Sorry MMTers, the Economy Doesn't Exist and GDP is Bogus

EB's picture

Republished with permission from

The other day, a practitioner of Modern Monetary Theory (MMT), Robert Koerner, called for a sythesis between MMT and Austrian Economics. Robert Wenzel, at EPJ Central, provided an Austrian rebuttal here, which provoked an interesting discussion in the comments. Unfortunately, this appears to be part of a trend, in which the bogus constructs of MMT are passed off as somehow part of Austrian economics, which they are most definitely not. This post will demonstrate that MMT is simply a justification for the broken and irreparable status quo, but with a novel face.


Friend of EPJ, Robert Murphy, provides some background and criticism of its foundations,here*. To say that so-called MMTers come to some rather unconventional conclusions is understated, and something from which they do not run. For instance, Murphy writes, "if the federal government runs a budget surplus, then by simple accounting the private sector can't save."
However, at its heart, MMT appears to be based on accounting identities derived from national income accounting methods, which are themselves based upon imperfect abstractions. These are the same familiar equations [sadly] taught in nearly every economic intro course:
GDP = C + I + G + (X — M)
GDP = C + S + T
Austrian economist, Frank Shostack, tears apart GDP and its foundations here (emphasis mine):
To gain insight into the state of an economy, most people rely on a statistic called Gross Domestic Product (GDP). The GDP framework looks at the value of final goods and services produced during a particular time interval, usually a quarter or a year. This statistic is constructed in accordance with the view that what drives an economy is not the production of wealth but rather its consumption. What matters here is demand for final goods and services. Since consumer outlays are the largest part of overall demand, it is commonly held that consumer demand sets in motion economic growth.
By focusing exclusively on final goods and services, the GDP framework lapses into a world of fantasy wherein goods emerge because of people's desires. This is in total disregard to the facts of reality (that is, the issue of whether such desires can be accommodated). All that matters in this view is the demand for goods, which in turn will give rise almost immediately to their supply. Because the supply of goods is taken for granted, this framework completely ignores the whole issue of the various stages of production that precede the emergence of the final good.
In the real world, it is not enough to have demand for goods: one must have the means to accommodate people's desires. Means—i.e., various intermediate goods that are required in the production of final goods—are not readily available; they have to be produced. Thus, in order to manufacture a car, there is a need for coal that will be employed in the production of steel, which in turn will be employed to manufacture an array of tools. These in turn are used to produce other tools and machinery and so on, until we reach the final stage of the production of a car. The harmonious interaction of the various stages of production results in the final product.
The GDP framework gives the impression that it is not the activities of individuals that produce goods and services, but something else outside these activities called the "economy." However, at no stage does the so-called "economy" have a life of its own independent of individuals. The so-called economy is a metaphor—it doesn't exist.
By lumping the values of final goods and services together, government statisticians concretize the fiction of an economy by means of the GDP statistic. By regarding the economy as something that exists in the real world, mainstream economists reach a bizarre conclusion that what is good for individuals might not be good for the economy, and vice versa. Since the economy cannot have a life of its own without individuals, obviously what is good for individuals cannot be bad for the economy.
The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption.
For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.
Because the GDP framework completely disregards the intermediate stages of production, it can be of little help in the assessment of boom-bust cycles. It is little wonder then that mainstream economists are forced to conclude that recessions are a response to a sudden fall in consumer spending. Consequently, it is quite logical within the GDP framework to advocate loose monetary policies to revive the "economy."
The whole idea of GDP gives the impression that there is such a thing as the national output. In the real world, however, wealth is produced by someone and belongs to somebody. In other words, goods and services are not produced in totality and supervised by one supreme leader. This in turn means that the entire concept of GDP is devoid of any basis in reality. It is an empty concept.

Quoting the Austrian masters on the fallacy of national accounting:
According to Mises the whole idea that one can establish the value of the national output is somewhat far-fetched:
The attempt to determine in money the wealth of a nation or the whole mankind are as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimension of the pyramid of Cheops.

