Is the Application Modern Monetary Theory (MMT) Based Policy the Economic Answer to the Impending Underpopulation Crisis?
Advisor: Mr. Mark Sperrazza
Internship Location: University of Newcastle
Onsite Mentor: William Mitchell
Over the past few years, our common assumptions about what defines successful macroeconomic policy has shifted. The COVID-19 forced massive government spending throughout the world especially in nations like Japan and the United States. In this paper, I hope to investigate an alternative understanding of the reaction to the COVID-19 pandemic, Modern Monetary Theory or MMT. MMT reforms our understanding of how currency and government work and creates an interpretation that justifies liberal government spending for the public good. MMT-based policy changes how governments react to excess financial pressure. Japan and the United States serve as the preeminent example of this problem today. Japan's reaction to the COVID-19 pandemic incorporated similar stimulus spending to the US, however, unlike the US in the aftermath of increased inflation after the pandemic Japan maintained high stimulus spending, maintained high employment, and kept low interest rates. While all of these policies are in accordance with an MMT-based approach, the government has been reluctant to give a public endorsement. I hope to study the ability of the approach countries like Japan have taken to help solve these important issues. I want to see if these approaches are applicable to the United States and other nations. To study this, I will read advanced literature on both MMT and mainstream economics. I will also consult with Bill Mitchell, one of the leading professors of MMT and study publicly available data to back up my findings. I will write a paper on my findings for how MMT based policy can become a valuable tool in developed nations.
Project Blog
Week 0: Blog
Hello! My name is Isaac Wald and I am a senior at BASIS Independent Brooklyn. I am working on a project related to Modern Monetary Theory (shortened to MMT) and population degrowth. I will be studying the efficacy of approaching high level government policy decisions under the lens of MMT. While I do not think I can fully explain MMT in this brief intro I will make my best attempt to ensure that you can follow along.
Modern Monetary Theory reframes our understanding of how sovereign currency issuing states operate rather. You can think about it in three core principles:
A sovereign issuer of currency cannot default on payments, our government has a monopoly on American dollars.
A sovereign issuer of currency spends before it collects taxes. Its spending is not limited by taxes rather by macroeconomic inflationary effects
A government deficit has a 1:1 correlation with private sector (households and corporations) surplus, this means public debt creates private wealth.
My project will focus on the application of that understanding of the government's monetary ability to adapt to population degrowth. Population crises are approaching in almost every developed nation. This is a natural trend as birth rates decline in correlation with wealth and education. When populations begin to decline there is probable economic struggle due to issues with dependency and a skills shortage. If our government hopes to solve these problems, refocusing our government with an understanding of MMT, could help to greatly reduce the problems caused by a shrinking population. Increasing government spending will help to manage these issues, by maintaining per capita wealth and economic sustainability even as it appears on overall figures that the economy is shrinking. The government can help to create a path forward for modern economies dealing with an unseen problem.
To study this I will be working with Professor Bill Mitchell of the University of Newcastle, New South Wales, Australia. Professor Mitchell is one of the preeminent scholars in Modern Monetary Theory, he has been teaching MMT for decades and he will advise me on my project. Additionally, I will be using statistics published by the Bureau of Labor Statistics to substantiate the claims in my paper. The government provides full access to extensive research which can be used to back up my claims. If you would like to read a full copy of my project you can see that here.
Thank you for reading, I will keep you updated on my progress each week on this blog.
Week 1: Blog
Welcome back! On this week's blog I am going to give an outlook for the future and cover some of the work I have already done. In the future, I will be doing serious reading on Modern Monetary Theory. Here is my booklist:
A Mitchell Innes, What is Money?
Warren Mosler, Soft Currency Economics
Georg Friedrich Knapp, State Theory of Money
Bill Mitchell, Reclaiming the State
Mosler and Mitchell are two of the preeminent scholars on Modern Monetary Theory. Mosler is credited as the so-called creator of “Modern Monetary Theory” with his invaluable early works and writings in the 1980’s. Mitchell was one of Moslers early collaborators and has been teaching MMT at the college level for decades now. Additionally, Mitchell is my advisor for this project and reading his work with his assistance will help me to gain a greater understanding of MMT.
