Magic Money Tree? Part Two

24 Oct

A week ago, in Magic Money Tree? Part One, I spoke of the chilling circumstances confronting humanity. I spoke too of the main strands of resistance in the West – social democracy, trade unionism, revolutionary sects and direct action – as incapable, whatever their other virtues, of effecting change of the kind, scale and timeliness needed. And I saw our best hope in the rise of China (a view no more acceptable to the far left 1 than to liberals) before replicating a Positive piece, its essentials at one with modern monetary theory (MMT).

I concluded with this:

… many [MMT] pundits display naivety as regards the West’s power structures … Does this render them irrelevant for those who recognise the dire straits in which humanity finds itself? I think not and my starting point for saying so is in the “impossibilism” of Leon Trotsky’s Transitional Program. But that will have to await Magic Money Tree? Part 2.

So here we are. But if you’ll excuse my darting down memory lane once more, this time to August 2021, I’ve a mea culpa  to make. In Richard Murphy’s peaceful revolution, I wrote:

I admire economist, 2 tax specialist and Modern Monetary Theorist Richard Murphy. This despite my deep suspicions of MMT (often derided as “magic money tree” not only by … neoliberalism but by a Marxism which – correctly as best I can tell – sees in MMT a defiance of the law of value.

... as best I can tell …  My bad. I was confusing apples with oranges, fiscal and monetary matters with economic ones, description with prescription. Here’s Richard Murphy the other day:

MMT is not a policy: it is a description of how money actually works in the economy. I believe that description is right: the choice as to whether you follow all the policy prescriptions like the job guarantee is for you to decide on. 3 There are three key issues though, I think.

First, people are taught markets rule. They don’t. But we’ve had politicians so incompetent and chaotic that they have abandoned decision making to the markets, and especially central banks. The result is going to be a crash due to interest rate rises that are totally unnecessary.

Second, politicians of all parties seem to think that shrinking the state is the goal of public life. Most of economics is designed to confirm that. MMT says that’s not necessary. It lays out the conditions where politicians can decide what size of state they think is needed.

Third, MMT challenges Thatcher’s household analogy that suggested the economy is like home. Thatcher forgot government’s create money, households don’t, so they’re totally different. MMT says managing like a household is a disaster for a country: the opposite of what is needed.

The problem is not with the markets. The power to control markets exists, as Japan shows. Just because the Fed wants to trash the US economy and that of developing countries 4 we don’t have to follow suit we don’t have to follow suit and raise rates, for example.

The problem is with governments who think they cannot stand up to markets in the public interest. As a result they let bad things happen because some in the City abuse market power for their own interests: you’re more than familiar with that.

Professor Murphy is certainly generous. He attributes that surrender – of economic planning to the casino capitalism of hyper-financialised markets – to incompetent politicians. But ineptitude of this scale and longevity cannot be laid at the door of stupidity alone. It requires other drivers – cowardice and venality spring to mind – and a revolving door between high office and high finance in the corporate world. And while I’m in quibbling mode, perhaps the professor should substitute China for Japan in that penultimate paragraph.

Such carps aside – ditto objections from those who say capitalist markets are uncontrollable by definition 5 – Richard Murphy strikes me as having a cast iron case, morally and logically. But what has this to do with Leon Trotsky’s “impossibilism”? Glad you asked. Feel free to mug up on his Transitional Program 6 if so inclined. Here I’ll simply set out its context and essence:

  • On the eve of WW2, revolution in the West having failed to materialise, the Soviet Union stood alone. Stalin had long ago declared the waiting over. There was no alternative, he insisted, to the aim, hitherto deemed both heresy and oxymoron, of building socialism in one country. If a pact with Nazi Germany could further that end – when large sections of the British and US ruling classes saw Bolshevism as the greater threat – then so be it.
  • For his part Trotsky, now a prophet in exile and one of the very few to see in fascism not just another form of reaction but something new and terrible, concerned himself with the problem of bridging the gap between workers’ current state of political awareness, and ‘revolutionary consciousness’. He argued for the formulation of demands which met the needs of the hour – and would be perceived as such by workers who still believed in the reformability of capitalism – but which no capitalist regime could concede.

Whether or not the modern monetary theorists realise it, some of the policy goals permitted by their understanding – not of how money should  work but of how, for sovereign issuers of a fiat currency, it does  work – are very much in the spirit of Trotsky’s transitional demands.

