Episode 31 – MMT Basics with Eric Tymoigne

Macro N Cheese – Episode 31 
MMT Basics with Eric Tymoigne 
August 31, 2019 

Eric Tymoigne [intro/music] (00:04): 

You can impose monetary sovereignty on your country, but that doesn’t mean you’re going to develop immediately and very rapidly. 

Eric Tymoigne [intro/music] (00:18): 

I think automation is great for repetitive, dirty, difficult, and tiring activities. Why would we want to involve humans in that? 

Geoff Ginter [intro/music] (00:40): 

Now let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host. Steve Grumbine. 

Steve Grumbine (01:34): 

Alright. This is Steve with Macro N Cheese, Real Progressives. I am so excited. I have finally been able to land an interview with none other than Eric Tymoigne. Eric is an Associate Professor of Economics at the Lewis and Clark School in Portland, Oregon. He is a Research Associate at Levy Institute and his teaching specialties, if you will, include macroeconomics money and banking and monetary economics.  

Without further ado, let me bring on my guest. Eric, thank you so much for joining me today, sir. 

Eric Tymoigne (02:09): 

Thank you for having me. 

Steve Grumbine (02:11): 

So here at Macro N Cheese, one of the big things that we talk about is Modern Monetary Theory, and you’ve written some really, really important work, in my opinion, on money and banking and some of the most important pieces out there regarding debunking some of the myths that are thrown at Modern Monetary Theory.  

And just the other day, you put out what I consider to be a really, really eyebrow raising tweet. And I’m just going to read it to you. And this will kind of set the stage for our entire show. You put a tweet out there. It said, “MMT Myths.” You said, “Number one, MMT ignores Minskyan financial instability.  

You said, “Number two, MMT ignores capital controls. Number three, MMT only applies to the US. Number four MMT says nothing about developing econ. Number five, MMT doesn’t recognize there can be trade offs. Number six, MMT is for monetary financing of government spending. And number seven, MMT says deficits don’t matter.” That’s quite a huge tweet all wrapped up in one bundle there. 

Eric Tymoigne (03:29): 

Yeah, I maxed out the word count. That was important. 

Steve Grumbine (03:34): 

I think maybe we should probably start with before we even jump into that. Can you give a relatively short definition of what Modern Monetary Theory is? 

Eric Tymoigne (03:46): 

Yeah. Before I do that, I just want to say that all of these myths have been already presented by others. If you look at Warren Mosler’s “seven myths” (Seven Deadly Innocent Frauds). He goes through those basically in his book already. And I’m just laying it out there because most recently I’ve read a few things that basically repeat these myths.  

And so I just want to put them out there. And so regarding MMT, I think MMT is basically a theoretical framework that aims at understanding how monetarily sovereign governments operate in the economy. And once you understand that what you can do to help promote full employment and price stability with the help of government policies. 

Steve Grumbine (04:33): 

That is a very, very nice, short, succinct answer. I love that. So with that in mind, MMT is not new. It’s not something that needs to be implemented. What do you think makes it so difficult for people to understand at least the base tenants of MMT? 

Eric Tymoigne (04:51): 

Well, I just published an article in Challenge that goes through this. And one of the main problem is that people are not accustomed to think in terms of monetary sovereignty. They think in terms of their own finances and in terms of their own finances, of course, they’re not sovereign. And so when they think about the fact that they can default and then go bankrupt.  

And so they apply that logic to the government, too. And we see that among households, among businessmen, and we see that among politicians. They just take this personal experience and try to apply it — what seems to be obvious — to the government, but it’s not obvious. It’s incorrect. 

Steve Grumbine (05:37): 

This kind of mismatch of understandings blocks them from understanding the difference between a currency issuing nation and their own finite amount of bank accounts. 

Eric Tymoigne (05:48): 

That’s right. Their experience is misleading them basically. 

Steve Grumbine (05:53): 

Okay. All right. So let’s just jump right in. Cause there’s so many of these, I really want to take some time, especially on this very first one. This first one is saying an awful lot because it presumes some prior knowledge: MMT ignores Minskyan financial instability. First of all, what is Minskyan financial instability? 

