Great Leap Forward

MMT, THE EURO, AND THE ROAD TO RECOVERY: Interview with L. Randall Wray

Interview conducted by CJ Polychroniou for the Greek national financial daily Express
(View the original in Greek here)

Q: You are one of the leading figures in Modern Money Theory (MMT). Where did the name  MMT come from and on what ideas, principles, and assumptions  is it based?

A: We had been calling it “Chartalist” after G.F. Knapp’s State Theory of Money (Charles Goodhart had used that term in the British version as Cartalist) in the middle 1990s when I was writing the first book to lay out the approach. We cast about for a book title and I hit on Understanding Modern Money as intentional irony (the subtitle was The key to full employment and price stability, which I think was jointly formulated with Mat Forstater and Warren Mosler; the book was published in 1998 by Edward Elgar). Keynes had claimed in his Treatise on Money that Knapp’s state money approach applied to the last “4000 years, at least”, and so I called it “modern money” to indicate that while we could not really know the origins of money, we could be sure that it has been a state money for the past “4000 years, at least”. Perhaps the barter and commodity money story is true for some very distant past (I don’t believe it), but that is irrelevant to any monetary system we have ever known.

Q: Does MMT have wide applicability in today’s world economies and regardless of currency setups?

A: Absolutely. Indeed, a couple of years ago I was working with the Asian Development Bank to apply MMT to the situation of developing nations (I was giving lectures in Kazakhstan) and I wrote a working paper generalizing the theory even to fixed exchange rate systems in which the US dollar might actually be preferred to the domestic currency. I then expanded that paper first in a series of blogs as a “primer” to the approach (at New Economic Perspectives) and then reorganized all of that into a book, Modern Money Theory: A primer on macroeconomics for sovereign monetary systems (Palgrave 2012). I think that sometimes MMT has been unnecessarily restricted to floating currency systems (and critics charge it really only applies to the US and a handful of other nations whose currencies are globally demanded). That is a mistake in my view. If a national government issues its own currency, denominates taxes or other obligatory payments in that currency, and accepts its own currency in payment, then it has a sovereign currency and MMT applies. Whether a country floats or fixes the exchange rate, and whether domestic residents prefer foreign currencies for some types of markets, affects policy space—but MMT still applies. While MMT-ers recommend a floating exchange rate that is because it opens policy space—not because MMT won’t apply.

Q: Paul Krugman has offered a critique of MMT which you in turn sought to rebuttal. What are Krugman’s main objections to MMT?

A: Actually Krugman gets better and better with age. He’s gradually getting close to understanding us. I think every one of his criticisms has been wrong—and many of us have corrected him. He does not acknowledge this and I really don’t care if he ever does. What is important is that he (quietly) changes his mind and gets more and more of it right. I mean, take a look at this most recent post: It is at least 90% correct. Krugman absolutely understands that a sovereign currency issuer cannot be forced to default. He understands that the deficit hysterians, as well as President Obama, are just plain wrong when they say the US could “run out of money”. He knows that there is no reason to fear bond vigilantes if you issue your own currency. You can tell them to take a hike, pay all your bills, and set your own interest rate anywhere you want, even at zero. Krugman understands all that. I think any remaining disagreement is because he has not fully abandoned the old textbook ISLM model, which is confused. That framework has no banks, no financial system, no financial instability. And that is why Krugman doesn’t understand Minsky.

Q: You were a student of Hyman Minsky. Was Minsky’s view on banks based on MMT principles?

A: Here’s the funny thing. In 1996 when I was finishing up the UMM book, I mentioned the prospective title to Minsky. He raised an eyebrow. I talked about “taxes drive money” and the “employer of last resort”. Eyebrow was raised again, but he didn’t say anything.

I did recall that when I was his student, he had talked about taxes giving value to the currency. And in his 1986 Stabilizing an Unstable Economy book there are two direct references to this: (p. 55-56) “The value of Federal Reserve liabilities is based on the existence of substantial taxes, which must be paid in Federal Reserve liabilities to the government’s account at the Federal Reserve. As long the federal government is an effective taxing authority, as long as a major part of government expenditures are financed by taxes, and as long as the government ‘banks’ at the Federal Reserve, conditions cannot arise in which the Federal Reserve liabilities no longer function as money”; and (p. 258) “In an economy where government debt is a major asset on the books of the deposit-issuing banks, the fact that taxes need to be paid gives value to the money of the economy”.

So he’s got both Federal Reserve “money” and private bank “money” driven by taxes. You cannot get clearer than that. What I didn’t know in 1996 was that Minsky had actually started a new book in 1989 with a working title of “Modern Money”! During the period 1991-93 he detailed how modern financial systems work as he continued to work on the book manuscript. And, he had written tons on the employer of last resort approach to ending unemployment and poverty back in the 1960s and early 1970s—including yet another unfinished manuscript. Unfortunately, he died later that year so I never got to talk to him about all of this, and only found all the manuscripts a few years later as we started to put his archives together at the Levy Institute. We are working at getting his drafts out. Stay tuned because it is tremendous stuff. He blows away any other post WWII thinker, in my opinion. He is the giant on whose shoulders we should stand.

