Randall Wray is probably the best known representative of a branch of economic thinking called Modern Monetary Theory (MMT). On Naked Captilism I read his polemic called “Debt-free money and banana republics“. I am more than a bit disappointed. From somebody like Randall Wray, who specializes on debt, I would have expected a more careful treatment of the relation of money and debt, especially if he wants to be vitriolic and call those cranks, who argue for “debt-free money”. Randall does not seem to know, what debt is.
My comment on Naked Capitalism is still “awaiting moderation” after about five hours, so I post it here. For anybody interested in monetary reform, it is worth reading Wray’s article and the comments, as they give a good flavor of his attitude and make it clear that it is pointless to try and form an alliance with him and people of his kind, even though the MMT-people are among the ones who understand money best. But they are also hell-bent on telling us, it is the best of all systems. This is my comment:
Randall writes damningly:
“Imagine a cloakroom that issues “debt-free” cloakroom tokens. You can return them to the cloakroom, but you don’t get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts. What is a “debt-free” cloakroom token? It is a piece of plastic”. Its value is determined by the value of the plastic.”
This is off the mark. A cloakroom is not issuing a debt-token. The coat still belongs to me. All I get is a token that helps me proof that I gave the coat for safekeeping. It is not money and it has no debt attached to it. Nobody will accept this token for payment.
In the case of government issued tokens he is also off, though not quite as far:
“Imagine a sovereign that issues ‘debt-free’ coins. When you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.”
Okay, formally, the coin is a debt of the government, but a very specific one and the macro-economic substance of the act of issuing the coin is very different from what banks do, when they issue what “debt-free-cranks” call “debt-money”.
By issuing the coin, the government allows a provider of goods or services to bring forward the settlement of their pre-existing tax debt to the government. The coin can be understood as a receipt that the tax has been pre-paid. If the recipient of the coin simply keeps it, till his taxes are due, he can show the coin to prove he already paid. Thus, by issuing the coin, the government creates a negative debt (which is made fungible to be able to serve as money).
This is very different from what banks do, when they create deposit-money by issuing a loan. There is no pre-existing debt of the customer taking the loan. By giving the loan, the bank creates new debt (for which interest is to be paid, whether or not it is put to productive uses).
Another sloppy argument:
“The ‘debt-free money’ cranks hate payment of interest by government. I’m not sure, but I think what they really want to do is to prohibit government payment of interest. That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds. I’m with them. Advocate ZIRP, not banana money.”
This whole thing of exemplifying debt-free money with bananas is beyond sloppy. Bananas are extremely perishable and thus the last thing you would use as money. Use gold or silver in your examples, please. By legislating ZIRP for the FED forwever, you will not have done away with the interest that banks charge for the money they create in the form of additional debt.
I find it quite troubling that some MMT-people who are usually so precise and clear when they make their own case are becoming so sloppy when they are in the business of discrediting the findings and convictions of neighboring tribes. This is sectarianism at its worst and really the best anyone can do to preserve the Wall-Street-inspired economic orthodoxy.
P.S. (13 May 2017): My comment was never published on Naked Capitalism. All what was published was my question on why it was still awaiting moderation and the answer by Lambert Strether referring me to the comments policy and the 24-hours-turnaround for comments mentioned there. Worse, even, Randall Wray clearly responds to the the arguments raised in my comment, in a follow-up rant, even quoting me on “Nobody will accept this token for payment”, without explicitly referring to them, and without them ever being published under his original piece.