Eric Tymoigne (06:15): 

So it comes from Hyman Minsky who developed the financial instability hypothesis (FIH). And the idea of the financial instability hypothesis is that market system are unstable and periods of economic stability during which you have prosperity, and during which you might have might have mild recessions, they don’t have a tremendous impact on the trend of economic activity.  

During these periods of relative calm, partial fragility grows as balance sheets tend to become more leveraged. People tend to take on debt that is of a lower quality — meaning that tends to involve refinancing in the future. And it tends to be also more dependent on the direction of asset prices.  

And so during a period of expansion where people enjoy themselves and make some economy gains, they also become less risk adverse and attempt to take on more debt and debt of lower quality, which leads to financial instability in the end. And so all this is not due to irrational choices. It’s not due to an exogenous event that creates problems rather for Minsky it’s through the logic of the market.  

By that, I mean, businesses and households tend to get involved into what he calls Ponzi finance; and Ponzi finance is basically a case where you take on debt and you don’t have the expectation that you will be able to repay it with your income, at least for the foreseeable future. And so the only way to pay is by taking on more debt or selling some of the assets you have at your house.  

So to take a concrete example — prior to the recent financial crisis — people, households took on mortgages, and there is no way they could repay them with their income. The only way they could make the payments is by borrowing more or selling the house. And so for Minsky, this kind of dynamics are embedded in the way the capitalist system works. 

Steve Grumbine (08:48): 

So basically I guess my question to you is what does MMT say? How does MMT lens, the framework, work to ply together with . . . what is the answer to that financial instability? I guess is the question. . . 

Eric Tymoigne (09:05): 

The main point here is that government that are monitarily sovereign are not subject to these dynamics because it cannot go bankrupt. They can always pay. And in addition to that, governments by deficit spending provide the domestic private sector and a foreign sector with extra income that allow these sectors to be on a more sustainable path in terms of their finances.  

And so government deficits do help to stabilize the economy because it strengthens the balance sheets and the income statements of the non-government sectors. 

Steve Grumbine (09:54): 

Now when we think of this kind of government interaction within the economy and understanding the fact that, you know, it can’t go broke, is this where automatic stabilizers kick in? Is this an opportunity to look at the federal job guarantee, which is a core tenant of MMT to kind of buffer that Minskyan financial instability? 

Eric Tymoigne (10:17): 

Sure. It helps to stabilize private income basically. And one way to do that is through a job guarantee program indeed, where during a recession, people lose their income, they’re not able to pay their debt. And so by implementing a job guarantee program, you allow private income to fall less than it would otherwise have fallen. And so it helps to stabilize the economy. 

Steve Grumbine (10:45): 

Okay. Very good. So the second one is the MMT ignores capital controls. I guess start with what are capital controls? 

Eric Tymoigne (10:55): 

So the idea of capital controls is basically to prevent inflows of money in and out of the country and prevent that in such a way that only capital that is there to help the economy over the long run is about to enter or exit. So you want to basically limit speculative inflow and outflow of money from the country.  

And you can do that through either incentives like putting in place taxes on capital flows, or you can put direct barriers that prevent people from moving their money. 

Steve Grumbine (11:39): 

Is this kind of the Marxist answer to capital flight? Is this where we’re at? 

Eric Tymoigne (11:45): 

It’s not Marxist that was commonly used during the Bretton Woods period. And the IMF recently came up and said that “Yes, capital outflow are relevant tool under some specific circumstances.” So there has been a revival of the idea that these tools can be used sometimes. 

Steve Grumbine (12:06): 

So Warren Mosler had said that capital flight was an impossibility in a free floating fiat, modern money economy. What does he mean by that? 

Eric Tymoigne (12:17): 

I have to ask him. 

Steve Grumbine (12:20): 

He has a way with words. Knowing him, he probably said it with a slightly different way than I just said. So what ends up being sound sounds so clear to me, he’s like, ah, it’s not what I said, but I do believe he said that capital flight is not an issue in a free floating fiat environment. 