A Mitchell Innes and Georg Friedrich Knapp are centuries-old economists. Despite the age of their work, it is important to understand the arguments that they made about currency then and how they have been reformulated under our current understanding. Warren Mosler called Innes “What is Money?” one of the greatest things ever written on money. Innes and Knapp are fundamental to understanding MMT despite them never having lived to see its formation.
So far on this project I have begun my work by re-reading L. Randall Wray’s “Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems”, this book is great for understanding the reasoning behind MMT. A point that Bill Mitchell emphasized during our first meeting was to understand that MMT is not a set of policy proposals rather a re-understanding of how our government interacts with money, that can then lead us to policy proposals. MMT is not a political stance, it is a comprehension of how the treasury interacts with the public. Additionally, I will meet again with professor Bill Mitchell, on April 2nd to discuss my progress. I hope to keep you all updated!
Weeks 2-3: Blog
Hello, in the time since I have last posted I have continued to study Modern Monetary Theory and have had extensive conversations with Professor Bill Mitchell. One of the key concerns that I had going into this project was my ability to act as a knowledgeable source of information
/ While I am heavily invested academically in this project, I am no expert. I have been worried about my ability to explain and validate the economic theory which is necessary for the continuation of this project. After all, I am a high school student not an expert so I do not have sufficient experience to declare myself an expert.
In my conversation with Bill Mitchell I spoke about this to which he advised that I take a different approach to writing for my final paper. Instead, Professor Mitchell said that I should focus on my paper as a less analytical piece and in more of a narrative similar to a newspaper article. To accomplish this while still achieving my goals I can enter the paper with a presumption of certain economic theory as fact. While I do not have the qualification to put forward high-level economics as my own work I do have the ability to interpret them and continue upon my work. In this way I can write an effective paper that still holds value to the reader without rushing to make my own less accurate assumptions. From talking with Bill Mitchell, I learned that I can transfer the credibility of the people who have done prior work into my own writing.
Additionally I have been reading Bill Mitchell’s book published in 2017 titled “Reclaiming the State”. In the book Mitchell alongside Thomas Fazi covers how neoliberal ideology has corrupted much of modern western politics. They discuss how in America the debate over macroeconomics has been lost. Mitchell argues that both parties have collectively decided upon a path forward for the American economy and that without proper debate you can never find the right path. There is no longer a Keynes or a Friedman to side with rather we now follow a Fed which remains consistent between administrations. Thank you for reading and see you next week where I will discuss the overall subject matter of my paper in further detail!
Week 4: Blog
Welcome back once again! Over the past week I have continued to do research and have also re-evaluated the goals of my project. I have continued to read Bill Mitchell and Thomas Fazi’s 2017 book “Reclaiming the State” . The book goes far in depth about the history of the macroeconomic battle in several western states. It covers the devolution of conversation in regards to monetary policy and showcases how we have lost the debate in favor of an outcome that pits the government strongly in the corner of the wealthy and powerful. In reading this I have become reminded of just how important it is to understand the prominence of monetary policy in people's lives. Government's ability and willingness to spend currency impacts billions of people constantly.
In doing this research I have decided to refocus my project to focus on an evaluation and comparison of the monetary policy of several states over the past few years especially during the Covid-19 Pandemic. In specific I will be comparing how Japan and other modern states differ and their approach to government spending. Japan has been steadfast in their position over the past few years as they have continued to spend and devalue the Yen in order to continue various government programs throughout the pandemic and into the post pandemic era. Japan has maintained high spending and low interest rates in the face of countries like the United States and Australia which have been willing to raise interest rates and have been less willing to maintain their own spending power or utilize the government's full capability. Mainstream economics has remained critical of Japan yet there has been no major downturn for the Japanese people, relative salaries have not decreased, exports have increased. My final paper will focus on this comparison and take a look at the way that we evaluate national economics.
Thank you for reading and I will keep you updated next week.