Q: Is MMT necessarily linked to a certain macroeconomic policy or even a political ideology?

A: Narrowly speaking, no. I’ve written pieces on “MMT for Austrians”. At one level, MMT describes how things actually work, with no ideology and no policy prescription. However, I do subscribe to the view that the goal cannot be to just understand the world. We try to understand it so that we can change it. Some Austrians do understand MMT and they are horrified; they want to go back to an imaginary past in which we used gold as money, and would use such a system to stop all progressive policy. I’m a progressive and I want to go forward, to use the monetary system to mitigate problems such as unemployment and poverty. I’m not shy about my political ideology and my use of MMT to further the agenda.

Q: You were one of the people who argued very early on that the European Monetary Union was built on faulty foundations and that it would have a hard time dealing with financial crises when they would break out, as they always do in the system of capitalism. Was the design of the eurosystem merely a “technical error” on the part of its architects due to insufficient understanding of how monetary unions work, which is the point of so many recent critiques about the flaws of the eurosystem, or was it built the way it is because it served initially certain interests?

A: I cannot pretend to get inside the minds of the founders of the EMU. Maybe they made mistakes, but there was no grand scheme. I do not know. What is clear now is that all European leaders do understand that the system is fatally flawed. They have no excuse for imposing suffering. So now it certainly does look like they are using the flawed system to benefit certain interests. I know that politicians play to domestic voters, and I can understand the fear that, say, German politicians work under: if they appear too generous in dealing with Greeks, they might lose domestic elections. But by playing to the worst instincts of the worst of the domestic population, they are imposing intolerable suffering on most of the rest of Europe. They are dooming the entire European project. It should be beneath them. Europe has been down that route before—the 1930s. It did not turn out well then, and it will not now.

Q: You have written a great deal about the euro crisis, including the Greek crisis. In your view, did Greece have much of a choice when it ended up under an EU/IMF rescue mechanism, or should it have managed somehow an orderly default and returned to the drachma? This is a position taken by a number of economists both in Europe and in the US. Where do you stand on this?

A: Here’s what I recommended for Greece, Ireland, Portugal, Italy, and Spain. You must band together, making a pact that you will not allow the center to pit one Euro member against the other. Together you demand an end to austerity, or you will leave the EMU—all for one and one for all. Debt relief for all. Substantial fiscal stimulus from the center for all. A job guarantee program for all. Without that, all of you leave. Make it clear. Make it believable. And leave if the center does not stop the austerity. You do not need to serve Germany’s domestic policy agenda.

Q: The contractionary policies and the harsh austerity measures advocated so passionately by Germany and the EU leaders as a means for the peripheral nation of the euro zone to deal with their fiscal and debt problems, regardless of how they arose, have proven to be absolutely catastrophic for those economies, causing massive human suffering and stalling global growth. How do you explain the persistence of EU chiefs and certain capitals on having Greece and the other indebted euro zone nations stay the course when the results are so devastating?

A: As discussed, domestic politics combined with some desire to impose labor discipline have got Euroland to the present situation. Here’s the problem. Those who are powerful in the center view exports as the path to prosperity. Germany is of course the most successful at that. While Germany is huge within the EU it is relatively small compared to the global economy. It is conceivable that Germany can hold costs in check while innovating, improving efficiency and focusing on high value exports to create demand for its output (many of those exports staying within the EU, of course). Perhaps Germany can hold its own against Asia and the Americas. But this strategy has no chance of succeeding for Europe as a whole. The world is not big enough to supply demand for Europe’s potential output, while Martian demand is at best speculative. And everywhere else has cheaper labor than Europe’s. So Germany insists on belt-tightening and cost-cutting throughout Europe, which cannot work because Europeans cannot reduce living standards to those of Viet Nam. And even if they did, that kills Germany, too.

If one were extremely cynical, one would conclude that Europe’s leaders understand all this but don’t give a damn because they plan to move all jobs to Asia anyway. They are globalists, not nationalists or even Europeanists. Europe can wither and die, and Europe’s megacorps would find outlets and workers in China. It is possible that this is the true strategy. It wouldn’t be the first time—look at Japan, which moved jobs abroad and killed their own economy. I don’t know.

Q: The IMF announced for the second time in less than four months that it miscalculated the fiscal multiplier for Greece. The Fund has  a record for miscalculating the fiscal multiplier and being way off the mark in its predictions of global economic trends (it predicted in 2011 a 2.2% growth rate for Europe, but it will be negative growth), yet it remains stubbornly committed to the same polices for the past thirty or so years. Would you like to comment on this?