If a business calculation values a supply of potatoes at $100, the idea is that it will be possible to sell it or replace it against this sum. If a whole entrepreneurial unit is estimated at $1,000,000 it means that one expects to sell it for this amount the businessman can convert his property into money, but a nation cannot.
In addition to all these issues, there are serious problems regarding the calculation of the GDP statistic. To calculate a total, several things must be added together. To add things together, they must have some unit in common. It is not possible to add refrigerators to cars and shirts to obtain the total of final goods. Since the total real output cannot be meaningfully defined, obviously it cannot be quantified.
To solve this problem, economists employ total monetary expenditure on goods which they divide by an average price of those goods. There is, however, a serious problem with this. What is price? It is the rate of exchange between goods established in a transaction between two individuals at a particular place and a particular point in time. The price, or the rate of exchange of one good in terms of another, is the amount of the other good divided by the amount of the first. In the money economy, price will be the amount of money divided by the amount of the first good.
Suppose two transactions were conducted. In the first transaction, one TV set is exchanged for $1,000. In the second transaction, one shirt is exchanged for $40. The price or the rate of exchange in the first transaction is $1000/1TV set. The price in the second transaction is $40/1shirt. In order to calculate the average price, we must add these two ratios and divide them by 2. However, $1000/1TV set cannot be added to $40/1shirt, implying that it is not possible to establish an average price.
It is interesting to note that in commodity markets, prices are quoted as Dollars/barrel of oil, Dollars/ounce of gold, Dollars/tonne of copper, etc. Obviously, it wouldn't make much sense to establish an average of these prices. On this Rothbard wrote, "Thus, any concept of average price level involves adding or multiplying quantities of completely different units of goods, such as butter, hats, sugar, etc., and is therefore meaningless and illegitimate."
More on the fallacy of average price level, and getting to the heart of the matter (that GDP is simply a tool of coercion for the ruling class):
The employment of various sophisticated methods to calculate the average price level cannot bypass the essential issue that it is not possible to establish an average price of various goods and services. Accordingly, various price indices that government statisticians compute are simply arbitrary numbers. If price deflators are meaningless, however, so is the real GDP statistic.
So what are we to make out of the periodical pronouncements that the economy, as depicted by real GDP, grew by a particular percentage? All we can say is that this percentage has nothing to do with real economic growth and that it most likely mirrors the pace of monetary pumping.
As a rule, the more money created by the central bank and the banking sector, the larger the monetary spending will be. This in turn means that the rate of growth of what is labeled as the real economy will closely mirror rises in money supply.
So it is no wonder that in the GDP framework, the central bank can cause real economic growth, and most economists who slavishly follow this framework believe that this is so. Much so-called economic research produces "scientific support" for popular views that, by means of monetary pumping, the central bank can grow the economy. It is overlooked by all these studies that no other conclusion can be reached once it is realized that GDP is a close relative of the money stock.
One is tempted to ask, why it is necessary to know the growth of the so-called "economy"? What purpose can this type of information serve? In a free unhampered economy, this type of information would be of little use to entrepreneurs. The only indicator that any entrepreneur relies upon is profit and loss. How can the information that the so-called "economy" grew by 4 percent in a particular period help an entrepreneur make profit?
What an entrepreneur requires is not general information but rather specific information regarding the demand for his specific product, or products. The entrepreneur himself has to establish his own network of information concerning a particular venture.
Things are quite different, however, when the government and the central bank tamper with businesses. Under these conditions, no businessman can ignore the GDP statistic since the government and the central bank react to this statistic by means of fiscal and monetary policies. Likewise, participants in financial markets closely follow the GDP statistic in order to assess the likely responses of the central bank.
The entire army of economists is busy guessing whether the central bank will lower, or raise, interest rates. Moreover, to provide a rationale for all this, a new form of economics labeled macroeconomics was invented.Needless to say, this type of economics doesn’t deal with the real world but rather with a nonexistent entity called the economy.
By means of the GDP framework, government and central bank officials generate the impression that they can navigate the economy. According to this myth, the "economy" is expected to follow the growth path outlined by omniscient officials. Thus whenever the rate of growth slips to below the outlined growth path, officials are expected to give the "economy" a suitable push. Conversely, whenever the "economy" is growing too fast, the officials are expected to step in to cool off the "economy's" rate of growth.

The powerful conclusion:

If the effect of these policies were confined only to the GDP statistic then the whole exercise would be harmless. However, these policies tamper with activities of wealth producers and thereby undermine people's well-being. To take a particular instance, by acting to make the nonexistent entity the "economy" more efficient, U.S. government officials are busy destroying a major wealth generator—Microsoft.
Likewise, by means of monetary pumping and interest rate manipulations, the Federal Reserve doesn't help generate more prosperity, but rather sets in motion a "stronger GDP" and the consequent menace of the boom-bust cycle—i.e., economic impoverishment.
We can thus conclude that the GDP framework is an empty abstraction devoid of any link to the real world. Notwithstanding this, the GDP framework is in big demand by governments and central bank officials since it provides justification for their interference with businesses. It also provides an illusory frame of reference to assess the performance of government officials.
Bob Roddis writes in the comments in Wenzel's post about MMT's intellectual heritage:
Never forget that MMT godfather Abba Ptachya Lerner’s magnum opus was “The Economics of Control”:
The fundamental aim of socialism is not the abolition of private property but the extension of democracy. This is obscured by dogmas of the right and of the left. The benefits of both the capitalist economy and the collectivist economy can be reaped in the controlled economy.
And again, in a subsequent comment:
More things I have dug up on MMT…
1. Abba Lerner was a longtime economic Stalinist. He writes in the preface to “The Economics of Control” that he was long resistant to the any “free market” analysis but finally he thanks Joan Robinson for getting him to overcome his prejudices against “Mr. Keynes great advancement in economic understanding”. Great. A Stalinist tempered with some Keynesianism. That’ll work, right? This is their starting point and helps explain how they can be so joyous when they explain “The government is not revenue constrained!!! [how cool is that??]”
2. In 1980, two years before he died, Abba Lerner (1903-1982) was dabbling in the following price control system based upon this article by David Colander, a co-author of a 1980 book with Lerner:

Lerner found the implications of sellers’ inflation so important that, beginning in the 1960s, he changed his research program to center on finding cures for sellers’ inflation. Initially he toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[??!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market [???!!!!] anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [@page 12]

So, we now know enough about MMT to know that Abba Lerner wrote a book in 1980 proposing a ghastly and barbaric Rube Goldberg system where one would be precluded from raising (setting) one’s one prices without trading the right to do so with somebody else under penalty of statist law. But I thought the MMTers could cure inflation just by changing the tax code. Hmmm.
And it was Keynes, himself, in collaboration with a few other economists and statisticians at the beginning of World War II, who invented the national accounting constructs that would give rise to GNP and GDP. All for the purpose of justifying a protracted, expensive war. Writes Judo Cuyvers in the Economic Journal:

The elaboration of national economic accounts and detailed national income estimates is generally considered to be a direct result of Keynes's emphasis on the main macroeconomic determinants of employment and aggregate demand.

Scholars have repeatedly stressed Keynes's impact in the course of the first few years of the Second World War, or have pointed to Colin Clark's pioneering calculations during the 1930s. However, as we shall show in the following pages, it was at the very beginning of the Second World War, not in 1937 nor in 1941, that British national income accounting entered a critical phase. Determined to convince the authorities and public opinion of the necessity of financing the war effort properly, Keynes immediately set himself the task of elaborating a proposal based on statistical evidence. It was during the period between Octboer-November 1939 and February 1940, when Keynes was working on his December 1939 article in this JOURNAL and subsequently on his pamphlet How to Pay for the War, in close statistical collaboration with Erwin Rothbarth, that the first double-entry national accounts were developed and the still very crude accounting and estimation procedures became essential steps in economic policy making.

In true Ministry of Truth fashion, decades of Keynesian and related indoctrination continues to facilitate and propagate the lie that the banking system is somehow not regulated enough--too free market. As Tom Woods recently wrote:

She likewise thinks the banking system is pretty close to a free market – after all, hasn’t she seen news reports about bank "deregulation"? To the contrary, the banking system is perhaps the least free-market sector of the entire economy. The whole system is overseen by the government-created Federal Reserve System, which presides over a system-wide cartel. It involves monopolistic legal tender laws, a monopoly of the note issue, artificial disabilities on other media of exchange apart from the depreciating dollar, and various forms of bailout guarantees. For a sense of what a free market in banking would actually look like, read Murray N. Rothbard’sThe Mystery of Banking.

Even if we ignore MMT's dubious historical origins and assume beneficent intent, it's important that Austrian economics not be conflated with MMT and the work of its practitioners, such as Wray, Mosler*, Aureback, Mitchell, Fullwiler. Why make the distinction? As governments and economies fail around the world, there is and will be increasing demand for alternatives. MMT ensures the status quo ante. It's simply another system for central planning and price fixing.  And prices matter.
* EPJ Regular, Taylor Conant, produced a series of critiques of Warren Mosler's book called "Seven Deadly Frauds of Economic Policy", which itself is based upon MMT.


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Vinz Klortho's picture


I don't understand your point.  People would have the same motivation to work as they do now.  To produce something useful and gain income to purchase the useful work of others.  MMT doesn't require some socialist utopia to operate, where do you come up with this stuff?

Vinz Klortho

Chinese Busboy's picture

So sorry, this criticism of MMT is weak and doesn't work. A Mr. Frank Shostak writes a 1800 word article in 2001 that says, "GDP framework is an empty abstraction devoid of any link to the real world" and that is the death knell for MMT?  Are there any other Austrian economists or any economists for that matter in the last ten years who have built on Mr. Shostak's work and provided further proof that the "GDP framework is an empty abstraction"? Has Mr. Shostak even come back to this topic? Can you cite any other scholarly publications that prove that hypothesis? Who made Mr. Shostak the lord of economics, who has single handedly slain the the GDP dragon? Where are the monuments to this great man? Why hasn't he published a book to cement his claim to fame? Isn't GDP the foundation of all mainstream economics? It really looks like Shostak made a one-off rant that has gotten no traction with anyone.

In fact, Shostak recently wrote an article at Mises entitled "The Depression is Not Over" . His conclusion in that article: " A sharp fall in the current growth momentum of AMS poses a threat to economic growth in terms of GDP in quarters ahead." So Mr. Shostak uses the term GDP 20 times in his recent article, and it is just an "empty abstraction"? It seems that the current Shostak has a need to use GDP or the "empty abstraction" to discuss the economy.