Eric Tymoigne (12:40): 

Sure. Because in this case, it’s not an issue in the sense that you don’t have to defend the exchange rate. And so if people are trying to leave and leave very quickly, what you may have is your exchange rate may depreciate quite rapidly. And so in this sense, it’s not an issue. You just let it depreciate. 

Steve Grumbine (13:00): 

Okay. So the next one I think is kind of a really important one. They’re all important, but this one in particular is the one that folks like, even Mark Blyth, who I’ve had on recently have tried to say this MMT thing, eh, you know, it only applies to the US, man, you guys have this global monopoly on the reserve currency and all this other stuff.  

And you know, it’s a little bit of an eye roll moment. Explain to us why MMT is not only applicable to the United States. 

Eric Tymoigne (13:33): 

Well, because it basically applies to any country that satisfies monetary sovereignty: namely you issue your own currency, the government issues that only denominated in its own currency, it imposes taxes in its own currency, and it pays using its own currency. And there are plenty of countries that do that.  

Where the United States is special indeed, is that you have foreign demand for the US dollar and some countries and many countries do not have that. And so what that means is if you go back to the three balance identity, it means that the foreign sector wants to net save the currency, the US dollars.  

And as a consequence, the fiscal deficit given everything else has to be bigger than it would otherwise have been. And so the implication of the fact that you have a demand for US dollars is not that the US is special or that MMT only applies in the United States. It’s only that the deficit will be bigger than it would otherwise have been.  

And so if people in the rest of the world do not do, let’s say, save your currency than what’s going to happen is your fiscal position will be smaller. 

Steve Grumbine (14:52): 

So, when you look around, you know, different countries have different limitations on the spectrum of monetary sovereignty, and some of these countries have pegged their currency to the United States dollar, others have pegged their currency to a commodity. Others have given up their monetary sovereignty like folks in the EU with Greece and others.  

And they have seen that lack of sovereignty directly impact the prosperity of their nation. Can you talk to some of the constraints, the external constraints or the internal constraints based on fiscal rules even, that limit monetary sovereignty that make it appear that maybe the US is the only place that these can happen based on the lack of understanding of the spectrum of sovereignty. 

Eric Tymoigne (15:39): 

Yeah. Well, even if you’re not looking to United States, it has internal constraints that look like it doesn’t have somebody like the public debt ceiling, but we know this debt ceiling can be used for political gain and has been used for political gain recently and has created quite a few disruptions.  

And so you have countries that may impose on themselves, these kinds of constraints the United States does, but they are easily bypassed. Going for Europe there is not easily bypassed because it’s not a self-imposed constraint. They basically have given up all monetary sovereignty. And so in this case, you have hard constraints and those hard constraints that are not so much in the form of the deficit rules or the public debt rule, they come more in terms of the fact that you’re required to pass by the bond market to finance yourself.  

And if the bond market is not willing to finance you, then you have issues, so that during the Euro Zone crisis, a few years ago, so you have that kind of issue. Other countries that may indeed peg their exchange rate have problems to use their fiscal policy and monetary policy the way they want, because it may prevent them from maintaining the peg.  

Other countries also may borrow in foreign currency. And so they may issue their own currency. They may tax in their own currency. They may even issue public debt partly in their own currency, but they also have issued public debt in a foreign currency. In that case, well, then that means they need to acquire the foreign currency to be able to pay that part of the public debt and their ability to do so may be limited and that basically may constrain their ability to spend also. 

Steve Grumbine (17:38): 

I see a tie in here to some other popular folklore, not captured here, but given the constraints here, I think we can look at somewhere like Weimar Germany, which is typically thrown up at us as another straw man. And then you’ve got Zimbabwe and Venezuela and so forth, but in particular, the issues that pertain to Weimar and the Treaty of Versailles and the cruel rules that the French put on them in a sense, and you look at the approach to that foreign debt payable only in French francs and the gold and the revolt of labor, the industrial sector and Weimar eradicated production altogether.  

And then on top of it, the debt they owed was denominated in a foreign currency that they had no means of producing on their own. Can you talk a little bit about how that paradigm plays into this other myth here that’s kind of encapsulating in to the applies only to the US myth. 

