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. 

ENSURING BASIC NECESSITIES TO ALL AT ALL TIMES & HAVING A FUNCTIONAL STRATEGIC & CRITICAL INFRASTRUCTURE TO FACE EXIGENCIES LIKE THIS ARE THE LESSONS LEARNT BY ALL COUNTRIES FROM THIS ATTACK. If not, why all of us work so hard & for what?'

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.

Recommendations:
  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 foreign-currency standard.

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".
Fadhel Kaboub:
Bill Mitchell:
Stephanie Kelton:
Pavlina R. Tcherneva:
Mathew Forstater:
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 foreign-currency standard.

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:




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.

So, if Govt understands how money gets created in a fiat money system and how monetary system really operates, then it could fully deploy its human resources in its productive function.

What is monetary sovereignty? When a country has exclusive authority to issue and retire its own currency, it is monetarily sovereign. Also when it taxes its population in that same currency (which incidentally retires the currency), issues debt denominated only in its own currency and doesn’t fix the value of its currency to a foreign currency or a commodity like gold (In other words, monetary sovereign governments don’t follow the gold standard or fixed exchange rate regimes), it satisfies the definition of monetary sovereignty.  Plenty of nations do that. 

Money gets created by a keystroke when Govt spends (as stated by Ben Bernanke & Alan Greenspan) and a bank lends (Bank of England: money creation in the modern economy) (Deutsche Bundesbank: The role of banks, non-banks and the central bank in the money creation process); as long as real resources are available to purchase, money created these ways will not lead to inflation; however, Govt doesn’t have to pay higher prices to purchase what it wants. Prices paid by Govt define the value of currency. It’s a simple case of monopoly. Govt being money monopolist could set the price and inflation (Warren Mosler: Government Is Money Monopolist, Therefore It Sets The Price).

Govt declares a paper currency as money unit of account and then imposes tax, payable only in that currency and Govt is the monopoly issuer of that currency; now, that currency has to be earned, directly or indirectly, from Govt by selling labour, products and other services to the Govt; it implies that the tax-liability has created unemployment. This is how the cycle operates and Govt necessarily spends, as provisioning itself is the reason for the entire exercise. Unemployment created by tax-liability and employment generated by Govt spending may not match most of the time. Once the provisioning cycle is over, if there is unemployment, it is an evidence that Govt spending is inadequate to reverse the unemployment created by tax-liability.

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. Important and inevitable roles of public sector are planned development to ensure economic sovereignty to the extent possible, building the basic infrastructure, maintenance of the infrastructure created, ensuring balanced regional growth, bridging the gaps in industrial structure, operating critical minimum capacity in essential sectors all the time at any cost, counter-balancing the monopolies, investing to attain food, energy & technology sovereignty, keeping buffer-stock of essential commodities, playing the role of stabilizer at the time of glut and shortage and creating financial & distribution infrastructure and access to every citizen. The above are the critical functions of the public sector. Both sectors are vital to the economy and mostly are complementary. Public sector should also act as counter-cyclical stabilizer, which is a critical role. Obviously, these roles cannot be driven by profit motive and the fiat monetary system suits this perfectly.

Provisioning the Govt is met by non-Govt sector - the individuals, enterprises and corporates. Private Sector plays a significant role being major part of economic activities. So, private sector is the major employer. As the Govt controls and sets the terms of economic and livelihood activities (including how much of real resources (products, labour and other services) is surrendered to public domain by private in exchange for what it calls as currency, get that currency back as tax and extinguish it, how much surplus spending to incur to increase the money supply and savings at the hands of people which acts as equity to the entire credit structure, that way being responsible for credit money creation) and creates unemployment by imposing tax-liability, it has to provide the transition job till private sector could absorb them. The provisioning structure also requires the non-Govt sector to be productive.

Private sector's utilization of human resources expands or shrinks dependent on market condition; public sector should play counter-cyclical role, acting as employer of last resort, releasing the productive capacity of a nation at all times; Govt being the currency-issuer and price-setter, public sector can act as buffering and stabilizing anchor in any market condition; as Govt is the monopoly currency-issuer, it cannot abandon this duty to the market forces. Markets operate within the institutional structure set by the monopolist.

