This doesn’t even follow in its own logic

In the first instance MMT says all money is created by either government central banks or other banks acting under state licence.

Second it says that money only has value because the government promises to back it.

Third, it suggests that this backing is evidenced: the requirement that tax be paid in government created money guarantees state created currency a value in exchange, most especially if there is no other currency in circulation in an economy.

And fourth, this necessarily means government spending must come before tax is raised in our macroeconomy or there would be no money created to settle the tax bill. This cannot be issued as semantics: it is fundamental to understanding the role and nature of deficits.

Central banks and or commercial banks create money.

Therefore government spending must come before taxation otherwise there would be no money to collect the taxes in.

Eh?

Which fifthly means government deficits are a necessary and good thing because without them the means to make settlement would not exist in our economy.

But if it’s the banks, central and commercial, which create the money then it would be the absence of banks which would lead to the absence of money.

And sixth, and most important of all, knowing this liberates us to think entirely afresh about fiscal policy, which Portes rightly says is prioritised by MMT over monetary policy, which I would happen to argue is now largely redundant anyway because in a world of low interest rates monetary policy is wholly ineffective, and I believe low interest rates are here to stay.

Low interest rates are a monetary policy.

Sigh.

19 comments on “This doesn’t even follow in its own logic

  1. Got me worried about the low interest rates. If HE thinks they are going to stay…

    Anyhow, absent banks, absent government, people invented money. They always will, to grease the wheels of trade.

  2. This doesn’t even follow in its own logic

    Given that this is Capt. Potato, the surprise would surely be if it did.

    I’ve long ago given up visiting his site so I’m not sure if he progresses beyond sixth but Murphy’s Numerology dictates that the more points he adduces in any argument the more bonkers it is and the more unhinged he gets.

  3. To the extent that we can imagine the author reading to us, does anyone else find our Richie dictating in a pompous mock-Churchillian accent?

  4. On the subject of fvckwits whose English is crap, I read through the entire Guardian note pleading for cash which is at the end of some of its articles, the Guardian being an English paper. It contained this:

    “Your support gives Guardian journalists the time, space and freedom to report with tenacity and rigor, to shed light where others won’t.”

  5. In real life, of course, none of this matters. Governments do not suddenly materialize. Nor do they descend from the heavens. When new governments are formed, existing government systems are co-opted to the extent necessary. Been that way for thousands of years.

    As usual, Murphy babbles about that which simply doesn’t matter.

  6. But he must know that their are governments who have a surplus. How does their money work then?

  7. @BF
    From the OED

    Rigor: A sudden chill, esp. one accompanied with fits of shivering which immediately precedes certain fevers and inflammations.

    That should really be “follows” rather than “precedes” but otherwise it works well in the context.

  8. Third, it suggests that this backing is evidenced: the requirement that tax be paid in government created money guarantees state created currency a value in exchange, most especially if there is no other currency in circulation in an economy.

    Is that right? I understood that you could pay your tax in any currency as long as HMRC was happy with the exchange rate you used?

    I know the theory of money is quite complicated but one of those theories is that the causation runs the other way. Money works when the government gives people confidence in it by accepting it for payment of taxes and services.

  9. The potato is trying to glue together two competing arguments. For years he’s been demanding MOAR tax, telling all and sundry that without MOAR tax the government is short of spending money, particular flogging his “tax gap” as it was the most important problem. No one was really listening anymore so when mmt came along he leapt onto that band wagon (also see green quantitative easing after qe came in) Of course under mmt theory tax is only used to control inflation. If Inflation is low then the gap gap is irrelevant and runs into another of his peeves that inflation is too low. He’s like schroedingers MMT advocate you never know if he’s going to be advocating that the government needs tax to pay for spending or not. The only certainty is that his brain can’t reconcile 2 competing narratives, so he flaps around like a fish out of water. He should really just concentrate on his model railway and writing his concentration camp memoirs.

  10. In countries that are suffering from hyperinflation the US$ is money despite not being backed by the government of that country.
    In the past gold was used as money despite not being backed by any government.
    Murphy is wrong, as usual

  11. The logical fallacy in his argument is that, while he may be correct that a government accepting tax payments gives a currency some value, that is not the only (or, necessarily, the main) source of a currency’s worth.

    Being accepted by other people – traders, employees, etc. – can also give a currency value.

  12. I’ve pointed out to Murphy in the past that HMRC accept Euros and (I believe dollars) as payment for tax.

    Murphy’s baffling response was that he was still right because the Euros were converted into £s.

    This was a couple of years ago.

    Says much about the man’s stupidity and delusions that you can point out to him that what he claims is a horse is in fact a cow and he will then stand next to the animal in 2 weeks time, saying “look at my horse”.

