*  Update – It’s come to my attention that some of the statements in this piece might be somewhat misplaced.  Many different economists have contacted me over the last few months to point out that MMT was not, in fact, the first group of economists to predict the Euro crisis (although that should not detract from the fact that they did in fact predict the crisis). I should also be clear that Wynne Godley was not an MMTer and I should not have implied as much.   Additionally, there are a number of economists who predicted that the Euro would not work and did so well before the MMT economists.  This list has been updated to account for this.  Sorry for the exaggeration.


Being right matters.  This isn’t emphasized quite enough in the finance world and in economics in general.  Too often, bad theory has led to bad predictions which has helped contribute to bad policy.  While MMT remains a heterodox economic school that has been largely shunned by mainstream economists, the modern proponents have an awfully good track record in predicting highly complex economic events.

In the last few years, the Euro crisis has proven a remarkably complex and persistent event.  And no school of thought so succinctly predicted the precise cause and effect, as the MMT school did.  These predictions were not vague or general in any manner.  In reading the research from MMTers at the time of the Euro’s inception, their predictions are almost eerily prescient.  They broke down an entire monetary system and described exactly why its construction would lead to financial crisis if the union did not evolve.

In 1992 Wynne Godley described the inherent flaw in the Euro:

“If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under conditions of extreme emergency….The danger then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.”

In his must read book “Understanding Modern Money” Randall Wray described (in 1998) the same dynamic that led to the crisis in the EMU:

“Under the EMU, monetary policy is supposed to be divorced from fiscal policy, with a great degree of monetary policy independencein order to focus on the primary objective of price stability.  Fiscal policy, in turn will be tightly constrained by criteria which dictate maximum deficit to GDP and debt to deficit ratios.  Most importantly, as Goodhart recognizes, this will be the world’s first modern experiment on a wide scale that would attempt to break the link between a government and its currency.

…As currently designed, the EMU will have a central bank (the ECB) but it will not have any fiscal branch.  This would be much like a US which operated with a Fed, but with only individual state treasuries.  It will be as if each EMU member country were to attempt to operate fiscal policy in a foreign currency; deficit spending will require borrowing in that foreign currency according to the dictates of private markets.”

In 2002, Stephanie Kelton (then Stephanie Bell) was even more specific in describing the funding crisis that would inevitably ensue in the region:

“Countries that wish to compete for benchmark status, or to improve the terms on which they borrow, will have an incentive to reduce fiscal deficits or strive for budget surpluses. In countries where this becomes the overriding policy objective, we should not be surprised to find relatively little attention paid to the stabilization of output and employment.In contrast, countries that attempt to eschew the principles of “sound” finance may find that they are unable to run large, counter-cyclical deficits, as lenders refuse to provide sufficient credit on desirable terms. Until something is done to enable member states to avert these financial constraints (e.g. political union and the establishment of a federal (EU) budget or the establishment of a new lending institution, designed to aid member states in pursuing a broad set of policy objectives), the prospects for stabilization in the Eurozone appear grim.” (emphasis added)

In 2001 Warren Mosler described the liquidity crisis that the Euro would lead to:

“Water freezes at 0 degrees C.  But very still water can be cooled well below that and stay liquid until a catalyst, such as a sudden breeze, causes it to instantly solidify.  Likewise, the conditions for a national liquidity crisis that will shut down the euro-12’s monetary system are firmly in place.  All that is required is an economic slowdown that threatens either tax revenues or the capital of the banking system.

A prosperous financial future belongs to those who respect the dynamics and are prepared for the day of reckoning.  History and logic dictate that the credit sensitive euro-12 national governments and banking system will be tested.  The market’s arrows will inflict an initially narrow liquidity crisis, which will immediately infect and rapidly arrest the entire euro payments system.  Only the inevitable, currently prohibited, direct intervention of the ECB will be capable of performing the resurrection, and from the ashes of that fallen flaming star an immortal sovereign currency will no doubt emerge.”

