Sunday, September 20, 2020

Proposal for Self Reliance, Full Employment & Price Stability

The purpose of the proposal is to show the Govt & other stakeholders that it is possible to provide employment and basic essentials to entire citizenry, particularly a country like India which is resource rich. And we are providing a model & structure to do that.  

Is it possible to provide basic essentials? 

India occupies top 3 position in production of many of the farm products. To sustain this and get the maximum benefit out of this, we need to streamline the entire process. India gets plenty of rain, but storage is very limited. Rural India is home to farming and vast number of unorganised labour, who are not productively employed. Rural India also is lacking in facilities to produce value added farm products & other essentials which could be produced  with rural workforce itself. Rural population is 980 million, out of which 400 million could be part of this productive activity. 

So, rural India has all the necessary real resources to create facilities to produce basic essentials.  

Water security is an integral part of this process, as only 8% of rainwater is stored in a year (detailed presentation on water security is provided in our Oct 9th proposal). Multiple water bodies to store rain water have to be built. 

Energy needs can be met by local solar projects to encourage distributed power systems and our traditional gobar gas system could be revived.  

Additionally need to have investment in educational facilities/research facilities/health facilities/sports facilities/supporting infrastructure to promote high quality/emission friendly service sector expansion and greatly enhanced real wealth/higher standard of living without adding to emissions, etc.  

We have availability of all the raw materials, including cultivable land, water which needs to be stored, human resources which needs to be employed and sunlight throughout the year to generate solar power. So, real resources are available to produce basic essentials. As producer, consumer forces are in Rural India itself, if production, value addition & consumption are localised to the extent possible, it would reduce carbon footprint, in addition to plethora of other benefits.  

Rural enterprises owned by workers & managed by local & district administration would be an ideal model to execute this. 

Is it possible to sustain full employment? 

India is a vast country with huge population, predominantly living in villages. It has an extremely high share of informal workers, 85% of the workforce. Dependence on agriculture & related activities are at least 65%. Everybody wants to transition to better employment, but the problem is lack of choice in villages. So, they become migrants, live in pitiable conditions in cities, as their work is not valued much wherever they work. As big farmers shifted to mechanisation, small farmers & farm labourers move to Cities & other States for most part of an year to earn some money, leaving their families behind. So, an ideal solution is providing better employment opportunities in the village itself, as the size of the rural workforce is humongous & there are many issues connected to migration. 

Given the above context, we are talking about providing guaranteed work to at least 400 million people. This is massive for a transitional job guarantee program, both in numbers and works that could be provided on a transitional basis. Also, as the organised sector employment is very low, to meet the necessity of having a larger organised workforce in private sector for the transitional mechanism to work efficiently, the rural program could be operated as private enterprises. The existing NREGA, expanded to urban areas with the number of days extended to 300 in stages, could be the transitional job guarantee program. 

With this, we could employ all available workforce, which will generate a vast producer, consumer community consisting of at least 400 & 980 million people respectively, the largest in the world in both, also the largest self reliant community in the history of humanity.  

Nature of work in rural enterprises is production related. NREGA works are related to asset creation & maintenance in water storage & conservation, ground water recharge, soil productivity enhancement, rural housing, livestock promotion infrastructure and other social infrastructure. With the growth of rural enterprises, infrastructure demands in villages will grow. Water storage in series of ponds should be expanded massively to capture most of the rain water.  

So, NREGA could be expanded to 300 days in a year and acts as a transitional job guarantee program, expanding during downturn and shrinking during upturn in economy, so that it supports it as an automatic stabilizer. NREGA wage also has to be increased in stages.  

As long as loose enough fiscal is maintained, the NREGA pool won't grow all that much as workers transition to private sector employment.  

The infrastructure required for the rural enterprises could be created as part of the NREGA work. As the rural enterprise is a producing-consuming group, additionally producing value added essential products for sale, it is structurally self reliant and profitable. So, within a year of operation, it could become self sustaining and start making profit. 

So, with this model, full employment is sustainable. 


As this program streamlines the existing production based on actual need/demand and also increases and makes available all the essentials, it leads to great price stability. The plan clearly shows, real human resources produce and consume real products and services and in this real economy, the role of nominal money is to make it all work. 

The following execution & funding plan is our suggestion, particularly funding through direct Government spending arises out of MMT view of fiat monetary system operation. Alternatively, the plan execution could spread over longer period, instead of 3 years, thereby reducing annual outlay. 

We have clearly shown that if the entire operation is seen in real terms, the funding part could be seen for what it is, just facilitating real products & services produced by real labour. But, if MMT view of real monetary operation is not acceptable, the second option given could be utilized.

(I) The rural enterprises program is suggested to be executed over 3 years & program outlay for the first year is taken at Rs 20 Lakh Crore ($270 billion). During second & third year, Rs 10 Lakh Crore respectively would be required. Instead of 3 years, if implementation period is taken as 10 years, annual outlay would be Rs 4 Lakh Cr. Program implementation employing 400 million people in 3 years would be extremely challenging.

It will be funded by direct Government deficit spending, issuing treasury bills of maturities 3 months. RBI then simply 'offsets operating factors' to keep rates on target. 

NREGA gets funded by the Government as usual. 

(ii) As the rural enterprises will achieve self sustenance within 1 year, beyond that it doesn't need funding support. If Govt is delaying the decision making or reluctant, it could be availed as a loan at concessional rate of interest & repaid over 5 years. 

