Paul Krugman Still Gets MMT Wrong

By L. Randall Wray

On Monday, Paul Krugman tried yet again to spell-out where he disagrees with “modern money theory” (MMT)—the approach that I adopt. And, again, he gets it wrong. He continues to make two kinds of errors: errors of attribution, and errors in his understanding of money and finance. I don’t normally like to include long quotes followed by critiques, but I think in this case it will be useful. Sorry, this is going to be a bit long and wonkish.

Before proceeding, let me say that I appreciate the role that Krugman plays. Like many of you, I enjoy reading his blogs and more often than not, I agree with him. He is almost the lone, sane, voice in a position of authority who argues against the standard deficit hyperventilation that is driving the nation into a great depression. I mean no disrespect in the following critique. And I am glad that he is writing about MMT—most of those within the Beltway simply ignore it. But there are two reasons to respond to his critique: first, there is some hope that he might change his mind and embrace MMT. That would allow him to mount a much more powerful attack on the deficit hysterians. Second, he is misleading his many readers—by misstating what MMT believes, and by his own misunderstanding of monetary operations.

Ok, on to his critique and my responses.

Krugman: In a way, I really should not spend time debating the Modern Monetary Theory guys. They’re on my side in current policy debates…

Wray: Yes, we often do agree with him on current policy; we need more stimulus, not less. And I often agree with his political musings—although that has nothing to do with MMT. (As I have argued on this blog, MMT is also perfectly consistent with Austrian politics, Bushonomics, Reaganomics, or Ron Paulism. And that is because MMT is not a policy proposal. MMTers do have policy proposals, of course, but Krugman’s complaints do not address them. And in any case, the policy proposals are idiosyncratic—each MMTer has her own preferred policies. More on that at the end of this blog.)

In his previous post, commentators criticized him for his apparent lack of familiarity with MMT—he was attributing ideas to us that we do not hold. (My colleague, Bill Black, takes apart that post)

For example, he has many times claimed that we argue “deficits never matter”—a false claim that we have countered on many occasions. (Here is one of my responses.) Hence, in Monday’s post he assured readers he has read some MMT literature:

Krugman: First of all, yes, I have read various MMT manifestos — this one is fairly clear as they go. I do dislike the style — the claims that fundamental principles of logic lead to a worldview that only fools would fail to understand has a sort of eerie resemblance to John Galt’s speech in Atlas Shrugged — but that shouldn’t matter.

Wray: In case the link above does not work, this is the piece he refers to. Now let me say that this is a fine summary. (I do not like the seashells example, which perpetrates a dangerously wrong view of the origins of money, but that is a topic for another day.) Still, Krugman seems to believe that MMT resides only in blogs. Now, the blogosphere has played a huge role in dissemination of MMT, and as I argued on Monday, discussions on blogs have helped us to clarify, tighten, and frame the arguments. (See here) Further, many bloggers have adopted MMT and have even gone so far as to create their own MMT blog sites.

That is all great! But if Krugman really wants to understand and to debate MMT, he really needs to look to the academic literature. (Some citations are provided below.) After all, he is an academic economist who should be able to read the professional economics journals and books that have published work in this area. I certainly would not want to criticize Krugman’s academic research—let us say, the work that got him his Nobel Prize—based on some blogger’s interpretation of that work. It is just too silly to imagine. But that is apparently the level of analysis that Krugman has done to discover that MMT is wrong.

Let us move on to what he thinks is wrong with our analysis.

Krugman: …I do get the premise that modern governments able to issue fiat money can’t go bankrupt, never mind whether investors are willing to buy their bonds. And it sounds right if you look at it from a certain angle. But it isn’t. Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues.

Wray: Here he has painted an unrealistic scenario. It is certainly possible that government ex ante constructs a budget that is projected to generate spending equal to 27% of GDP with a tax law expected to generate an amount equal to 17%. It expects to have an ex post deficit of 10% of GDP. But there can be many slips ‘twixt lip and cup’. At least some spending will be endogenously determined (for example, unemployment benefits will depend on unemployment outcomes); some tax revenue will be endogenously determined (income tax receipts depend of course on economic performance); and GDP itself is endogenously determined. So the resulting deficit could end up much smaller or much larger than 10% of GDP.