And taking old quotes from Abba Ptachya Lerner to say that the MMT of Wray, Mosler, and Mitchell is about "central planning and price fixing" does not work. Sorry.


Vinz Klortho's picture


Work is necessary, because even though money can be spent by the government at will, there would be nothing to buy.

Vinz Klortho

MrPike's picture


Correct, nothing to buy.  So the motivation to work would be to produce goods for the sake of producing goods, not for profit, but for the betterment of society?  I believe MMT'ers must be dreaming of a "great socialist man" one who works for others, and not for himself.  

In my office, people are hardly even able to work for themselves, how could they possibly be persuaded to work for another?

Vinz Klortho's picture

As an interested MMT reader and observer, I have read most of the recent stuff from Mitchell, Auerback, Mosler, Hudson, et. al.

If the theory is invalid, I have been wondering when someone would come along and dissect it, and show where it is flawed and/or invalid.

Unfortunately, this post did not do that.  Instead, it makes a couple of strawman arguments that MMT==socialism/big government.  I'm not really into knocking down strawmen, especially weak ones based on ignorance of the basics.

Big fail. Try again.

Vinz Klortho.

EB's picture

As the "top operating Thetans of MMT" have declared, MMT is not a "theory", so you might want to adjust your second paragraph and get your facts straight. 

As I clearly demonstrated, MMT relies on national accounting identities, which are meaningless constructs.  Real bears no resemblence to nominal. It's a slight of hand shell game.  

If you want a dissection from a differet direction, read Bob Murphy's take (linked to toward the beginning).

The use of the word "strawman" has become the most popular incarnation of the intellectually lazy argument.  Congratulations.  Demonstrate that MMT does not justify government spending.  Big or little, however that might be mearsured, matters naught.

MMT treats the savings/investment/consuption activites of the public and private sectors as equal.  As though the entrepreneur risking his own capital is on an equal footing with the state looting its subjects to foot its bills, and wherein the state suffers no repercussions for malinvestments (and is often rewarded with larger budgets to "get it right").

ping's picture

Great Post. One of the best I've read on ZH. No waffle. No purple prose. No attempts to be cool. Just tells it like it is. And it's better for it. 

Hope to see more of EB. Plus he has a cool top hat.

Donlast's picture

This is absolutely right GDP accounting is a farce and the debt crisis has revealed what I would term its atrocious fallacies, namely the "G" in the standard textbook equation contributes to economic growth; or that a rise in nominal GDP induced solely by an incremental rise in national debt represents growth. It does not. It never has, it never will. Economic growth is based on the private sector, people, productivity, investment, technology, enterprise and risk taking. Always. Debt unless used for productive, properly costed endeavours simply grabs from the future to consume scarce resources in the present. The real cost of the debt is the interest obligation incurred over the life of the debt, and that should be deducted AT THE TIME of the debt creation in calculating the nominal GDP.? It never is deducted. Simply ignored. Real long-term economic growth cannot possibly be achieved by accumulations of sovereign debt. The only time such debt-created government spending serves a useful purpose is when the inevitable business cycle causes a fall in investment and then it serves as a VERY SHORT-TERM measure to bridge the gap while creative destruction works its beneficial effect and investment revives.? Then it should fall away entirely. But instead it has been continued year in and year out to support unsustainable entitlements, pensions, interest groups and ideological fantasies and so created dysfunctional Western societies and government which pursue vacuous and meaningless notions of fairness, equality and social justice. This is the fallacy that lies at the heart of the failed policies that have been pursued for the last 50 or so years in the West. We now face their nemesis. Keynes would NEVER have supported what was is done in his name by the likes of Krugman.

Zero Govt's picture

Good article EB ...always interesting to see the historical path of economics and where this largely useless and almost worthless 'profession' (paid soap box for windbags) sprang from!


"Never forget that MMT godfather Abba Ptachya Lerner’s magnum opus was “The Economics of Control : Chapter l. ..The fundamental aim of socialism is not the abolition of private property but the extension of democracy... The benefits of both the capitalist economy and the collectivist economy can be reaped in the controlled economy." The "controlled economy" is an idea that springs from the same ignorant vacuum of high-IQ but running-empty-on-reality (delusion) of the ancient Greek philosophers, academia and those humans that seek authority over others (parasites like Royalty, tribal leaders and politicians). You put it so well with these statements:
"...the GDP framework is an empty abstraction devoid of any link to the real world... the GDP framework is in big demand by governments and central bank officials since it provides justification for their interference with businesses... It's simply another system for central planning and price fixing." Spot on. And society is framed (mentally hed-fuked) by vast arrays of political (parasitical) fabrications, lies and liberal intellectual horseshit. Amongst the greatest fabrications (that do not exist) are; countries and the nation State, national security, public health, equality, social security, the average man, average life expectiency, foreign policy, home office policy, pretty much every political policy in fact and as you mention, 'the economy' and GDP. The biggest fabrication is Government itself. It is a complete and utter sham of a construct and a heady delusional mix of parasites needing a front to rob society and live of its back and idiot academics and liberals suckered into its vacuous window dressing to do 'good' for society (hard when most academics are human train-wrecks themselves!). There is no collective, there is no society, there is no economy, there is no national anything. We are, exist and experience the world as individuals. Period. We sometimes herd or pack when it suites us as individuals. But we cannot be corralled, tagged or policied (or policed) like a flock of sheep. Individuals drive enterprise. Society follows and benefits from those individuals. Politicians and their academic morons have nothing to do with it, cannot improve on it, have no value to add. But they attempt to tap into it, rob it and ride on others backs like they were the wizards. ALL political interference is a negative. All and every Govt sucks.
Look around at the absolute bankrupt shambles East and West 'democratic Government' has made of this planet. It is a trainwreck of Govt corruption, ignorance and incomptence.  The free market and a free society are the only systems that work for the benefit of us all (as individuals). 