Week 5: Blog
Hello and welcome back! Over the past week I have been reading about the use of federal interest rates as a deterrent to inflation. In the United States it is commonly accepted that raising the federal interest rate through the Federal Reserve is an effective counter-inflationary strategy. The argument is that by making borrowing more expensive you can slow down the movement and prevent spending throughout the economy. Additionally while borrowing becomes more expensive, holding your money in banking systems becomes more profitable and establishes a baseline income for people who invest their money as continual interest is paid upon it. Following this logic in the United States after the “inflationary effects of Covid era spending the government responded by raising rates. However, while widely accepted in America as a useful tool this is not true throughout the world.
In Japan throughout and after the pandemic, despite similar if not higher spending to the US the government held steady in refusing to raise interest rate. Japan has opted to maintain low rates, 0.0% compared to the American 5.33%. Japan operates this way because raising interest rates in their view does not have the same interaction with the economy as the US Fed would like you to believe. The general public interacts with interest rates largely through mortgages or any other type of borrowing. For the vast majority of people, high interest rates mean cost of living expenses go up and become more unachievable. This would not have an impact however on smaller day to day expenses where the vast majority of Covid inflation was felt. Food and gas prices are not dependent on interest rates, as people do not typically need to borrow considerable amounts of money to afford those products. This means that while larger expenses get more expensive the smaller costs which saw the actual inflation would experience no change as a result. On the other hand, people with enough money to store large amounts in banks see vast benefits. Remember, interest rate increases also establish a baseline income for savings accounts and the ultra wealthy who hold the majority of American savings see those payments. This largely accounts for why in America, raising interest rates has not stopped us from seeing far higher inflation than Japan has experienced at any point. Understanding macroeconomics through the lens of Modern Monetary Theory tells you why our expectations of the Japanese government's effectiveness have been subverted. Rather our government has been bankrolling the ultra wealthy who see immense profit everytime rates are raised. See you next week!
Week 6: Blog
Welcome back to my blog. In my research I have found that it is not just important to cover the past few years of interest rate policy in the US but to understand how the Fed is currently acting. As the Biden administration has continued to make fighting inflation a key priority the Fed has held strong in maintaining high interest rates. This week Jerome Powell and the Fed met to provide the latest update, and decided upon maintaining the rate at 5.3% until inflation reduces further. The problem with this is that it will continue to cause damage to the American economy furthering class inequality in the United States as interest rates continue to serve as a regressive tax on all but the one percent. Understanding these issues through an MMT lens one would rather choose to continually keep interest rates low as people's ability to borrow does not generally impact what qualifies as inflation, people do not need to borrow for the small day to day purchases which have been impacted so heavily by inflation in the past few years.
Additionally, across the globe in countries like Argentina we have seen further evidence of the downsides of a government deficit. Since Javier Milei, an economics professor from the Austrian school was sworn in, Argentina has run a strong government surplus. When a nation runs a surplus it means they are imposing taxes to a sum higher than government spending. The greater the surplus the more money is taken out of the economy. This has had vast negative impacts as economic activity has been down consistently since those austerity measures were imposed (https://tradingeconomics.com/argentina/monthly-gdp-yoy ). Milei has proven that his strongly held economic convictions are not beneficial to the Argentinian economy in only a few months.
Week 7: Blog
Hello, this week I will be covering the Bank of Japans (The Japanese Central Bank) response to the Covid-19 Pandemic. The BOJ used what I would consider a four pronged approach in tackling the impacts of Covid-19 Pandemic. The four key strategies they used were a loan program similar to the US PPP program to ensure businesses remained solvent, a bond purchasing program to free up money in the Japanese economy, currency purchases to ensure price stabilization, and the mass purchases of ETFs covering the Tokyo Stock Exchange to help maintain stock price stability.
Japan's loan program far outspent the United States when you compare for relative percent of gdp. The American PPP program loaned out 857.92 Billion compared to a 21.02 Trillion GDP about 4% of US GDP. The European Central Bank's loan program landed at about 12% of Eurozone GDP, the BOJs program ended up at 18% of GDP. The Bond purchases that occurred regularly after the pandemic were in the hundreds of billions of Yen, they helped to free up money in the Japanese economy. Bonds typically have long maturity periods and by outright purchasing them the Japanese government put more currency into the economy helping to counter the slowed down economy.