But more importantly, it takes three to tango: the sum of the government balance, domestic private sector balance, and foreign (current account) balance must be zero. That is to say, government can achieve that 10% deficit ex post only if the sum of the private and foreign balances equals 10. Now, in his example he has presumed the economy has recovered (that is why the private sector wants to borrow again). At that point it is plausible that private sector desired saving has fallen from current very high levels of almost 9% (the private sector doesn’t want to spend now—it is reducing debt and trying to accumulate saving in the face of an uncertain future). By spending more, the economy will grow faster; that increases government revenue and reduces some of its own spending. The deficit will be reduced pari passu with reduction of private saving—as a percent of a rising GDP.

To get the 10% deficit that he assumes, we would need—say—a 5% private sector surplus (saving) and a foreign sector surplus of 5% (our current account deficit would be 5%). Now, this is possible, but it is unlikely. Our private sector saving rate is normally much below 5% when the economy is growing on trend—typically more like 2% of GDP (and saving was actually negative for almost the whole decade before the global financial crash). If it is 2%, then our current account deficit would have to be 8% to get the 10% budget deficit Krugman assumes. This is within the realm of possibility, but based on historical experience, with domestic saving that low—meaning domestic spending is high—the government budget tends to move toward balance (it went into surplus in the Clinton years). So I think there is a bit of inconsistency in his example.

So I think the whole set-up of his example is wrong-headed. But let us go on with it.

Krugman: …consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds.

Wray: Well, the first scenario is a non-starter. Sovereign US government does not “borrow” its own dollars from “investors”. So what he actually means is that banks and others holding government IOUs (coins, Federal Reserve notes, and bank reserves) willingly exchange them for government IOUs that pay higher interest (Treasuries). OK, that is a quibble, but it helps to resolve his misunderstanding about the second scenario:

Krugman: The second case poses no problem, say the MMTers, or at least no worse problem than the first: the US government can simply issue money, crediting it to banks, to pay its bills. But what happens next? We’re assuming that there are lending opportunities out there, so the banks won’t leave their newly acquired reserves sitting idle; they’ll convert them into currency, which they lend to individuals.

Wray: Oh boy. Three big errors in that short passage. First, as I discussed last week, the sovereign US government always spends via “keystrokes”—what he is calling issuing money and crediting it to banks. But he presents that as an option. It is simply a description—how government spends. Second, he says banks won’t leave the reserves idle, but will convert them to currency.

Reserves are the Fed’s IOU, a number on the liability side of the Fed’s electronic balance sheet; they are simultaneously an asset on the asset side of bank balances. There are only three things banks can do with them: lend them to other banks; buy Treasuries; or convert them to cash (the Fed sends an armored truck to the bank that wants to exchange reserves for cash). He already assumed no one wants to buy bonds. And if the government is running the 10% deficits he presumes, banks are going to get stuffed full of excess reserves—so banks won’t be lending them to one another.

The final option is to convert them to cash. That would be a poor choice for banks, since the Fed pays 25 basis points on reserves and cash earns nothing (and has nonzero storage costs). However, Krugman says they will do this in order to lend cash to individuals. Really? Has he ever borrowed from a bank? If you have ever borrowed—say, for a house or a new car—did the loan officer give you a wheelbarrow filled with cash?

OK so let us presume he did not mean this literally. What could possibly have crossed his mind? There used to be something called the “deposit multiplier” that was taught in the old textbooks. Banks sit around and wait until they have excess reserves, then they make loans by creating demand deposits. So his view must be that because the banks have got excess reserves they now decide to make loans—not by lending “green paper”. But a bank facing a willing and credit worthy borrower will always make the loan even without excess reserves. I will not go into all the wonky stuff, but Krugman simply shows he does not know much about banking.

That is not a criticism. Economists specialize and cannot know every area of economics. After all, his Nobel was not in the area of money and banking. The reality is that excess reserves in the banking system do not encourage banks to lend more to individuals; instead they try to lend reserves to other banks (individuals cannot borrow them) and that pushes the overnight interest rate (called fed funds rate in the US) to the central bank’s support rate (for example, the 25 basis points the Fed now pays). The impact in other words is not on lending but on interest rates.