In a recent article, Paul Krugman referred to some of his predictions as “big stuff”.   What the MMT school has accomplished through its understanding and prescience of the European union is not merely “big stuff” – it is nothing short of remarkable.  This was not merely saying that the Euro was flawed for this reason or that and that the construct of a united Europe was misguided (a prediction made by many at the time of the Euro’s inception due mainly to political biases).  The MMT economists approached the formation of the Euro from a purely operational aspect and predicted with near perfection, exactly why it was flawed and exactly why it would not work as is currently constructed.

Some economists say MMT focuses too much on reality by focusing on the actual operational aspects of the banking system and the monetary system.  But as we have seen time and time again, having a poor understanding of the monetary system is not only detrimental to your portfolio, but detrimental to the millions of citizens who are now being subjected to the ignorance of the economists who influence these monetary constructs.

* Corrected date error in Godley citation.

** I should also be clear that Godley was not an MMTer and was the first post-Keynesian making the Euro comments.  

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Commie joke: “We are in deep s–t,” says the 1st comrade. “The question is,” replies the 2nd comrade, “will everybody get an equal share?”

  2. Since I have been visiting this site, the predictive capacity of MMT as applied to the US economy has been very good, and has put money in my pocket, which is all I can ask. The Euro’s failure was a terrific and specific macro-monetary call for MMT that evolved over two decades. Hyperinflation didn’t happen; QE really was mostly an asset swap; the downgrade of US debt was a non-event; default is not possible for the US; inflation is the bogey; Fed independence is a myth; banks don’t lend reserves; etc.

    MMT describes monetary and banking operational reality, whether you like it or not. Fed-Treasury transactions are merely step transactions that can be collapsed and disregarded when analyzing monetary policy. As TPC points out, the left and the right might have very different policy prescriptions resulting from MMT analysis (e.g., I believe that ELR programs cannot possibly work due to the high welfare and Medicaid benefit package in the US), but MMT describes functional reality for the left and the right. Memo to mainstream economists: the US has been in a pure fiat system since LBJ abandoned silver coinage in 1964 and then Nixon closed the gold window in 1971; the Fed and the Treasury are simply two pockets in the same pair of pants.

    I will make an MMT prediction of my own. If the ECB does not step up to stabilize the Italian situation as buyer of last resort (regardless of treaty and mandate concerns), we will soon be hearing this three word phrase: “cascading counterparty failures”; or this one: “gross equals net”.

  3. good god. By the reasoning of economists listed in this article, MMT only got part of the crisis correct. MMT got the liquidity crisis aspect correct, but, god, the only people that have gotten that part wrong are sitting in the ECB. But that is a liquidity problem. Liquidity problems can turn into solvency issues, which is arguably happening with Italy and soon France.

    However, it is obvious that Greece, Portugal, and probably Spain have a solvency issue and the direct cause of that is balance of payment imbalance. You should find MMT articles which specifically predict that problem, which is the crux of the current crisis, to make your article more compelling. (They shouldn’t be hard to find)

    • Godley discussed this in 1992:

      “What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes. With an economic and monetary union, this recourse is obviously barred, and its prospect is grave indeed unless federal budgeting arrangements are made which fulfil a redistributive role. As was clearly recognised in the MacDougall Report which was published in 1977, there has to be a quid pro quo for giving up the devaluation option in the form of fiscal redistribution. Some writers (such as Samuel Brittan and Sir Douglas Hague) have seriously suggested that EMU, by abolishing the balance of payments problem in its present form, would indeed abolish the problem, where it exists, of persistent failure to compete successfully in world markets. ”

      Godley’s greatest achievement was his work on sectoral balances. I should have spelled this out more clearly.

      • Thanks that’s nice. There was also a Goodhart quote about, one country accepting contractionary monetary policy when they are in economic stagnation. (and vice versa) Germany of course, got easy money when they wanted it, and now they get tight money now that they want it. In both cases, it is devastating to the long-term health of the peripheral countries.

