MMT macroeconomics primer

Firstly, the money multiplier theory taught by mainstream economics departments is wrong. Learn what that is before you know how its wrong here. The Bank of England have debunked that in their 2014 paper "Money Creation in the Modern Economy" here. Some quotes from the paper: 

"Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England."

"The reality of how money is created today differs from the description found in some economics textbooks: 

* Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. 

* In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. "

"As a by-product of QE, new central bank reserves are created. But these are not an important part of the transmission mechanism. This article explains how, just as in normal times, these reserves cannot be multiplied into more loans and deposits and how these reserves do not represent ‘free money’ for banks"

"While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates. In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. "

Even mainstream economist Simon Wren Lewis admits in a comment the money multiplier is false despite that it is still taught in textbooks. "Money printing" means nothing literally - money is only printed when you take cash out of a bank deposit. Government spending and taxes work by crediting and debiting bank accounts (putting numbers up and down.) It is easy to see from this that governments can't run out of money. The limit on spending is real resources - running out of things to buy at the price government sets.' 'Government buying' instead of spending. In all currency issuers (outside the eurozone and floating exchange rates) governments can QE the debt. A intuitive explanation. Even with arbitrary 'full funding rule' restrictions borrowing happens at the end of the day (only way all payments can be made otherwise you would sometimes run out of money) as explained here: 

"I believe the mainstream theory government finances spending by tax, borrow or print is wrong. In the UK all government spending works by creating money and there are unlimited intraday overdrafts at the central bank borrowing happens at the end of the day. Money can’t leak abroad it is a swap/exchange, not a conversion. If there is no saving or pay back bank loans in the spending chain you will get all government spend back as tax. Similarly, if people spend from savings or take out bank loans and spend no saving or pay back bank loans get all that money back as tax too. Government spend at Tesco get some back as VAT (taxes as ‘cashback’), Tesco pays its employees another chunk taken by government in income tax and so forth.

https://publications.parliament.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm

Point 20 says:

“ensure that its position is balanced at the end of each day”

Also at diagram in bottom surplus/shortfall in consolidated fund."

The mechanism QE is supposed to result in inflation doesn't happen. Bill Mitchell has made a series of posts debunking mainstream views on QE, here, here, here and here. There is work from the paper published by the Economics Department at the University of Warwick showing QE has no effect. 

Effect of interest rates mainstream economists also get wrong. Raising interest rates is supposed to encourage saving and discourage lending. The common claim:

"when we raise Bank Rate, banks will usually increase how much they charge on loans and the interest they offer on savings. This tends to discourage businesses from taking out loans to finance investment, and to encourage people to save rather than spend."

Overall if loans go down, financial savings must go down by exactly the same amount. If you want the stock of bank loans to come down, while the stock of bank deposits goes up, then, unfortunately, reality won’t let you do that. As MMT shows the cost of credit is incorporated into the cost of all goods and services. The higher the interest rate, the higher the price. The loan lock paradox - "Consider a scenario where interest rates rise, and you decide to hold a deposit of £100, living off the interest it generates. In that case, a corresponding £100 loan has to exist permanently somewhere in the system to balance that deposit. For as long as somebody holds the deposit, a matching loan quantity is locked in place and cannot, in aggregate, be paid off. There are insufficient deposits circulating to cancel the loan. Increased financial savings, in terms of holding deposits, will stop an equivalent amount of loans from being repaid, forcing them to be refinanced or defaulted."

Mainstream claims about deficits are also wrong. If people spend from savings or take out bank loans and spend that reduces deficit but paradoxically increases transactions and potentially inflation. Government spend and get all money back as tax more transactions only leakage from circular flow of money to tax rather than tax and saving (stops sooner) hence STRUCTURAL DEFICITS ARE DEFLATIONARY (structural deficits not including spending that goes up or due to the growth or recession in the economy - a permanent increase in deficit spending)! You can think of saving as blocking additional transactions down the line. A full worked example.

Mainstream views on the foreign sector are wrong - why economists fail at foreign. 

Under current crazy/evil policy 5% of the population are kept unemployed to control inflation under the NAIRU - 1 in 20 people by design. A significant number of economists consider unemployment to be a voluntary state, chosen by individuals upon the basis of their preferences for “leisure” against work. The empirical evidence is that quit rates are pro-cyclical, which means they rise when the labour market is strong and workers feel confident about their job chances and fall when the labour market is weak and workers fear unemployment. This is exactly the opposite to what mainstream predicts. 