This essential economy requires only planning & will, everything else is available! A country of 138 Cr people with assured income and basic facilities would be a land of peace & comfort, one of its kinds in the world!

The above proposal has evolved out of conversation with Warren Mosler & the verbatim extract of the correspondence is given

Evolution of the Proposal in Conversation with Warren Mosler: A Verbatim Report

The above proposal has evolved out of conversation with Warren Mosler & the verbatim extract of the correspondence is given below: 

Warren Mosler: Thoughts on proposing to make the rural poor employment program universal and with a somewhat higher wage? 

Rajendar: The employment program for rural poor is called NREGA (National Rural Employment Guarantee Act) program. 

WM: Ok  

Raj: We need to carefully look at the situation. Indian context is unique, compared to developed economies. It has an extremely high share of informal workers, 85%. 

WM: Is the NREGA wage above informal sector wages? 

Raj: NREGA wage has been increasing every year, presently it is at Rs 200 ($3) pet day. It is lower than prescribed minimum wage which is Rs 300 per day. Informal wage varies hugely state to state, based on demand & supply. In Tamilnadu, it is very high Rs 600 per day for men, Rs 400 for women. Other Southern States closer to this. In North, where jobs are few, it is close to NREGA  or minimum prescribed wage, except in Punjab.  

WM: So initially the wage could remain at 200/day to avoid flooding the system and then be increased over time probably to 500 ultimately (inflation adjusted).

As long as loose enough fiscal is maintained the NREGA pool won't grow all that much as workers transition to private sector employment etc.  

Raj: Agreed. Rural population is 980 million, out of which 750 million needs to be uplifted, we can call them poor & lower middle class. Dependence on agriculture & related activities are at least 65%. 

WM: Ok, agriculture probably could have the same output with a lot less employees?  If so, the trick is to transition those who want to transition to other/better employment?  

Raj: Exactly. Everybody want to transition to better employment, but problem is lack of choice in villages. So, they become migrants, live in pitiable conditions in cities as their work is not valued much wherever they work. Also, as big farmers shifted to mechanisation, small farmers & farm labourers move to other States for few months in a year to earn a little, leaving their family behind. Ideal solution is providing better employment in village itself, as the size of rural workforce is humongous & there are many issues connected to migration. 

WM: Exactly 

Raj:  One, is to ensure food & water security in the long run, two, migration makes them live in unliveable condition in cities, three, cities are overcrowded, four, pandemic time all came back to villages, they are reluctant to go back, five, agriculture produces don't get good price, six, middlemen & retail shops gain at the cost of farmers, workers & consumers.  

WM: Increasing agricultural yields via investment and economies of scale can mean more food with fewer employees.  That kind of productivity gain is critical for an improved standard of living.  Too often productivity is conflated with unemployment to the detriment of all.  

Raj: Yes. So, in the above context, if we make NREGA universal, challenges are:

1. Size. Even though it is a demand based guaranteed program, presently only 50 million are employed for 60 days in a year, even though scheme is for 100 days 

WM: A low enough initial wage might keep the initial size down, and wages increased as management is developed?  

Raj: I meant that the size is Himalayan, in billions. 

We are talking about feeding 1.4 billion people, providing work to take care of 1 billion people. 

So, they should not be moved out of villages.

Rural enterprises in villages producing value added food products & essentials could provide employment to all of them. Allied enterprises could be in water storage (only 8% of rainfall is stored & it is predicted to have huge water problem)(my Oct 9th proposal has complete details on bringing water security) & other activities as you listed in the last point. 

WM: Yes, water storage issues need to be addressed immediately.   

Raj: 2. Quality of assets created. Very low. 

WM: Not a problem as the purpose will be to facilitate the transition to private sector employment, which it will do. 

Raj: Food security has to be ensured. Now, farmers get pittance because they sell their produces as such. Value addition is done by middle men. Do that value add in village through villagers owned rural enterprises. We need to see this little differently from typical PV. Profit has to go to workers rather than nonworking private promoters. This will keep the prices also lower. It should have district administration continuous role play, for planned production on macro & micro level to avoid waste & excess, price control, management help, etc. Amul in Gujarat is a world class company, owned by milk farmers ( 

WM: Good points. 

Raj: 3. Only assets are created, no production. 

WM: Not a problem, as above.  The large pool of employed will act as an employment agency for the private sector, allowing fiscal relaxation to increase aggregate demand to attract NREGA workers.  

Raj: Yes. Not only workers, Govt & its arms would get convinced, once it rolls out and provide more support. Once the benefit is seen, program also will evolve. 

So, a very clear district wise planning is required, involving the entire administrative machinery, to build food based enterprises, producing all food products(value-added) including farming, and other essentials. 

WM: I would suggest a move to higher agricultural efficiency- more output with fewer workers- via investment by private sector farmers, and investment ieducational facilities/research facilities/health facilities/supporting infrastructure to promote high quality/emission friendly service sector expansion and greatly enhanced real wealth/higher standard of living without adding to emissions, etc. 

Raj: Agreed totally, this could bring in food, water, energy security, meet their health, education & recreational needs. 

Investment part only has to be looked at differently. Project outlay could be debt at really low cost or no cost, govt supported. 

WM: Finance isn't the issue.  Real investment needs have to be determined and the finance follows.  And best for direct/normal gov deficit spending.   