  4. Two things!
    1) The balance of payments hasn’t led to a sovereign debt crisis in the US, obviously because we can print money. (the trade imbalance is an ongoing disaster for our country though!).
    2) Again, I’m sure there are MMT people who have predicted the current account imbalances as a precursor to the liquidity crisis! In fact, a quote from Goodhart above seemed to be promising.

  5. Being right doesn’t matter – it is irrelevant.

    Being profitable matters; it is very relevant.

  6. 1. Having a central bank issueing currency (or anything else) simply postpones the inevitable. i.e. a deflationary bankruptcy/default. But the longer the central bank is able to postpone the credit contraction the more severe the deflation will be. Followed by a credit/bond market blow up. USA, China, Australia, Germany, Greece, Iceland, California or Illinois. MMT or no MMT. Currency issuer or currency user.
    2. A recapitalization of the central bank WILL be inevitable AS WELL. DO NOT count on a recapitalization of e.g. (major) US banks.
    3. Any govt (US, Germany, Greece, Japan, California, Illinois) ALWAYS has to compete with the private sector for money in the credit markets. And precisely THAT competition is ONE (and only ONE) reason why interest rates go up and down. And NOT because the FED supposedly sets/controls interest rates.
    4. Even a central bank WILL have to watch the size of its balance sheet. And when I look at the what the FED has done in operation Twist confirms – IMO – that the FED is out of (monetary) bullets. The FED seems to be VERY worried what they’re holding on their balance sheet. The FED has become the second largest holder of T-bonds. So, in effect together with China they have become the T-bond market.

    • Bond Vigilante/Willy2 “The FED has become the second largest holder of T-bonds. So, in effect together with China they have become the T-bond market”.

      Vigilante/Willy2 where did you get that statistics ? Thanks

      • The Federal Reserve has surpassed China as the single largest creditor of the U.S. government.

        “the Federal Reserve at the end of 1Q held about 14% of total outstanding federal debt (debt held by the public). It is, therefore, now the single-largest creditor of the US government.”

        “According to separate data from the Treasury Department, China is ranked second. It owned in late March Treasuries worth USD 1,145bn, which is slightly less than 12% of the total amount outstanding.”

    • A recapitalization of a central bank is conceptually absurd for any CB affiliated with a country that is the sovereign issuer of its own non-convertible currency. Recapitalize…to what purpose? Even though you seemingly acknowledge the difference between a currency issuer and a currency user, your conclusions are all predicated on a “user” framework.

      • “A recapitalization of a central bank is conceptually absurd for any CB affiliated with a country that is the sovereign issuer of its own non-convertible currency.”

        Thats is correct but only to a certain extent. If you keep replacing lemons in your lemonade by diluting it with water you are fooling your self if you think you don’t need to eventually recapitalizes your lemonade with more lemons.

        • Can you speak in specifics, please? I don’t understand the analogy.

          • “sovereign issuer of its own non-convertible currency.”
            Its own “non”-convertible currency. That is the water in the lemonade.
            As mention it can work but “only to a certain extent”

  7. “Great news everyone. Europe was just saved”

    You crack me up with that every time.

  8. Bonds sold off hard following the approval of the austerity measures in Italy. Since when are austerity measures are inflationary??

    • Since when are austerity measures are inflationary?? They are not but since when did austerity measures mean any thing in Greece or Italy? Its in there culture the word fiscal disciplines is not in there dictionary. Its not going to happen.

    • It has nothing to do with inflation; it has everything to do with Italy’s ability to *repay* under austerity measures. The bond market is saying the higher tax burden and/or lessened govn’t outlays will have a negative effect on GDP, which results in lower tax receipts, which … etc. etc. Austerity is a vicious cycle, and the bond markets know it.

  9. Is it not ironic to see Government owned banks selling those Bond when the same Governments are bailing out those countries.