Eric Tymoigne (18:44): 

Yeah. So there’s another constraint that is important. I’ll come back to it in a second. So here again, the idea here is that only the US is able to issue a public debt in its own currency. That’s not the case. Okay. Plenty of other countries do so — Japan, the UK, Canada, China. So you have that.  

And indeed in the case of Germany, they did issue a public debt in a foreign currency. There is another issue though, in that case, that relates to resource constraints and what happens on the productive side and for Germany at that time period. And in one way more recently, what happened on the productive side of the economy was really where the problem was.  

So we had major disruption, the productive system that created a lot of problem for the country. And so there are constraints on government, but there are not financial constraints for a monetarily sovereign government. In the case of Germany, they had both [inaudible] constraints and productive constraints. 

Steve Grumbine (19:59): 

Okay. Very, very good. All right. So the next one I think is really worth touching on here because this one I’ve heard Fadhel Kaboub talk quite frequently about this, as his focus has been on developing economic nations, under developed countries that don’t have a fully developed economy. The last, it says nothing about developing econ. Talk to us about that one. 

Eric Tymoigne (20:24): 

I think this is really nonsense. There has been some work way back early, two thousands about developing countries. The idea again is that you can impose monetary sovereignty on your country, but that doesn’t mean you’re going to develop immediately and very rapidly because development involves a lot of task decision and complex decisions regarding how to develop your production, how to educate your population, how to create a viable health care system.  

So there’s a whole range of problems that come into play when you try to develop. And what monetary sovereignty helps you to do is give you some freedom in trying to do so. So we can take a worst case scenario. Say you have an economy in which most of your population, I’d say, and let’s go full bore: none of your population is educated.  

They’re in poor health. You have as resources only sand and dirt, and you have no machines. Your population is of course not educated at all. Okay. So what do we do in that case? Well, probably in the first place you are going to have to rely a lot on foreign grants and foreign help in, you know, a lot of help to develop.  

What can the government do in this narrow setting? Well, if it’s monetarily sovereign, you can use the meager resources of the country to help the development of the economy and to try to promote employment. So, whereas dirt, you can make houses and how people have a dwelling. And so you might have a lot of homeless people in your country, use government to help to build dwellings for these people that maybe what you think as a preamble, a primitive past, toward development, okay, in this such a poor country.  

But if you take a country at a higher level of development, if you have more resources, part of your country is a population that is educated, you can then have more options in terms of how you decide as a government to be involved in the economy. And again, ideally it’s not the government that decides.  

It’s the people that decide. So you have a democratic system that determines how you involve the government. And what you want to do is try to make sure that the government uses the domestic resources in a way that is promoting full employment, price stability and economic prosperity. And in doing so, you don’t promote a narrative of we’re going to run a deficit; and so we’re not going to be able to afford to buy things, and we’re going to go bankrupt.  

No, again, monetary sovereignty means that you can afford to buy everything that is available for sale before in your country denominated in your own currency. So, with that you have quite a bit of flexibility. If there is not much available, in that case the government cannot contribute much. As you develop more resources available in your country, so you have the ability of the government to be involved more. 

Steve Grumbine (23:59): 

So Scott Fullwiler was on here with me the other day. And he said, you know, I think the thing that’s neat about MMT is MMT’s goal is to make money the least important aspect of the economy. 

Eric Tymoigne (24:11): 

Glad to hear that. 

Steve Grumbine (24:11): 

The economy is really about the distribution of real resources and ensuring the public purpose is taken care of and et cetera. And it was really a very, very important moment for me. And it sounds like you just said the same thing, because as you’re looking at these developing nations, it’s really not about money per se.  

It’s really about how do we leverage what limited natural resources we have, real resources we have, and maximizing them for the good of all. And that is kind of the MMT statement if you will, on developing economies. 

Eric Tymoigne (24:47): 

Yeah. Okay. And so you try to also make sure that you can as much as possible — it’s not always possible — but as much as possible, be self-reliant as a country to develop your food, to have an energy system that helps to respond to the need of your economy, to have shelters for your population. And so to be able to respond to the social problems that are confronting all these developing countries — they mean mostly healthcare problems, educational problems and shelter and food. 