Krugman: So the government indeed ends up financing itself by printing money, getting the private sector to accept pieces of green paper in return for goods and services. And I think the MMTers agree that this would lead to inflation; I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue. For it is. And in my hypothetical example, it would be quite likely that the money-financed deficit would lead to hyperinflation.

Wray: Quite a mess here. Government finances its spending by keystrokes, that generate demand deposits in the private sector, with banks holding reserves. MMTers agree this COULD lead to inflation—for example, if the spending pushes the economy beyond full employment. Inflation can result even before full employment—for example if bottlenecks in important resources develop. All government spending is financed by what he calls money issue—always—so it is wrong to state this would necessarily lead to inflation.

Finally the “deficit financed by bond issue” is not technically possible. Banks must have the reserves before they can buy the bonds. The government spending must come first, then the bonds can be sold. I suppose, however, that what Krugman has in mind goes back to his scenario in which no one wants to buy the bonds. But why would that be more inflationary. The only reason not to buy the bonds is because banks are happy with their excess reserves that earn 25 basis points.

(You could even argue that if banks and others do buy bonds, that will be more inflationary—because now they will earn higher interest income that could be used to fuel more spending, driving the economy beyond full employment.)

Again, Krugman does not understand the basics of banking. That is not a criticism. But it does mean his critique of MMT is simply wrong.

Returning to his 10% deficits, as we discussed above, that must mean that private savings plus the foreign surplus (our current account deficit) must sum to 10%. Let us again presume that each is saving an amount equal to 5% of GDP. As a result of the government’s spending in excess of taxing, an amount of bank reserves equal to 10% must have been created. Note that the government’s spending has already been “financed” at that point—the reserves are created as the government spends. Selling Treasuries allows banks to substitute low-earning reserves (25 basis points) for higher earning Treasuries (maybe 2%). Krugman assumes they do not want to do that. OK, let us say they are not interested in profits, so they hold the reserves. Is there any problem with government finance of its deficit, due to a “strike” by the “bond vigilantes”? No. Government already spent. If markets don’t want to hold Treasuries, government can just let them hold reserves.

(For the wonkier readers: yes, the Treasury and the Fed have adopted procedures so that Treasuries are sold to special banks, that credit Treasury’s demand deposit. Treasury then moves the deposit to the Fed, which credits the Treasury’s account and debits the special bank’s reserves. To replace the reserves, the bank then sells the Treasuries to the Fed. And there they stay if no “bond vigilantes” want them. Note that these special banks must buy the Treasury issues—that is why they are special. In return, they get to temporarily hold Treasury deposits in special “tax and loan accounts”.)

Krugman: The point is that there are limits to the amount of real resources that you can extract through seigniorage. When people expect inflation, they become reluctant to hold cash, which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.. Do the math, and it becomes clear that any attempt to extract too much from seigniorage — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed. This would not happen, even with the same deficit, if the government can still sell bonds.

Wray: While I do not like his use of “seigniorage” to describe normal government spending operations, I do agree with the general argument. Yes, MMT definitely agrees there are limits to real resources, and trying to go beyond full employment of them will cause inflation. Since government has an infinite number of keystrokes to spend, it can always win any bidding war against private uses for those resources. The result is runaway inflation. We agree.

But selling bonds does not help! Bonds just mop up excess reserves. Even after buying the bonds, banks can continue to lend to borrowers who can continue to borrow and spend in an effort to win the bidding war against the government. Indeed, holding bonds provides good collateral against borrowing! And the bonds pay interest that can be used to raise the bids! So, yes, government spending can be so great it causes inflation—maybe hyperinflation—but that can occur with or without bond sales. Krugman is just wrong on this.

Krugman: The point is that under normal, non-liquidity-trap conditions, the direct effects of the deficit on aggregate demand are by no means the whole story; it matters whether the government can issue bonds or has to rely on the printing press. And while it may literally be true that a government with its own currency can’t go bankrupt, it can destroy that currency if it loses fiscal credibility.

