[Original interview published August 24, 2010]
The US-economist Warren Mosler belongs to the protagonists of the Modern Monetary Theory (MMT). What MMT means? In the following exclusive interview he gives an answer to this as well as to the Fed’s quantative easing, how money comes actually into existence, and the crisis of the euro.
By Lars Schall
Warren Mosler, who earned a B.A. in Economics from the University of Connecticut in 1971, is afinancier, hedge fund manager and maker of some of the world’s fastest race cars. Currently he is the President of Valance Co, Inc. located in St. Croix in the US Virgin Islands, where he resides and conducts his principle business activities.
Furthermore he serves as Chairman and majority shareholder of Consulier Engineering (CSLR); President and founder of Mosler Automotive (http://www.moslerauto.com), which manufactures the MT900 sports car in Riviera Beach, Florida; Co-Founder and Distinguished Research Associate of The Center for Full Employment And Price Stability at the University of Missouri in Kansas City; Senior Associate Fellow, Cambridge Center for Economic and Public Policy, Downing College, Cambridge, UK; and Associate Fellow, University of Newcastle, Australia.
In 1982, Mosler was a founder of Illinois Income Investors. Over the years, he pioneered numerous investment strategies that utilized US Government securities, mortgage backed securities, LIBOR swaps and LIBOR caps, and financial futures markets in market neutral, 0 duration strategies. In 1986, he originated the ‚mortgage swap‘ and in 1996 orchestrated the largest futures delivery to date (over $20 billion notional) in Japan. He also created a swap futures contract currently operational (in a muted form) by a major exchange. III was rated number one by MAR in risk adjusted returns for the previous 10 years in 1997 when he turned control over to his partners.
Mr. Mosler runs currently for the US Senate in Connecticut (see for more on this: www.moslerforsenate.com.). His “Mosler Economic Restoration Plan” has three core proposals to promote his ‚bottom up‘ agenda to fix the US- economy in 90 days:
A full payroll tax (FICA) holiday that increases the take home pay of workers earning $50,000/year by over $300/mo.
A $500 per capita revenue distribution to States. Connecticut would receive approximately $1.75 billion.
An $8/hr. job for anyone willing and able to work to facilitate the transition from unemployment to private-sector employment.
For the last twenty years, Mr. Mosler has also been deeply involved in the academic community, publishing numerous articles in economic journals, newspapers and periodicals, and giving presentations at conferences around the globe. His analysis of financial / economical developments can be found at “Mosler Economics” under: http://moslereconomics.com/. He’s also a frequent contributor to “New Economic Perspectives” (http://neweconomicperspectives.blogspot.com/), the Blog of professional economists at the University of Missouri, Kansas City, and is the author of: “The 7 Deadly Innocent Frauds of Economic Policy”, that is currently published as an e-book by Valance, his financial services company, and will be available at Amazon from next week on as a regular book.
Mr. Mosler, before we get down to the nitty-gritty related to the Modern Monetary Theory, or short MMT, could you give us your overall expectations / worries for the US economy, please?
The US economy is experiencing a severe shortage of aggregate demand as evidenced by the unemployment rate and other measures of the output gap. At current levels of population and productivity, this has probably already resulted in a loss of real output that rivals the losses of all the wars in the history of the world combined.
What do you think will be the outcome of the second round of quantative easing put in place by the Federal Reserve?
There will be no discernible changes in the real economy as a result of QE. QE is about interest rates, which are already low, and there already is both theory and evidence to support the conclusion that lower rates have not worked to support aggregate demand.
What would you do instead if the choice was yours?
My three proposals are for a full payroll tax (FICA) holiday, revenue distributions for the states, and a federally funded $8/hr job for anyone willing and able to work.
Okay, let’s focus on the Modern Monetary Theory. Why is it relevant?
MMT simply recognizes the operational realities of the monetary system. There is no theory or ideology.
What are the objections of MMT related to: Inflation? Or in other words: Should Americans fear a Weimar type of scenario if MMT policy recommendations are implemented?
The operational reality is that the currency itself is a public monopoly, and therefore the govt. is ‚price setter‘ for its currency of issue, just like with any other monopoly. All the well known, textbook ‚rules‘ of monopoly apply.
That means the price level is necessarily a function of prices paid by govt. when it spends and/or collateral demanded when it lends.
A Weimar outcome is due to a policy decision. For example, the decision to deficit spend at rates of 50% of GDP to buy foreign currencies to pay for something like war reparations should produce similar results to Weimar.
What are the objections of MMT further related to:
Causality in accounting identity Government Deficit = Private Sector Savings + Current Account Deficit?
The important causality for purposes of my analysis is as follows:
If govt tries to (deficit) spend by paying market prices, to the extent govt. spending exceeds the net desires of the other two sectors to accumulate financial assets of that currency, the price level moves higher to accommodate that ‚excess‘ govt. spending.
Could you tell us about your Job Guarantee program?
