On MMT and Munis

Bruce Krasting's picture

If you have any interest in the topic of Modern Monetary Theory (“MMT”) there is a good discussion in this article at the Harvard International Review. (Link) Bill Mitchell, the Research Professor of Economics at the University of Newcastle, Australia, is interviewed. He provides his take on what is going on.

MMT is not a theory about what should be done. It’s a roadmap of how the global fiat money system works. From the article:


MMT just describes the system that most countries in the world live under and have lived under since 1971.

There’s a whole bunch of things in this that I don’t agree with. But who am I to question an eminent economist. The final conclusion by Mitchell is a case in point. His words:

Budget deficits, independent of any monetary operations, drive interest rates down, not up. This is the complete opposite of what orthodox economists claim is the case, and it’s confirmed by the present combination of record low interest rates and very large budget deficits.

I think this is completely wrong. Yes we have low interest rates and huge deficits. But the reason for this is that the Fed is controlling interest rates at artificial levels.

Does Mitchell really believe that .25% Federal Funds rate is a fair market rate given that CPI-W is over 3.5% for the past year? Do MMT’ers think that 5 year T-Notes at 1.1% are reasonably priced looking at Core Inflation north of 2%? Do these deep thinkers not understand that the Fed bought $2 trillion of paper and in the process wrote the check that covered the massive deficits that are occurring? These folks don’t get the fact that the entire credit curve is a measure of manipulation? Maybe they should start reading the Blogs.

To me, there is no evidence to support the MMT assumption that deficits drive interest rates lower. It's coincidental that the Fed is driving interest rates to zero while deficits are exploding. The “orthodox economists” have this one right. The MMT’ers are looking at the facts and drawing the wrong conclusion.

MMT is a 4-legged stool. One of the legs is wobbly (I would say missing). If you sit on it, you’ll fall.



Saving the Taxpayers

The IRS issued the state of California a private letter ruling. They allowed Cali to re-market $132mm of 2010 BABs bonds. This wasn’t supposed to happen. Congress has let the BABs legislation lapse. But no one can argue with the IRS, so the bonds will be sold in the near future.

This is a, “no big deal”. But there was one aspect that gets me to comment. Tom Dresslar, a spokesman for Cali Treasurer Bill Lockyer had this to say about the IRS decision: (Bond Buyer link)


“The best part is that we are going to be able to save taxpayers money.”

Well, good old Tom is right. It will save the “taxpayers” money. The question is which taxpayers? The ones in Cali will pay less. But the taxpayers at the federal level will have to foot the bill. Uncle Sam will pay 35% of the interest on the re-marketed bonds.

The business of subsidizing Muni debt issuance with tax breaks or subsidies (BABs) has to end. The rallying point for this should be Dresslar’s words. I can’t think of better proof that the system is screwed up.


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dida's picture

I agree with your opinion in this and I hope that this "theory" will succeed to solve all this financial problems. Hoteluri Bucuresti

TPC's picture

Bruce, the reason for the decline in interest rates is actually central banking 101.  When the Tsy spends it creates reserves in the banking system.  If the Fed does not control the amount of reserves then their target rate drops as banks compete to rid the reserves.  This is why reserves create downward pressure on the FFR.  This is the only reason for paying IOR currently.  This is all well documented over the last few years as the Fed's balance sheet has exploded.  

The point is, the Fed always controls the price of its debt via monetary policy.  They are the price setter as the monoply supplier of reserves.  You call artificially low rates manipulated, but that's false as well.  The natural rate of interest on govt debt is zero as is evidenced by the fact that the Fed has to manipulate the amount of reserves in the banking system to keep the rate from dropping to zero.  This is 100% proven by now.  Not even debatable.  

If the Fed didn't manipulate rates by paying IOR the rate would drop to zero and everyone would see that deficits create reserves in the banking system and result in a 0% FFR.  The FFR is actually manipulated HIGHER 100% of the time.  Again, there's no theory here.  All you have to do is look at the balance sheet expansion in the last few years and the Fed's response.....