Wray: We agree that government cannot go bankrupt (in its own nonconvertible, floating rate currency). We agree that too much spending will cause inflation. We agree government can lose fiscal credibility—if it spends too much, causing inflation. The solution is to restore credibility by cutting spending and/or raising taxes—to lower aggregate demand. In addition there are other things that can be done to fight inflation—industrial policy (increasing resources where bottlenecks occur), incomes policy (wage and price controls, for example), encouraging imports to relieve constraints, and management of buffer stocks (releasing strategic reserves of oil, etc). I suspect Krugman agrees with all of this.

But he is wrong about the “choice” of selling bonds or relying on “the printing press”. There is no such choice. Spending is done by keystrokes; bond sales mop up the resulting reserves. Selling bonds in no way reduces inflationary pressure. (One caveat: in WWII the government had to deal with inflation pressures, and used a combination of rationing and patriotic saving. It convinced the public that it was their patriotic duty to reduce consumption and to save in the form of US war bonds. By reducing private consumption, government attenuated inflation—effectively preventing a bidding war for scarce resources. But by itself, selling bonds will not normally reduce consumption—consumption can still find finance whether banks hold reserves or Treasuries.)

Let me conclude with the most frustrating aspect of Krugman’s critique—a characteristic he shares with virtually all critics of MMT. They see our explanation of how things actually work in a country that uses a sovereign (government-issued, floating exchange rate) currency as a proposal to change policy. Everything I have said in this post about government finance is a description, not a proposal. The problem is that the critics almost universally have no idea how the government actually spends; they have no understanding of the operational details and coordination between the Fed and the Treasury that allows government to spend, collect taxes, and sell bonds.

Everything I said above describing these operations has been vetted by operations people within Treasury and the Fed. And so all those who immediately jump to accusations of Zimbabwe!, Weimar Germany!, Hyperinflation!, simply display their ignorance of fundamental operating procedures for sovereign currencies.

If government spending “by keystroke” automatically causes hyperinflation, then all the nations of the world that have been spending that way should have hyperinflation all the time. Every nation in the world that issues its own floating exchange rate currency spends by keystrokes. That is the essential “take away” point that every reader should understand. Yes, such governments can cause inflation, and they could probably produce hyperinflation if they tried hard enough. But there is no inevitability about this. Yes, governments need to be constrained. That is what budgeting is all about. But budgeting, itself, will be improved if we actually understand how the government spends—and understand that it is not affordability but rather inflation that is the problem.

Once we get past Krugman’s errors of attribution, we really are left with misunderstandings over banking and government finance. I realize that a lot of the stuff I have summarized here is exceedingly wonky. The operational details are complex. The longish blog that Krugman claims he read (cited above) actually goes through a lot of these details, with appropriate quotes from “insiders” at the Treasury and Fed.

They are presented in much more detail in a lot of academic literature as well as publications available from the Treasury and Fed. Few readers are going to want to go through them—and I rather doubt that even someone like Krugman, who is quite capable of understanding them, is going to do so. But if one wants to criticize academic literature, one actually has to understand it. Krugman has yet to make the effort.

Here is just a small sample of some of the more accessible literature, again from the blog he mentioned. If the links do not work, go directly here.

And for those interested in my Modern Money Primer, go here.

A) The following are reasonably simple expositions for general audiences.

Understanding Modern Money, By L. Randall Wray

Soft Currency Economics, by Warren Mosler

7 Deadly Innocent Frauds, by Warren Mosler

Interest Rates and Fiscal Sustainability, By Scott Fullwiler

It’s Time to Rein in the Fed, By Scott Fullwiler and L. Randall Wray

9 Myths We Can’t Afford, by L. Randall Wray and Marshall Auerback

MMT and the Operational Realities of Our Monetary System, By Scott Fullwiler

Deficit Spending 101 (part 1), (part 2), (part 3), by Bill Mitchell

Barnaby, Better To Walk Before You Run, By Bill Mitchell

Stock-Flow Consistent Macro Models, By Bill Mitchell

Modern Central Bank Operations – The General Principles, Scott Fullwiler

Sector Financial Balances Model of Aggregate Demand, by Scott Fullwiler

Helicopter Drops Are Fiscal Operations, By Scott Fullwiler

A collection of Essays by Wynne Godley, Wynne Godley

The Financial Instability Hypothesis, Hyman Minsky

The Natural Rate of Interest is Zero, Warren Mosler & Mathew Forstater

The Neo-Chartalist Approach To Money, By Randall Wray

Protecting the Budget From Intergenerational Warriors, By Galbraith, Mosler, Wray