Raj: Get it. Human resource is there, managerial support would come from Govt, land could come from Govt if it holds locally, otherwise it can be taken be on lease/purchased from small farmers, water bodies will be created, gobar gas was a big thing during 60's which could be revived, along with solar for energy need, with distributed energy as focus. For each village or group of few villages, specific suitable production activities could be identified. Each village can have a health centre with remote diagnostic tools & nurse attached to Drs at nearby hospitals. Similarly, all other basic needs have to be established, together with storage & processing centres. Handicrafts would be part of this. 

Ownership of the enterprises can be started as PPP & workers getting majority stake thro performance based creeping acquisition, benefitting entire village, not individuals. Active & continuous participation of district administration, which is headed by IAS(highly respected & efficient) is required. One point to note is NREGA has a phenomenal infrastructure, with digital every minute reporting system which could be tweaked for this ( 

WM: Again, think real terms first, and then nominal.  If the real resources are there, the nominal can make it all work. ;)  

Raj: Agreed. 

Options of funding: 

WM: The answer here is normal deficit spending.

I'd limit bond sales to maturities of 3 months only to eliminate market vagaries. 

Raj: Agree with you. If Govt is open & willing to listen, that is a solution to most of the problems in one go.

As I anticipated reluctance or delay from Govt, I offered the alternatives and also mentioned about direct bond sale. As the enterprises could be made profitable in a short time, I thought even a loan would be fine.  

WM: Whatever is simplest. New private capital can work if it's determined a private firm best suits public purpose in real terms.

If not, direct gov spending most efficient, like the military, for example.  

Raj: Agreed, whichever is suitable for the public purpose. I thought, as explained below, expanded NREGA could be direct gov spending as a transitional job guarantee program & the rural enterprises funded by debt (@4%) from govt, so that all workers would benefit, as I thought compensation in real resource would be better. It could also be from private capital. 

OTHETWISE, we can even think of a unique solution to countries like India, expanded universal NREGA with higher wage as a transitional job guarantee program & the rural enterprises fully funded by debt, producing all essentials providing decent living standard, ensuring secured supply of essential products & services & price stability. This provides transitional element to the entire schematic. 

To benefit the urban poor, the marketing & distribution arm of these enterprises could be manned by them. 

WM: It's about hiring the best qualified for this type of thing, which can include training programs.


Wednesday, April 8, 2020

WAR against the pandemic

MMT India presented a policy proposal during Oct. 2019 in which the possibility of sudden disruption to all economic activities was considered and proposed an economic model focused on ensuring availability of basic necessities to all at all times and having critical & strategic infrastructure in place to meet any eventuality.

Covid19 is the worst crisis faced in the modern era, which caught all the countries, particularly the developed nations, completely unprepared & woefully short in their response to medical exigency of unseen proportion. No other crisis known to us has brought entire world to a total physical standstill, abruptly stopping all activities. It is not only a health crisis which doesn't have a known cure, it is spreading very fast & killing people, it could cause unimaginable economic disruption, shattering the livelihood of millions & millions and destroy most of the private sector if the impact is long-lasting. The crisis is unprecedented and so, better to be prepared for the worst. With the technological & medical advancement & top-notch medical facilities, we thought that we will never face a healthcare emergency threatening entire humanity; but a micro molecule has exposed our inadequacies.

It brought to the fore unbelievable deficiency in the healthcare system throughout the world and also the lack of critical & strategic infrastructure in all the countries. It also showed us that we have left substantial number of people completely vulnerable, without any guilt, to the vagaries of nature & exigencies, that too at a time when major climatic catastrophe is expected to strike us. It also reminds the Government of its  primary duty that it would do all it could to provide the basic needs to every one of it's citizens at all times and also create & maintain the critical & strategic assets that may come to life-saving rescue during exigencies. 

A country without much of human, natural, industrial & financial resources would struggle to provide these. Financial resources was a constraint when our currency was under gold standard. But now, ours is a fiat currency and Govt being the currency issuer, spends currency into existence through keystrokes whenever money is required for its planned programs (meaning, it is not a separate process of create & then spend; spending is currency creation) and so, it doesn't have financial constraint. We are endowed with huge human resources with one of the youngest population in the world, much of natural & industrial resources needed, but limited majorly by petroleum products. Country is only constrained in its priorities & planning of productive programs. If money for a fiat currency issuing Govt comes in to existence as it spends through keystrokes for its productive programs, then fiscal space could be defined as consisting of deployable human resources, infrastructure needs & industrial capacity. That way, we have huge fiscal space.

Economic priorities, needs & model cannot be the same, post the pandemic. The enormous sacrifices made by people on the front-line, including Doctors, Para medics, other hospital staff, policemen, municipal staff, transport workers, retailers, deliverymen, functional production workers & many of the Government staff working during this crisis can never be forgotten, unrecognised and not taken into account while rebuilding the economy. World & the economy cannot be the same again which is not giving preeminence to such people. Such a careless, completely inadequate, uncommitted & unrewarding institutional structure cannot be continued. 

The pandemic had taught us 'we depend on each other & we are connected'. We need to stop having policies which favor the fortunate. Otherwise, nature will strike again harder & harder. As a first step towards a life reflecting this, economic support provided now should not differentiate people. 


Stakeholders are people, private sector, local/state Governments & Central Govt. Only the Central Govt is the currency issuer and all others, including local/state governments are currency users. While looking at the role of all the stakeholders, as a currency issuer, Central Govt has to fund all others. So, during exigencies like this, State Governments have to be provided with the funds & other resources as a top priority, as they're in the forefront and basic necessities have to reach people to get their total compliance & cooperation.