Q: Yes, surprise, surprise. There is a government spending multiplier! We’ve known that since Keynes’s General Theory in 1936. The currency issuer can provide extremely safe financial assets that everyone wants, and its spending can create jobs. All of the macroeconomic theory that denies this is as useless as Medieval blood-letting techniques are to modern medicine. Don’t ever listen to any of the economists who propagate such nonsense. Ignore them from this date forward.

Q: In spite of the tragedy unfolding in Greece and elsewhere in the periphery of the euro zone, there is a relative calm in the euro zone since the fall of 2012, but based on what you have said so far I assume you don’t think it will last for much longer since the system remains in dire need of a repair. Am I correct?

A: Fundamental reform is required. It will be needed sooner if I am right about the global economy—which I believe is headed back to crisis and recession. In any case, there must be a stronger fiscal center in Europe—an equivalent to a US Treasury that can provide finance to all member nations instead of imposing austerity on them.

Q: The US was faced towards the end of last year with a “fiscal cliff.” How did this come about for a sovereign currency nation which is treated by bond investors worldwide as the safest place to park money?

A: In our case, I think this is mostly politics. There might be some who actually believe the nonsense about “running out of money” (including perhaps the President, unfortunately), but most do not. The publicity given to MMT’s “trillion dollar platinum coin” proposal was sufficient to dispel such silliness; and both Chairman Greenspan and Bernanke have said the US as currency issuer cannot become insolvent. So, I think it is a grand compromise by both Republicans and Democrats to cut popular social programs. In other words, a subterfuge, or as Naomi Klein put it, “shock docrine”. They don’t believe it.

Q: Was the deal made between president Obama and the republican leaders of the US Senate strong enough to ensure that the US won’t slide back to a situation it faced a couple of months ago?

A: No. We’ll revisit the silliness in a couple of months. And in any case, we need substantial fiscal stimulus right now—and we will not get it.

Q: What’s your forecast for the global economy in 2013?

A: My Levy colleague Wynne Godley used to say he does projections not forecasts. Soothsayers and mainstream economists do forecasts; serious economists do not. And, of course, the mainstream is notoriously wrong. By projection, Godley meant that one carefully studies the three sectoral balances and what would have to happen to them to achieve a set of alternative scenarios—a contingent statement of what could happen given likely trends.

If we look at the US, we see current account deficits (that will continue so long as other nations rely on export-led growth) and private sector surpluses as households continue to save to replenish financial wealth wiped out in the crisis. Both of those sectors act as a drag on the US economy. At the same time, all levels of government are retrenching—another drag. There are no positives looking forward. And indeed we’ve seen the US economy slow, with growth actually dipping negative. Much of that was due to military cut-backs but government spending has fallen in 9 of the last 10 quarters. Consumer spending only grew 0.2% in January (half December’s pace); job growth was only 157,000 versus nearly 200,000 the month before. And payroll taxes rose by $1000 annually for the typical working family as a result of the “compromise”—so the outlook for consumption is even worse.

And the bankers continue to lie, cheat, and steal without any fear of prosecution. They crashed US real estate and it is years away from good health. American households are buried under student loans and credit card debts, which are likely to be the next shoes to drop. Banks treated commercial real estate much like they treated housing: lots of bad loans were made and now the same sorts of fraudulent foreclosings and robo-signing shenanigans are beginning in that sector. Need we mention bank support of drug runners and international terrorists? Banks are partying like it was 2006 all over again, with no constraints from regulators and supervisors.

There’s no relief in sight. It will crash. Only a soothsayer can predict when.

20 Responses to “MMT, THE EURO, AND THE ROAD TO RECOVERY: Interview with L. Randall Wray”

jonf34February 9th, 2013 at 9:16 pm

"There’s no relief in sight. It will crash. Only a soothsayer can predict when."

Geez, the stock market is doing great. This is kinda bummer news. No wonder economics is called the dismal science.

LRWrayFebruary 9th, 2013 at 9:37 pm

Yep, stock mkt did great in 1929, too. Until it crashed.

When the average investors begin to pile in, the professionals pile up bets against them. You always get a last gasp boom before the bust.

Andrew B. SullivanFebruary 10th, 2013 at 6:08 am

What would 'MMT for Austrians' look like? Would it be like Switzerland with a JG? Could you please write a post that mentions some specific features?

L. Randall Wray L. Randall WrayFebruary 10th, 2013 at 12:50 pm

HankbHater: Get your facts straight. I didn’t say “invent”. We pushed it and we were out there in the press getting interviews and quotes. No idea if Beawulf was but if so, good on her/him. In any case, it was MMT that provided the theoretical support for the idea.