Intermission (25:29): 

You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube and follow us on Periscope, Twitter, and Instagram. 

Steve Grumbine (26:24): 

So when you think of monetary sovereignty, obviously you can purchase as a government anything that’s for sale, that’s payable in your own currency, but then you listen to Warren. Warren Mosler will tell you that, you know, imports are a real benefit and that exports are a cost. And you look at these developing nations and what we’re saying here, or what I’m hearing you say also is that having food sovereignty, having energy sovereignty and so forth is a very key aspect to developing a prosperous economy.  

While at the same time, there is the balance between trading pieces of paper or digits for the real goods and services of the foreign sector. Can you explain that? I mean, it seems like that’s a pretty important thing for people to understand as they talk about bringing the jobs back, or they think of what constitutes value. They’re looking at pieces of paper as the value and not the real goods and resources that come from that. 

Eric Tymoigne (27:29): 

Sure. I think Scott said it perfectly. What you want to do is emphasize money and finance. Those are just tools to arrive to a goal and a goal is being able to develop your economy. So you might need to probably, you surely need to export some things sometimes to be able to import others. Okay. And so you want to have a development strategy that focuses on these real outcomes and that at least if you have a monetarily sovereign government that leaves aside the financial aspect.  

Now it doesn’t mean that you can spend as much as you want, because again, your domestic economy maybe resource constrained. So you might have limited ability to spend. You also may have a political process that prevents you from spending. People for whatever reason, don’t want the government to be involved in the economy to solve problems that they face.  

But what you want to do is have development strategies that focus on their real side, and that involve government in a way that promotes solving these resource issues. Okay. While are limiting as much as possible, the partial constraints and the [inaudible] way to do that is to adopt monetary sovereignty. 

Steve Grumbine (28:58): 

Very, very good. Okay. So the next point, MMT doesn’t recognize there can be trade offs. What do you mean by that? 

Eric Tymoigne (29:09): 

Yeah. So that’s going back to the resource constraint issue. A lot of people, when we say, ah, if you have modern money, what that means is we’re going to have Zimbabwe and we’re going to have Weimar Republic. But that is especially with these trade off. Once you have an economy in which you have spending running close to the productive capacities, then in that case, you have a potential inflationary pressures.  

And if you decide to involve the government even more, than in that case to prevent inflation, you’re going to have to sacrifice some private spending. So if you want to have more guns, or in our case, we don’t want guns, but if you want to have more healthcare, you might want to reduce use private consumption because you have reached full capacity.  

What MMT though recognizes that this kind of trade tradeoff are usually not the norm. Usually we operate in an under-employed economy. And so you have the ability to have more healthcare and more consumption at the same time. And so the economists are usually too quick to think in terms of trade off.  

Basically, if you increase government spending, what do you have to give up on the other side? But maybe you don’t have to give up anything because you have quite a bit of slack into your economy. And so can increase spending, government spending, quite substantially before you reach those bottlenecks.  

And once you get to a fully employed economy, then yes, that’s have trade offs, have to recognize it. That’s the whole point basically of Keynes 1940 “How to Pay for the War.” Okay. How to deal with those trade offs, how to then limit inflationary pressure that comes from large increase in government spending in the context of the time, that meant trying to find a way to increase dramatically spending for the war without creating inflation and run through different possibilities.  

And today, if we crank up spending enough, we may reach this kind of problems. The way I see it, one of the major issue we face today is an environmental issue. And we probably will need to ramp up government spending quite substantially. We would deal with this issue and the more we delay responding, the bigger the response will have to be.  

And so the more we are going to have to find a way to constrain inflationary pressures that may come from rapid restructuring of our economy and increase in government spending to try to help in this restructuration of the economy. 

Steve Grumbine (32:08): 

It’s interesting. You say, I love what you said by the way, but I think it’s interesting when you think about the fact that as a nation that is obsessed with automation, it’s not just the nation, it’s the world. There’s a strain that has really polluted the public space, made us believe that there’s no work to be done.  