The BOJ additionally purchased $475 Billion worth of ETFs in the Tokyo Stock Exchange which in the midst of an unprecedented economic event helped to stabilize stock prices and lower public concern, this is a move which is as equally unprecedented as the pandemic which preceded it. The Federal Reserve took similar action but only $8.7 Billion dollars which is even more minimal when comparing the size of TYO vs NYSE. This was considered an unprecedented move by the Fed but it also played a part in preventing total collapse of the stock market. In fact by the end of 2020 the NYSE Composite had returned to the levels of the pre-pandemic era.
After the core of the pandemic was over the downstream inflationary effects of high government spending combined with supply chain issues hit the world. The BOJ bought 2.8 Trillion and 6.3 Trillion Yen respectively in October 2022 helping to pull Yen out of the economy in a time of inflation, these measures helped to ensure that Japanese inflation remained below that of the US and the EU (The EU was simultaneously dealing with the energy crisis caused by the Russian invasion of Ukraine).
Week 8: Blog
Hello! I have spent the past week working to begin the writing process as I will be turning in a final paper as the deliverable for my project. I have been thinking a lot about how I am going to approach this process and what I want the paper to accomplish. On this I have set out two goals for myself.
Primarily, I want this paper to be highly researched and accurate to the best of my ability. I hope to explore and compare the responses to the Covid-19 pandemic through the lens of MMT. I want to draw insightful conclusions from my research that provide further to the body of knowledge on this subject.
Secondarily, I want to use this as an opportunity to grow as a writer but also as a researcher. I have found many aspects of this project difficult because as a high school student I have an issue declaring that anything I write is of substantive value. After all I have no real credibility in this field I merely find it to be interesting. I want to use this as a learning experience because this project has provided me with a window into academia, a three month span in which I can focus on something that provokes my own interests rather than a predetermined class. I want to use this as a testing ground for the skills I am supposed to have developed throughout high school and to help prepare myself for the writing I will be doing next year in college.
Thank you for reading and I will keep you updated over the next month as I embark upon my writing journey!
Week 9: Understanding Modern Money
Hello this week I will be covering my coverage on understanding modern money. This writing is based off of the collective research I have done during this project.
Modern Monetary Theory is a misnomer, it provokes you into thinking that MMT challenges current perception in an irreparable way, that it is a radical ‘theory’ that bears some sort of dramatic change to your understanding of the world. The theory usually describes an idea that holds value but lacks the necessary verifiability to be treated as absolute truth. MMT is not a theory in that sense, it is a re-evaluation of how the systems of currency and statehood work together around us. MMT can be applied to any nation that possesses sovereignty and issues their own fiat currency. These qualifiers exist because MMT shapes the way that we think about currency, currency is not simply something the state does, it is rather a function of the state. The difference is that common perception issues currency as part of the expected action, currency is a measure of wealth above all else, not a reflection of how our government chooses to take action. We think about the way currency moves as part of the circular flow of the economy, dollars move from point to point continuously, are held in banks, distributed as salary, spent at the deli, etc. If you approach currency under the lens of MMT you can remove the perception of a circular flow as the whole of the economy. Currency moves from the government's budget to the greater economy before eventually returning in taxes to be burned. It moves from point A, its inception through spending, to point Z, its destruction through taxation. The letters in between represent the path it took to get there but do not change the general lifecycle it went through.
To understand further why MMT as a concept exists, it's important to understand what gives currency such value in our lives. Currency is used typically as a measure of value dependent on your location. In the United States, we accept USD for transactions, it's rare that we think about why we accept USD though. If a European company opened an office in New York City offering to pay their employees in Euros an equivalent amount to what they could make an alternative company in USD it would be much more difficult for them to find workers. This is not just because you would have to pay conversion fees for all your day to day expenses but because you are required by the IRS to fulfill your tax liability at the end of the year in USD. The federal government mandates that you must make American dollars and that you must hand them over. They have operational control over the flow of currency in the US.
