This is part 3 of 3 in a series which I have extracted from a long interview with Warren Mosler held in Mallorca on October 14, 2021. It will be published in both English and Spanish
Stuart Medina Miltimore (SMM): I mentioned the words monetary sovereignty previously, and you reacted by asking “what do you mean by monetary sovereignty?” What is your position regarding the notion of monetary sovereignty?
Warren Mosler (WM): Before MMT the meaning of monetary sovereignty was a sovereign government that issues its own currency. But right now the meaning has been extended to include other meanings such as non-convertible currency, or no foreign debt, or food independence, or something else. So now I have no idea what they mean anymore.
SMM: I would understand it as a government that issues its own non-convertible IOU.
WM: Right. But let’s say you are the Franklin University, and you’re issuing the Franklin franc, which is your tax credit of which you are the sole issuer and which the students need to pay a tax. Do you have monetary sovereignty?
SMM: Well, no. They are only the sole issuer of that currency.
WM: When you said ‘sole issuer of the currency’ I wouldn’t have questioned you when you say that they have monetary sovereignty. But you don’t need to be a sovereign to be the sole issuer.
So, what are you trying to say when you use the word monetary sovereign? Well, you could be just referring to countries that do this or that. And some of the proponents have a list of eight things you need to have or you don’t have monetary sovereignty.
SMM: It muddles the issue
WM: Yes, it muddles the issue and it opens you up to criticism that sidetracks the issue for no reason. It’s hard enough to have enough time to focus on the actual points without having to put out all these fires all around the edges which using that word creates.
So it’s like using the word money. I don’t ever use the word money unless it is in a casual conversation.
SMM: What do you use?
WM: If you go back you will remember that I said bank loans create bank deposits. It’s the same thing. The definition of ‘money’ is so casual that it is not constructive.
SMM: It’s more a taxonomy sort of issue or rather about being precise about the definition of what we’re talking about.
WM: You want to get your point across. And this concept makes it more difficult to get a point across, not less difficult. It works against you getting the point across. So when I say bank purchases create bank deposits, I’ve got my point across. If I say bank purchases create money, you might raise all kinds of questions and start discussing those, maybe even arguing about them.
SMM: Now that you’ve been in Europe for a few weeks, what would you recommend the European Commission, the European Council or the ECB to do regarding the end of the pandemic and the gradual return to normal? Employment rates have bounced back, not completely to their pre epidemic levels, but they have recovered; activity is almost back to normal. Would you recommend them to continue with the 1.5 trillion program that Christine Lagarde announced a year and a half ago?
WM: Let’s just review the last thirty years ago quickly. Twenty-five years ago we were sitting in a Bretton Woods conference on the European Monetary Union recognizing what was going to happen this whole time, discussing what the end game would be. The Endgame would be a permanent zero rate policy. There would be a central bank guarantee of all national debt, and they would have to use the deficit as a policy tool, rather than as a constant deficit limit. So now here we are. And we also discussed that they were going to need a credible central bank guarantee which is necessary for deposit insurance. Without that the banking system is going to collapse. They are forced to have one because there’s no other way to do it. This is a point of logic.
So here we are 25 years later. I would say it’s time to declare victory and move on. They’ve got a 0% rate. Just make it permanent! They’ve got the central bank guarantee of all member nations. They’ve got the credible deposit insurance. Just put it in writing. Don’t make it a Mario Draghi policy that we are continuing.
And, as of last year, the Commission decided to change the 3% limit.
SMM: Yeah. The escape clause.
WM: Make it a policy tool!
SMM: But you know that this is temporary.
WM: But temporary and crisis means it’s a policy tool, right? It’s a policy for a crisis. It’s a policy, temporary or permanent. So what they’ve decided is that it’s not fixed at 3%. It’s a tool to use to obtain a result: to get out of the crisis. To solve the energy crisis, the natural gas price crisis, whatever, they’ve recognized that you have to do this. Before that there was no discussion about this. We went through a lot of crises and they never changed it. They tried to enforce penalties, and then the central bank enforced the rules by letting people up from under the umbrella to let your spreads widen if you didn’t comply with what was always a hard limit. Now it’s a policy tool.