Mark123's picture

It is a complicated system built by the money lenders for their own benefit.  When you have people eagerly awaiting for any hints from bankers that might give the people a clue about their next move (e.g. fed minutes), or their plans to fix things (e.g. european bail outs) you know that our civilization is on its last legs.

Right now the Fed is creating and lending massive amounts of money to the government at less than inflation.  Why?  I smell a nefarious plan that sucks the last bit of wealth out of the USA before they abandon ship and thow us all to the wolves.

Makes me sick!

Dirtt's picture

deficits drive interest rates lower?  Beginning to wonder if BK has the stomach to outlast this crusade.  In the Pass-The-Bill B4 Reading Age, we Flying Monkeys are going to have to have strong wings.

The Synthetic Bell Curve and all Her Glory!

Lazane's picture

little do most know that crusty old warren has been battling the IRS for over 10 years, he don't pay enough taxes cause he is too busy paying accountants and tax lawyers behind the scenes to obfuscate his role in paying his fare share of taxes in BS. I will say he is nothing but hot air BS. 

mind_imminst's picture

I am upset that I am bailing out California again. Warren Buffet, being so upset about not paying enough taxes, should pay the tab of the BABs bailout of California.

CapitalistRock's picture

He is actually correct regarding interest rates and deficits. If you remove our $1.4 trillion dollar deficit then you remove that amount of new money coming into the economy from lenders. In terms of the amount of money in the system it is identical to the fed restricting the money supply by the same amount, which raises interest rates.

Another way to think of it: when money is scarce people demand higher rates of return. Scarcity is controlled by both the fed (to print or not to print) and by the treasury (to borrow or run surpluses and reduce debt).

halfacanuck's picture

"To me, there is no evidence to support the MMT assumption that deficits drive interest rates lower."

Oh come now, Bruce, it's basic economics: If you make more of something then (all else being equal) its price goes down. When the govt deficit spends it creates more money in the pvt sector. The price of money is the interest rate.

I'm not sure why this is so difficult for an intelligent person like yourself to understand. I know you have a lot invested in the notion that a govt's budget is conceptually the same as a state's or city's or household's budget, but that is simply not true and you're smart enough to get it. Currency issuer != currency user.

My advice is to try to forget what you think you know about money and give MMT/sectoral balances another shot, with a truly open mind. I believe you won't regret it.

THE DORK OF CORK's picture

I think the only weakness of MMT is the final settlement of foregin transactions.

The production of money via defecits is just reducing the leverage in the banking system - it is far more stable with a higher money vs credit content.

It is socialising the losses via reducing the yields but the losses are already in the system - it is at least giving people a medium in which to save & transact currency.

In Europe we have a lack of money problem & a deluge of credit - its far worse on this side of the Atlantic - unless the ECB bids up the price of Gold we are Goosed.

Richard Koo although not a strict MMTer has produced a good presenatation of the net benefit of producing non leveraged money into a depressed economy.

The previous credit post 1985 was very net negative while the money production by his calculations was a 4 to 1 benefit.



Having said that the dollar is the worlds premier reserve asset and not just a national currency - thats where it gets tricky I guess.

Perhaps the American domestic economy is better without the dollar reserve - New York not so much.

bank guy in Brussels's picture

Nomura's economist Richard Koo is indeed fascinating, quite unique. Richard Koo is indeed on the side of people in the streets, that 'austerity' is the wrong way round about things.

Koo has some extraordinarily good arguments about governments using fiscal policy, and shows data backing credible claims that by using such policies, Japan was able to avoid any drop in GDP over the last 20 years, despite drops in asset prices of over 80% after the circa 1990 crash of Japan's 1980s credit-inflation bubbles.