Having created unemployment through taxation, Govt has to offer a job guarantee program providing transition jobs, automatically increasing government employment and spending whenever jobs are lost in the private sector, and decreasing government jobs and spending whenever the private sector expands. JG Program, for a country like India, offers a massive productive opportunity to create the lacking basic infrastructure throughout the country, which will lay the foundation for growth and well-being through out the country, encompassing all its citizens.

JG could be utilized to create comprehensive public infrastructure to make each village & state self-reliant with respect to basic needs and at the national level in all sectors; an institutional structure from the national to village level, on the lines of MGNREGA, has to be in place (if there is one Job Guarantee Program in any part of world which is functional, effective and vast, it is MGNREGA; it is the largest JG program in the world; the institutional structure in place implementing MGNREGA could be the base for the JG program); complete overhaul of all the policies and frameworks is necessary to reflect the operational realities of fiat monetary system.

Enormous benefits available to a currency-issuer would be lost if it is not backed by institutional structure based on exact understanding of monetary operation. Almost total dependence on own currency and minimal dependence on foreign currency for imports should be the policy goal. Self-reliance in all sectors, large investment in import-substitution and energy-independence, technology independence and food self-sufficiency have to be accomplished; indigenous payment system and communication infrastructure have to be established. To achieve the above, both public and private sector have to play their part. For Central Govt and its Undertakings, there is no financial limitation, as explained above, for investment. But State Governments, Municipalities and State Undertakings are not currency issuers. So, they should be provided with loans at 0% interest or grants for the same. To achieve the above, monetary resource and human resource are not constraints for India. With respect to natural resources, it has to be sensitive to the environment.

Most of the developed countries were invaders at one point in time and continue to do so directly or indirectly. Internally, the advantaged are the beneficiaries of institutional structure at the cost of vast majority, but shamelessly justify ‘might is right’. Globally and locally, we need to admit, world only has limited common resource meant for all of us, including trillions of other beings which acting together make living possible in this part of the universe. At the rate exploitation and depletion of natural resources is happening (including the critical water resource), the damage could be irreversible and we may be forced to cut-down abruptly. But, as usual, we will not respond to this caution. The option is, Govt to focus on creating basic infrastructure to meet decent living standards for all its citizens as a primary function and then on other development goals, but even this has to be segregated responsibly, keeping the exigencies in mind.

Possible employment and investment options under JG:

India is blessed with huge human resources, very large market and vast infrastructure to be built all over the country – an ideal platform for (applying) policy options derived from the understanding of monetary operations in a fiat money system.

Vital role of public sector: Private sector being driven by profit maximisation cannot serve the public purpose; many years of market economy has widened the disparity massively, leaving billions of people vulnerable; Govt being the monopoly currency-issuer and the one which controls and sets the terms of economic activities, it cannot abandon this duty of public purpose to the market forces; the way the structure is set up, public sector has to be the lead player in providing the basic services and infrastructure to people and also in the critical and strategically important sectors. 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 that; if 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 development; at the time of climate emergency, we may have to halt all our economic activities; instead of that, if Governments segregates their economic activities as suggested above, then during climate  emergency, the basic essential functions and the critical and strategic functions could be continued, so that the vulnerable segment, which would have got affected badly, will be protected and others also would get the basic services.

What are these three segments?

Essential & basic services: It means ensuring basic essential living condition to every citizen, covering water, food, shelter, healthcare and education. Job Guarantee Program could be utilized to create all the assets necessary to make these basic services available. As this doesn’t put free money in the hands of people, without creating any productive asset or services, it will not lead to excess money chasing fewer products. 
Target areas are: piped water supply to every household (barely 18 per cent of India’s rural households have access to piped water, out of 178.7 million total rural households), increasing irrigation capacity, water conservation, recharge and storage using traditional methods, utilizing all possible means to store as much water as possible, to ensure food-security and greater income in the agriculture sector on which 65% of the population depends.