First, the pandemic has to be contained & mitigated, people affected by lockdown & deprived of their livelihood have to be provided with basic necessities & households not having access to provisions & other daily needs have to be serviced.

Recommended Immediate steps:
  1. Lockdown to suppress & contain the spread. If it is spreading rapidly, then 'extreme lockdown' should be imposed. Early lockdown is extremely important & we did that. Now, is the critical period. Lockdown has helped in many ways, but we're still not out of danger. If we look at the comparative graph, we are in the same trajectory as US. So, we need to continue the lockdown, till the new cases comes down drastically.
  2. Stranded people at various parts of the country. State Governments are taking good care and it should be continued with stricter implementation of social distancing. 
  3. Public Distribution System with it's infrastructure is very well established with access to every citizen. Utilize the PDS fully to reach food-grains, pulses & other essentials to all types of ration cardholders at doorsteps of households at free of cost. Provide cash compensation to free category of ration cardholders. 'One nation One ration card' should be given effect immediately.
  4. Permit pharmacies, kirana shops, super markets & online suppliers to operate with strict enforcement of safety protocol.
  5. Increase the number of beds in isolation wards with all the necessary medical equipment & protective gears. Beds should be adequate to meet huge influx of patients. On need basis, engage additional space for this, which could be converted in to isolation wards in a short time. Have adequate ambulances.  Book hotels near the hospitals for the stay of doctors & hospital staff. 
  6. Increase the testing facilities all over the country. For collection of swaps for the tests, use mobile vans.
  7. Do contact tracing fully, test & quarantine.
  8. Whichever private hospitals are not treating covid patients, temporarily bring them under Govt control and use it 
  9. Make the treatment completely free during this period, including testing.
  10. Ramp up the manufacturing capacity of the needed medical equipment & protective gears; request the private sector manufacturers to participate, if conversion of their existing facility is possible for this purpose.
  11. As fast & immediate reach of reliefs to all those in need is the aim, preventing leakage need not be the focus at this time.
Recommended permanent infrastructure as strategic assets, in operational condition at all times, to face exigencies like this:
  1. Increase healthcare bed capacity with isolation wards, adequate manpower, equipment & protective gears. Let isolation wards be safely segregated. Build more medical colleges, post graduation seats, nursing colleges & institutes for other healthcare & hospital services.
  2. Establish manufacturing facilities for equipment, disposables & protective gears with adequate stock of raw materials & finished products, equipped to operate 24x7.
  3. Build Choultries for travelers, which could house homeless & stranded during exigencies. Takeover financially stressed hotels, colleges & convert them to Choultries.
  4. Build community kitchens all over the country to undertake feeding on need basis; Choultries also could house them
  5. Expand Amma Canteens all over the country; Akshaya Patra Foundation could also pitch in. Choultries also could house them.
  6. Stock essentials for a long haul. Our PDS is well established with last mile connectivity of ration shops providing access to every household. Let PDS be strengthened further with advanced technology, storage & delivery systems & expanded list of products.
  7. All buildings should be earthquake, fire & flood proof.
  8. High internet capacity to handle large volume of data transfer during lockdowns & floods.
  9. Promotion of kitchen gardens in a major way.
Financial support to overcome the impact:

We have never ever seen a complete physical standstill of all the economic activities throughout the world for a prolonged period, disrupting all the industries, with total hold on import, export, supply chain, banking credit, debt servicing, FDI & most other industries. Without unprecedented support from Govt, most of the companies will stare at bankruptcies. As importance of most of the companies, except the larger ones, is better known to local/state Governments, the support has to come from them, with the Central Govt providing total backing to the local/state Governments with financial & other support.

This disruption will affect private sector in an unprecedented manner, putting their viability in serious doubt; those who survive could continue with the support of lenders & Govt and those who cannot survive but strategically important can be nationalized. In this extraordinary situation, rebuilding the economy & society, as it involves unprecedented spending from the Govt, should address, consider the following factors:
  1. How did we get in to this situation of finding ourselves completely inadequate, unprepared & vulnerable to a virus, in spite of so much wealth creation & technological advances?
  2. Having a functional strategic & critical infrastructure to face any kind of exigency is the primary requirement for the survival of a country & it's people.
  3. Basic necessities of all the people should be met at all times; otherwise, no point in having an organised economic structure.
  4. Rebuilding the economy & bailing out private sector & banks are funded by the public purse as always and so the outcome should be oriented towards equitable benefit to all.
  5. All kinds of exigencies, including possible second cycle of this pandemic & climate catastrophe have to be factored while rebuilding.
Rebuilding the economy should address all the above to create an equitable, caring & environmentally sustainable economy, by segregating the economic activities in to three segments: essential basic services to its citizens, critical & strategic infrastructure creation and other economic activities; and public sector be the lead and dominant player in the first two segments.