MrPike's picture

I wish an MMTer would explain to me why work is necessary at all.  If wealth can be created with a printing press, and inflation controlled with taxes, why work at all?  Why not print everyone money, then control inflation with a VAT?  Prosperity without work is a dream of the ages.  MMT survives as a theory because the ultimate consequences of money printing by the reserve currency country have yet to be realized. Theoretically, the reserve currency country can print indefinitely, that is until the rest of the world stops accepting it.  Then it becomes an even bigger inflationary disaster when dollars are unloaded by everyone for anything of value at any price.  

Unfortunately people will just say that "infectious greed of businesses" are responsible for the increased prices, and the all knowing benevolent hand of government will take over even more then they are now.  What is more, is the majority of the people will beg for it, and applause it when we are nationalized completely.  They will say the free market is broken and needs regulation to keep prices fair, and the public will nod knowingly.  Central Banking will not be blamed because understanding it requires patience and discipline, not the average Westerner's strong suits..  

halfacanuck's picture

For most people labor is necessary in order to earn money, because taxes must be paid if prison is to be avoided. It is this which ultimately creates demand for, and thereby gives value to, a nonconvertible fiat currency. The fact that the input of labor also serves to grow the economy (e.g. by pulling minerals out of the ground, planting corn, taking care of frisky IMF chiefs, etc.) is a bonus, but doesn't really fall within the domain of the MMT framework because it is - as the name implies - more concerned with the monetary system than economics in general.

MMT does not advocate the transference of net assets to the private sector (i.e. "money-printing" or running a budget deficit) under all circumstances, nor vice versa. It advocates conducting fiscal and monetary policy in such a way as is most appropriate given the current state of the economy. Budget deficits/surpluses are only "bad" if they are inappropriate wrt achieving the desired effect on the economy (e.g. increasing the savings rate or decreasing inflation). See "functional finance" for more detail:

Smiddywesson's picture

People wonder what the world would have been like if Hitler were never born, I used to wonder what would have happend if Keynes were never born.  I even thought of a book based on "It's a Wonderful Life" in which Keynes is forced to view the effects of his miserable works. 

I gave up on the book.  The world is full of idiots, and even if you could go back in time and stop Keynes (with a .45 perhaps?) some other idiot would step up to the plate to empower the Boyzz.

lins216's picture

THANK YOU Tyler(s) for posting!!  I check Yves Smith daily and her blog is filled with MMTers.  From my very limited understanding, the basic premise of MMT:  all is well because we have a printing press and can control inflation via interest rates.  After researching the web and reading numerous comment section debates, I've never come away the feeling that MMT makes sense in that it doesn't explain why wages have not inflated and the impact (in other words the loss of purchasing power).  In addition, many make the point that if we can just print our problems away, why not print a cool million to each tax payer, private debt is paid, problem solved?  Of course, the rebuttal by the MMTer to this statement always ends in "straw-man."  I for one, feel that MMT is a load of rubbish and dangerous.

halfacanuck's picture

No, MMT says high inflation should be reduced through increased taxation or decreased government spending, not through interest-rate adjustments. In other words, if inflation is caused by too much money chasing too few goods then the way to fix that is by removing money from the private sector.

It follows that by handing out "a cool million to each tax payer" there would be much more money in the private sector while the quantity of goods available for purchase remained the same, and thus the likely consequence would be very high inflation. A million wouldn't be cool for long.

brian oblivion's picture

MMT does not say you can print money endlessly. That's a strawman.

lins216's picture

I apologize, I missed the section of my comment in which I stated "MMT says you can print money endlessly."  Regardless, where am I incorrect in finding that the foundation of MMT is that we have a printing press we are a "Monetary Sovereignty?

Carp Flounderson's picture

keep reading if you're really interested, but you haven't captured even the basics of MMT in your understanding so the flaws of your criticisms are very transparent to those who do understand MMT.  MMT generally arrives at the same principles as mainstream economics in terms of inflation.  The most releveant difference these days is related to the meaning of large outstanding debt and possibilities of default.

sgt_doom's picture

"..all is well because we have a printing press and can control inflation via interest rates."

