* This post was written in 2011 before Mr. Roche founded Monetary Realism, a post-MMT school that was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought. For more info on the difference in views please see here. For more on MR’s views please see here.
(If you’re interested in reading part 1 of this post please see here)
Robert Murphy of Austrian school fame has posted some final thoughts on MMT. It’s my opinion that the Austrian perspective is confused about the actual workings of a modern fiat monetary system so some clarification is necessary. In his commentary Mr. Murphy makes three final points:
POINT #1: The accounting identities don’t prove the things that the MMTers think they prove, at least not by themselves.
The goal of Mr. Murphy’s initial article was to show that a modern fiat monetary system need not involve government spending in order for the private sector to save. Mr. Murphy has created his own mythical world where there is no government sector.
In a classic case of confirmation bias, Mr. Murphy has created this mythical anarchist world that he likes to refer to as “Robinson Crusoe economics”. What he has done is created an anarchist world and then filled in the pieces to prove his point. The only problem is, we don’t live in a world that even remotely resembles the Robinson Crusoe world. We live in a world where there is a highly developed government, a foreign sector and a highly productive private sector.
Mr. Murphy “proves” his point in this example by showing that Crusoe can save in coconuts. And this is quite true. If the private sector of the United States desired to save in coconuts they most certainly could (assuming they lived on this mythical island). They don’t need any government money or government spending to save. Unfortunately for those of us that live on planet earth in the USA, we must transact in USD. Why? Because we live within the organized society that our forebearers designed for us and what we call the United States of America. When they designed this society they created a common currency. And in return for specific benefits of this society they created a tax liability that was only payable in the currency of the USA. So, while Mr. Murphy might be quite content collecting coconuts in his free time I can assure you that he saves in US dollars in order to meet his tax liabilities. How do I know this? Well, I know it because the book he so prominently pushes on his website is sold for 22 DOLLARS and not 22 COCONUTS:
You’ll notice that he is not selling his textbook for 22 coconuts. No, he is selling his book for 22 dollars. And some portion of that $22 goes to Uncle Sam. More importantly, those $22 dollars can ONLY come from one place – they must be spent into existence by the government of the USA. If they are never spent into existence then they never exist in the first place. So, you can see why Mr. Murphy is eager to collect his book payments in USD and not in coconuts. He must fulfill his tax liability in the currency of the USA.
Now, I am using this example a bit tongue-in-cheek, but it is applicable in a broader sense. In doing business in the USA we incur a tax liability and that tax liability can only be extinguished via US dollars. If you take a basket of coconuts to the IRS on April 15th they will tell you to go sell the coconuts and exchange them for USD. Payment of taxes ultimately involves savings in the currency that the USA deems as proper for extinguishing tax liabilities. And that means accumulating the same currency that only the USA can spend into existence….
POINT #2: Neither the Austrians nor the Keynesians deny that the Fed could print whatever amount of money is necessary, in order to avoid a technical default on government bonds.
We don’t agree at all according to Mr. Murphy’s own commentary. First of all, we should better understand the Fed and Treasury’s symbiotic relationship so as to avoid the myths villainizing the Fed at all times. And hyperinflation is a rejection of state money (the same state money that Mr. Murphy rejects the existence of – contradiction there – yes). But let’s not get off point here. In an interview that is prominent on his website with Fox Business Mr. Murphy compared the US government to a shopper in a grocery store who can’t pay for all of his food and asks the store for a line of credit to be extended. This proves that Mr. Murphy is being disingenuous in his comments or just flat out doesn’t understand the fiat monetary system.
A currency issuer can never become insolvent in the currency that it issues if its debt is denominated entirely in that currency. This is NOTHING like a household which is ALWAYS revenue constrained. Warren Buffett cited this point in a recent CNBC interview:
Buffett says the U.S. will not “have a debt crisis of any kind as long as we keep issuing our notes in our own currency.”
So, Mr. Murphy’s comparison to a shopper at the grocery store is entirely incorrect. It is not even remotely applicable. So his comment here is either a change in his entire position (an admission of being wrong) or he is being disingenuous in claiming that we agree. Clearly, Mr. Murphy does not recognize the fundamental difference between a currency user and a currency issuer.
POINT #3: Even in its textbook version, “crowding out” is consistent with higher private sector saving. What is being crowded out is private investment.
I covered this in the original post so I won’t belabor the point, however, Mr. Murphy attempts to prove his point by falling back on the loanable funds market. Mr. Murphy’s use of the loanable funds market proves his lack of understanding with regards to basic banking operations. As Dr. Scott Fullwiler has previously explained, the entire idea of the loanable funds market is flawed:
“This model (loanable funds market) is simply inapplicable to our current monetary system in which bank loans are created “out of thin air” without the requirement of prior reserve balances or deposits to “fund” the loan’s creation. Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases.”
In a modern banking system banks are never reserve constrained. An Austrian colleague of Mr. Murphy’s has shown this to be true. So, the entire point on crowding out is dead in the water….
* Edit – This article is nothing personal against Mr. Murphy. I am sure he’s a good man and a fine American. His teachings represent a broader perspective by a wide audience. So while some of these arguments may appear directed at him, I can assure you they are not. They are merely meant to show how a broader school of thinking is, in my opinion, misguided and/or incomplete.