The rise of modern currency theory (MMT) in the United States is the presidential election, and at home, it is the new crown virus. A discussion on “Monetization of Fiscal Deficit” is starting in China.

Humans have used hundreds of years and countless tragedies to prove the harmfulness of money printing, but we have forgotten everything in just 10 years. This discussion was progress, because there would not be such a discussion until Article 29 of the People’s Bank of China Law was born. History gives us the importance of fiscal discipline, one of which is to maintain the independence of the central bank. The anchoring of currency inflation is at most an “invention” after the loss of anchor. So far, maintaining price stability has been recognized as the primary goal of central bank monetary policy, so it seems that as long as inflation is worry-free, monetary policy can “open the gap.”

In an open economy, it is not the central bank that bears the cost of monetizing the fiscal deficit, but the finance itself, and the ultimate bearer can only be the taxpayer. Because it destroys fiscal discipline and national credit, investors will demand a higher risk premium.


MMT: Monetary Theory in the Age of Sovereign Credit Currency

The disintegration of the Bretton Woods System announces the end of the commodity currency era and sovereign credit currency (fiat currency) With the advent of the times, currencies no longer need any metal reserves as the basis for issuance. With the development of information communication and digital technology, the form of currency is also changing. Its main body is not reflected in cash, but a series of numbers on bank accounts-bank deposits, which constitute the main body of broad currency. Commodities and financial transactions can be realized through the bank’s electronic system, so the “money of account” function of money is highly respected and considered to be the essential attribute of money. Randall Wray, an economist of the Post-Keynesian school and Shi Chengminsky, is one of the representatives. The “Modern Monetary Theory” (MMT) he admires refers to sovereignty Credit currency theory.

Historically, due to lack of credit, the government issued bonds to be taxed as a guarantee. So, when credit is established, do we need to rely on tax to issue government bonds? How to guarantee the government’s tax revenue?

If there is a lot of unemployment and corporate bankruptcy in the economy, as in the Great Depression, or this new coronary pneumonia epidemic has caused companies to stop working and stop production, residents are separated from their homes.Or, as Richard Koo said, the economy is in a “balance sheet recession” cycle, and the private sector (non-financial companies and households) are aiming to minimize debt As investment and consumer demand are seriously insufficient, taxation will also drop sharply. According to the logic of “tax-driven national debt”, the government’s counter-cyclical policy will not start. This is obviously inconsistent with practice.

MMT ’s methodology is based on Stock-Flow Consistent analysis to explain the economy from the dynamic relationship between the macro balance sheet and cash flow statement The logic of operation is that stocks generate flows, flows superimpose stocks, and changes in the balance sheets of various departments are the result of the interaction between stocks and flows. From the perspective of macro accounting principles, the financial assets of one department must be the liabilities of another (or several departments). At the same time, for a single department, every transaction will be recorded on both sides of the balance sheet at the same time, and the balance sheet at any time is balanced. Therefore, SFC is based on the principle of equivalence followed by physical and financial exchanges. Whether it is the relationship of capital flow formed by a single transaction, or the relationship between the balance of a single department and the balance sheet formed by each transaction, it is necessary to meet the “consistency” rule in the SFC.

Four-sector stock-flow consistency

under open economic conditions The real economy can be divided into four sectors: government, non-financial enterprises, households and foreign countries. Among them, non-financial enterprises and households are collectively referred to as the (domestic) private sector. Then, in any time period, such as one year, the surplus or deficit of the four departments must equal zero, and it is impossible for the four departments to achieve a surplus at the same time, and it is impossible to have a deficit at the same time; the surplus of one department must correspond to the other Or deficits in multiple sectors.

Based on the principles of stock and flow consistency, MMT supporters believe that the private sector can only maintain a surplus when the government sector is in deficit. Therefore, it is advocated that under the sovereign currency system, government departments should increase leverage, because the government will not go bankrupt, and private sector leverage will also lead to financial instability. Without causing inflation, it is possible to finance the government ’s implementation of the “employment protection / final employer” program through “monetization of fiscal deficits”. Of course, in the case of full employment, this is not necessary, so most of the prescription is suitable for the state of incomplete employment, and in this state, the inflation risk of government expenditure is also small. Randall Ray (2017) believes that policies after the financial crisis and the European debt crisisBoth are practicing MMT. It is worth emphasizing that MMT did not explicitly require the central bank to purchase government bonds at a zero interest rate in the primary market. The primary market is still the secondary market, which seems to be just a technical or procedural difference, but the former bypasses the constraints and pricing of the market.

An ideal economic system corresponds to a relatively balanced government and foreign sector, as well as a surplus resident sector and a deficit non-financial corporate sector, which can also be considered a normal Combination, but the normal state is only one stage of the economic cycle after all. In the bubble stage, the private sector is often in a deficit state, or the household sector basically does not save, such as the United States before the 2008 financial crisis. Figure 1 is the flow of funds reflected in the financial accounts of the four sectors in Japan and the United States. The upper side of the horizontal axis represents the surplus (financial assets minus financial liabilities greater than zero), which represents the fund provider, and the lower represents the deficit, so Need to borrow funds.


Figure 1: The surplus / deficit relationship of the four macro sectors (Japan and the United States) Source: Bank of Japan and the Federal Reserve, flow of fund account, Oriental Securities

The typical fact of Japan is that since the early 1980s, the external sector has always been in a deficit state, that is, net capital outflow; 1990 After the annual bubble burst, Japan fell into a balance sheet recession cycle, and the corporate sector changed from the original deficit sector to the surplus sector, and it has remained so far; the household sector’s surplus has declined relatively. Overall, the private non-financial sector is in surplus. On the other hand, the government is always in the state of “borrowing money”, but it shows a certain periodicity, and each time it encounters a crisis, the deficit will increase. During the Asian crisis, it once exceeded 10%, and after Abe came to power, it narrowed significantly.

The structure of the United States is different from that of Japan. The foreign sector has been in surplus since the mid-1980s, but its scale has shrunk since the 2008 financial crisis; the surplus in the household sector continued to decline during the 30 years before the outbreak of the 2008 financial crisis, basically maintaining balance in the first 10 years, and basically the first two years Is in a deficit state and has now recovered to the 1980s