    Fucking mental. And people pay him to regurgitate this shyte.

  13. “Being accepted by other people – traders, employees, etc. – can also give a currency value.”

    But why is it accepted by other people? I believe it’s mainly because of inertia and historical reasons. Some random Welsh sheep farmer accepts GBP because he always has, and his father before him, and the value hasn’t changed too much or too quickly over his lifetime. When we stopped using precious metals because the government said so, he was also forced to stop using them for everyday purposes because everyone else stopped.

    He might be prepared to accept euros or silver bullion or Bitcoin or Zambian Kwacha if you told him the benefits of doing so, but it requires some investment of effort and/or networking and may be outweighed by the costs.

    Meanwhile a sheep farmer in Argentina would have seen the value of his pesos decline dramatically over a few years and he might follow the other people in his village when they start hoarding USD, because their relatives in the cities started doing it, and so on.

  14. Being accepted by other people – traders, employees, etc. – can also give a currency value.

    The value of anything is determined by what other people are prepared to exchange for it. All attempts to get around that truth by govt defining values have not gone well

  15. “The logical fallacy in his argument is that, while he may be correct that a government accepting tax payments gives a currency some value, that is not the only (or, necessarily, the main) source of a currency’s worth. Being accepted by other people – traders, employees, etc. – can also give a currency value.”

    Those are just links in a chain, in which the value at each point depends on it having value at the next point. Ultimately, the value in the entire chain is founded on the *end* of the chain, when somebody promises to accept the money and then destroy it.

    ‘Money’ is a credible and legally enforceable promise to pay the bearer something of real value – the useful product of human labour. It is created when we borrow, and promise to repay.

    Most money is created when people walk into a bank and sign a piece of paper promising to repay X pounds per month for Y years. The signature turns that worthless piece of paper into ‘money’ worth twelve times X times Y pounds (multiplied by the probability of you repaying it). The borrower creates the money, and the bank put it in its vault. The bank exchanges that for a more ‘liquid’ form of money, and that gets passed along the chain of transactions. But the end point of the chain is that money eventually has to be earned by the borrower (in exchange for real work) and paid back to the bank, where it is cancelled. The piece of paper in the vault is worth X pounds less, and eventually after Y years returns to being a worthless piece of paper again.

    Government spending works the same way. They can print money promising to pay the bearer, and by doing so are borrowing. The difference is that they promise to repay immediately, not on a schedule over Y years, and so the money is ‘liquid’. Instead of sitting in the bank vault while the liquid stand-in circulates, it circulates itself. And when it eventually comes back to the government in the form of taxes, that is the repayment of the government’s debt. It has to *destroy* the money it gets as taxes. There has to be an *end* to anchor the chain of transactions.

    So you can think of it two ways. Money is paid to the government as taxes which the government spends. Or the government spends IOUs which it redeems and cancels in the form of taxes. The latter is more accurate, but somewhat brain-bending and equivalent in effect to the former, so it’s just easier to think of it as tax-and-spend rather than spend-and-tax.

    However, the more accurate way of thinking of it doesn’t buy any of the conclusions Murphy wants to draw from it. It doesn’t mean the government creates all money, or is essential for its existence. Anyone can write IOUs. It doesn’t mean money only has value because the government promises to honour it. Everyone who borrows from a bank is backing the money they create, with their contractual promise to repay. It doesn’t mean the government has to spend before it can tax. Besides the chicken-and-egg nature of the question, it would be perfectly possible to take payment of tax in somebody else’s IOUs and instead of destroying them spend them, passing them along the chain. Or to actually produce something of real value (like a big pile of Gold), sign bits of paper giving the holder a share in that value, and spend those. And it certainly doesn’t mean the government can spend as much as it wants without consequences or any intention to repay it, which is what Murphy really wants. Money has to be backed by a credible promise to repay something of real value. Your spending is limited by your credibility.

  16. Money is energy.

    I do work. I receive a token or tokens in proportion to the amount/difficulty/risk involved, multiplied by a factor accounting for the number of other people willing to do said work.
    I can then take this token to someone else and swap it for the product of their labour – which is a result of their energy input.
    They can then take the token and use it somewhere else, and so on.

    The value of the token is merely a representation of the amount of work. Inflation just means that the subdivision on the energy scale the token represents becomes smaller. Too much inflation and the scale becomes too small for practical purposes – like trying to measure the distance to the moon in Angstroms.

    Credit is just payment in advance, not creation of money/energy. Debt is similarly payment in arrears.
    Money can only be created by doing work (the end source is the sun), and only destroyed by entropy (like a car rusting into a useless lump)

    That’s my theory, still working on it…

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