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Tuesday, October 13, 2015

Book Review: The National Debit

The book The National Deb(i)t: How the Post-Gold Standard Modern Monetary System Really Works (Second Edition) by Edward J. Delzio is a good introduction to Modern Monetary Theory (MMT).  Like the reviewer, the author worked in the fixed income markets, and was similarly attracted to the insights provided by MMT. Although I believe the book is worthwhile, it must be kept in mind that it is introductory, and it is not enough to grasp some of the online debates surrounding MMT.

Book Description

The second edition was published in 2015, by Dog Ear Publishing. It is fairly slim, at 103 pages, and without a bibliography or endnotes. Given the target audience, the lack of a bibliography is reasonable, but it also limits the book for more advanced readers.

The book is focussed on the operational aspects of MMT: floating currencies, central bank operations, and the role of national debt. If there is a discussion of the Job Guarantee (which is an important aspect of MMT), I missed it. (The Job Guarantee is a programme where the central government guarantees a job for everyone, at what is the effective minimum wage. Since it requires working at a government-sanctioned workplace, it is distinct from "guaranteed income" schemes that are becoming popular amongst progressive activists.)

The author had a 30-year career in fixed income, working in New York and Tokyo. The historical analysis is generally centred on the United States economy, but he also works in examples from Japan. The book covers some of the recent areas of debate in the United States, such as Quantitative Easing and the debt ceiling.

I will not attempt to summarise the main points of the book within this review, but the main theme is that the mainstream fixation on the national debt is misplaced. Since Federal government debt is an asset of the "non-Federal Government" sector (private sector, foreign sector, state & local government), the "national debt clock" is really a measure of non-central government assets. Moreover, he suggests since government bonds are denominated in a unit of account that the Federal Government can create without using real resources, it is not really "debt," in the same way that equity is not a "debt" of a corporation, since it can be freely issued. (But please note the debate around equity that I discuss here; Delzio may actually be out of step with the "official" MMT line on corporate equity.)

Book's Strengths

The National Debit is a straightforward read, particularly for those with experience in the financial markets. It focusses on the aspects of MMT that are of most interest for financial market participants, particularly for fixed income investors. The attraction of MMT is that offers explanations for bond market behaviour that are counter-intuitive from a "mainstream" point of view.

As someone who was in a similar position, this attractiveness cannot be understated. The mainstream approach to the bond market is hopelessly incoherent. Two contradictory views are simultaneously embraced.
  1. The markets are super efficient at discounting the future (rate expectations theory).
  2. The government bond market is priced based on an irrational fear of default. (The best course of action for bond holders is to roll over debt.)
I learned to ignore most economists' views about interest rates; the only economists worth following had enough experience to unlearn whatever nonsense they were taught in university about interest rates. On the other hand, the MMT approach to "interest rate formation" is coherent, simple, and fits the facts on the ground. This is why there is a sub-culture of MMT enthusiasts within finance.(Austrian economics has a foothold in finance for a similar reason. Only a cloistered academic could believe that recessions are caused by fluctuations in productivity.)

Delzio gives a justification for the policy of continued 2% inflation; the idea is to punish hoarding behaviour. This runs right into the popular Austrian complaint about the U.S. dollar losing 97% of its purchasing power over time. It may have been useful to more directly take on the Austrian story, since it is a very popular factoid incorporated into many pieces of Austrian analysis.

Limitations Of The Book

The book does not attempt to cover the wider theoretical debates within economics, which erupt periodically across the internet. My ebook -- Understanding Government Finance -- covers similar ground, but I deliberately avoided making it purely an introduction to MMT. The reason being is that I find it somewhat difficult to distinguish MMT from the wider post-Keynesian school of thought.

In Marc Lavoie's graduate text on post-Keynesian economics (reviewed here) covers the schools of thought within post-Keynesian economics. He sees underlying similarities, creating what he calls "broad tent" post-Keynesian thought. Modern Monetary Theory fits within that broad tent, with a coherent view on certain topics. What distinguishes MMT from others is the emphasis on monetary operations, as well as the embrace of free-floating currencies.

When I read the academic articles by MMT, they fit within that existing tradition. I assume that there are some arguments over who should be cited, but only an academic can really care about those disputes. (I write as a lapsed academic.) But the popular MMT works probably discuss the rest of post-Keynesian economics less than they should.