Yup, that and ignoring any and all reality impacts, such as the effect of Prohibition, and real estate securitization (in share form, instead of bond form as was the case this time) on the Great Crash, and doing the same (as far as securitization/credit derivatives/naked CDSes, etc.) this time around.

Bogus punks.....

SlightlyCompetent's picture

I hear hear TPC grinding his teeth.

Submitted article on - social news for finance.

Yancey Ward's picture

For me, the blind spot of the MMTers is when they write that the government doesn't borrow or tax in order to spend, but borrow to adjust the interest rate structure and tax to regulate aggregate demand.  However, this is the exact same thing as saying that the government borrows and taxes in order to spend.  If I could get just one MMTer to actually see this, I would consider my purpose in life to have been accomplished.

EB's picture

Ignoring the meaningless aggregates for a minute, "regulate aggregate demand" of course includes all demand, private and public.  So, they claim whatever public spending is called for is simply to regulate the economy.  It's for your benefit.  The bureaucratic wizards have thus spoken.

The claim is also supported by the conflation of the Treasury and the Fed into an entity they call the "government".  However, this is impermissible for a few different reasons, which I will outline in my next post.

TruthInSunshine's picture

Albert Einstein advised people to keep things as simple as possible.

Economics = Supply & Demand.


Unfortunately, we now have a warped-beyond-human-comprehension Supply & Demand curve, as entities having collective taxing power have arisen and grown into goliaths, which have gone on to take a massive portion of peoples' savings, and allocate that portion of dry powder towards procuring A LOT of worthless shit that no one in their right, sane mind, on an individual basis, would have ever desired (I haven't even bothered to delve into the matter of intractable corruption and graft that has infected Central Banks and Legislators, causing the Supply & Demand curve to become even more hopelessly absurd).

Good luck fixing the Supply & Demand or price discovery 'issues' that now are suffocating the life out of any real economy, now that Central Banksters have so screwed up every single input.

ebworthen's picture


The only reason these academic shills have jobs and get listened to is the largesse of the populace and the greed of Politicians and Financiers.

earnulf's picture

I agree, KISS, Keep it Simple Stupid.

It's when we try to detail every possible frickin outcome that things get boloxed beyound belief.

Steroid's picture

Dis malscience by name of MMT!

Don Levit's picture

This is a very timely and thought-provoking article.

MMTers seem to place the government on the level of God, for both can create something out of nothing.

Here is a quote from a fellow, who seems to be an MMTer:

"The only entity that can provide the non-government sector with net financial assets (net savings) and thus eliminate unemployment is the government."

Wow, I thought savings were produced by selling goods and services for a profit.

i thought that savings was a result of innovation and creativity.

I thought savings was a result of doing something more efficiently.

I thought savings reside in the minds of man, not in the mint of the federal government.

Don Levit

Dirtt's picture

Thank you Levit.

"Wow, I thought savings were produced by selling goods and services for a profit." I know I'm just a Dumbass.  But this is my thought too.

GDP = Government Designed Propaganda. As if distrust in my government could get any higher...

halfacanuck's picture

The key concept you're overlooking from that quote is the *net* creation of financial assets, i.e. without corresponding liabilities. In a financial system based on a nonconvertible fiat currency, only the government can do this. Bank loans create both an asset and a liability that cancels it out, thus do not create *net* assets, thus the private sector cannot increase its *net* savings without the government first creating more assets and transferring them to the private sector.

To get a firmer handle on this, imagine we're starting from scratch and all bank accounts are reset to zero. From where does the money come to begin populating the empty accounts? From "selling goods and services for a profit"? From "innovation and creativity"? No, from the government *creating* the money and either spending it in or loaning it to the private sector (these are called "vertical transactions"). Only then can profit through innovation take place within the private sector ("horizontal transactions").

The MMT view of the economy makes perfect sense if you actually follow through the logic and focus on the consequences of the government being the sole issuer of a nonconvertible fiat currency. This is true regardless of your (or the OP's) opinion of the validity of the GDP statistic. The Wikipedia entry is a reasonable place to start if you want to learn more about it beyond the rather dubious and superficial treatment above:

EB's picture


This is true regardless of your (or the OP's) opinion of the validity of the GDP statistic.