Now they can move it back if they think that’s beneficial. If they think it isn’t beneficial, they don’t have to move it back. And that’s what they’re trying to decide. Is it a trillion and a half or isn’t it? It’s a policy tool now. Otherwise, there’s no discussion like before. Three percent, there is no discussion! Where did we get that?
Now they’ve got the correct policy tool.
What’s left is to recognize that raising rates causes inflation, in which case they will leave interest rates permanently at zero. Because why would you raise rates if you don’t want to cause inflation? Use the other policy tool. Let everybody have lower taxes or higher public services. Raising rates is a totally regressive way to regulate the economy: basic income for people who already have money. There’s nobody in favor of that! Right? Even the basic income people are against that kind of basic income.
So their economists now have data that show what this deficit limit of 11% or 6% or 3% or 20 % or whatever does. They can give the Commission a spectrum as to what their forecasts are when they put the policy tool at those levels and they can also get forecasts from private sector economists, like they already do.
Where do we want it to be next? Should we be back to 3% or not? Well, what do our forecasters say is going to happen at these various levels?
We know that with the central bank guarantee even Greek debts are at zero %. There’s no credit risk anymore. They used to have credit risk but now that’s all behind them. It’s not there for the banking sector. It’s not there for the government. The debt to GDP ratio is what it is. And with permanent zero rates, why should they sell long term securities at all? They should all just sell three months securities at zero percent. Now they have no debt service.
The tool of fiscal policy is where all the impact comes from. Use your technocrats to determine what it should be. And then the Commission would decide which one is the most appropriate for the European Union.
SMM: Well, this would still be a rules based determination of what the deficits should be. The reasonable alternative might be that we want a rule that requires as low an unemployment rate as possible and let the deficit be whatever it needs to be.
WM: The technocrats can tell them that so they have to make the decision. They’ll tell them what the corresponding inflation rate will be. They’ll tell them what the currency will do. They’ll tell them everything.
SMM: Unfortunately, my impression is that next year they’ll start tightening the belts again.
WM: They might. If they recognize it as a policy tool and that they’re not bound by historical limits, but by future outcomes, then the European Union could do enormously well. It could be the most prosperous Union of all time. They can figure that out. And they’re right there. They’ve already got the things in place now, which they didn’t have two years ago. I say they’re on the edge of greatness. Right?
SMM: Except some people are closer to that edge than others. Not all the technocrats have the same understanding. They have the guarantee from the central bank. They’ve suspended the deficit limits. But they’re still anxious about the consequences of that.
WM: But they have data on what the consequences are, right? They have data on what happens with 11%. They didn’t have that before. They might have been afraid that the currency would collapse, hyperinflation, etc. Well, now they know it doesn’t happen.
SMM: What’s the deal with the Biden administration’s proposals for tax increases and wealth taxes and so forth? Do you think it’s necessary?
WM: Trump was the price that the voters were willing to pay to keep the Clintons out of office. Now Biden’s the price voters are willing to pay to keep Trump out of office [laughs]. There isn’t anything positive about the last couple of US elections, it has all been about the lesser of two evils.
So Biden is in there in the middle of the road, finding ways to pay for things, looking for legislative compromises.
SMM: Do you think it’s just tweaking the tax rates a bit to satisfy part of his progressive electorate rather than an actual policy?
WM: Satisfy the headline progressives; not the real progressives, the MMTers. It satisfies people like Robert Reich who say that you could tax the rich and get enough money to feed everybody. That’s what a lot of voters want to hear.
SMM: Are you concerned about the hike in oil and gas prices having consequences in terms of prices and demand?
WM: Isn’t that what triggered the 2008 debacle? Oil just went straight up.
SMM: That year was the maximum for oil prices. I was looking at a time series of natural gas and oil prices. And the last peak was around 2007-2008. I have been hearing comments of people saying, oh, prices of natural gas are an all-time high. No, they’re not! They are higher than they were a year ago but not at an all-time high.
WM: Yes but that can drain demand and money goes to places that don’t spend it.
SMM: Before we began recording you mentioned something which I thought was interesting about the European official trade surplus perhaps not being as high as recorded in the official figures. You said one proof that the official statistics are not picking up the real imports could be that the Euro is not appreciating.