At the same time, not everyone is in agreement with Marc Lavoie about "broad tent post-Keynesianism." There are "narrow tenters" who would dispute that MMT is actually post-Keynesian economics at all. There are petty academic disagreements, as well as more substantive disagreements about policy stance. (For example, a standard complaint is that MMT is "U.S.-centric" and "only works if you are the reserve currency." This seems ridiculous; one of the "founders" of MMT -- Bill Mitchell -- is an Australian, and I am a Canadian. Neither the Australian nor Canadian dollar are reserve currencies, the last time I checked.)

If you want to get deeper into those sorts of arguments, you will need to find more advanced texts.

Even if you are not concerned about theoretical debates, it would have been nice to have some charts of economic and financial time series to illustrate points. Purely textual arguments are best buttressed if you can point to how they show up in real world data. For example, he cites the U.S. experience of U.S. fiscal surpluses being followed up by depressions/recessions. This is an argument that I would be cautious approaching. One could debate the U.S. experience about government surpluses. Moreover, Australia and Canada had Federal surpluses without perceived negative consequences.

Delzio follows the conventional line about the role of interest rates (that lower rates are stimulative for the economy), although he notes the MMT dissent about the effectiveness of Quantitative Easing. The belief that low interest rates are ineffective is not considered a "core belief" of MMT, even though Warren Mosler (one of the "founders") advances the idea. Although an interesting area of debate, it was probably a good idea to avoid it as being too much for most readers to absorb at once.

Concluding Remarks

The book is a good introduction to Modern Monetary Theory for the non-specialist reader, particularly those in finance. More advanced readers might find it useful to understand what are the perceived advantages of MMT with regards to understanding fiscal policy. However, it is not aimed at those who are interested in academic disputes.

(c) Brian Romanchuk 2015


  1. I found Delzio's description of US spending as just adding debits to the spent account very useful in explaining to others why the federal debt is not "debt" per se. It helps to view federal spending as entering a debit rather than as incurring a debt.

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  3. The US National Debt is a debt; it is the debtiest debt there is, using the word "debt" in the most ordinary and universal way. Thinking that it is not "debt" per se is the opposite of MMT - at least if "MMT" means academic MMT in books & papers & writing on the web, as opposed to incoherent popular web-MMT that recapitulates the defects & perhaps the history of the Keynesian consensus & the postwar era.

    1. Firstly, MMT revives Functional Finance, which is a key part of post-War Keynesianism. There was a split between the Old Keynesians and the post-Keynesians, but MMT could be viewed as a revival of some old ideas.

      Secondly, I am not too interested in linguistic games. Not referring to government debt as debt is somewhat contradictory to Chartalism, but at the same time, various MMT academics have grumbled about re-labelling government bonds as something other than "debt".

  4. various MMT academics have grumbled about re-labelling government bonds as something other than "debt".

    Are you saying they propose this, or oppose this?

    1. I guess it's not clear - I have seen it proposed, but I do not have a reference handy,

  5. Well, this "relabelling" or proposal is the opposite of MMT, the opposite of Mitchell Innes. So I don't think any MMT academics have proposed such nonsense that would contradict the rest of their work! However such suggestions or nutty distinctions between "liability" & "debt" are often made by fans of MMT. If you look at Wray's or others old posts at New Deal 2.0 - or at NEP, he rightly criticizes such fans for this kind of thing. I also think it is a serious matter. But it seems most of the fans of MMT don't understand this - and therefore don't understand MMT at all.

    1. It was not a serious policy proposal, rather it was more a brainstorming idea on a blog by one of the main MMT authors (Wray, Mitchell?). The context was that fiscal conservatives had framed the debate about government spending by relating it to the common sense view that "debt is bad", and there needed to be a way of reframing the debate. However, the idea was not really followed up on.

  6. I know this post is 2 yrs old but I want to comment about this statement

    "Moreover, Australia and Canada had Federal surpluses without perceived negative consequences"

    The response to this would be Australia and Canada running trade surpluses. US has been a net importer for a while now and its not going to change anytime in the near future. Its just the basic sectoral balances equation.

    1. I would need to look at the data. The Canadian trade balance tended to follow commodity price trends, and working from memory, the surplus coincided with weak commodity prices. As for Australia, they tended to run current account deficits, although their statistics are skewed by large international resource corporations.

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