and the basis for today’s Modern Money Operations. This is a short clip with Warren Mosler, the man many herald as the founder of MMT.
It is so simple anyone can understand it.
I have not studied MMT with the intensity of a doctoral student working their dissertation but I have given it a good look and believe I understand the general ideas and notions of the school of thought. I am neither an economist nor a professional in monetary theory but have had a serious avocational interest in the subjects for over 20 years. I would like to comment on what I have not seen in the MMT material. Perhaps I overlooked it and if I have, I would appreciate being directed to this, in my judgment, absent material. I have not seen any penetrating analysis nor thought regarding the interaction of commercial banks and the economy. I read the very interesting material published here by Alt but it totally ignores the role of banks, rendering the material, in my opinion, irrelevant as a serious commentary on our present monetary system. To be more specific I would like to offer the following analytical examination, using a simplified model, of bank options when interacting within an economy.
An economy is assumed with a quantity of free money, M0, defined as money that does not require being repaid to the bank and is accruing no interest by its presence in the economy. We also assume a bank enabled to issue additional money into the economy by way of loans at an interest rate, IR. The bank, at time t = 0 with the economy having monetary aggregates of M0, has three general options. The bank can decide to establish an increasing money supply or it can plan to establish a fixed, higher amount of money in the economy or it can reduce the money in the economy. Up, down or straight ahead, the bank has no other options other than closing shop to maintain the economy with aggregates of M0.
The simplest option, not necessarily a wise one, would be to reduce the money in the economy. It is simple because all the bank has to do to accomplish that goal is to establish a policy of making loans at a fixed monthly loan rate, MLR, and for a term of T months and interest rate, IR. Then at time = T the money in the economy will have increased to M0 + MLR*T. Beginning at a time t = T + 1 the money supply will start decreasing with a linear slope of MLR*IR each month as principal plus interest is paid back and eventually the money supply goes to zero at a time (in months) equal to:
(MO +MRT*T)/(IR*MRT) plus the initial T months.
This is very obviously not a good choice for the bank, the long term result being catastrophic for the economy and the bank.
Another option to investigate is establishment of a higher, fixed level of monetary aggregates in the economy. This is also simple, theoretically, to do. The bank can proceed as above for the initial phase, establishing a money supply of M0 + MLR*T in the economy at time t = T. Then, in month T + 1, to keep the money in the economy constant, the bank must lend (1 + IR) * MLR into the economy to keep the money supply the same, essentially lending back exactly what was paid in, principal plus interest. By maintaining this lending rate through the second period the money supply in the economy will remain constant. However in the third period, at a time 2* T + 1, the lending rate must be increased to (1 + IR)2 * MRT to cover the loan repayments and in the 4th period it becomes (1 + IR)3 * MLR. We can see where it is going, in the nth period the loan rate must be (1 + IR)n-1 * MLR. The lending rate must grow exponentially to maintain a constant money supply causing this option to lead to a catastrophic ending as well. At some point in time the repayment will be equal to the total money in the economy making a very unstable situation. It will occur in the period:
n = 1 + (log(TM/MLR)/log(1 + IR)) periods
Years = n *T/12
where: TM = M0 + MLR*T, total money in economy at end of 1st period
It is interesting to note what is really happening when the bank is in the constant-money-supply mode. The money supply remains constant but bank loans increase exponentially and what is happening is that the free money in the economy is being replaced by interest bearing money. I suggest this actually happened after WWII when the large amounts of treasure notes spent into the economy during the war years were flushed out in the 60s and 70s. Evidence of it can be seen on a plot of currency in circulation over those years.
This analysis shows there is no single policy that can be pursued by banking with regard to money supply. Banks must “back and fill” or should we say “boom and bust” to work around that pesky “1 + IR” exponential inherent in bank operations. The bottom line conclusion is that the only rational way to introduce money into the economy is by government spending sans borrowing, placing interest free money into the economy and guarding the money supply against inflation/deflation via taxing and spending policy.
A simple, interactive program has been written to illustrate the effects discussed above and it shows that many “buts” will be heard to the argument presented above. Some of the “buts” are very legitimate. For example, if the loan term is long and the interest rate is low the exponential function is not seen for a very long period of time as the expression above shows. The current very low interest rates established by the Fed can also be seen as an attempt to push the economic instability of bank lending into the future. I speculate and challenge but am suggesting our economic busts may be preceded by a shortening of average bank loan terms and increasing of interest rates. The math says this would bring forth the skyward reach of that exponential.
I would be happy to share my analysis program with anyone interested in playing with it. However, I would like to add a few bells and whistles before I put it into public hands. You can contact me at FLFIRST500@AOL.COM
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