WM: Yes because you never see a case where trade surpluses keep going on and on without the currency appreciating. According to purchasing power parity the rate should increase although there are other things that determine the value of the currency.
There are several articles about how trade figures from different customs offices don’t add up.
SMM: Well, if you add the trade surplus or deficits of all the nations in the world, there’s always a huge gap. Those missing exports must be going somewhere. It’s not going to another planet for sure. But the statistical discrepancy is very large indeed.
What is your opinion on where MMT is headed?
WM: It’s just nice to see the proliferation of MMT discussions. Anybody who gets involved in the discussion can go right to the source material. My Seven Deadly Innocent Frauds book was written for readers with a third grade level. All the knowledge is there.
The interesting thing is that MMT has become a grassroots movement. We might have created our own celebrity with Stephanie Kelton, but we certainly didn’t have a celebrity promoting it in the beginning. Nor did we have any central banks promoting it.
Somehow people, like yourself, just sprung up all over the world. For what? It wasn’t for say animal rights, or women’s rights, or the green movement. Who would have heard of a movement to get central banks and governments to understand that they have fiscal policy backwards, that they spend first and then tax? How is that the stuff of a grassroots movement that not only spread to millions of people but also filtered up? And none of them were senior economists, even junior economists. There were zero mainstream economists participating.
But now —there might be one or two reluctant ones— they’ve all started changing their models because they could see that they weren’t right. And MMT is now mentioned and studied at every central bank of the world and discussed in every legislature. How improbable was that!
SMM: And there have even been some attempts to declare MMT a pernicious and dangerous idea.
WM: Yes. The US Congress has a resolution condemning a theory describing monetary operations.
When I talk to senior people at the Fed they go: “Well, yeah, of course. That’s how it works. Everybody knows that!” Then why don’t you say anything? “Well, it’s not our job”.
So it’s nothing except monetary operations. So how do you get a grassroots movement to instruct the central banks and the legislatures on monetary operations and how it’s done? How improbable is that? It is quite improbable in this channel.
how do you get a grassroots movement to instruct the central banks and the legislatures on monetary operations and how it’s done?
SMM: You didn’t expect this when you started writing about this, did you?
WM: This started purely as an exercise of logic.
SMM: Well, I think it has to do with the pain that standard neoclassical economics has caused to a lot of people, especially in countries like in Southern Europe, where you have high rates of unemployment, which wasn’t necessary.
WM: Yes, but that is not how it started. It wasn’t the unemployed who started this. It came in kind of out of nowhere, off on a tangent somewhere and filtered its way in through regular working people. It wasn’t like we started addressing the unemployed and getting them all whipped up. People we talked to were already working. And it was just me at first and my partners in ‘92 or ‘93 and then some people in the financial sector followed. I tried to introduce these ideas to the academic community in ‘96 without much success. Later Bill Mitchell, Randy Wray got involved and then we met Stephanie Kelton.
SMM: What is the issue with the academic community? Why are they so reluctant to embrace MMT? Because the logic is impeccable. It’s hard to contest it. But you get these, sometimes, visceral reactions from some of the academic economists. It is true that some Post-Keynesians seem to be more sympathetic to these ideas. But in general, a lot of the neoclassical economists are just plain hostile. They will claim that MMT is nothing new, nothing that we didn’t know already, and if it’s new, then it’s false. I don’t know if you’ve ever reflected on why there’s so much hostility on their side.
WM: I take it personally (chuckles). I worked in the financial sector for 20 years, been out of it for 30 but that doesn’t seem to matter.
SMM: They don’t like an outsider telling them how it actually works, right? Ivory tower complex, I guess.
WM: Yes. Maybe they just resent having been wrong but they won’t even agree to realize that they were wrong. Maybe that is just how the type of people that go into that field are like and it has less to do with anything that I or anybody else did to them. They are like that towards life in general.
SMM: They’re just bitter with life (laughs). It took them a long time to realize they didn’t understand anything about how the currency and the system work.
WM: That’s going to come around eventually. I’m not going to be around to see it, but history is not going to be kind to them.
SMM: That is what happened with Darwin’s theory. There was a lot of hostility towards it initially. Nowadays few people would reject the theory of evolution or even Einstein’s theory of relativity which was probably not well understood initially.