Modern Monetary Theory and Cryptocurrency

mydknyght (39) in modernmoney • 7 years ago

I've been reading and watching videos about Modern Monetary Theory (which @davidpakman recently covered) and thinking about its implications for cryptocurrencies. My questions to others on Steemit are below. First here is my understanding of MMT and what it purports about currencies in general:

Money = Debt. A dollar is quite literally an IOU issued by the government with the understanding that citizens will pay it back through taxes. The idea that the government needs to tax people in order to spend is flipped on its head. Instead, the government issues currency so and creates a demand for it by imposing taxes, penalties, and fees.
Leaving out the possibility of foreign ownership of currency or debt, a government surplus means domestic private debt and vice versa. This is obvious once you accept the first point and supported by the weight of evidence and experience over the boom and bust cycles of the past.
Government bonds drain excess reserves... I admit, this seems obvious to me but I admit I don't fully understand how this process is used to control the interest rate. Maybe someone can explain it to me.

When @davidpakman recently asked Stephanie Kelton, Professor of Public Policy and Economics at Stony Brook University, about MMT and its implications for cryptocurrencies, she admittedly didn't have much to say about the topic. I have never seen cryptocurrencies addressed by neo-chartalists otherwise.

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MMT doesn't seem to have a coherent explanation for crypto yet. Perhaps they see them behaving more as a commodity or something akin to stocks? We see the same rapid price fluctuations in gold and precious metals (albeit over longer timeframes). Since cryptocurrencies are not issued by the government and have no inherent value of their own (other than the trust people put in them), I can't believe MMT proponents see them taking over as a form of currency.

Anyone have any sources they'd like to recommend for a neo-chartalist perspective on cryptocurrencies? I'm very partial to MMT but looking for some broader context. Thank you!

modernmoney mmt economics politics cryptocurrency

7 years ago by mydknyght (39)

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rewardpoolrape (62) · 7 years ago

Enjoy the vote and reward!

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penston (55) · 7 years ago (edited)

I'm delighted to see another person blogging about MMT (I found you through the MMT tag). It's almost 3am here, so I hope that what I'm about to write makes sense.

a government surplus means domestic private debt and vice versa.

I'd make a slight tweak - a government sector surplus is a non-government (private sector and foreign sector) deficit, and vice versa.

Government bonds drain excess reserves

When I first came across MMT, people kept repeating that as though I should automatically understand what they were saying. In truth, they didn't understand it, either. Who decides when someone has excess money and what gives them the right to drain it?

Here's a quick(ish) explanation:

Commercial banks have accounts at the central bank, usually called reserve accounts.
The type of money in those accounts is often referred to as reserves.
Commercial banks have to have positive balances in their reserve accounts over a period of a few days (they're allowed to go negative now and again).
If they don't have enough reserves, they must borrow from the central bank at a penalty rate or from other banks (these are called overnight loans).
The central bank sets a target interest rate for overnight loans. It's not a fixed rate that's carved in stone - the actual interest rate can fluctuate.
If there are too many banks competing to lend reserves to a borrower bank, this pushes the interest rate down below the target rate (as competition to make the loan is a race to the bottom).
The central bank wants the actual interest rate to hit the target so they sell government securities to the banks so that they have less reserves to lend (i.e. the excess reserves have been drained). This pushes the actual interest rate up towards the target rate, so the central bank has manipulated the market to force the borrower bank to pay higher interest.
If there aren't enough banks willing to lend to the borrower bank, then the actual interest rate goes up above the target rate. The central bank combats this by government securities from the banks so that they have enough reserves to lend out at a profit. This pushes the actual interest rate down towards the target rate.
If the central bank didn't manipulate the market through open market operations (OMO's - which is just buying and selling government securities), then the actual interest rate would drop to zero.
The reason why the central bank has a target interest rate in the first place is because they believe that it influences the economy (lower rates stimulate the economy and higher rates cool it down), but ignore the fact that this monetary policy has been proven to be almost completely ineffective.

In November 2017, Bill Mitchell said in his blog that he's "planning to do a MMT talk which connects with Bitcoin/cryptocurrency shemes." But I think you're pretty much right - MMTists would view cryptocurrency as a commodity that can be bartered for other commodities or sold.

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mydknyght (39) · 7 years ago

Thanks for the explanation! I’ve been reading the primer on the New Economic Perspectives blog, but haven’t gotten to that part yet. It’s pretty unintelligible stuff, which is why I think a lot of people prefer the “kitchen table” narrative of Paul Ryan and such. Still the basic notion that the issuer of currency cannot by definition “go broke” is clearly the case.

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penston (55) · 7 years ago

I went through Bill Mitchell's Billyblog with one of my colleagues from Fair Money Australia to learn about this. We spent about three hours one night trying to understand a single post. After that, we were able to read all of them without any problem. Bill has amazing insights on many things and understands macroeconomics inside-out.

This video by Steven Hail was the best explanation I'd seen when I first began to learn about MMT.

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originalworks2 (36) · 7 years ago

The @OriginalWorks bot has determined this post by @mydknyght to be original material and upvoted it!

To call @OriginalWorks, simply reply to any post with @originalworks or !originalworks in your message!

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clintballinger (25) · 7 years ago

My take on the issue (won't be popular here):
"Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin"

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