The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus, James Galbraith

B) For the truly masochistic readers with way too much time on their hands, here are additional articles, chapters, policy notes and briefs by Yours Truly, on money, finance (including instability and crises), government budgets, and employer of last resort policy. These include some of my more academic expositions. Probably best to read in reverse chronological order, as my ideas evolved.

“If Free Markets Cannot Efficiently Allocate Credit’, What Monetary Policy Could Move us Closer to Full Employment?”, Review of Political Economy, Vol. 7, no. 2, 1995, pp. 186-211.

“Deficits, Inflation, and Monetary Policy”, Journal of Post Keynesian Economics, Summer 1997, vol 19, no. 4, pp. 553-571.

“A Tribute to Hyman Minsky”, (with Dimitri Papadimitriou), Journal of Economic Issues, June 1997, vol. 31, no. 2.

“The Institutional Prerequisites for Successful Capitalism”, (with Dimitri Papadimitriou), Journal of Economic Issues, June 1997, vol. 31, no. 2.

“Kenneth Boulding’s Reconstruction of Macroeconomics”, Review of Social Economy, vol LV, no. 4, Winter 1997, pp. 445-463.

“The Economic Contributions of Hyman Minsky: Varieties of Capitalism and Institutional Reform”, (with Dimitri Papadimitriou) Review of Political Economy, vol. 10, no. 2, 1998, pp. 199-225.

“Surplus Mania: A Reality Check”, Policy Notes, 1999/3, Jerome Levy Economics Institute.

“The 1966 Financial Crisis: financial instability or political economy?”, Review of Political Economy, Vol 11, No. 4, 1999, pp. 415-425.

“Can Goldilocks Survive?”, with Wynne Godley, Policy Notes, 1999/4, Jerome Levy Economics Institute.

“Is Goldilocks Doomed?”, with Wynne Godley, March 2000, Journal of Economic Issues.

“Implications of a Budget Surplus at Mid-Year 2000”, Policy Note, Center for Full Employment and Price Stability, 2000/1.

“Can the Expansion be Sustained? A Minskian View”, Policy Notes, 2000/5, Jerome Levy Economics Institute.

“Fiscal policy for the coming recession: large tax cuts are needed to prevent a hard landing”, (with Dimitri Papadimitriou), Jerome Levy Economics Institute, Policy Note 2001/2.

“Are we all Keynesians (Again)?”, Levy Economics Institute Policy Notes 2001/10 (with Dimitri Papadimitriou).

“Demand Constraint and the New Economy” (with Marc-Andre Pigeon), in A Post Keynesian Perspective on Twenty-First Century Economic Problems, edited by Paul Davidson, Edward Elgar Publishing, pp. 158-194, 2002.

“A Monetary and Fiscal Framework for Economic Stability”; Center for Full Employment and Price Stability Policy Note No. 2002/02

“What Happened to Goldilocks?” in Journal of Economic Issues, June 2002, vol 36, No. 2.

“Social Security: Truth or Useful Fictions?”, Center for Full Employment and Price Stability Policy Note No. 2002/04.

“The Demise of the Goldilocks Economy: Causes (!) and Cures (?)”, in The Urgency of Full Employment, Edited by William Mitchell and Ellen Carlson, 2002.

“A Fiscal and Monetary Framework for Economic Stability: A Friedmanian Approach to Restoring Growth”, in Problemas del Desarrollo: Revista Latinamericana de Economia”, 2002.

“The Perfect Fiscal Storm”, Challenge, January-February, vol 46, no 1, 2003, pp. 55-78

“The War on Poverty after 40 Years: A Minskyan Assessment”, (co-authored with Stephanie Bell),Public Policy Brief, Levy Economics Institute of Bard College, No. 78, 2004.

