25 Jun 2020

My Exhaustive (Exhausting?) Review of Stephanie Kelton’s New MMT Book

MMT 23 Comments

Jeff Deist urged me to review this, and I’m glad he did. An excerpt:

I’ve got good news and bad news. The good news is that Stephanie Kelton—economics professor at Stony Brook and advisor to the 2016 Bernie Sanders campaign—has written a book on modern monetary theory (MMT) that is very readable and will strike many readers as persuasive and clever. The bad news is that Stephanie Kelton has written a book on MMT that is very readable and will strike many readers as persuasive and clever.

23 Responses to “My Exhaustive (Exhausting?) Review of Stephanie Kelton’s New MMT Book”

  1. Transformer says:

    I haven’t read Kelton’s book but the review was informative and appeared fair-minded.

    I do have a disagreement on one of Bob’s list of alleged MMT mistakes – ‘Money Mistake #3: MMT Confuses Debt with Money’.

    Bob quotes Kelton as saying: ‘The debt clock on West 43rd Street simply displays a historical record of how many dollars the federal government has added to people’s pockets without subtracting (taxing) them away.’ and in relation to this says:

    ‘even in the MMT framework, Kelton’s claim about the national debt is wrong. The outstanding federal debt would only correspond to “how many dollars [have been] added to people’s pockets without subtracting…them away” to the extent that the Federal Reserve had monetized the debt by taking the Treasury securities onto its own balance sheet. But to the extent that some of the outstanding Treasury debt is currently held by individuals and entities that aren’t the Federal Reserve, Kelton’s statement is simply wrong.’

    I think Bob is wrong to claim that this is incorrect from within the MMT framework. MMTers believe that new money is created by government deficits. If the government spends $1M more than it raises in taxation then it has (in the MMT view) added that $1M to people’s pockets without subtracting it away in taxes. Now MMT also recognizes that by law the government has to sell bonds to cover the deficits. This means that at any point in time the sum of all previous government deficits and surpluses will be exactly matched by outstanding bonds. So given that the deficit adds money to people’s pockets, and that bonds are sold dollar-for-dollar to match the deficit Kelton statement is totally correct.

    Now I think the issue gets a bit confused by the fact that the ‘conventional view’ sees the bonds sales coming first and the money raised then being spent – so that no new money is created. In this view it is already existing money is borrowed and spent. But MMT rejects this view. They see the deficits and the bond sales as disconnected activities. The deficit creates new money (as described above) and the bond sales only causes people to swap money for bonds. I do not see anything incorrect with this MMT view – its just a different way of looking at the same thing. And within this framework it is correct to say that the value of all outstanding bonds sold to match the deficit will match the value of new dollars created by the deficit – which is what Kelton claims.

    • Rory says:

      To my reading, this still doesn’t account for Bob’s point about non-monetized debt (e.g. privately held bonds). To quote Bob’s example on yen:

      “You can’t spend Japanese government bonds in the grocery store. That’s why money and debt are different things. If Lonergan were correct, then we could also go the other way: specifically, if the Japanese government issued enough bonds to absorb every last yen on planet Earth, then apparently Lonergan would have to say that aggregate demand measured in yen would go through the roof. Yet how could it, if nobody held any yen anymore? Remember, you can’t pay your rent or buy groceries with government bonds.”

      I’ll construct my own scenario: I hold some government bonds, and it’s tax season. My understanding of MMT is that the government establishes the legitimacy of a currency by using taxes. But unless I’ve been missing something, I can’t pay my taxes in even the government’s own bonds – I have to convert them to dollars first. But simultaneously these bonds are counted in the national debt.

      Assuming all of that is correct, it seems at the very least counterintuitive to me, if not just outright inconsistent to say that the bonds I’m holding are (quoting Dr. Kelton here) “dollars the federal government has added to [my] pockets” when the very entity that establishes the currency through taxation wants the bill paid in dollars, not bonds. This seems to say very clearly these are not the same thing, no? Am I missing something, or how does MMT reconcile that functionally in terms of liquidity/spending/what have you, both consumers and even the government that is establishing the legitimacy of the currency does not consider these items precisely equivalent? Genuinely asking.