While private sector and corporates paid down or slowly wrote off bad debt, the Japanese government borrowed to make up for the lost credit activity, avoiding depression - Koo preaches that this kind of 1930s-style 'balance sheet depression' must be understood.

Koo says that in 1929-1933, US GDP collapsed by over 40% which did not need to happen. The Holy Grail solution was not money supply (au Helicopter Ben), but fiscal policy, like Japan used since 1990. Japan's GDP never dropped, though asset values plummeted.

Koo says the rest of the world is now risking the 1930s or worse depression, but can avoid it by following the Japanese path. He's a fiscal stimulus guy but he has important provisos, which make him very different from a common Keynesian.

One is that workers' incomes and spending power should be maintained.

Another Koo theme, very unusual and intriguing, is that a country best uses its own private savings pool for government debt, not that of other nations, which leads to problems.

Richard Koo puts this distinctive proposal - which Zero Hedge has covered before - at the centre of proposed economic policy to save the eurozone, saying that eurozone governments should perhaps only sell bonds to their own citizens, and not to other nations.

Koo's idea is that here in the EU, as long as any nation is only selling further debt to its own citizens, we should totally scrap any deficit limit in our era of 'balance sheet recession' when the private sector is deleveraging. Officially, the EU deficit cap is supposed to be 3 per cent of GDP, but that stopped being honoured years ago, even by Germany.

So Koo indeed says the whole world has it backwards. When corporates and households are deleveraging, unwilling to borrow, any nation should be free to borrow to the limits of the country's own private savings pool, to keep the economy going, even if this results in high debt-to-GDP ratios and annual deficits.

He may be right ... and sadly his ideas are not being well-enough considered.

That clip of Koo linked above, is an hour-plus audio item.

Here is a very good, much shorter survey of Richard Koo's main ideas, video of him speaking at the April 2011 Bretton Woods Conference sponsored by the Institute for New Economic Thinking.


THE DORK OF CORK's picture

Randell Wray is a more hardcore MMTer but gives a good breakdown of the stability  instability hypothesis.



If you are a dollar bug or a Gold bug - there is simply too much leveraged credit out there - its got to be neutralised.


LawsofPhysics's picture

"Perhaps the American domestic economy is better without the dollar reserve - New York not so much."

I agree.  Having the world's reserve currency is a blessing and a curse, but more importantly, fuck those paper-pushing fucknuts on wall street who continue to steal real wealth from an otherwise healthy economy.  The interesting bit it the issue of American military strength.  Seems to me that having a stable Russian military was far safer than the post collapse "where-did-the-nukes-and-the-armaments-go" Russian military.  The American military-spy network monitored the Russian collapse closely.  Who will do the same during such a collapse of the dollar and U.S.  Now that would be one scary power vacuum.

Orly's picture

"Monitored" it, did they?

NotApplicable's picture


Great taste, less filling.

rumblefish's picture

Bruce,  I appreciate your work. CONCISE, pertinent, and not peppered with self promotion or solicitations.

Thanks Bruce.

Thisson's picture

"It's coincidental that the Fed is driving interest rates to zero while deficits are exploding. "

No Bruce, that is not a coincidence.

csmith's picture

"The mainstream believes that taxation distorts individual incentives..."

MMT types believe the Laffer curve is garbage. I have a simple question for them: Which portion of the Laffer curve is wrong? At a tax rate of zero, revenues are zero, right? At a tax rate of 100%, revenues are also zero, right?

Oh, wait: If the tax rate is 100% and productive people refuse to go to work in order to hand over REAL RESOURCES for the purpose of buying jet fighters, paying Social Security, etc. WE'LL JUST PRINT ALL THE MONEY WE NEED TO PAY FOR IT!


Dan Duncan's picture

Billy Mitchell's justification for MMT can be found here:


He derives his justification from "The Fiscal Accounting Equation".  In this equation, he matches up "Sources of GDP" = "Uses of GDP".