Recommended Financial Support during the impact period:

To cover the basic necessities of every household, the following support is recommended during the impact period of the pandemic:
  1. Direct cash distribution of Rs 3000 to a household covering 13.6 Cr families which is under NREGA, 20.4 Cr Jan Dhan women account holders, 8.7 Cr farmers under PM Kisan Yojana & 3 crore senior citizens, disabled and widows among the poor. This will be paid on monthly basis during the impact period. Whoever is left out & needs relief can record it  in a register which would be maintained at each ward and also through mobile & online to receive the cash assistance in a bank account that will be opened in their name.
  2. Free grains, dhal & other essential groceries through PDS to the above households during the impact period. 
  3. Free gas cylinders for the above families during the impact period. 
  4. Rent waiver for the tenants in the above category during the impact period.
  5. Electricity bill payment waiver for the above families during the impact period.
  6. Interest waiver, EMI & principal holiday for the borrowers belonging to above category during the impact period.
  7. Universal healthcare for all the citizens under an insurance scheme, which will be effective post the pandemic also.
  8. Subsidized Food Canteens like Amma Unavagam in Tamilnadu all over the country. Support Akshaya Patra Foundation to expand.
  9. Rs 1 Cr compensation to medical workers family and any other worker in the front-line, in the event of death during the pandemic. This is to be covered by insurance. Exceptional Monetary compensation to every heathcare worker & medical professionals 
  10.  As we will not know the length of the lockdown & social distancing period, arrangements have to be made to manage the incoming harvest requirements. As it involves saving huge quantum of food-grains which is extremely precious now, huge number of harvesters may be required or putting together Manuel harvesting practice with safe distancing under strict supervision of village administration officers. This will also ensure cash in the hands of farm workers & farmers.
Support for Private Sector:

For the private sector companies to have any chance of survival from this paralysis, this period of shutdown have to be considered as holiday period; this is an extraordinary time, so, we need to accommodate extraordinary response; understanding & sacrifices are required from all the stakeholders; steps suggested here are an attempt to make the companies survive this;  to do that, they need to be protected from all dues; workers of all the enterprises are considered together with the common public with respect to relief and if they fall under the categories mentioned above,  Govt is meeting that, as per the recommendation. In addition to the support provided by the Govt to meet the basic necessities, it cannot compensate the private sector's salary bill also. We are at a point in time in history that Governments cannot treat their people differently as we're paying the price for that now. At this stage, we don't know where we're heading, how long the pandemic will last and the strength & weakness of whatever is left. 

Recommended support for private sector:
  1. Deferment of principal & interest payment till further orders for all debts. 
  2. Deferment of all kinds of dues till further orders 
  3. Extension of insurance coverage for the period without payment of premium.
  4. Nationalize strategically important, but financially failing enterprises.
  5. Fast track insolvency process for companies whichever want to exit; provide relief to the promoters by allowing them to participate in the process.
  6. A Job Guarantee Program to provide transitional jobs to the unemployed till they are hired back by private sector.
Govt & the banking system will incur huge cost on account of the private sector during this period. In addition, Job Guarantee program & building the infrastructure will require large continuous infusion of money by the Govt, so, large financial support for private sector is not recommended.

Recommendation for the Govt:

With almost all the workers out of work, supply lines severely crippled, including international supply chain, finances in tatters and the net result of policies & institutional structure leaving us with lacking critical & strategic infrastructure & vulnerable society (which suddenly make us realize that we're cheated all along by the system), the present standstill, as we're going to restart from scratch, provides an opportunity to build an economy which meets the basic needs of all and build the infrastructure to meet this & the exigencies; this will also suit the huge informal workforce we have; a major unexpected window of opportunity is the chance to shift whole hog to green economy from fossil fuel.

We reiterate again & again that this is an opportunity for the Govt to build an economy based on a model which respects & recognise all its citizens by providing equal space for them to be part of the economic activity with a decent living wage, makes available basic necessities for all and have critical & strategic infrastructure in all sectors.

A transitional Job guarantee program is a simple & perfect solution to achieve the above and create all the needed infrastructural assets at the local level. 

Private sector is the mainstay of the economy of a country and significant provider of employment. For the private sector, profit maximisation is the driving force, but for the public sector, social and strategic objective is vital. During this crisis, the limitations of private sector is totally exposed, with the public sector coming to the rescue of every stakeholder with a massive support. Govt is the currency issuer,  policy maker and whenever other sectors fail to manage on their own, acts as the rescuer with unprecedented bailouts, quantitative easing, relief & stimulus packages. 

Between two crises, that is between bailouts, the institutional structure, consisting of Govt policies, regulations, taxes, physical infrastructure, State money, the credit money, payment & settlement systems (supporting annual volume of at least $1000 trillions globally) and central bank's lender of last resort function, paved the way for creation of the hierarchical society with all the weaknesses we have now; finally, after many such instances, it ended up in a never-ever-seen crisis like this.

Rather than repeating this again and ending up like this to helplessly face death at any time, Governments should use the power of its currency creation capacity and economic policies for what it is meant for, that is, for the benefit of everyone, by opting for a model which ensures basic necessities to everyone & have critical and strategic infrastructure in place to face any kind of exigency, as the threat of climate catastrophe or second coming of this virus or any other pandemic is a real possibility.

India's 80% of  workforce is employed in informal sector. We are all well aware of the lack of rural infrastructure needed for self-sustaining & self-reliant rural India. That is why, we see a huge migration from rural India. Food & water security are our two most important needs. India currently stores only 6% of its annual rainfall or 253 BCM, while the assessed total water requirement is 1447 BCM by 2050. Nearly 80% of rainfall flows unutilised to the sea, causing disastrous floods, while 99 districts of the country are drought prone. Solution is the inter-basin transfer of water. Food Parks in villages with warehouse, cold storage & food processing can supply grains, vegetables, fruits, spices, seeds, milk & milk products. Such planned programs in food, water & other sectors together can be executed with a job guarantee program. Energy security will get a major boost with the promotion of solar power in villages. So, this crisis is providing an opportunity to engage the rural workforce and the migrants who came back to villages to create self-reliant rural India, which also is an answer to the long lasting rural distress.