“The War on Poverty Forty Years On” (co-authored with Stephanie Bell), lead article in Challenge, September-October 2004, vol 47, no. 5, pp. 6-29.

The Ownership Society: Social Security Is Only the Beginning . . .” Levy Economics Institute Public Policy Brief No. 82, August 2005

“Neocons and the Ownership Society”, Challenge, 49(1) January-February 2006, pp. 44-73.

“Can Basel II Enhance Financial Stability? A Pessimistic View”, Public Policy Brief No. 84, The Levy Economics Institute of Bard College, 2006.

“Twin Deficits and Sustainability”, Policy Note 2006/3, Levy Economics Institute of Bard College, 2006.

“Extending Minsky’s Classifications of Fragility to Government and the Open Economy”, Levy Economics Institute Working Paper, May 2006

“Keynes’s Approach to Money: An assessment after 70 years”, invited paper for symposium in Atlantic Economic Journal, vol 34, no 2, June 2006, pp. 183-193.

“Banking, Finance, and Money: a Socio-economics Approach”, Levy Economics Institute Working Paper #459, July 2006.

“A teoria do dinheiro de Keynes: uma avaliacao apos 70 annos”, Revista de Economia, vol 32, No 2, Jul/Dec 2006, pp. 43-62.

“Demand Constraints and Big Government”, the Journal of Economic Issues vol xlii, no 1, March 2008, pp. 153-173

“The April AMT Shock”, Policy Note, (with Dimitri Papadimitriou) Levy Economics Institute, January 2007

“Veblen’s Theory of Business Enterprise and Keynes’s Monetary Theory of Production”, Journal of Economic Issues, vol XLI no 2, June 2007, pp. 617-624.

“Minsky’s Approach to Employment and Poverty”, Working Paper #515, Levy Economics Institute, September 2007; also forthcoming in volume edited by Dimitri Papadimitriou.

“The Continuing Legacy of John Maynard Keynes”, Working Paper #514, Levy Economics Institute, September 2007.

“Lessons from the Subprime Meltdown”, Challenge, March-April, 2008, pp. 40-68.

“Financial Markets Meltdown: what can we learn from Minsky?”, Levy Economics Institute, Public Policy Brief, No. 94, April 2008.

“Financiarización y burbuja especulativa en materias primas,” Ola Financiera, Vol. 1, No. 3 (May–August) 2009

The Rise and Fall of Money Manager Capitalism: A Minskian Approach,” Cambridge Journal of Economics, Vol. 33, No. 4 (July) 2009

“Minsky, the Global Financial Crisis, and the Prospects before Us,” Development, Vol. 52, No. 3 (September) 2009

“An Alternative View of Finance, Saving, Deficits, and Liquidity,” International Journal of Political Economy, Vol. 38, No. 4 (Winter 2009–10)

“Alternative Approaches to Money,” Theoretical Inquiries in Law, Vol. 11, No. 1 (January) 2010

“Minsky, the global money-manager crisis, and the return of big government”, in Macroeconomic Theory and its Failings: alternative perspectives on the global financial crisis, edited by Steven Kates, Edward Elgar 2010.

Review Article: “This Time is Different: Eight Centuries of Financial Folly”, Challenge, Jan-Feb Vol 54, no 1, 2011, pp. 113-120 (co-authored with Yeva Nersisyan).

“Money manager capitalism and the global financial crisis”, Soundings: a journal of politics and culture, issue 45, pp 76-88.

“Finansiell Instabilitet”, SocialistiskDebatt, No 4/08 p. 13-19.

“The global financial crisis and the shift to shadow banking” (co-authored with Yeva Nersisyan),Intervention: European Journal of Economics and Economic Policies, vol 7 no 2, 2010, pp 377-400.Republished by K Suguna Nagaraj, Publications Department, Institute of Public Enterprise, Osmania University Campus, Hyderabad, Andhra Pradesh, India, in a forthcoming book on the global financial crisis.

“La crisi financier actual y sus secuelas” Rojo-Amate: Revista de politica, economia y cultura(Mexico City), August 2010.