In The Deficit Myth, Stephanie Kelton sets out the most accessible summation of what MMT is about. Here’s a passage from her introduction:

In 2019, the House and Senate passed legislation that increased the [US] military budget, approving $716 billion, nearly $80 billion more than Congress had authorized in fiscal year 2018. There was no debate about how to pay for the spending. No one asked, Where will we get the extra $80 billion? Lawmakers didn’t raise taxes or go out and borrow an extra $80 billion from savers so that the government could afford to make the additional payments. Instead, Congress committed to spending money it did not have. It can do that because of its special power over the US dollar. Once Congress authorizes the spending, agencies like the Department of Defense are given permission to enter into contracts with companies like Boeing, Lockheed Martin, and so on. To provision itself with F-35 fighters, the US Treasury instructs its bank, the Federal Reserve, to carry out the payment on its behalf. The Fed does this by marking up the numbers in Lockheed’s bank account. Congress doesn’t need to “find the money” to spend it. It needs to find the votes! Once it has the votes, it can authorize the spending. The rest is just accounting. As the checks go out, the Federal Reserve clears the payments by crediting the sellers’ account with the appropriate number of digital dollars, known as bank reserves. That’s why MMT sometimes describes the Fed as the scorekeeper for the dollar. The scorekeeper can’t run out of points.

There is, of course, nothing transitional – in the sense Trotsky intended! – about magicking into being the money for Washington to impose its imperial will on the world while further enriching the shareholders of Boeing, Lockheed-Martin, Raytheon et al. (And what did I say earlier about “a revolving door between high office and high finance”? ) Nor, though now it may be me who is being generous, do I suppose left-of-centre Ms Kelton sees these things as good. She simply makes the point that the government of the USA – like that of the UK and any number of other issuers of a fiat currency – can never run out of money. 

(But her example – ‘No one asked, “where will we get the extra $80 billion?”‘ – packs a whiff of the transitional. To be sure, pacifists and left reformists often contrast cuts to public services, on ground of ‘unaffordability’, with eye-watering “defence” expenditure. But their arguments are dove v hawk clashes over priorities. Both sides not only assume a finite pot of money that can be increased only by taxing, borrowing and/or making cuts elsewhere. They conflate that “pot” with economic capacity. For its part MMT calls out the false premises of such debates, showing instead how those ‘eyewatering expenditures’ on the death sector are possible.)

It is not my job here to set out the core principles of MMT. The Deficit Myth, a snip at £0.99 in its Kindle form, does that admirably. (I also recommend signing up for daily e-alerts to Richard Murphy’s blog: biased towards the British scene but a shade to the left of Ms Kelton and more in step, whatever his intent, with the spirit of Leon Trotsky. Though I disagree with him on some fairly fundamental things, this Scottish Nationalist Quaker has a clarity of style, accompanied by zero tolerance for the asinine, I warm to.)

Nor is it my job to address the objections many, whether left leaning or right, will have. Here too Ms Kelton does a good job. I’ll just summarise the biggies:

So MMT is saying any sovereign government may print as much money as it likes without fear of the consequences?  

No, it isn’t. Don’t make the conflation I made: of fiscal/monetary practice with the real economy, which at any given time will have a ‘natural’ limit. Obsessed with decreasing the national deficit, and in the grip of a homely but utterly specious Thatcherite model of household budgeting, politicians in the US and other fiat currency issuers are ensuring their economies work below (or in rare instances above) this limit – one measure of said limit being full employment. Whatever else Ms Kelton and I may differ on, I am now as one with her on this.

Isn’t a deficit inherently bad?

Not when, as any accountant will tell you, a deficit ‘here’ is a surplus ‘over there’. When a government creates more money than it takes back in taxes, the gain will be to the real economy as homes, schools and hospitals are built; wages paid and spent. Running a king-size deficit, especially in times of economic crisis – are you listening Mr Sunak? – is a moral and fiscal imperative.

Since sovereign governments print money at will, why bother taxing their citizens?

Because taxation serves other purposes. Most fundamental of these is the control of inflation but other functions include (potentially!) more equitable wealth sharing – a UK wealth tax, anyone? – and deterrence of ‘sinful’ activities like smoking.

Since sovereign governments print money at will, why do they borrow?

This is a more complex question, not least when the world’s most powerful state differs from other fiat currency issuers in having made its own debt highly profitable, demarked as it is in dollars untethered to gold since 1971. (France’s Valery Giscard d’Estaing had this in mind when he referred to “America’s exorbitant privilege”.) The question also recalls Professor Murphy’s “generosity” in chalking up to incompetence, pure and simple, that which has darker drivers. We are not speaking of leaders in the political sphere deferring to money markets behind a firewall. Would that we were!

This is as far as I’m going today. My aims were to (a) describe and contextualise ‘transitionality’; (b) give a skeletal overview of MMT; (c) hint at areas of complementarity. Job done. In Part 3 I’ll ask how the transitional implications of modern monetary theory may offer useful leverage in the situation confronting my own country.


No. Mr Sunak – the third British prime minister in seven weeks and a day, and the second to be imposed by a cabal – is not listening. Far better to impoverish our children and grandchildren than saddle them with a ‘debt problem’. Bah!

