of MMT.
2. Review the validity of the placement of OFZ, it is theoretically possible to Finance government spending without issuing bonds (but now in Russia there is a legal ban on direct financing).
3. The shift towards an active fiscal policy — lower taxes, increase budget deficit. Fiscal policy should vary depending on the state of the economy.
4. Manage key rate of the Central Bank based on the analysis of MMT and not the IMF recommendations.

It is important to understand that economic policy must change as economic development, but the goal remains the same: full employment, stable prices and economic growth.

Tags: Russia , USA , finances


RELATED MATERIALS: Economy and Finance
Возрастное ограничение