The flow of currency as understood by MMT is simple. A government creates its own flow of currency by spending into existence the dollars that they print. We commonly think of this as the federal deficit, the money that our government spends that it did not receive in taxes during the prior year. In 2023 the US collected 4.44 Trillion in revenue, they spent 6.13 Trillion this means that we ran a deficit of 1.7 Trillion USD.
That deficit is a currency that was spent into the economy by the government. It is the manner in which every single USD was created. It is the only access point for dollars to gain entry into our economy and downstream is the growth of the economy. That is why if you line up the US annual deficit and GDP growth there is a strong correlation. The economy's growth and shrinkage are determined by the supply of USD created by the government, successful corporations can't drive the economy forward without a continuous supply of USD, and if we accept that the dollars are coming solely from the federal government we must accept that they posses a significant element of control over every aspect of the economy through monetary policy alone. American dollars like any other sovereign fiat currency flow from government spending to the greater economy before being returned through the form of taxation. Understanding this changes the way we perceive government in a key manner. It means that there is no inherent limit on how much the government can spend, this understanding allows you to appreciate the gravity of the decision-making behind monetary policy. The lack of an inherent limit on the government's ability to spend allows infinite room for error. Spending too much could send inflation into hyperdrive crushing the economy in rapid speed, think Zimbabwe 2008. Spend too little and you pull money out of the economy.
If you look back at the previous graph you'll notice a special marker for the Clinton era surpluses. Bill Clinton campaigned to reverse the longstanding deficit and create a government surplus, in this task he was successful. Clinton ‘turned around’ a nearly $300 Billion USD deficit into a $100 Billion surplus. For many this was an economic miracle, if you viewed the government as a business or a household spending $300 billion that you don't have is awfully poor decision making. The ‘Government-household analogy’ is perhaps the most common talking point you will hear when discussing the government spending balance. A central government is a unique entity within the economy; it is not akin to a household, the goal is not to build a retirement fund rather the goal is to exercise continuous control through policy decisions that build lasting economic success, not savings. Finding balance in controlled and continuous spending supports the economy. It is clear that running a deficit to some degree is an aspect of this, the United States aside from the Clinton years has run a deficit in all but eleven years since 1931. It is why our national debt has surpassed $34 Trillion dollars and why our GDP surpassed 25 trillion by 2022.
The obvious criticism of this interpretation of government ability comes from the fear of mass hyperinflation and absurd federal debt. If we are to understand that the government can do good through its unlimited spending ability, how do we prevent it from going too far? Where do we draw the line?
Finding the sweet spot for government spending is a complicated question. While MMT effectively declares insolvency from public spending impossible, that does not mean the downsides of excess spending can be avoided. Since the early 1990’s Japan has run a government deficit and has yet to see any signs of mass inflation. Rather Japan struggles to sustain a healthy inflation rate and is constantly fighting to find new ways to try and boost its inflation. This tells us that the way we think about inflation today is flawed, simply increasing the money supply does not have a direct correlation with inflation as is often presented. Rather inflation is the result of many complex factors in today's economy and has to be dealt with using specificity rather than general observations. Especially when dealing with the era of inflation after Covid-19 it is important to understand how difficult it is to pin down the true causes of inflation.
Thank You for reading.
Week 10
Hello, this week I will be covering the federal reserves response to the pandemic.
In the United States, we do not have macroeconomic debates at the highest levels of politics. If you watch presidential debates you will not see disputes from the schools of Milton Friedman or John Maynard Keynes rather they will be ignored. Our macroeconomic status quo has become undisputed between the two major parties. Throughout the last two administrations, Jerome Powell has remained at the highest position in the Federal Reserve, his macroeconomic decision making is constant, and the effects always achieve the same target. This is key to understanding the policy choices that have been made, if there is no dispute over who is in control of the Fed, if there is no dispute over what the Fed does, then what interest is being served?