“Ανταγωνιστικότητα με εργασιακό Μεσαίωνα: «Η Ελλάδα έχει ξεκινήσει μια κούρσα προς τα κάτω” article in ENET Ελευθεροτυπία 14 august 2010 .

“The Development and Reform of the Modern International Financial System”, in Post Keynesian Foundations in the Analysis of International Economics, edited by Johan Deprez and John Harvey, Routledge, 1999, pp. 171-200

“Money, Credit and Finance”, in Encyclopedia of Political Economy, edited by Phillip O’Hara, Routledge, 2000

“Monetary Theory of Production”, with Johan Deprez, in Encyclopedia of Political Economy, edited by Phillip O’Hara, Routledge, 2000

“Financial Instability”, in An Encyclopedia of Macroeconomics, edited by Howard Vane and Brian Snowdon, Edward Elgar publishing, 2003.

“Functional Finance and US Government Budget Surpluses in the New Millennium”, in Reinventing Functional Finance: Transformational Growth and Full Employment, edited by Edward Nell and Mat Forstater, Edward Elgar, Cheltenham, UK, 2003

“What a long, strange trip it’s been: can we muddle through without fiscal policy?”, co-authored with Stephanie Kelton, in Post-Keynesian Principles of Economic Policy, edited by Claude Gnos and Louis-Phillippe Rochon, Edward Elgar, 2006, pp. 101-119.

“The Continuing Legacy of John Maynard Keynes”, in Keynes for the twenty-first century: The Continuing Relevance of The General Theory, Edited by Mathew Forstater and L. Randall Wray, Palgrave, April 2008.

“Lessons from the Subprime Meltdown,” in N. B. Rapoport, J. D. Van Niel, and B. G. Dharan, eds.,Enron and other Corporate Fiascos: The Corporate Scandal Reader, 2nd ed., Foundation Press, 2009

“Money Manager Capitalism and the Global financial Collapse,” in E. Hein, T. Niechoj, and E. Stockhammer, eds., Macroeconomic Policies on Shaky Foundations: Whither Mainstream Economics?Metropolis-Verlag, 2009

“Minsky, the global money-manager crisis, and the return of big government”, in Macroeconomic Theory and its Failings: alternative perspectives on the global financial crisis, edited by Steven Kates, Edward Elgar 2010.

“Transformation of the financial system: Financialisation, concentration and the shift to shadow banking” (co-authored with Yeva Nersisyan) in Minsky, Crisis and Development, edited by Daniela Tavasci and Jan Toporowski, Palgrave Macmillan, 2010, 32-49.

“Keynes’s approach to money: what can be recovered?” in Keynes’s General Theory after Seventy Years, ediged by Robert Dimand, Robert Mundell, and Alessandro Vercelli, Palgrave Macmillan 2010 pp. 222-240.

“Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment” (with É. Tymoigne), in G. Fontana and M. Setterfield, eds., Macroeconomic theory and Macroeconomic Pedagogy, Palgrave Macmillan, 2009; second edition paper 2010.

“Excessive Bank Lending in China: a modern money perspective” (co-authored with Xinhua Liu), forthcoming in International Journal of Political Economy, 2011.

Forthcoming (2011):

Forthcoming: “The financial crisis viewed through the theory of social costs”, contribution to The Social Costs as Cause and Effects of Contemporary Crises edited by Wolfram Elsner, Routledge.

Forthcoming: “Minsky’s money manager capitalism and the global financial crisis” in an Italian-edited volume.

Forthcoming: “A Minskian road to financial reform”, in a volume edited by Martin Wolfson and Gerald Epstein.

Forthcoming: “The dismal state of macroeconomics”, in a volume edited by John Davis.

Forthcoming: “Minsky’s money manager capitalism: Assessment and reform”, in a volume edited by Steven Fazzari and Mark Setterfield.

Forthcoming: “Money in Finance”, for an encyclopedia.

Forthcoming: “Money”, in a volume edited by Geoffrey Harcourt and Peter Kriesler.

Forthcoming: “Financial Keynesianism and market instability”, in a volume edited by Cristina Marcuzzo.