American economist, Lester Thurow summarised this issue succinctly:

"… why do quits rise in booms and fall in recessions? If recessions are due to informational mistakes, quits should rise in recessions and fall in booms, just the reverse of what happens in the real world."

Real people means (in the case of the US) six million real walking, talking human beings, all with hopes and dreams and aspirations, who cannot and will not be able to obtain sufficient to feed and house themselves and the people that depend upon them. And their only hope of advancement is to replace themselves in that pool of hopelessness by swapping themselves with somebody currently outside it. Dehumanization and individualization of a systemic problem are the tools by which this carnage is justified. It stinks and it must be stopped.

Instead we could offer everyone a public sector job at minimum wage and private sector only has to offer slightly better pay than minimum wage to attract workers from job guarantee to private sector or regular public sector. The Job Guarantee - a buffer stock of employed workers instead of unemployed that expands during recessions and decreases during booms. Easier to hire off JG than unemployed more private sector employment for the same level of inflation. Obviously you would have to restrict open borders to other countries with a Job Guarantee and equivalent social infrastructure otherwise they have to apply for a visa. The Job Guarantee is clearly superior to manual stimulus (Central Bank Independence advocates don't like politicians - I don't either) and interest rate changes that have long and variable lags while JG increases and decrease spending automatically and is 'spatially targeted' (at areas with high unemployment.) JG is an 'automatic stabilizer.' The Job Guarantee is fit to the person. This (USA-based but still mostly applicable) paper explains the Job Guarantee in detail as well as types of Job Guarantee jobs. 

Care for the Environment:

"The jobs will tackle: soil erosion, flood control, environmental surveys, species monitoring, park maintenance and renewal, removal of invasive species, sustainable agriculture practices to address the “food desert”2 problems in the United States, support for local fisheries, community supported agriculture (CSA) farms, community and rooftop gardens, tree planting, fire and other disaster prevention measures, weatherization of homes, and composting." 

Care for the Community:

"Jobs can include: cleanup of vacant properties, reclamation of materials, restoration of public spaces, and other small infrastructure investments; establishment of school gardens, urban farms, co-working spaces, solar arrays, tool lending libraries, classes and programs, and community theaters; construction of playgrounds; restoration of historical sites; organization of carpooling programs, as well as recycling, reuse, and water-collection initiatives, food waste programs, and oral histories projects."

Care for the People:

"The JG aims to support individuals and families, filling the particular need gaps they may be facing. Projects would include: elderly care; afterschool programs; and special programs for children, new mothers, at-risk youth, veterans, former inmates, and people with disabilities. One advantage of the JG is that it also provides job opportunities to the very people benefiting from these programs. In other words, the program gives them agency. For example, the at-risk youth themselves participate in the execution of the afterschool activities that aim to benefit them. The veterans themselves can work for and benefit from different veterans’ outreach programs.  Jobs in these projects can include: organizing afterschool activities or adult skill classes in schools or local libraries; facilitating extended-day programs for school children; shadowing teachers, coaches, hospice workers and librarians to learn new skills and assist them in their duties; organizing nutrition surveys in schools; and coordinating health awareness programs for young mothers.  Other examples include organizing urban campuses, co-ops, classes and training, and apprenticeships in sustainable agriculture, and all of the above-mentioned community care jobs, which could produce a new generation of urban teachers, artists and artisans, makers, and inventors."

Why is it so difficult to understand?

Also: detailed why positive money is flawed and they are barking up the wrong tree and very detailed look at how to reconfigure the banking sector according to MMT. In a nutshell:

"Sovereign money stimulates the economy by increasing the price of and therefore reduce the level of bank lending and then replaces that in the economy by increased government spending or tax cuts. Essentially the government does the borrowing from its own bank so you don't have to. And that's it. We can do that with the current arrangements. We already do of course, but we can do it more if we choose to. The basic theory is that increasing the price of bank lending automatically selects the correct projects to receive bank lending. Unfortunately what it is likely to do is encourage ponzi schemes since those are the ones with the returns necessary to pay the higher price. The correct approach, as highlighted by the MMT view, is to reduce bank lending by banning its use for anything that isn't constructive. Bill Mitchell regularly suggests that 97% of financial transactions should be illegal. You should narrow banks directly by taking action rather than indirectly by 'influence'.  Then you can leave the price of loans low - allowing those projects with a low marginal efficiency of capital to receive funding. In a world with ever decreasing returns on useful projects that is important."