The Federal Reserve acts with no criticism placed upon it and in doing so it acts based on macroeconomic strategies that benefit the wealthiest people in the US. If you look back at the choices they have made this is clear. In 2008 when the biggest banks in the US needed a bailout within a day the Fed typed numbers into a bank account and directly. The Fed did not enter numbers into the bank accounts of the people who lost their homes and livelihoods as a result of the crisis. They pick and choose who to help based on what will return the greatest positive impact for both the overall measurables of the US economy and the wealthy in America. Luckily for them, those interests happen to coincide as we have continued to hit new peaks of wealth inequality in no doubt due to the Fed's continuous backing of our wealthiest. If you seek to grow the economy and accomplish your job deliverables of favorable overall economic numbers, you should seek to grow the pockets of the wealthiest people in this country because they are the ones with the most capital. If the wealthiest Americans make money then on the whole the averages and summation of American economic figures will be reported in a positive light. There will not be outcry nor protest because on the surface all is well. It is for this reason that the Fed has helped the elites of this country benefit, there is a mutual convergence of interest. When the wealthy benefit so does the Fed. Not to mention the fact that the Federal Reserve is already influenced by money through political donations which determine the outcome of elections toward the federal government and further towards those who make the appointments and delegations of government power. The Federal Reserve and the political system as a whole work together in mutual effort; they seek to benefit those who have already benefited the most. We have seen this express itself greatly since the onset of the Covid-19 Pandemic.
When the United States first began to deal with the Covid-19 Pandemic we did what most nations do in times of crisis. We spent more to help lift ourselves out of recession and the potential economic collapse posed by the largest mass health event in the last hundred years. Our spending helped to turn around what could have been one of the greatest economic disasters of history into a six-month blip on the record. By the end of 2020, the economic implications directly caused by the pandemic had been solved. The economy was booming and so was US GDP, the natural recession caused by the total freeze on the economy was short lived and reversed within months. In 2021 the US completely reversed the economic effects by the numbers. We experienced nearly 6% GDP growth, the largest figure since 1984. If we analyze this without the perspective of Modern Monetary Theory we would understand this simply as a monumental accomplishment in economic management. Yet if we choose to look at those two years something becomes evident. 2021 and 1984 were two of the eras of the greatest change in US federal spending policy in history. In 1984 we were well into the Reagan era of high government spending. Which under the lens of MMT means that we were spending more money into the economy thus enriching the GDP. The same thing is true in 2021, while the type of spending that Reagan engaged in has become the norm, 2020 saw the highest levels of government spending outside of a major war. US deficit spending reached around 15% of GDP which means that the US Government was spending that money into the economy thus creating downstream economic benefits for the GDP. The problem with modern-day spending, however, is the parties that benefit. Rather than spend on social or physical infrastructure for the people, the US chooses policies that continuously benefit the wealthy. Over that timespan, the share of America owned by the wealthiest individuals continued to increase. The share of the stock market owned by the wealthiest one percent has peaked since Covid at 53.9%. The overall wealth held by the wealthiest one percent skyrocketed to 44 Trillion USD.
How does the Fed aid this process? Through the abuse of interest rates in favor of the wealthy. When the Federal Reserve raises interest rates, its main tool for controlling inflation like what we saw due to the supply chain problems after Covid-19, it expresses itself in a few key ways. The primary reason given is that increased Fed interest rates make borrowing money from bank to bank more expensive, effectively raising the cost of raising capital. Making it more expensive to take out a loan for any purpose. This should theoretically slow down the flow of capital, but in the inflation we experienced that is not necessarily true. This is because what we saw after Covid was not a general increase in prices for all markets rather it was in two key sectors. Energy and food, both of which had experienced a decrease in consumption and a shutdown of key supply chain infrastructure. When you increase the cost of a loan that does little to impact someone's ability to purchase a meal. The monetary slowdown does not exist in that sector. The second key way that the Federal interest rate expresses itself is in the bond market. When the Fed raises rates they are also promising to give higher returns on any bond purchased from the US government. In theory this should also help to slow down the economy as people are allowing the government to hold their money for an extended period of time taking it out of circulation and decreasing the money supply. In practice, however, the dollars in the bond market are not that which would be spent on meals or gas. Bonds are held by the wealthiest people in this country as a form of safe investment. How do we know this? After the Covid-19 pandemic, the Fed's outstanding liabilities (the summation of the money they owed on bonds) reached 8 Trillion USD. Regular people who were greatly impacted by the inflation in these sectors do not and probably will never have 8 Trillion dollars. That kind of capital only exists in the elite sectors of American society. Choosing to have high interest rates sets a minimum wage for wealthy Americans and directly allows them to profit. High interest rates set by the Federal Reserve are disgraceful, they serve as a form of wealth redistribution towards the wealthiest people in this country. They are built to boost economic figures by empowering those who already control so much.