Actually, my attack was on the validity of national accounting identities (including GDP), which you implicitly rely upon when you write about "net creation of financial assets".  These are fine for keeping nominal books of account, but do not correspond to real savings or real wealth.  Of course the dollars needed for taxes need to come from the government somehow.  My point is a system in which "the government [is] the sole issuer of a nonconvertible fiat currency" is a bad system.  It confiscates real wealth and destroys real savings.  MMT is simply a justification for the status quo.


halfacanuck's picture

Also, I don't "rely upon" GDP or any other statistic when I say the government must create new financial assets (i.e., run a deficit) in order for net private-sector savings to increase. That has nothing to do with measuring anything; it's a simple fact when you're talking about the kind of monetary system MMT attempts to explain.

halfacanuck's picture

Fair enough. But MMT is merely an attempt to explain how such a monetary system works. You may not like that system, but MMT isn't responsible for its existence, nor its continuation. It's simply a theoretical framework for understanding our current monetary system, and has nothing to say about how capital should be employed or how much government should be involved in the economy, etc.

hooligan2009's picture

this is not a good riposte to the argument. savings representing the deferral of consumption are wealth, money is a unit of currency, the saver creates the wealth and money is one possible medium of exchange. so is gold, so is barter. your analogy only works in a closed economy and suffers from two shortcomings, one is that you can't print savings and the other is that money may be a medium of exchange (oil sold for dollars used to buy food) but it is not a store of value. the government can control the amount of money printed, but not the degree to which it is used. 

halfacanuck's picture

Yes, MMT is by definition only applicable to a monetary system based on a nonconvertible fiat currency issued solely by the government (or its central bank, as the case may be). It does not claim to apply to any other setup, such as a commodity- or barter-based monetary system.

Nor does it have anything to say about how money is used; it is simply a framework for understanding how fiat monetary systems function. The point I was trying to make is that no-one can save (or make a profit) without someone else dissaving (or making a loss) except through net new financial assets being created by the currency issuer.

brian oblivion's picture

Great post. The misunderstanding of Keynes and MMT on ZH is epic in proportion.

No one who has actually read Keynes can blame him for the the looting and corruption in Washington. What we have now is Lemon Socialism. Anything that can be attributed to Keynes is a twisted version of which Keynes would never have approved.


The issue at stake for Keynes is the notion that an economy can find itself in a place of sub-optimal equilibrium at which labor and capital are left on the sidelines senselessly. Right now we sit with corporate coffers stuffed with cash and massive unemployment, we are in such a sub-optimal equilibrium. Keynes argues to remedy such a situation you need the government to spend to push the market towards a better equilibrium.  He would never argue that the spending be done propping up financial markets.

Carp Flounderson's picture

"The misunderstanding of Keynes and MMT on ZH is epic in proportion."  Amen

But the misunderstanding of Keynes and MMT and anything even remotely related to economics is epic in proportion everywhere, including in the link  where the guy seems to get some strange satisfaction of victory through the revelation that: When MMTers speak of "net saving," they don't mean that people collectively save more than people collectively borrow. No, they mean people collectively save more than people collectively invest.

Brilliant breakthrough there buddy.  Then he manages to agree with it and still make fun of the concept.  douche-bag... can't be bothered reading the rest.  TLDR

Dr. Acula's picture

Keynes's General Theory was torn a new orifice by Henry Hazlitt in "Failure of the New Economics".

Why does anyone even bring up the discredited pseudoscientist Keynes any more...

TaxSlave's picture

The money is counterfeit.  It is not wealth.  Public spending of it not only muscles out productive spending, it devalues savings and constitutes an unpayable debt burden on the hapless producer.

Dig those ditches and fill them in!

Keynes was a fascist.

THE DORK OF CORK's picture

Its saving chips rather then more BTUs - or at least thats what I think they mean, when the economy is strong goverment extracts credit deposits to pay tax and when its weak they can produce new Goverment money at will - they do not think that is devaluing as they believe they can generate more money from the future using a efficient MMT formula.

Private debt contracts do break down without the production of new Goverment money during periods of economic weakness - I am witnessing this phenomena first hand in my country.

This does lead to to economic inefficiency as otherwise the medium of exchange dries up - killing commerce.

Also they seem to differentiate between QE 2 like excess reserves and the printing of raw currency into the economic medium.

JeffB's picture

"Private debt contracts do break down without the production of new Goverment money during periods of economic weakness..."


I don't see why that should be so. Private debt contracts weren't doomed to break down under private money systems or countries on a gold standard.

Perhaps more importantly, I think the artificial manipulations of the money supply by the central banks is what *causes* the boom & bust cycles or the "periods of economic weakness" you allude to.


THE DORK OF CORK's picture


I am not a fan of MMT - I just think it is the system

When banks stop producing credit the money supply dries up - people cannot pay their debts.

The only mechanism to free this consequence of malinvestment is the production of broad base money in a MMT world

Even most Gold standard people agree you have to dramatically increase the price of Gold and thus cash M0 and/or M1 in the system to replace M3 when such a dramatic contraction happens.

The malinvestment we have witnessed cannot be stopped by deflation now - it must inflate , if not you get a breakdown of transactions with even more inefficiency.

THE DORK OF CORK's picture

This entire thing is such a mess - I think MMTers have the best understanding of how the monetory system actually works which perhaps explains why its not working to increase wealth.

I am however sceptical of extreme Austrians as not all human constructs are created by rugged individualism.