As both demand & supply has simultaneously come to a standstill, unless it is faced head-on with the enormous money power of a fiat currency issuing government, it will lead to disastrous result. That is why, many Governments have launched trillions of dollors worth relief & stimulus packages.

  1. State Governments are going to face severe loss of revenue (State Governments are currency users, unlike the Central Govt which is a currency issuer) and they have to sustain public service; to compensate lose of revenue & sustain public service, we recommend Rs 1000 per capita contribution to State Governments.
  2. A transitional job guarantee program for all.
  3. Build critical & strategic infrastructure.
  4. Rural infrastructure to create self-sustaining rural India, with food, water & energy security.
The pandemic taught us that while Central Governments formulate policies &:issue currency, it is the State Governments which administers the day-to-day operations, bringing out the best in leaders at the state & local level, showing many leaders to the country. We need them as local & state governments have to be the implementing agency for the job guarantee program.

Let us create a strong, self sufficient India which serves all its citizens.

Wednesday, October 9, 2019

MMT: Modern Monetary Theory ....Introduction

Full Employment & Price Stability, which is at the heart of MMT, 
could be achieved by Governments, 
       if only they understand how monetary system really operates          
under the current fiat money regime.
Different monetary regimes have different operational realities.

Yes, it could be achieved by Governments issuing their own fiat currency, provided they understand how money gets created and how monetary system really operates in a fiat money system. It is very critical that it is fiat currency, not gold standard or pegged to a foreign-currency.

Having never let money play an explicit and prominent role in their theories for decades, orthodox economists completely missed the significant shift in money creation and monetary operation when fiat money system was quietly ushered-in, failing to realize that the currency issuer under a gold standard has different operational realities than the currency issuer under fiat money system and a central bank under gold standard has different operational realities than a central bank under flexible exchange rate.

READ MORE .......

MMT: Modern Monetary Theory: Further Reading.....Policy Proposal:

Policy Proposal:

Let us see MMT in detail below.

MMT introduction given above is the necessary pre-read.

Being the money monopolist, nothing comes in the way of the Govt to provide basic and essential services to people and ensure functioning of critical and strategic sectors, at all times, even during recession and exigencies like wars or natural disasters including climate catastrophe. So, Govt has to segregate the economic activities in to three segments: essential basic services to its citizens, critical & strategic functions and other economic activities; and then be the lead and dominant player in the first two segments.

We are hanging on to the uncertainty of climate damage for not acting on thatif it happens, then it will be catastrophic for the entire world, particularly to the vulnerable segment of people; even if it doesn’t happen, there is nothing wrong absolutely about responsible and sustainable developmentat the time of climate emergency, we may have to halt all our economic activities

Full employment, price stability, meeting the basic needs to ensure a decent living condition for all and sustainable, environmentally sensitive development should be the economic objective for any country; otherwise, it is meaningless for a Government to regulate the economic and livelihood activities which were running on its own. Delivering without fail on those objectives are what a Government is meant to do, particularly when it provisions itself by transferring resources from the non-Govt sector and it is possible for a monetary sovereign country.

Taxation creates unemployment (Taxation is the intervention that creates unemployment by design for the further purpose of the state being able to hire those it's tax caused to be unemployed. Residual unemployment is the evidence that the tax liabilities created more unemployed than the Govt hired. The JG works to transition the unemployed back to private sector employment and optimize output - Warren Mosler) and it is extremely difficult to determine the quantum of Govt spending necessary to reverse the unemployment, JG is the only option.

MMT: Modern Monetary Theory: Further Reading.....Policy Proposal continues.....

MMT: Modern Monetary Theory: Further Reading.....

Policy Proposal continues.....

As core industries are the basis for all the economic activities, self-sufficiency in those industries should be a focus area. Food and water sovereignty are the two most important targets. Job guarantee program could play a major role in these two sectors.

India is the second largest producer of crude steel in the world and the third largest consumer of the finished steel after China and USA, however, its per capita consumption is only 69 kg as against the global average of 214 kg. With huge investments in infrastructure and construction sector, steel demand and corresponding consumption is expected to grow at an average of 7.4 per cent. This will lead steel production to go up to 255 million tonnes by 2030 and per capita steel consumption to 160 kg.

Warren Mosler:
Selected posts from @wbmosler:

"Taxation is the intervention that creates unemployment by design for the further purpose of the state being able to hire those it's tax caused to be unemployed.  The JG works to transition the unemployed back to private sector employment and optimize output".

"Assuming Gov is fully provisioned, it can 'correct it's mistake' by lowering the tax until they return to the private sector.  The JG promotes that transition from unemployment to private sector employment because employers don't like to hire the unemployed, etc. etc".

"The govt. created unemployment, by design, by imposing tax liabilities, for the further purpose of provisioning itself by spending it's otherwise worthless currency.   Residual unemployment is the evidence that the tax liabilities created more unemployed than the gov hired".

"Gov. spending is the awarding of tax credits.  If you call that 'printing money' then taxing is 'unprinting money' as it is the redemption of those tax credits.  So if you're looking for redemption, pay your taxes...  ;)".

"It's about sufficient deficit spending- public + private- to offset desires to not spend income".