Thank you for reading.
Week 11
Hello, this week we will be covering the BOJs response to the covid 19 pandemic.
Since the early 1990s Japan has been learning how to deal with a new and unique set of macroeconomic circumstances. Japan is a developed nation dealing with a decreasing population and uncertainty over its own ability to grow the economy. From an outsider's view, the last 30 years of Bank of Japan (BOJ) policy might look more like maintenance than expansion. In many ways the BOJ has operated as an unwilling example against the macroeconomic mainstream, they have consistently approached issues from the same school of thought that the US does while ending up with results that prove to be unwanted.
As of 2022, Japan's debt to GDP ratio has crossed 260%, a staggering number that for many would spark fear that the government has overspent and flooded the market with yen. However, Japan is instead dealing with many of the issues one would expect of a government that refuses to spend. The BOJ has been consistently fighting against deflation for decades. Japan has kept interest rates at or around 0%. There has been no hyperinflation or mass economic crash as had been previously predicted by American economists like Paul Krugman. Instead, Japan has seen relative stability which while lacking the growth that would be typically associated with success allows Japan the ability to carry forward as a strong developed economy. To this one might easily assume that the Japanese government has adopted a worldview with an understanding of MMT and has used that to help maintain and bolster their economy. While much of Japanese economic policy is averse to the advice given by many in the West they themselves would deny any appreciation or understanding of MMT as being part of their policy-making framework. Taro Aso, the Japanese Finance Minister, described MMT as “an extreme idea and very dangerous.” The perception of MMT as dangerous comes from the fear that any understanding of MMT allows the government to freely spend without repercussions. This fear is misplaced in its misunderstanding that MMT serves as a general policy for the government, Japan can’t ‘follow MMT’ Japan as a sovereign issuer of a fiat currency operates a currency that will always be a form of modern money. Japan does not want to allow anyone to believe they ‘adhere’ to MMT because they likely believe it opens them up to great risk. My mentor on this project, Bill Mitchell, referred me to a quote from Paul Samuelson, one of the most legendary American economists, in which he says “I think there is an element of truth in the view that the superstition that the budget must be balanced at all times … Once it is debunked takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have … anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that long-run civilized life requires.” Effectively what Samuelson is saying is that the concept of a balanced federal budget is a necessary myth so that the general public does not become too needy. A lie designed to protect the interests of those in control, and yet it is a falsehood that is disproven annually by governments around the world. Samuelson is admitting that the government has the resources and fiscal capability to do far more than what it currently achieves and yet chose not to. When the government says they don't ‘adhere’ to MMT it's not a lack of understanding rather a public choice that is designed to keep the interests they deem valuable at heart.
It is important to keep all of this in mind when evaluating the choices made by the Bank of Japan during and after the Covid-19 Pandemic. The Bank of Japan is aggressive in pushing forward policy, but not emboldened enough to fully challenge the macroeconomic status quo. The Bank of Japan will make policy decisions that may seem irregular, but they will bend for fear of being perceived as extremist or outside the box. They approach issues with the same end goal in thought as the United States yet they do not use the same methods. The BOJ used a four pronged attack in tackling the impacts of the Covid-19 Pandemic. The four key strategies they used were a loan program similar to the US PPP program to ensure businesses remained solvent, a bond purchasing program to free up money in the Japanese economy, currency purchases to ensure price stabilization and the mass purchases of ETFs covering the Tokyo Stock Exchange to help maintain stock price stability.