* * *

  1. Re ultra-leftist opposition to China, witness the formulaic predictabilty of this on today’s WSWS. No mention of the 800 million lifted from what the World Bank calls extreme poverty. No mention of the fact China’s capitalists exist because the West’s left failed to make its own revolutions, obliging China to adapt to global conditions of entrenched neoliberalism.
  2. I’ve seen criticisms of Richard Murphy on the ground he is an accountant by training, not an economist. For anyone serious about political economy, which by definition precludes being dazzled by the emperor’s-suit bankruptcy of economic orthodoxy – beginning with its ideologically driven denial of the origins of profit – that’s a positive not a negative.
  3. The Deficit Myth repeatedly insists that full employment is possible. I have called that naive when the unemployed – what Marx called the reserve army of capitalism – play a pivotal role in holding down wages. But Richard Murphy is right to say that whether full employment is desirable is a political question. MMT simply states that, for sovereign states with a fiat currency, objections to programs aimed at full employment on ground of lack of money are baseless and risible. (In fact both the prof and I are oversimplifying. Full employment is more than a possibility, to be realised or not according to political will. It is an important indicator of whether the real economy is performing at capacity, and therefore whether inflation needs to be controlled: by fiscal rather than monetary measures; i.e. by raising taxes rather than interest rates. But that’s a detail Stephanie Kelton addresses far more ably than I can. Richard Murphy’s thrust here – that MMT is descriptive not prescriptive – is nearer the mark than those criticisms, mine included, which fail to distinguish ‘is’ from ‘should’.)
  4. “… the Fed wants to trash the US economy and that of developing countries …”  This is as close as I’ve seen Richard Murphy get to acknowledging that elephant in the room, the US led empire. Silence on the latter is the biggest lie of omission – not by the professor but by Western media and politicians – of all. The market ‘reform’ conditionality of IMF and World Bank loans to ‘developing countries’, requiring privatisation by fire-sale of their economies – Naomi Klein’s Shock Doctrine is excellent on this – is integral to the functioning of modern imperialism.
  5. The claim that markets are inherently uncontrollable informs the more intelligent leftist criticisms of China’s use of capitalism. I disagree but accept that such criticisms, however armchairedly purist, may yet be borne out. In which case I’ll have bigger worries than egg on my face. (The claim that markets should not  be controlled is of course axiomatic to the Western mainstream. Having spent years watching China coverage in The Economist and Business Insider, I can say with confidence that it seldom rises above self-parody as it issues warning after wishfully doom-laden warning of impending collapse.
  6. Trotsky never used the term, ‘transitional program’, far less ‘impossibilism’. The one was later bestowed by his admirers, the other by his detractors.

10 Replies to “Magic Money Tree? Part Two

  1. One observation which occurs in the case of the example quoted by Stephanie Kelton (which is hinted at further down the commentary) is the wider context of the USA being a unique case.

    There exists a wealth of material, comment and analysis around the argument that the Petro-dollar system – in which the US simply prints dollars at will to sell to the rest of the World who need those dollars to buy the energy required to run their economies – gives the US economy a free ride in which the rest of the world is in effect financing the entire US economy. Including its inflated defence budget and its ability to have hundreds of overseas military bases.

    In general terms what Kelton argues is in theory quite accurate. In terms of the specific example of the US it would seem reasonable to argue that in practice it is this factor which dominates in terms of the way the US economy is able to function.

    Which is why there is both a panic and a hissy fit from those who have installed themselves at the top of the pecking order every time they get a whiff of anyone anywhere in the world attempting de-dollarisation.

    • In general terms what Kelton argues is in theory quite accurate. In terms of the specific example of the US it would seem reasonable to argue that in practice it is this factor which dominates in terms of the way the US economy is able to function.

      Yes. For all her radicalism on fiscal, monetary and to an extent economic matters, Ms Kelton is like most MMT pundits in my limited experience (with the important exception of Michael Hudson, with whom she has worked). Showing no awareness that ‘America’s exorbitant privilege’ flows not simply from control over its currency (unlike, say, Greece in 2015) but from the dollar being the world’s reserve currency and, as you say, from the petrodollar system (now under threat) which obliges all oil importers to hold dollars and thereby prop up the greenback’s value regardless.

      This itself flows from a deeper and more widespread malaise by no means confined to MMT. I speak of the absence in the writings of Stephanie Kelton and Richard Murphy (I’ve yet to check out another high profile MMT advocate, Bill Mitchell) of any sign of them recognising that the US Empire, with Britain and the rest of the West as junior partners, really is a thing.