      • Charles DuBois says:

        Rory, I think MMT treats the bonds as interest bearing dollars whereas currency, etc. represent non-interest bearing dollars. I believe they just point out that, if in need of currency, etc, the bonds can readily be converted to currency, etc. But their point is that bonds are dollars of wealth for the holders. True, you can’t spend bonds to buy groceries. But that’s probably true of, say, a $1000 bill. But both can be readily converted to dollars which can then be spent, etc.
        Make sense?

        • Rory says:

          Yes, I see your point, thank you.

          However, I admittedly am not convinced this is just some technical issue, as if it’s all just cash and cash equivalents, so what’s the difference? And I also don’t think it’s quite the same as private entities not accepting large bills (to my knowledge usually because of risks of loss due to counterfeiting and not wanting to expend all their change), though I appreciate you raising that point.

          But doesn’t this also say something about other situations where we could readily convert things to currency? For example wouldn’t there be implications on the MMT framework vis-a-vis monetary sovereignty considering we can easily exchange once currency for another? If bonds and dollars are functionally the same thing because one can be converted into the other, let’s take a hypothetical country where currency holders have lost faith in the national currency, so they just use dollars (or gold, or bitcoin, or stone wheels) in all transactions but on tax day everyone swaps out the appropriate amount of dollars for the home currency and pays their tax bill. This seems to muddy the waters of the whole monetary sovereignty issue to me. In this way it seems like not just a petty point to be concerned about opening the door for stuff being swapped into dollars as an explanation for why bonds and dollars can be lumped in together.

          • Charles DuBois says:

            Sorry, not sure what you are asking. When currency holders swap into another currency – there are two different currencies involved. In contrast, when we are talking about, say, converting Treasury bonds to cash – the same currency is involved. So these transactions don’t seem comparable. But I may missing your point.

      • Transformer says:

        I agree with Bob’s view that MMT is confused on the debt v money thing. They do indeed seem to think that the ratio of bonds to money held by the public has little or no effect on spending or the price level – which seems wrong to me both theoretically and empirically.

        But I think that is tangential to my point. Here’s a thought experiment to try to explain what I am saying:

        Imagine an economy where the government is in year 1 and fiat money does not yet exists

        Lets say the government likes me and prints up 1000 dollar bills and gives them, to me (and I put them in my pocket!) and doesn’t demand that I pay any taxes. The government has really “added dollars to my pockets without subtracting (taxing) any of them them away”

        Now suppose the government has a rule that says that when it gives money away like this it has to issue bonds to match the deficit. It sets the interest rate high enough so that I use the $1000 dollars to buy $1000 of bonds.

        At this point I think that both the following statement are true:

        – The government really ran a deficit so it could give me the $1000 (‘in my pocket’) and taxed me 0$
        – The value of bonds in existence exactly matches this deficit.

        (note: the $1000 is no longer ‘in my pocket’ but I do not think that invalidates Kelton’s claim).

        So at this point I have $1000 worth of bonds and no cash so I can’t buy anything. The fed then steps in and offers me enough dollars to make me part with $500 worth of interest bearing bonds. . Lets say they have to pay me $600 for bonds with a nominal value of $500. The fed now hold half the initial issue of bonds and I now have cash to spend.

        And in my view the end point is that both the above statements are still true even though half the bonds are now held by the fed and not by the public.

    • Warren says:

      I’ve been perusing MMT sites for awhile and they claim that the Federal Government does not need to tax or sell bonds to finance its operations.

      That’s because it creates new money whenever there is a need. It does not rely on accumulating money. It just credits whatever account with whatever amount of money it needs to. And it can do this because it is the sovereign. The biggest bully on the block as it were, so it can get away with things that lesser entities cannot.