Food Park at every village affiliated to an Agricultural University which will be under an umbrella institution at the State & National level, cultivating, processing, storing and supplying grains, vegetables, fruits and other food products including milk (both at the regional and national level, it will be a coordinated & planned operation, as shown by Verghese Kurien, the 'Father of White Revolution', to achieve many objectives like controlled production to avoid excess supply, value-addition, profitable operation, farm-to-fork supply-chain to benefit both the farmers and consumers, food-security, nutrition-security and increased intake of fruits & vegetables in food). Seed preservation, support to organic farming, stubble conversion (stubble burning causes huge environmental problem), water management (including rain-water harvesting & run-off river water storage in ponds, barrage, dams and ground-water recharge), warehouse, cold-storage, food-processing, marketing assistance, assistance in contract-farming, end-to-end financing and insurance could be part of the food park activities.

Similar comprehensive programs have to be structured in housing, healthcare and education to make them available to every citizen.

Critical and strategic infrastructure: Critical sectors means sectors which are critical to the nation and whose incapacity or destruction will have a debilitating impact on national security, economy, public health or safety.

Strategists have identified different categories of sectors that are considered to offer vital services and thus require protection. These are the core sectors and possibly the areas where a large-scale interruption would be most devastating:

Energy: electric power, gas, and oil
Food: food supply, and food safety
Water supply
Critical manufacturing
Chemical and nuclear industry: transport, storage, production, and processing of dangerous materials
Transportation (air, surface, rail & water)
Banking & Finance: payments (bank retail) and financial transfers by the Administration
Telecommunication Infrastructure
Defence 
Space
Law enforcement, security & intelligence
Sensitive Government organisations
Public Health: hospital and rural care, medicines, and vaccines
E-Governance

As the above functions are critical for the well-being and safety of the nation, it cannot be run with profit alone as the motive and so public sector has to play a major role or at least control critical capacity in these sectors.

Other economic activities: Economic activities, other than essential basic services and critical strategic functions, will come under this. Unlike the above two essential segments which have to be run at all times, recession or otherwise, other economic activities which is almost totally under private sector, will expand or shrink in response to market condition.

As most of the manufacturing and service industries would come under this, what is the best strategy for growth in this segment? “India’s GDP momentum sustained 7% growth for several years due to big expansion of roads, electricity and telecom to rural areas that boosted internal trade between states, producing the economic gains that small countries can gain only from international trade. But now over 90% of the country has roads, electricity and telecom, so further gains are tapering off. Also, in the 2000s, India produced three world-class industries — software, automobiles and pharmaceuticals. But in the 2010s, it hasn’t produced a single new world-class industry” - Swaminathan A Aiyar, TOI. To have similar or superior impact on economy and people, rather than groping in the dark for probable means, job guarantee program itself could become the means and around it, projects could be structured to develop the essential basic infrastructure, the critical and strategic infrastructure, other economic activities to support those infrastructures and additional economic activities possible during expanding economy, without causing damage to environment and over-exploitation of resources.

As stated earlier, self-reliance in all sectors, large investment in import-substitution, energy-independence, technology independence and food self-sufficiency have to be accomplished; indigenous payment system and communication infrastructure have to be established. As exports are cost to the economy, focus on it could only be to the extent of foreign currency needed for import; otherwise, we should strive to import paying our own currency.

As described in detail, understanding how monopoly money works would advance public policy formation a great deal. Unfortunately, government, usually, does not recognize it operates monopoly money. Once the policy makers understand that the currency is created through spending by a currency-issuer (meaning, there is no separate currency printing or creation before spending; Govt, being a currency-issuer, creates currency as it spends) and in a fiat currency system, tax is not a revenue for a currency-issuer, Govt creates money and imposes tax to provision itself, Govt is the price setter & the price level is necessarily the prices paid by Govt when it spends and the so-called ‘deficit-spending’ only provides savings and equity to the non-Govt sector that supports the entire credit structure, then the twin-issue of monetary-resources and inflation are addressed and the quantum of Govt spending is whatever it chooses it to be.