  10. I am sorry but I just don’t get it – where is the final payment settlement between nations in a MMT universe ?
    Example – France engages in a supposedly uneconomic nuclear programme – it appears uneconomic in the dollar centric universe of the 80s.
    At the time it merely confers cheaper coal and natural gas prices on its neighbours while it reduces consumption to pay for this apparent malinvestment in a ad hoc monetory ecosystem – where is the payback without Gold in the mix ?

    A world of just paper obligations makes the above endeavour pointless as gaming the systems depletion rate is more profitable until it finaly is not – and if real applied technological improvements are pointless rather then California dreaming which although a money spinner is dependent on the physical world humming along just nicely then we are in a world of S$£t

    • “the final payment settlement between nations in a MMT universe ?”
      Simple you print it.

  11. @First
    Thanks – no conduction , convection or radiation – just print.
    Me thinks this is the fatal flaw of MMT – a complete absence of energy flow & conservation in its model.

    • I’d argue that MMTers concern themselves far more with real resource constraints than any other school of economics. Witness Moslers proposals on Long Only Commodity Funds and speed limits.

      Not only that, MMT is the only school to focus on real growth at the expense of inflation. Every other school uses inflation fears as a reason to restrict real growth.

      I don’t think I am claiming anything controversial to state MMT as a school believes: “We want to maximize real growth, period. At some point, inflation becomes counter productive to maximizing real growth. But never, never forget we want the most real growth we can get. In the short and long run, it’s all that matters.”

      We recognize real constraints on growth. We just happen to think that monetary restrictions on growth should be largely ignored.

  12. Cullen
    I essentially accept your thesis that MMT is the working model we have now with both taxes and private gov bond buying essentially destroying or removing money from the banking system but I still can’t understand how it can work as a final settlement between nations.
    This final settlement dilemma is being played out in Europe right now – with Germany/France vs the rest.

  13. I’m new to this topic and MMT (after finally figuring out what it represented). I’ll endeavor to read some of the foundations (honest) currently open in another tab.

    Having read through the above, I’ve not detected the question:

    Has any MMT prediction been incorrect? This, of course, is one of the acid tests of a theory’s validity.


  14. Cullen, you’re a national asset in the war on economic stupidity. Your work deserves a medal. Deficit Owl solidarity!

    I would add, though, that 1st Generation MMTers did not just predict the Eurozone crisis, they were right about the Clinton Surplus and insufficient Bush deficits, too!

  15. Cullen,
    Not to take any wind out of MMT’s sails, but I think the claim to be the only school of thought to see the EU’s problems on the horizon is a bit overstated. As a grad student in 1991 I wrote a paper on Europe 1992: Conflict or Cooperation? analyzing the issues confronting the EU. I used the analytical framework of institutionalism and the New Economics of Organization in combination with a cursory application of the Mundell-Fleming model’s trilemma of fixed exchange rates, monetary independence, and free capital movement to outline the likelihood of success or failure for the EU under the Single European Act. No predictions, as integration was a 40-year process from the European Coal and Steel Community to the European Common Market to Maastricht (and the EU has not disintegrated yet), but I certainly outlined the risks an economic shock would cause to the union that was moving toward currency union before the harmonization of fiscal policies and a supranational fiscal institution could evolve. I had no inkling of MMT, but certainly appreciate its more recent contributions.
    It seems rather rudimentary to me now, but perhaps I’ll post the pdf to my blogsite.

  16. Cullen,
    I just posted it as a pdf at:
    It’s kind of a 2nd-yr grad school ditty, but somewhat prescient I guess.

    I will give MMT kudos, but predictions always carry more weight when one bets the farm. Some hedgie like Soros or Paulson, citing MMT, should have leveraged billion$ on the sovereign credit spreads and broke the ECB. That would gotten peoples’ attention. Cheers.

    BTW, after reading Mosley’s Economics of Soft Currencies I do have a few questions regarding MMT perspectives that I’d like to raise with you. Since it’s a bit off topic, is this the best place?