  2. Jams, thanks for the tip: I just read the article. And it seemed fine to me.
    Part of the problem, and this is related to the ‘transitional programme’, is that people have forgotten that socialism means democracy in a much fuller sense than the ‘representative’ parody that we take part in. Socialism means ‘workers control’ and , in political; terms, something akin to the permanent sessions of the French Revolution.
    The author of the book that Peterson reviews seems to be unaware of this, as if ‘socialism’ was as defined by the USSR or Clement Attlee’s government with Herbert Morrison’s top down management of nationalised industry by government appointed career ‘experts’ who treated their jobs as variations of corporate management, capitalist style.
    It seems to me that the ultimate ‘impossibilist’ demand to make of capitalism is to run society in the interests of the masses: it can’t be done. Only the people can govern on their own behalf.
    All socialist campaigning in a class society involves making demands that capitalism cannot meet-not in the long term. There was a time-in the long post war pre-neoliberal era- in which otherwise perfectly sensible “marxists” rationalised the success of reforms such as free education, the NHS, publicly owned utilities, Trade Union rights etc as having been accepted by the capitalist class and incorporated into the system. Education and Healthcare were seen as enhancing productivity and giving national economies an ‘edge’ over less reformed societies.
    In fact the reality was that the capitalists had never and will never accept the ‘reforms’ which we had learned to take for granted: it turned out (look around you) that the NHS was a transitional demand- a reform imposed on the ruling class by the working class which the capitalists never accepted. Can never accept. And, since 1951 and since the 1970s in particular politics has been the story of the capitalists rolling back socialist reforms.
    Where Trotsky was overly optimistic was in assuming that, once having been instituted those reforms-the NHS, the right to strike etc- would be defended tooth and nail by the working class . And that in defending these things the people would become revolutionary.
    Revolutionary meaning not just changing the world but also refusing to allow the good things in the world from being stolen.
    Mind you the ‘wheel is still in spin’ and the reactionary changes made by the ruling class are still not well understood: people are inclined to comfort themselves that an NHS run by contracted corporations will not lead, as it must, to the return of totally privatised medicine in which the sick, if poor, will suffer and die young. Perhaps, when the penny eventually drops, revolutionary consciousness will develop, despite the absence of any organised political education above the sectarian level …
    RH Tawney once told the Fabians that, re the Labour government, they would find that you cannot tame a tiger claw by claw- born in Bengal Tawney knew what he was talking about.

  3. Good stuff Phil – important work I feel.

    One of the things that has struck me when talking to people about MMT has been a near universal struggle to understand ‘money’ beyond its exchange value role. Most of us have an underlying sense that money is a fixed quantity, even though when pushed a bit the untenable nature of this (post gold standard) is readily acknowledged. Most seem uncomfortable and a little bemused by the notion that governments can create money – unlike households who can’t. Our ruling classes have done a good ideological job there!

    I was interested in Michael Hudson’s assertion that one of the main roles of money is to quantify debt – and thus provide a framework for interest charges and the accumulation of un earned income.

    • … one of the main roles of money is to quantify debt – and thus provide a framework for interest charges and the accumulation of unearned income …

      I’m still working through the implications of this for the model used in Marx’s Capital:

      C-M-C. Where money (M) serves in pre-industrial capitalist economies to facilitate the exchange of commodities (C).

      Marx contrasted this with the trade cycle in industrial capitalist economies: M-C-M+. Now commodity exchange is not the goal, but simply the means to the goal of profit.

      But was Marx right about that earlier cycle, with its intuitive understanding of the role of money? The question is empirical and historical rather than logical, and I understand Michael Hudson has a forthcoming book devoted to it.

  4. I’ve often encountered references to this disagreement between Trotsky and Stalin, as regards the possibility of building socialism “in one country”. Whereas I think events seem to have proved Trotsky right and plenty of criticism of Stalin’s regime, I have never seen mention of what Stalin’s choices might’ve been at the time it became clear the world revolution was not to be. Anyone can shed any light?

    • Not me, CC, though FWIW I agree with the thrust of your comment. What choices did the USSR truly have, given on the one hand an aggressively hostile imperialist world order, on the other the failure of revolution in the West; with the fate of Italy and Germany an especially bitter disappointment.

  5. Looking forward to Part 3. I am pleased that you have caught on to MMT and the fact that it simply describes how fiat money works and the macro-economic implications. However, that only gets you so far. Next you need to consider how economics as generally viewed is missing something crucial.

    I would like to point you in the direction of Surplus Energy Economics because until the underlying fundamental of energy is understood, it isn’t possible to address exactly how much trouble we are in. It’s a lot worse than even you think.


    P.S. I do hope you have lifted the block on me because although I don’t agree with everything you write, I do agree with a lot of it, and I would like to join in your discussions. It does seem a shame that we can’t have different views on some things but still exchange ideas.

    • I have never blocked you. I find your equivalences on one or two matters highly specious, and in one case absurd, but would never block a person on those grounds.

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