"MMT only has the understanding of the source of the price level. Govt is the price setter & what that means is price level is necessarily the prices paid by Govt when it spends or collateral demanded when it lends. But, the Govt thinks that the dollar comes from the private sector and there is no other option but to pay market prices for everything they buy; what happens during these is market prices start coming up which normally would be an one-time event that would reverse if the Govt do not pay those higher prices, but when the Govt pay more for the same thing, then the price remains at that level".

Randall Wray:
Selected posts from Randall Wray:

"Currency creation through spending comes first. But how can the treasury spend first, since it needs deposits (at the central bank) to avoid bouncing checks? Central banks are generally prohibited from providing overdrafts. Hence, they worked out procedures to ensure that the treasury obtains deposits through sales of bonds that are purchased by banks using either overdrafts or borrowed reserves supplied by the central bank. This serves effectively as an end-run around the “no treasury overdraft” rule. Once the treasury spends, bank reserves are replenished. If banks don’t want to hold bonds, they can be sold to the central bank in secondary markets. However, banks normally do not want excess reserves created by government spending, so they willingly exchange them for (higher) interest-earning bonds. 

Normal Fed operating procedure ensures banks always get the reserves they need to buy bonds—which allows the Treasury to get the deposits it needs in its account at the Fed. Furthermore, Treasury doesn’t have to issue any bonds, as rules can be changed to allow overdrafts at the Fed. In that case, the Fed can still maintain a nonzero interest rate target by paying interest on reserves (as it has done since the global financial crisis), rather than using bonds as the interest-earning alternative to keep the fed funds rate up in the presence of excess reserves."

"A key insight of MMT is that bond sales by the treasury or the central bank are functionally equivalent operations. The conventional view is that treasury sales are a borrowing operation while central bank sales are an open market operation, but in either case the functional impact is to withdraw reserves from banks. Government spending puts reserves into the banking system and the reserves can only leave the system through bond purchases, tax payments, or cash withdrawals from deposits. Cash withdrawals are normally small (with seasonal variability); national government taxes are large but with temporal variation and are usually—for most countries—significantly lower than sovereign government spending. To avoid wide fluctuations of reserves and to deal with net reserve accumulation due to government spending in excess of tax payments as well, the central bank and treasury coordinate bond sales to drain excess reserves. For this reason, MMT sees bond sales as part of monetary policy operations—whether undertaken by the central bank or by the treasury."

"A sovereign government cannot run out of currency. Major central banks demonstrated this with QE, as they “keystroked” trillions of dollar, euros and yen as payment for large-scale asset purchases. They could just as easily “keystroke” reserves to banks to allow the treasury to spend".
Bill Mitchell:
Fadhel Kaboub:
Mathew Forstater:
Stephanie Kelton:
Pavlina R. Tcherneva:
Scott Fullwiler:
Eric Tymoigne:
MMT history and overview

What is Money? by A. Mitchell Innes

Modern Money Theory 101: A Reply to Critics

Heterodox Views of Money and Modern Monetary Theory by Phil Armstrong

Flow of Money - Sectoral Balances

Sectoral balances and permanent fiscal deficit

Flow of Money - Revisited

MMT: Modern Monetary Theory ....Introduction

Full Employment & Price Stability, which is at the heart of MMT, 
could be achieved by Governments, 
       if only they understand how monetary system really operates          
under the current fiat money regime.
Different monetary regimes have different operational realities.

Yes, it could be achieved by Governments issuing their own fiat currency, provided they understand how money gets created and how monetary system really operates in a fiat money system. It is very critical that it is fiat currency, not gold standard or pegged to a foreign-currency.

Having never let money play an explicit and prominent role in their theories for decades, orthodox economists completely missed the significant shift in money creation and monetary operation when fiat money system was quietly ushered-in, failing to realize that the currency issuer under a gold standard has different operational realities than the currency issuer under fiat money system and a central bank under gold standard has different operational realities than a central bank under flexible exchange rate.

There are two competing approaches to money, with the orthodox approach dominating most research and policy formation to the virtual exclusion of the other. Historical evidence on the origins of coins and money seems to conflict with the dominant approach to money, against the neglected chartalist approach to money.

“Inconvenient as barter obviously is, it represents a great step forward from a state of self-sufficiency in which every man had to be a jack-of-all-trades and master of none….If we were to construct history along hypothetical, logical lines, we should naturally follow the age of barter by the age of commodity money. Historically, a great variety of commodities has served at one time or another as a medium of exchange: …tobacco, leather and hides, furs, olive oil, beer or spirits, slaves or wives…huge rocks and landmarks, and cigarette butts. The age of commodity money gives way to the age of paper money…Finally, along with the age of paper money, there is the age of bank money, or bank checking deposits.” (Samuelson 1973: 274-5)

“The modern state can make anything it chooses generally acceptable as money. It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done. Everyone who has obligations to the state will be willing to accept the pieces of paper with which he can settle the obligations, and all other people will be willing to accept these pieces of paper because they know that the taxpayers, etc., will accept them in turn.” (Lerner 1947, p. 313)

"The central idea of the alternative view is that the value of money is based on the power of the issuing authority, and not by any embodied or backing precious metal. Hence, Chartalists give a central role to the state in the evolution and use of money. For the most part, this evolution is not linked to reduction of transactions costs of exchange. Rather, the evolution of money is linked to the needs of the state to increase its power to command resources through monetization of its spending and taxing power."(Randall Wray, 2000) The critical point is that governments impose fees, fines, and taxes to move resources to the government sector, and that for many thousands of years, governments have imposed these liabilities in the form of a monetary liability.