Forthcoming: “Does Excessive Sovereign Debt Really Hurt Growth?” (co-authored with Yeva Nersisyan) in French language.

Forthcoming: “Money”, for a volume edited by John King.

Forthcoming: “Minsky Crisis” for a Palgrave Macmillan reference volume.

Forthcoming: “What should the financial system do?”, for a volume edited by Steve Kates.

Forthcoming: “Keynes’s approach to money after 75 years: money as a monopoly”, in a volume edited by Tom Cates.

This post first appeared at “Great Leap Forward”, my EconoMonitor blog .

  1. Thomas E says

    The UK in 2010 had a deficit of 10.2%. Which is maybe where Krugman gets the figures.

  2. Geoff says

    This really seems ridiculous. You agree on enough points, but you are arguing about how central banking operations work? I mean, wait, are you trying to say we really dont even know this? We have this massive system, it functions, and people operate it, yet no one can describe the chain of events. I find this preposterous. It should not be open to debate if it is this important. Can the workings possibly be obscured intentionally? Good grief. This is the kind of silliness that drives me nuts. People have the answers. Why can the answers not be obtained. The system can’t be functioning and yet no one can actually describe it with authority. The problem seems that your description lacks authority. Are the people operating the system denying the description? If so, why dont they just describe how it works? It just seems crazy that something so important can be so misunderstood.

    1. geerussell says

      “It just seems crazy that something so important can be so misunderstood.”

      I imagine this is what it would’ve been like if Copernicus had a blog trying to explain why the earth wasn’t the stationary center of the universe.

      MMT descriptions of fiat currency operations and their policy implications are compelling but so radically different from orthodoxy it feels like they must be missing something.

      1. Edward Harrison says

        It does feel that way at first. I felt that way too but read this critique of the same post by Krugman because it is very cogently worded to demonstrate how lending and reserve operations are separated in banking and what that means about how Federal Reserve policy is transmitted to the banking sector.

    2. Leverage says

      Yeah, it’s almost like a conspiracy. Only if it was…
      just plain silliness.

    3. Edward Harrison says

      I agree with your sentiments that it seems crazy that there is so much confusion around the operations of banking and how that affects the economy. But the problem is that the fiat credit system is new enough that most economists of merit in the mainstream are stuck in a gold standard/Bretton Woods view. I think Randy’s post here and one by Bill Mitchell I linked to this morning are very strong in terms of internal consistency without ideological bias. They give one a much better feel for the mechanics.

  3. Alan Avans says

    Yes, Krugman is so close yet so far away all at once. This can be resolved by his simply ceasing to put words in the mouths of Wray, Mosler, Fullwiler, Forstater etc.

  4. Max says

    It’s not really crazy that the system functions despite almost nobody understanding it. People know enough to do their jobs.

  5. Jim says

    You people are insane. Seriously. Have you any idea what politicians would do with a system that allowed them to spend money at the push of a button?

    ‘New aircraft carrier? $100bn you say? No problem!!’

    ‘Higher welfare payments all round? No problem!!’

    ‘Free health care for all? $1tn be enough for now? Just wait while I push the buttons, here you go!!!’

    And what effect would it have on the public? Every problem in society would be screaming out for more of the ‘free’ money. And what politician would be able to say no?

    MMT is VERY dangerous, and the people pushing it are either fools or have hidden agendas.

    1. wh10 says

      There’s always one of you.

      MMT doesn’t say to do that. It is just a description of the current system, not a policy prescription. MMT clearly explains the danger to too much fiscal policy is inflation. It makes this very clear, clearer than any other economic paradigm.

    2. okie farmer says

      Jim, that is pretty close to what is happeniung now with our politicians. When VP Dick Cheney said on Meet the Press, “deficits don’t matter” he is letting the cat out of the bag about how the ‘keystroke’ system actually works. The kubuki theater in Congress and by our presidents is pure propaganda to convince the public that it really is complicated and extremely difficult. Its not. And Krugman, for all his admirable stands during the last few years is still not ‘getting’ Dick Cheney’s point. Cheney is mostly right. When he made that remark he was aggressively responding to a question about the Bush administration’s deficit spending. He wasn’t being theoretical, he was telling us how the system works.

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