First, this is not MMT per se, but a viable proposal once MMT is understood.
The JG is my third proposal. The govt funds an $8/hr job for anyone willing and able to work. This proves for an employed labor buffer stock for price stability vs the unemployed buffer stock policy currently in place. An employed buffer stock is a far superior price anchor than an unemployed buffer stock, is capable of producing useful output, and works to diminish the negative externalities of unemployment.
One goal of MMT economists is full employment.
This is generally the case, but not necessarily.
Okay, but how can it be reached?
My $8/hr job for anyone willing and able to work eliminates unemployment as commonly defined.
And what happens when the economy is at full employment, e. g. thanks to big persistent government deficits, and the Federal Reserve hikes interest rates?
Interest rate hikes shift income from borrowers to savers, and with the govt a net payer of interest increase interest payments by govt to the non govt sectors by that amount.
The net effect depends on the various propensities to consume from interest income, and related multipliers also based on propensities to consume of various agents.
What are in your opinion the most misunderstood operational realities of our modern monetary system?
Mainly, as all legislators firmly believe, the govt must tax or borrow to get dollars to spend. That is, the govt thinks it needs dollars from the economy to be able to spend, when instead, it’s the economy that needs the govt’s dollars to be able to pay its taxes.
Does Abba Lerner’s theory of “Functional Finance“ play a role in MMT?
MMT supports the principle of Functional Finance that says taxes function to regulate the economy, and not to raise revenue per se.
MMT argues, that taxes don’t „fund“ anything – so why does taxation actually exist?
To regulate aggregate demand.
No taxes at all means no value to the currency. Taxing that doesn’t leave enough financial assets to pay taxes and meet savings desires is evidenced by unemployment.
How does money actually come into existence according to MMT’s understanding, Mr. Mosler?
A non convertible currency with a floating fx policy, like the dollar, is best thought of a beginning with a tax liability. That creates a notional demand for that unit of account, evidenced by sellers of real goods and services seeking units of that currency in exchange for those goods and services, which the govt. can then buy, presumably to provision itself.
Where do bank profits come from?
Fees and lending at rates higher than its cost of funds.
When MMT-proponents say ’savings‘ or ‚financial assets‘ how are these exactly defined?
One entities financial assets are another’s financial liabilities, in the standard accounting sense, and as used in national income accounting.
Can banks borrow from the central bank for a low interest rate and buy government debt at a higher interest rate?
Very rarely if they are matching maturities as required by most regulation. Ordinarily govt securities pay less interest than the borrowing rates from the CB of the same maturity.
Can bank loan money be used to buy treasuries?
Treasury securities are bought with funds held in transactions accounts.
How would you express MMT’s theory of business cycles?
MMT is not a business cycle theory. But any business cycle theory can be or not be consistent with actual monetary operations.
Could you explain to us how government deficits increase private savings, rather than leave it unchanged „because it borrows whatever it spends“?
Your accounting identity above already does that. If any sector spends more than its income, the other sectors in aggregate account for an equal change in financial assets.
To you question directly, govt spending adds to balances in member bank reserve accounts at the Fed, and the buying of Tsy secs, aka ‚funding the debt‘ shifts those balances from reserve accounts to securities accounts also at the Fed.
How is raising taxes to reduce aggregate demand going to affect people’s ability to repay outstanding loans, and what are the consequences to the economy?
Raising taxes reduces aggregate demand (unless a particular tax somehow serves to increase private sector borrowing to spend). This results in higher unemployment than otherwise.
What happens to bank deposits if a loan is not repaid?
Loan losses reduce bank capital.
Mr. Mosler, with a MMT approach: How do you read the crisis of the euro?
The member nations of the euro zone are in very similar positions to the US states. They are credit sensitive entities subject to liquidity constraints.
What would you advise to fix the problems of the euro-zone?
Unemployment can be eliminated with versions of my second and third proposals. Revenue distributions to all member nations by the ECB and an ECB funded minimum wage job for anyone willing and able to work.
Will the euro-crisis come back?
The forces remain in place for the euro head back to the 150-160 levels of not long ago. Whether other forces will come into play is always possible as well.
Let’s get back to the U.S.: What are the consequences of other countries holding Treasury Securities of the U.S.?
Desires to hold $US financial assets by the rest of the world allow the US to reap the benefits of a large trade deficit.
Do Americans have to worry about China selling the dollar and „dumping“ their debt?
At worst it would be temporarily disruptive and reduce our trade deficit. China has already been reducing holdings.
In case the Chinese would sell their US–government securities big time, what kind of psychological effect would this probably have for the global markets?
Hard to say for sure. In the short term markets can do just about anything.
How in your opinion exports are a cost and imports are a benefit?
This is a first principle of macro economics in real terms. It is the basis for real terms of trade.
Why do you guess is MMT not more broadly embraced, followed and applied?
Thank you very much for taking your time, Mr. Mosler!