The robots are coming, which Bill Mitchell writes frequently about. The object here is that automation can serve all of us, if we build an economy that’s set to absorb that. And so, you know, Alan Greenspan had sparred with Paul Ryan and when Paul Ryan was trying to privatize social security and Greenspan came back to him and said, “Nah, it’s not a matter of solvency.  

It’s a matter of do we have the real resources available for purchase based on this increased buying power that the people have here.” And I guess my question to you is, is that one of the ways that we can have inflationary pressure is the lack of production meeting demand. And that’s typically the one that people frequently focus on is that kind of inflation because now all of a sudden people have money and Hey, you know, everything’s going to go crazy.  

We’re all gonna die. But in this particular case with climate change coming and so forth, part of a mobilization strategy has got to include some automation here; and that would allow for us to have the productive capacity. If automation and human labor combined can meet the needs of this emergency we’re facing, wouldn’t that offset some of the inflationary pressures by being able to keep up with demand? 

Eric Tymoigne (33:48): 

Sure. Going back to automation, I think automation is great for repetitive, dirty, difficult and tiring activities. Okay. Why would we want to involve humans in that? What do you want to involve humans in are activities that are more pleasant. And we always think of work as this thing that is hard and difficult and boring.  

Well, it doesn’t have to be okay. The attitude to work in the past was quite different. And so you want to be involved in meaningful, productive activity, and there are ways to do that to a job guarantee program. People want to be involved. Regarding your question, yes, I think automation is a great way to help face our productive problems.  

If robots can produce more quickly what we need, why not? And the issue of course is how do you deal with the population that is disrupted by this automation? We hear about miners. Well, actually that their problem is quite different for miners. If we really want to go for a green economy, we probably have to shut down mines as quickly as we can and replace that with more green energy.  

It’s gonna take awhile, but it’s possible. Okay. And of course there are pushed back against that by miners because it’s mining as their way of life. But more deeply what they’re afraid of is, “Well, what am I going to do after that?” Okay. “And where is my income going to come from? Where can I find a way to sustain the family and have a decent life once mining is gone?”  

And so you want to provide, you want to make sure that you have alternatives that are provided to them through retraining, through job opportunities that allows them to apply their retraining; and ultimately if they can find through the private sector, a new job that they like. And so automation by itself, there’s nothing wrong about it.  

If it’s a mean to help, to improve productive capacities, if it’s a mean to lower the physical, to lower the difficulty of work, why not? 

Steve Grumbine (36:11): 

I think the other thing that always grabs me is in our local communities, there’s so much work that’s just not deemed profitable by the man, right. But yet it’s incredibly important to our society. I mean, things that are not deemed valuable to the capital class are very, very valuable to communities.  

I think redefining what work is and being able to help people see that, you know, even Captain Kirk works on the Star Trek Enterprise. There’s always work to be done. It’s just a matter of defining that work and defining who defines that work. And the job guarantees that I’ve heard from folks like Pavlina Tcherneva and Bill Mitchell, and even some of us who have started dreaming a better dream.  

We’re looking at this as an incredible democracy enhancer, a way for people to suddenly become part of their community and part of the political process, which, which should drastically change the fortunes of families and put a caring economy in place. I mean, do you agree with that? Or am I oversimplifying? 

Eric Tymoigne (37:20): 

No, definitely. One of the main goal . . . you cannot have true democracy until you introduce democracy into the economy. And that means people should have the ability to decide what to do with their life and how to organize their work and to decide what are the relevant activities. So for example, today we have a lot of people that have no shelter, that are lacking food, lacking education, lacking health care.  

What we could do through a job guarantee program is let the community organize to try to solve the issue by themselves. We saw that in Argentina, for example, when we had the Jefe’s Program. You had familial bakeries that provided bread for people in need. And we could do exactly the same, leading back to the new deal, the new deal program were involved in producing consumer goods for again, people in need and because the market will not provide to them.  

So we produce it ourselves. I don’t know. I can take a personal experience. I have a neighbor. So his brother went to Hawaii and came out of the water and not looking at the waves you’re supposed . . How are you? You’re supposed to come out of the water, look backward. You’re not backward looking at the waves.  

