Reviewed in the United States on 15 June 2020
Miss Kelton is obviously highly intelligent, and an excellent writer, which makes this book an easy read. Thus, the 3 star rating.
Unfortunately, like all MMT economists, Miss Kelton makes the mistake of equating currency issuance with the creation of money. In advanced modern-day economies, they are not one and the same. MMT economists further suggest that the governments of advanced modern-day economies create all the money that flows throughout an economy. They most definitely do not. While she clearly has a hard left political agenda, I don’t think she’s intentionally trying to mislead her readers; I believe she was simply taught something that isn’t so and then had it reinforced by being told the same by others. After well over a decade of working with people at all levels of economics and finance I’ve come to the realization that this misunderstanding of how money is created and propagated throughout an economy is so common that even a very large majority of professional economists, academics, strategists, and financiers believe it to be so.
Equating currency issuance with the creation of money describes a system that is over 2,000 years old, has not existed in developed markets for decades, and currently only exists in lesser developed emerging markets and frontier markets. Contrary to popular belief, Modern Monetary Theory is archaic.
It’s true that any government can print as much of its own currency as it wants in order to satisfy the obligations that are in its own currency. Contrary to what MMT economists seem to believe, I don’t think there are many economists of any kind who would disagree with this—it’s not some brilliant, new discovery. However, developed market governments today, including those with stable sovereign currencies, like the US, the UK, Canada, etc. don’t do it because it’s been tried over and over again for centuries and has always ended in financial and economic calamity.
Put simply, the money that flows through the US economy is created in the private banking system. Not by the Treasury, not by the Fed, and not through some secretive process developed by the Treasury and the Fed that occurs out of the public’s view. In fact, it’s almost certainly happened right before your very eyes. Specifically, when a bank makes a loan it simultaneously creates a deposit, and, voila, money has been created.
So, why can’t US banks just create as much money as they want into perpetuity? There are a number of reasons, including: 1.) banks have capital and liquidity restrictions imposed by the Federal Reserve that limit the amount of assets, including loans, that they can hold relative to their regulatory capital and 2.) markets impose natural restrictions during periods of relative calm because even though the bank creates the money, when someone defaults on their loan the bank still incurs a loss---a few too many losses eating into the bank’s capital and the bank will fail.
All of this said, what the Federal Reserve CAN do is lend money to the country’s private banks. HOWEVER, this only creates what are called “reserves” that are reflected on both the Fed’s and the private banks’ balance sheets. Importantly, these reserves cannot be loaned out by the private bank. So, while these newly created reserves are technically newly created money, they do not serve as money that will ever flow into the US economy. This is the same process by which the Fed purchases USTs or other fixed income securities. The Fed pays for the securities that they buy from the selling bank by creating an offsetting balance on the Fed’s balance sheet that pays a fixed rate of interest to the seller.
In attempt to prove to the reader that the Federal Reserve and Treasury DO create money out of thin air that eventually flows into the economy, Kelton points to an interview where Ben Bernanke says, in reference to the Fed’s assistance to private banks during the 2008/09 financial crisis, “It’s not taxpayer money. We simply use the computer to mark up the size of the account”. What Kelton doesn’t point out, or perhaps doesn’t realize, is that Bernanke was referring to the type of loan I just described above. She also quotes Alan Greenspan without noting that in the same statement he was warning that simply printing money out of thin air to fulfill obligations is risky and potentially inflationary.
The point to take from all this jibber jabber I’ve just written is that one should be very careful in drawing any conclusions from MMT economists’ explanations. Many, if not most, of their policy recommendations are based on theories and explanations that are entirely detached from economic, financial, political, and social realities. Keep in mind that one of their foundational premises, that all the money that flows throughout an advanced modern-day economy is created by the government, is simply untrue. The fact that they believe that MMT is an accurate description of how a modern-day monetary system works is troublesome. The fact that the policies prescribed by MMT economists have been tried time and again over a period of centuries and failed time and again over this period is a bit disturbing.
This is not to say that Miss Kelton’s book isn’t worth reading. Indeed, she certainly offers some interesting insights into financial and economic theory, it’s just that one has to tread very carefully lest they fall into the same trap of falsehoods that MMT economists have.
I could continue with the explanations of all the problems with MMT, but I’m tired of typing and my brain hurts, so I think I’ll stop here. Thanks for reading
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