      Therefore Treasuries are not used for funding purposes and are instead just savings accounts that reward folks for keeping their money out of circulation.

      So that money is not spent, it’s just resting.

      And that means, since the money is not spent there is no operational reason for bonds to be sold.

      And that means, if the law were to be changed, that the Feds could issue money without selling any bonds.

      And that means, from an MMT POV that any such discussions of bonds is pointless since bonds, at the federal level are not relevant.

      And that brings up the question: What if the Feds stopped selling bonds? What would be the result?

      • Charles DuBois says:

        Warren if bonds were not sold, then the new money created by the deficit would be in the form of bank reserves or “notes and coin”. MMT considers the national debt to be the sum of “Treasury securities plus bank reserves (bank cash) plus “notes and coins””. Thus, from their perspective, if bonds were not sold, then the “debt” just takes on a different form – as these three forms of Federal debt are interchangeable. Indeed, under current arrangements, interest is paid on the reserves. “Notes and coins”, of course, pay no interest. To answer your question, MMTers would say the only change is that the private sector is receiving less interest income overall.

        • Warren says:

          From my readings, MMTers do not consider it to be debt at all. That the word debt is a deliberate misnomer meant to confuse the issue. But they still use it because that’s the common usage and perhaps there’s no other better way to talk about it.

          That said…

          So money paid directly into personal accounts as happened with these recent relief packages count as bank reserves?

          Did the funds start as reserves and then the banks placed the money in the personal accounts?

          But even if the money started as reserves it became spendable really fast (limiting the amount of interest paid and thus reducing, as you said, the amount of money entering the private sector) and it was spent, therefore entering circulation.

          And if no bonds were sold to match that money would that mean anything?

          Would anything break in the economy if no bonds were sold?

          • Transformer says:

            I think even from a non-MMT perspective nothing would break if no bonds were sold. All monetary policy could be done via interest-on-reserves.

          • Tel says:

            If bonds are not considered “debt” by the issuer then they cannot be considered “savings” in the hands of the buyer either.

            • Transformer says:

              @tel: If I give you $10 and you only spend $5 what is that other $5 if it is not ‘saved’

              • Tel says:

                Financial assets must equal liabilities.

                The $5 in my hand is only valuable if someone will take that from me as payment. In the case of government issued currency, it isn’t a specific party but as a worst case I have a fallback in as much as sooner or later I will have to pay tax and the $5 must be accepted as payment there.

                Bonds are only assets for some people, if they are also liabilities to other people. Bonds are liabilities to a specific party. If government ever decides not to pay out on those bonds they instantly become worthless. Admittedly government simply kicks the can to other parties, the taxpayers, so the bond is equivalent to future taxes paid.

          • Charles DuBois says:

            My understanding is that the money is paid directly into personal accounts. These new deposits are liabilities of the banks. At the same time, this money is counted as a bank reserve. Thus, the reserves are assets of the banks and the new deposits are liabilities of the banks. So its a wash for the banks. The personal account has a new asset. The reserves are a liability (debt) of the Fed, The Fed is part of the government from an MMT perspective. So, at the end of the day, the government’s debt (the reserves) is offset by the private sector’s new deposit.

            If the money in the personal account at Bank A gets spent with a check – then the deposits and reserves move to the recipient Bank B (in the frequent case where the recipient of the check is not banking with Bank A). Reserves just move around – they are not reduced in this case.

            If the money in the personal account at Bank A is withdrawn as “cash” (notes and coin) then Bank A’s reserves go down and reserves decline overall. The offset is that the debt is now in the form of “notes and coin” held by the individual.

            Thus when the government runs a deficit, the resulting increase in “debt’ will incrrease by the same amount. But the composition of this debt will vary depending upon (a) whether or not Treasuries are sold and (b) the private sector’s demand for currency. In any case, total debt consists of Treasury securities, bank reserves and “notes and coin”.