From there, he employs simple algebraic maniuplations to arrive at his ultimate conclusions...and the Holy Grail of MMT:


The only problem, of course, is that Billy Mitchell doesn't understand simple math (or logic).

The issue is not that Sources of GDP = Uses of GDP.  Rather, it's that Sources of GDP cause (or allow for) Uses of GDP.  Once this is understood, his pathetic algebraic manipulations descend into a nightmare of recursive circular reference.

Yes, once the books are closed, then Sources=Uses.  But at this point, all you accomplish by moving the terms around is to make a statement about what already happened....You cannot, however, move the terms around to affect policy.  It's too late for that.

Think of it this way:  You own a business and run a household.  Sales - CGS --->Mtg pymt+Groceries+Savings.  Yes, at the end of the year, the LHS will = the RHS.  But this does not mean we can move Savings over to the LHS of the equation and Sales over to the RHS.  The Savings aspect was determined--in part--by Sales.  We need to close the books, see what Sales actually were before we really know what the Savings were.  Until the books are closed, Savings is really in a Schrodinger state of superposition. 

If a+b causes x+y,  you cannot just move the terms around.  It's not that simple.    Yet, this is exactly what Billy Mitchell and the other MMT Morons do, when they attempt to justify this abomination.

Look at the Billy Mitchell explanation.  I'm not making any of this up.   It really is quite astonishing that MMT is taken seriously. 

Printfaster's picture


"Yes we have low interest rates and huge deficits. But the reason for this is that the Fed is controlling interest rates at artificial levels."

I think that you miss the point.  High budget deficits drive the bulk of the issued debt, which includes prinited currency, to a zero maturity.  Remember that the Continental was nothing but a promise to pay.  Currency is a debt.  With zero maturity.

As the bulk of issued debt goes to zero maturity, the interest rates do go to zero if the printing of currency is allowed.  The reason interest rates go to zero, is if they do not go to zero the cost of debt overwhelms the issuance of new currency, which being zero interest overwhelms any paying debt.

Hence, the higher the debt the inevitable direction to zero interest.


RagnarDanneskjold's picture

Think of the deficit as part of money supply. Increase supply and rates go down. Japan led the way! That's the FUBAR system that is in operation. Of course, when the system reaches the breaking point and reverses course...ALL....HELL....BREAKS.....LOOSE. How can the Fed ever allow rates to go up, when it would turn the U.S. into Greece with interest costs on the debt skyrocketing? This is the end game, right now.

falak pema's picture

All economics does in sophisticated economies is to dress up the bare, hard logic of power in the garb of the knowledge tree, the logic of reason and pseudo empiricism. AS inconised by the Capitol, Supreme Court and financial super den : WS.  In unsophisticated economies like Libya and Saudi, of course, its like time immemorial; he who holds the stick owns the camel or oil slick. 

Now the mask is coming off in the hubrisitic spiral which has made western world alike the unsophisticated world, with the outer garb of sophistication now in tatters; as the Emperor goes naked. The question is how will the emperor of a sophisticated state act when the whole world realises that his power depends on the same basic principles as those of feudal lands. Will hard reality now bend to knowledge tree or the contrary?

Your guess is as good as mine. 

DOT's picture

"Mitchell" is how you say "Krugman" in the Austrailian language.   ;)

viator's picture

MMT = Keynes on steroids

Greenhead's picture

Budget deficits, independent of any monetary operations, drive interest rates down, not up.

Sure, if you are the reserve currency and your central bank is commited to monetizing the debt.  I can see how this would be the case, Treasury says they need cash, Fed says "no problem", magic money appears and is exchanged for Tpaper.  However, if you aren't the reserve currency and you have big deficits, watch out!

LawsofPhysics's picture

Yes, just ask the Russians alive today.

earnyermoney's picture

Need a little help with the word in the first graffiti tag?

falak pema's picture

May I make a suggestion?