You’re not supposed to come out forward. And he didn’t do that. And the wave crushed him. And he was paralyzed, since that time has been paralyzed. And for the past three years has been miserable at home. His wife has to work. He has nobody to talk to at home. There is a great opportunity to create a job where people go to see him, go to talk to him, play chess games with them, or whatever he likes.  

Read to him or do all kinds of things like that. More broadly, the population is becoming older and older and a lot of these people are lonely. And there is a great opportunity here to create some employment that would help to decrease loneliness, increase well-being of this population. I mean, there are lots of activities in which you can be involved.  

Those are more social activities, but so students that come out of undergrads or grad school and they need some work experience. And there we go, we go through a job guarantee program where you have jobs that are available for most skilled individuals. I mean, there are all kinds of way through which you can get the job guarantee involved in the economy.  

The point is that you want to give back to communities a mean to organize a mode of production is something that is not available to them now. 

Steve Grumbine (40:06): 

Great. So the next one is really good actually, because we’re watching the election, this primary season, and we hear various people talking about how to finance a Green New Deal. And this particular one MMT is for monetary financing of government spending has driven me crazy. We’ve got Elizabeth Warren out there talking about how we’re going to go ahead and finance a Green New Deal by selling green energy.  

And that’s how we’ll finance a Green New Deal. And I’m like, what is she talking about? What in the world is she talking about? What is this? But this is the level of, you know, I’m just going to say straight up insanity that we’re hearing coming, not only from our political space, but the mainstream media, et cetera, but MMT doesn’t say anything about financing government spending.  

I mean, in fact, Stephanie Kelton in her doctoral thesis, I guess it was, wrote this great paper about taxes and bonds can’t possibly fund government spending. Talk to me about what this particular one means to you. 

Eric Tymoigne (41:13): 

Okay. So for me, the best way I’ve been able to convey this ideas — governments means treasury and the central bank. And well in a monetarily sovereign economy, usually don’t allow the central bank to directly finance the treasury. What you observe is coordination of their activities in such a way that the treasury always is able to finance its budgets in a smooth manner.  

And the central bank is always able to upgrade its monetary policy in a smooth manner. So what monetary sovereignty means in practice is that you have high level of coordination between the treasury and the central bank, meaning that the treasury gets involved in monetary policy and the central bank gets involved in fiscal policy and they do that on a routine basis.  

They do that in the United States. They do that throughout sovereign economies. And so you don’t need a monetary financing of the government. That’s not what we’re about. What you need is a treasury and the central bank that work together to make sure that government operations on the fiscal side, on the monetary, side run smoothly. 

Steve Grumbine (42:34): 

Now, Warren Mosler has said to me that basically the Fed neither has nor does not have money. It creates money period. It is the wellspring from which money is born and the understanding that the government taxes, not for revenue, but it taxes as the means of providing an obligation payable only in its currency that creates the demand for the currency and that tool, that lever, that debt instrument, if you will, is both a brake and a gas pedal for the economy, depending upon where we are at any given time, based on the sectoral balances model.  

Can you explain a little bit more about the whole idea of the federal government neither has, nor doesn’t have money maybe even touch on exogenous and endogenous money in that one. 

Eric Tymoigne (43:26): 

Okay. So yeah, the central bank, what we would consider money, at least in part, is the bank notes we have in our pocket. Okay. And where do these bank notes come from? Well, they’re issued, they’re a liability basically of the federal reserve. Now you have the federal reserve, a debt owed at the federal reserve.  

So the central bank doesn’t have any domestic monetary assets, except we have points. We’re going to leave that aside. They’re there because of the way the government operates within itself. But basically the central bank doesn’t use that to spend. Okay. What it uses to spend is either these sheets of paper or it credits account electronically.  

And so all of these things is electronic money or this paper money are an IOU of the central bank. They are on the debt side of the central bank; they are not on the asset side. So that’s how the government basically create money. It doesn’t need to find it somewhere. It just creates it out of thin air. 

