Money, MMT and the last crisis

I would define money as a social construct or fact. What that means is that almost all member in society accept and act upon the notion that numbers on bank accounts and certain pieces of paper can be exchanged for goods and services at certain rates. That does not mean it as a voluntary agreement or something we can wish away. It is hard to opt out of money since it is used to regulate most of our lives and needed to get food and shelter for almost all of us. It is similar to another social fact, the law, in that sense. However, money is more unequal and pervasive.

The overwhelming majority of the money in our society is numbers stored on servers by banks that we trust, or at least accept out of necessity, to handle it properly. Think of money as a token of trust. The value you place on money depends on how much you trust that you can exchange it for something you want in the future. This is a very general definition of money that encapsulates its role as a store of value, medium of exchange and at least does not disqualify its role as an accounting unit. As with most general definitions it leaves a lot of questions open so lets look more closely.

All MMT supporters I have come across say that a sovereign central bank can not run out of money. I think this is technically correct but misses the larger point that a central bank can run out of trust. There are a ton of examples in history where central banks or states mishandle their finances and run out of trust with the effect that the new printed/minted money falls in value. This can lead to a positive feedback as the lower trust in the money leads to it being exchanged for a lower value leading to lower trust. Inflation is usually good for borrowers and bad for the debtors but in the extreme cases it can hurt everybody

If you live in a society with high trust like Sweden there is a large amount of trust in the government which would enable the government to print money for years. In this particular case MMT might be somewhat correct. Personally I am thankful that MMT has made people question the notion that money is strictly limited, as that is a false and dangerous notion actively hurting us now. For me that outweighs the risk of government overspending due to an overconfidence in the krona. The lack of inflation in the west has a lot to do with inequality and is not any form of proof that MMT works. The more mainstream theory about the ineffectiveness of monetary policy is secular stagnation. Many connect it to increasing inequality and the much smaller propensity to consume by the rich. 

The method chosen to combat deflation and depression, quantitative easing, was particularly ill suited to western economic conditions at the time. It could work in a scenario where there are lots of corporations waiting to start or expand their business but lack the credit to do so. We were in the opposite scenario where corporations and billionaires have huge amounts of capital that they do not know how to invest safely and profitably because the mass people are so poor and pessimistic that they do not consume.

It turns out that lending even more and ever cheaper money to a disgraced banking system does not make people more optimistic about their future economic situation. To put it another way, letting the bankers go free and showering them with money did not restore trust and hope in the economy. That some politicians honestly believed that it would work speaks to how warped their view of the world is by the people who lobby them. For the majority of right wing politicians I think the calculation was more cynical, the crisis was an opportunity to starve the beast.

There is now a significant body of empirical work that shows that government spending was effective at countering the crisis by using the natural experiments that come from different states trying different tactics. This was of course known since the the great depression but strategically forgotten for political reasons through a massive effort of will. I also think that it is likely that helicopter money would work in the next crisis but think that it is unlikely to be tried unless we can change government. If it works it belies the notion that money is limited and that we need austerity in a crisis. This would show how utterly pointless the last round of suffering inflicted on the poor and middling classes was except as whip to keep people in line.