Japan's loan program far outspent the United States when you compare for relative percent of GDP. The American PPP program loaned out 857.92 Billion compared to a 21.02 Trillion GDP about 4% of US GDP. The European Central Bank's loan program landed at about 12% of Eurozone GDP, the BOJs program ended up at 18% of GDP. The bond purchases that occurred regularly after the pandemic were in the hundreds of billions of yen, they helped to free up money in the Japanese economy. Bonds typically have long maturity periods and by outright purchasing them the Japanese government put more currency into the economy helping to counter the slowed-down economy. The BOJ additionally purchased $475 billion worth of ETFs in the Tokyo Stock Exchange which in the midst of an unprecedented economic event helped to stabilize stock prices and lower public concern. This sum of ETF purchases works out to nearly 10% of the Tokyo Stock Exchange and helped to ensure price stability. It has been a key driver in 9.7% growth of the exchange which comes as a staggering number in Japan, a country where fiscal growth is few and far between. However, these purchases pose a dangerous decision of choosing to offload or maintain the holdings. If the BOJ sells off the holdings, or transfers them to pension funds or other government programs as has been suggested they risk causing serious damage to the market. If they maintain the holdings they are accepting their inability to use the spent yen, however, they may benefit Japanese corporations because the price increases caused by the government purchases have been largely intended to encourage Japanese companies to take further risks in order to bolster the economy. Japan is notorious for its risk-averse culture when it comes to the economy. The only similar example of this action on such a scale comes from Hong Kong in 1998 when currency speculators attempted to put pressure on the Hong Dong Dollar yet were fought off when the government purchased large portions of the stock exchange to help boost prices. Price stability helped to prevent an economic collapse yet left the government holding a sum of ETFs with no use. To get rid of them the government made arrangements where natives of Hong Kong could buy the ETFs at a five percent discount on the original purchase price. At the time the decision to purchase ETFs was entirely unprecedented. The Federal Reserve took similar action but only $8.7 Billion dollars which is even more minimal when comparing the size of TYO and the NYSE.
After the core of the pandemic was over, the downstream inflationary effects of high government spending combined with supply chain issues hit the world. The BOJ bought 2.8 trillion and 6.3 trillion yen respectively in October 2022 helping to pull yen out of the economy in a time of inflation, these measures helped to ensure that Japanese inflation remained below that of the US and the EU (The EU was simultaneously dealing with the energy crisis caused by the Russian invasion of Ukraine). Additionally, these measures served to help the BOJ maintain the devaluation of the Yen. In the time after the pandemic, the BOJ has begun to attempt a new strategy, devaluing the yen to bring in foreign investment, hoping to induce a positive output gap in order to create new economic growth. They have accomplished this by maintaining low interest rates relative to the US driving people to hold more USD and less yen. This change in relative interest rates has allowed Japan to take advantage of increased tourism and investment. Through the increase in capital entering the Japanese markets they have successfully maintained an inflation rate above two percent, the standard for healthy inflation, for the past two years. Yet, despite this Japan is not thriving economically.
The Japanese market has faced wide instability over the past thirty years. They have established an economic market with longstanding hostility towards risk-taking and expansion. They have embraced American macroeconomic decision making without the willing cynicism that is required for it to be successful. The Fed operates a system built to produce beneficial measurables by enhancing the economic benefit of the country's elite. The BOJ operates in a country willing to invest in its social and physical infrastructure, not one that makes decisions based on its elite solely. For these reasons when the Bank of Japan finally gathered the strength to bring more capital into the Japanese market over the past two years, they failed to create success. Japan has seen real wages decrease each month for the past two years, why? Because corporations are too afraid to pursue growth or accept risk in an economy that has been trained on instability. You can not have growth if Japan falls back into another era of deflation.
Thank you for reading and I hope to see you at my presentation.
Week 12: conclusion
Hello,
I want to thank everyone who read these blogs each week for sticking with me. Additionally, I want to thank Mr. Sperrazza and professor Bill Mitchell for guiding me through this process.
The senior project allowed me to engage full academic focus on something that I am truly passionate about. It is a unique experience that I doubt many will ever experience. It is freedom to engage oneself without really any burden or expectation in the academic process towards a subject they hold true interest on.
Thank you for reading
Isaac Wald