Steve Grumbine (44:44): 

So we hear a lot of folks, especially in quite depressingly, on the left, talk frequently about the concept of fractional reserve, which Warren also states that it’s an AMI perpetuated innocent fraud, that the fractional reserve system largely ended in 1934 when we got off the gold standard. Can you talk about that myth as it pertains to monetary financing, because this is so prevalent today that it handicaps so many folks understanding of how banking and the federal government work together. 

Eric Tymoigne (45:22): 

So the idea basically is that there’s this part of real money, we’ll say, so it could be a gold, for example. So what the banking system is doing is basically using that part and creating its own IOUs, which are bank accounts or in the past, they also issued bank notes that are backed by this, what they call a real money.  

And so you can work out the math. If a banks are allowed to issue more money than the amount of real money, and if there is a certain ratio that they have to respect between the amount of real money and the markup bank money, what you have is the ability to multiply the amount of bank money to a certain proportion relative to the real money.  

The point is that, well, there’s no real money today. Doesn’t exist. The real money is well, what you have in your wallet. It’s what you have in your bank accounts. That’s where the real money is. There is no thing out there upon which you’re relying to be able to create your own money. That’s not how it works. 

Steve Grumbine (46:34): 

Very, very good. So let’s move to this last one. And this is something that Stephanie Kelton has really been pounding on. Did a great article a little while back in the New York Times. Did another great one in the LA Times about everyone can have a pony if we breed enough ponies and the other one is, Hey, deficits matter, just not the way you think they do.  

And she’s trying to get people to understand deficits. Give us your understanding of deficits and MMT in particular, the perspective of why deficits matter. 

Eric Tymoigne (47:08): 

So, as we say, I think it’s a good way to conclude this show is the deficit inject income into the private sector. They create net spending in the economy. The government is spending more than it’s removing from the economic system. So deficits may matter if they create inflationary pressure in the economy.  

They don’t matter in pure financial terms because the government can always afford to deficit spend, but it may not be able to afford to spend in terms of real resources because you might have inflationary pressures. So that’s why they matter. 

Steve Grumbine (47:49): 

When we talk about deficits, that word means different things to different people because they’re back to the household finance paradigm. When folks think of deficits, they think immediately that’s gotta be something bad. That’s gotta be bad. It’s a deficit. You have a deficit of intellect. You have a deficit of personality. You have a deficit of money. Oh no, I’m broke. What does a deficit really mean? Can you define the deficit for folks. 

Eric Tymoigne (48:16): 

It’s surplus spending, you’re spending more than what you’re removing from the economy. So spending is greater than taxes. So again, people have this view that, Oh, well, if you’re doing that, you’re going to go broke. And from the point of view of their personal experience, this is correct. If you spend more than what your income is, you’re going to have troubles.  

But for government, what this is basically mean is that you are spending more than what you’re removing from the economy. So you have a surplus spending in the economy. 

Steve Grumbine (48:52): 

When you say removing from the economy, I know what you mean, but for our listeners define what you mean by removing . . . 

Eric Tymoigne (49:02): 

Remove income. Increase taxing. Remove private income. And so if you add more income than you remove, then you have a surplus income that is generated – net surplus income. 

Steve Grumbine (49:15): 

Very good. Alright, Eric, with that, I want to thank you so much for joining me. You are just an incredibly nice man and I’m so happy to have finally gotten the chance to talk to you. 

Eric Tymoigne (49:29): 

So nice to talk to you. 

Steve Grumbine (49:29): 

This is just great. It’s always fun to meet the people that I read and I hope I get to meet you someday. Maybe one of these years, we’ll get you to one of the MMT conferences and we can have lunch or something, but I hope you’ll come back and join us again soon. We can talk about banking. 

Eric Tymoigne (49:46): 

Okay, great. 

Steve Grumbine (49:48): 

Fantastic. Alright folks, thank you so much for joining us here at Macro N Cheese. This was Eric Tymoigne and Steve Grumbine. Have a great day. 

Ending Credits (50:02): 

Macro N Cheese is produced by Kennedy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Mindy Donham. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/real progress,