            Yes, MMTers may call this “debt” so we know what they are talking about. But, of course, they also point out that it could just as easily be called an asset, private savings, etc.

            Maybe I’m wrong but if the “debt” were all in the form of bank reserves and currency, then I think there would be less of a fuss about it.



    • Transformer says:

      I just realized that the disconnect is that Bob is interpreting the phrase ‘how many dollars the federal government has added to people’s pockets without subtracting (taxing) them away’ in a way different to what (I think) Kelton intended.

      I believe that Kelton intends it to mean ‘net dollars created via deficits at any point in the past irrespective if they were subsequently swapped for bonds’ .

      But Bob interprets it as “dollars currently in existence’ . That is why Bob talks about ‘the outstanding Treasury securities [] sitting on the Fed’s balance sheet’ as that would indeed match that definition.

  2. Charles DuBois says:

    Transformer – you are correct. Another way to think about it is that all spending = all income. Thus, if the government sector spends more than its “income” (tax revenues) then the non-government (private) sector must spend less than its income, i.e. financially save, just as a matter of accounting and as a point of logic. Thus the government’s deficit results in an equivalent dollar surplus for the private sector. If Bob were correct, it would repeal the all spending = all income economic law, if I’m thinking correctly. Thanks.

    • Tel says:

      Let’s suppose only one gold coin exists in the entire world, and that’s the only thing that ever gets used as money.

      The coin starts out in the private sector, then gets taken as tax by government, then spent by government, then that’s not sufficient spending so the government borrows back the coin and spends it once more.

      Total government tax revenue = 1
      Total government spending = 2
      Government deficit = 2 – 1 = 1
      Government bonds issued = 1 (to cover the deficit)

      No new money got created, and none destroyed … we still have exactly one gold coin.

      This is an over simplified example, but still sufficient to contradict your statement that government deficit results in equal dollar surplus. The main point being that government bonds do not normally circulate as a payment mechanism, although to some extent they can do in practice via the repo market.

      • Charles DuBois says:

        Tel. If I understand your example, yes, agreed – the payment mechanism – the gold coin – is unchanged – which is your point. But the private sector now owns the newly issued government bonds – adding to the private sector’s financial wealth. The private sector surplus is simply an increase in financial wealth. It need not be immediately spendable money.

        Since financial saving always = zero in the aggregate – the non-government (private) sector must go into surplus (higher saving) if the government sector goes into deficit (lower saving).

        Hopefully that addresses your point. Criticisms welcome. Thanks.

        • Charles DuBois says:

          Sorry You said there was only one gold coin in the world. Thus the bonds could not be redeemed for additional gold. So I don’t think the MMT narrative works in your example. My narrative explained why the MMT narrative would work as long as the bonds were, say, convertible into gold. By extension, I think the MMT narrative works for the world we actually live in – where the bonds increase dollar financial wealth. Thx.

      • Transformer says:

        Tel, I think when the single gold coin is the only thing recognized as money then what you say it probably true.

        But if the government rejects this ‘gold standard’ and mandates fiat money then their choices widen. You have them borrowing back the coin” but under fiat money they don’t need to – they can just print up the money instead. If the law says they have to issue bonds, or they do so anyway to avoid inflation (or if the fed subsequently buys back some of the bonds) then from an MMT perspective these are separate ‘asset swap’ activities that merely change the form of the new money created by the deficit from cash to bonds.

        • Tel says:

          Right there you are presuming that government bonds are essentially printed money.

          Once you made that assumption … why does it matter whether a gold coin is in circulation, or any other payment system … bitcoin, whatever you like?

          By the way, if you accept government bonds as money, why not also corporate bonds provided we have a large enough corporation?

  3. guest says:

    I’m part way through your review. It looks really good so far. Thanks for this.

    I saw an article on EPJ showing that Stephanie Kelton deliberately misinterpreted your article so as to make it seem that you and the Mises Institute were supportive of MMT.

    I think she considers you a threat, is one takeaway from that.


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