Hell : hot place but at least the company is good, not like the other place. Bored to hell's kitchen haven is no misnomer. Its more jazzy!

Mr Lennon Hendrix's picture

When I listen to these economists I imagine this is what Easter Island was going through up until the islanders cut down the last tree.

We must chop down more trees, because it will spur the wealth effect!  Once we cut down the trees then there will be jobs for those moving the stone carvings.

All the while the idea of finite goods was neglected.  Then one day the priest class was gone, and the surviving people were forced to hunt small game to survive, and survive they did.  What a life it will be for all of us soon.  Hopefully in our case we don't let the priest class get away.

Barr/Ventura '12

AbelCatalyst's picture

Great Easter Island example...

These people keep looking at where we are now and making nutty assumptions (the one Bruce points out it perfect)...  It's like a dog sticking its tail through a hole in a fence and a bunch of economists gather around and theorize about how the dog got through the hole...  Totally backwards and these are the people who are making all the decisions??!!  Seriously, we're totally screwed!!  

prains's picture

Mr Hendrix


Polynesian cultures in the past have ended badly and some have thought the final days of Easter Island could have shared McCarthy's vision in the "The Road". Marauding bands

trying to eat each other to survive another day. luau's have always made me a little queasy and it wasn't the mai tai's. 

LawsofPhysics's picture

Yes, people don't understand exponential functions.  For example, if a culture of e. coli grows for an hour and then all die, the halfway point with respect to population was at 59 minutes, not 30.  Ergo, by the time shit looks bad, it is way to late to "fix" anything.

Hedge accordingly.

csmith's picture

Best explanation of hyperinflation I've seen yet...not a linear function.

LawsofPhysics's picture

In other words, the entire paper world is a sham.  Anyone really surprised here?  The dollar died in 1971 and essentially every other carry trade in just about every other currency since the fall of Russia shows that pretty clearly.  All things physical, including a physical pool of skilled labor that is willing to work for wages that won't sustain them.  Bloody sheep.  It's all a smoke screen to centralize control of resources folks

America and China are on the same page (unfortunately, for different reasons which will come to a head soon enough).  The kleptocracts in America want to the dollar and America to become the new Mark/Germany.   In addition, both China and the U.S. stand to benefit from significant population loss, at least in the near term.  Now how might that be acheived?  Hhmmm....  let's see, are conflicts on the rise or are they decreasing, hmmm... 

John_Coltrane's picture

While we're on the topic of fundamental laws:  one can't induce more order (reduce entropy) without doing work (i.e. expending energy).  If you could time would have no direction (i.e. future and past would be symmetrical), and we all know that never happens (ever see a broken glass sponteneously assemble itself?).  All very deep and all very fundamental-unlike MMT.  The future holds only one thing:  its own "heat death" as all organized motion  and activity degrades to uncorrelated random motion.  Not favorable to life, eh?

Now if that doesn't make your head hurt, you've consumed too much Guiness while listening to some great Miles Davis and John Coltrane.

Gene Parmesan's picture

Saving the California taxpayers. Shaving the rest of us.

LawsofPhysics's picture

If Californians were smart or had a truly sustainable way of life, then they would tell the rest of the country to fuck off.  Can't wait to see what happens when Colorado and Utah shut off the water to California and Arizona shuts off the power.  Again, all a smoke screen to control resources.

kaiserhoff's picture

"Eminent Economist" reminds me of my favorite book title.

Clairvoyance for Dummies

flow5's picture

Bill Mitchell only claims he knows how MMT works.  But the reality is that he doesn't understand money & central banking and only uses his breath to advance socialism.

Hansel's picture

"Do these deep thinkers not understand that the Fed bought $2 trillion of paper and in the process wrote the check that covered the massive deficits that are occurring? These folks don’t get the fact that the entire credit curve is a measure of manipulation?"

+1,  Credit isn't any smarter than equities at this point.

covert's picture

paper games are not the same as actual production.