L. Randall Wray L. Randall WrayFebruary 10th, 2013 at 12:52 pm

There’s a whole section on it in my new book. Cheap at Amazon. Otherwise go to New Economic Perspectives and go to the Primer page and scroll through the 52 blogs to find the one named MMT for Austrians. MMT is consistent with small govt, too.

jonf34February 10th, 2013 at 2:30 pm

It surprises me that the market bounces along near historic highs while there continues to be twenty million unemployed, and the Grand Bargain waiting in the wings. Incongruous that. I suppose we just can't help ourselves.

HepionFebruary 10th, 2013 at 3:46 pm

Germany never exported (achieved treade surpluses) with countries outside eurozone. All export surpluses of EZ countries inside EZ towards outside of the EZ have been accompanied by equal trade deficits of outher EZ countries towards outside of the EZ.

As this chart shows current account of the EZ as a whole has been in balance (rough balance, fluctuating between -1% to 1% of GDP, averaging at zero):

What this means that all German current account surpluses have their origin inside eurozone, they are counterparts to current account deficits of other eurozone members.

John AdamsFebruary 11th, 2013 at 3:31 am

Slightly off topic, but anyone have any insight into when Randall Wray's new undergraduate MMT textbook will be published, by which publisher and an approximate cost?

I'm slowly working my way through Wray's two excellent books on modern money, and am looking forward to further developing my understanding of the modern monetary system. These two books are, quite simply, a revelation.

I can only hope that Wray's new book is as reasonably priced as his two introductory books on modern money. Far too many of the more advanced MMT books are absurdly expensive. For those without access to a university library, there is no chance of ever accessing these books and understanding the important details and technicalities of MMT.

ErichFebruary 11th, 2013 at 3:54 pm

this is certainly not true. Germany has an export surplus towards outside of the EZ, it just pays with that surplus the deficits of the southern EZ countries for their oil and consumptive imports, so that overall the eurozone has a balanced account.

ErichFebruary 11th, 2013 at 4:02 pm

Of course the ECB could print a few 100 billion Euro and send them to the South to help them cover their needs. But in the end it's not only about the money, it's about the real goods that are send to these countries. They have to come from somewhere, and in this case it means they come from the north of the Eurozone.

Just compare the situation with California. Of course the FED could print a couple of 100 billions $ and help them to cover their deficits. But I guess the New Yorkers wouldn't be pleased about such a special present to California.

L. Randall Wray L. Randall WrayFebruary 11th, 2013 at 7:40 pm

Erich: wrong. The US Treasury does indeed “print up” hundreds of billions every year to send to our periphery so that they can buy the output of our strong central states. It is national policy. We don’t tell our “Greeks” to tighten belts just because they run a trade deficit with other US states.

William AllenFebruary 11th, 2013 at 11:49 pm

I also would like to see Randy's new book (with Bill Mitchell I believe) as well as the Minsky manuscripts. And some of the book prices have become outrageous, especially since Mr Edward Elgar … And apparently there is actually someone with that name … got his greedy tentacles all over the Post Keynsian and progressive economics journals and textbooks. I wretch whenever I see the name Edward Elgar associated with a book or journal because I know I will never be able to afford them!

L. Randall Wray L. Randall WrayFebruary 12th, 2013 at 1:15 pm

Yes, all. Bill Mitchell and I are working on it. Taking longer than we ever imagined–mostly because both of us are too busy. When it is out I will announce. Note we are also concerned about cost and we will keep it as cheap as possible.

L. Randall Wray L. Randall WrayFebruary 12th, 2013 at 1:18 pm

Let me correct a misconception about Edward Elgar, however. No publisher has played a more important role in putting out PK stuff. He took a big chance on me back in 1990 by putting out my first book, based on my dissertation (mine was one of his first books published). He helped many of us establish careers. Yes the books are expensive. But you need to remember he is publishing books that sometimes sell only 200 copies. I know Edward, and his family (it started as a family business, with his lovely daughters and wife handling much of the work), and he is a great guy.

William AllenFebruary 12th, 2013 at 5:42 pm

Randy, based on your comments, I will give Elgar the benefit of the doubt, although it eats heavily into a personal book budget. If I had unlimited funds, I would purchase a dozen or so of the Elgar published books as the titles and contents seem extremely attractive. Thanks for the insight.

BrianSeptember 18th, 2013 at 5:20 pm

Because the stock market = the entire economy…
Wall Street is booming while 11% (in reality) are still unemployed, many more are underemployed, and we all are earning less, paying more and cling to jobs waiting for the day they get cut.
Stocks are doing great, and that was really great for my 401k, too bad I am still working a low pay, (plus unstimulating/unsatisying) client service job with my bachelors degree hanging on the wall.
Places aren't hiring, as jobs go the work is being split amongst people simply, hours being lowered, we all have debt…and too boot the economy is almost certainly going to double dip, though there was never any recovery. But yeah the stock market is doing great, all's A OK