Maybe Freegold is the arena where both these practitioners will test their formulas as I feel it has many MMT & Austrian aspects.

As for Keynesians well fiscal spending is such a small little thing in comparsion to the shadow banking cancer now - it has not been tested in 30 years.

World trade has been in constant chaos since Americas default of 71 - how can you be sure of anything now.......except that Monetarists are scum

Dr. Acula's picture

"I am however sceptical of extreme Austrians as not all human constructs are created by rugged individualism."

Your statement doesn't make a lot of sense to me. At heart, AE is wertfrei, meaning value-free or non-judgemental. It's a science, like astronomy - not a political movement.

I might be an "extreme Austrian" but I also enjoy being a member of a homeowners' association, which is more-or-less a kind of commune. "rugged individiualism" is great, but I'm still not going to mow my own lawn.


THE DORK OF CORK's picture

Dr Acula

I imagine most Austrians would be against what they consider Fascistic endeavours such as the Apollo programme.

Personally I don't think enough money is spent on inspirational goverment programmes especially in applied science.

Once these programmes are kept below lets say 1 % of GDP I see no problem.

What Austrians fail to recognize is that most of the applied and some of the pure science advancements  came from Keynesian war spending during the 20th century.

While I am not advocating war  - war like simulations such as Apollo give massive returns once they follow the 3 successful rules of war - have a viable goal , a schedule and a respectable budget.

BigJim's picture

Well, I take issue with Dr. Acula's idea that AE is a 'science' to begin with. It's more akin to the study of logic. My reading of AE is that they feel an economy is too multi-variant to study as a science - ie, to isolate variables and run controlled experiments.

And much as I enjoy the spectacle of people bunny-hopping around our arid moon, what gave the government the right to appropriate zillions of dollars to pay for it? You say that many of our science advances are because of government programs, but this overlooks the fact that government programs by definition took the money from other endeavours to pay for such politically-prioritised science research. Yes, we've got teflon... but maybe we would have had a vaccine for breast cancer by now instead.

You want people to visit the moon? That's great, but please set up a charity that solicits donations from like-minded people, and do the research privately, instead of expecting the government to extort money from everyone else to pay for your interests.

THE DORK OF CORK's picture

@Big Jim - I only use Apollo because its such a dramatic wonderful example -but if you want to bring the primary mechanism for technological change & knowledge in the 20th century to a sudden stop or very slow crawl you will have to expect a very cruel short life for your children as Malthusian depletion dynamics begin to kick in.

You cannot save in a depleting world no matter how efficient - efficiency will only slow the process down - technological productivity is the only mechanism to beat entropy.

StarvingLion's picture

I don't know why you have an obsession with nuclear power and manned space flight to Mars.  The neoliberals love applied science, its just that its biology and information/communications technology.  Bioscience R&D became too expensive and now they're outsourcing that too and I think thats why they moved manufacturing to China, so they could tap the vast expendable labour force to do bioscience.  I think for our own good, we should focus on bioscience but the Phd programme currently sucks rocks.

THE DORK OF CORK's picture

Sorry Lion - Apollo has always been a fascination for me - I just use it as a example as I know its architecture pretty well.

But other applied science endeavours could be pursued - but I do think big applied engineering science has been neglected since the late 60s early 70s.

EB's picture

Freegold is indeed interesting and the Euro seems to be the prototype, though it could still unravel with the periphery states onboard.  

As for the MMTers, they consistently make the mistake of conflating the nominal with the real.  A good example is what Don Levit quotes below:

"The only entity that can provide the non-government sector with net financial assets (net savings) and thus eliminate unemployment is the government."

Taylor Contant writes in Part III to a Refutation of Mosler Economics:

True: this is a financial accounting identity.

False: the belief (whether Mosler holds it or not) that increased financial savings necessarily represent increased real savings.

So far, Mosler has not stated whether he equates financial savings with real savings. Regardless, I will clarify that anyone who would state such a thing as "an increase in financial savings necessarily means an increase in real savings" would be wrong.

If the US government expands its budget deficit and thereby expands the total amount of financial savings as a result (because all debt is held by somebody outside of the government sector as savings, as per Mosler's statement of the accounting identity), it does not follow that the pool of real savings (anything which may serve as a capital good in the production of higher order goods, for example, machinery, food stocks, clothing stocks, commodity stockpiles, fuel supplies, etc.) is increased proportionally, as an identity.

In other words, it would be wrong to assume that, because larger government deficits represent larger financial savings, larger financial savings represent larger real savings and therefore larger government deficits mean larger real savings which means we are all wealthier and economically better off if the government expands its deficit.

Given the use of Keynesian aggregates and faith in central planning, I fail to see the functional difference in MMT from Keynesianism.  It destroys real wealth.  However, if you want everything to look good on paper (i.e., nominally), then sure, it all balances out.  And one thing the Freegolders correctly point out is that to save a paper-asset-laden system in nominal terms requires massive inflation.