Minsky argued “the fact that taxes need to be paid gives value to the money of the economy. [T]he need to pay taxes means that people work and produce in order to get that in which taxes can be paid.” (Minsky 1986, p. 231)

The monetary system, itself, was invented to mobilize resources to serve what government perceived to be the public purpose.

"Understanding how monopoly money works would advance public policy formation a great deal. Unfortunately, government, usually, does not recognize it operates monopoly money, believing that money was an invention of private markets and it must pay “market determined” prices-whatever that might mean. Unemployment and inflation are the results of this misunderstanding."(Randall Wray, 2011)

A Job Guarantee (JG) model, which is central to MMT, is a key policy tool to resolve both inflation and unemployment. Therefore, given the right level of government spending and taxes, combined with a Job Guarantee program, MMTers state emphatically that a nation can achieve full employment along with price stability.  

The constraint is real resources a nation can command, not monetary. The available resources (goods and services) that are for sale in the currency of issue define how much fiscal space the government has in a fiat money system, millions of workers in need of jobs, capital equipment lying idle, natural resource inventory and other productive resources looking for a buyer (user). That is what fiscal space relates to in a modern monetary economy.                                                                                                                              

Modern Monetary Theory is a description of how the monetary system actually works and a set of policy proposals that arise from this description; fiat money system is what is prevalent in most of the countries presently, as they moved away from gold standard after Bretton Woods System collapsed, when United States unilaterally cancelled the direct convertibility of the United States dollar to gold in 1971 under President Nixon.

MMT is more descriptive of monetary operations than prescriptive of policy; it describes how money & monetary system operates. From this description, a set of policy proposals are derived. Differentiating a currency issuer from a currency user goes to the heart of MMT. The tremendous advantage a currency issuer has in a fiat money system  was missed by almost all the policy makers, the subtle shift under fiat currency made a huge difference to the way money gets created and operates and so to policy making.

Understanding the monetary system and knowing exactly how it really works is the prerequisite for a policy maker (including how money is created by Govt, how Govt spends money into existence and taxes it out of existence, how money is created with a keystroke (as stated by Ben Bernanke & Alan Greenspan), how Govt creates currency to provision itself, how Govt spending is not restricted by revenue from the day fiat money is adopted, how Govt spending is whatever the Govt chooses it to be, how Govt borrowing is not to meet its spending but to drain excess reserves from the banking system to support overnight interest rate, how deficit spending provides equity that supports the entire credit structure, how Govt being money monopolist could set the price and brings down inflation at all times, how trade deficit could be made beneficial if the importing nation insists that the import should be in its currency, how Central Bank acts as the ’lender of last resort’ and how reserves are added and drained).

The above facts got opened up to the world when Warren Mosler dared to look at the monetary system without the assumptions associated with gold standard.

Any policy maker has to first understand, how a monetary system operates and then it opens up plethora of policy options which was not seen as possible otherwise.

Monetary system under fiat currency is vastly different from monetary system under gold-standard. Monetary regime under a gold standard, a system in which arguably the government was required to tax or borrow to fund government spending, is different, highly restrictive and limited in its scope. Quantity of money creation was restricted by gold-holdings in gold-standard; monetary system under fiat currency doesn't have that restriction and opens up opportunities for a Govt to deliver its responsibility to serve the economic needs of all its citizens; it is the Govt which declared a paper as currency and imposed tax liability in that currency on all its citizens to provision itself and created unemployment in the process (Before money, tax-liability and other economic controls imposed by Governments, people were directly producing their needs and they were not 'unemployed', except in slavery).

Income-tax & corporate tax are not the only taxes, there is tax on every product and service we consume, even on safety-pin & salt; so, every citizen is a tax-payer. Let it be reiterated again, to provision itself only, Govt declared a paper as currency and imposed tax liability in that currency on all its citizens. That is, Govt creates a currency system to provision itself, as it has been happening from the days of kingdoms and invaders (India is estimated to have lost $45 trillion to British Empire through taxes and other economic terms set by them). Meaning, Govt takes (purchases) products, labour and other services from its citizens in exchange for a paper it declares as currency and tax-credit by imposing tax liability in that currency.

We are not meaning in any way, currency is not valuable for the user. Obviously, it is valuable being a tax-credit and the only monetary unit of account, the basic building-block of the economy. But, for the issuer, it is a means to provision itself.

It is clear, taxation for a currency-issuer is not for revenue, it is to make every citizen liable in a currency in which tax is imposed, so that they need to work for that tax-currency; in that sense, they are all unemployed by design. Then, they offer, directly or indirectly, labour, product and other services to earn the tax-currency. The structure evolved is, by declaring a paper as currency and imposing tax liability in that currency, Govt provisions itself. In the process, if the Govt doesn’t employ everybody, it means that its spending is not enough to cover all its citizens, as the tax has created more unemployed and the evidence is unemployment. In this provisioning structure, role of private sector is inevitable and necessary.

Govt imposing tax liability on all its citizens and not resolving the unemployment its taxation creates cannot be justified on any ground and it is against the spirit of social contract and so Govt is  responsible to resolve it. Private sector being a necessary and inevitable part of this structure, productivity of all its constituents has to be ensured. So, Govt has to be the employer of last-resort by providing transition jobs till the private sector could employ most of them, to repair the damage it caused by under-spending. Job Guarantee providing transition jobs is the solution to facilitate unemployed people's transition back to the private sector.

Introductory material on MMT: