Soft Currency Economics II: The Origin of Modern Monetary Theory

by Warren Mosler

Soft Currency Economics is the little book that could logically, in both real and nominal terms, legitimately challenge many of the core held beliefs of the mainstream classical and neo-classical schools of economics. It is a corner stone publication for the new, widely popular fresh approach to economics that has come to be called Modern Monetary Theory (MMT). It explains with actual facts, not theory, and with non-technical language, the true operational realities of our monetary system (central banks and private banks). The author, a 40 year 'insider' in monetary operations, and a very successful fixed income hedge fund manager, wrote this book in 1993 after witnessing the markets drastically discount sovereign debt on the errant belief that market forces could force nations into default on debt payable in their own currency, and that austerity was the only solution. This was contrary to the author's understanding of what are called fiat currencies, where governments always have the ability to meet all obligations in a timely manner. As a result of this experience, the author took up the task of educating government officials on how the monetary system operated with the hope that with this understanding they would be free to ensure that the government acted for the public purpose and achieved their stated goals of full employment and price stability. Initially published in 1993, this book will utterly convince many readers that what they thought they knew about monetary policy is wrong.
The book describes: what is money; why debt monetization and the money multiplier are myths; how fiscal and monetary policy can be used effectuate full employment; deficits do not cause countries to default on their debt unless that is the decision.

Genres: Economics, Nonfiction, Business, Finance

94 pages, Paperback

First published October 25, 2012

Reviews

[Debbie Notkin · Rating 4 out of 5]

I am seriously trying to understand "modern monetary theory." A friend who is doing the same recommended this book to me, on the grounds that it is short and clear. It is short, and it is quite clear, but it was still a little over my head. I think it was helpful to me in grasping more of the basic concept (which is, very roughly, that governments that issue money must operate at a deficit, because the government deficit is what makes money circulate in the private sector). If the MMT theorists are correct, the whole "balanced budget" argument for national governments is completely wrong-headed.

Mosler is a money man, and not at all a political radical. He thinks clearly, defines his terms, shows his work, and is quite convincing. I just need to understand more of the underlying system to make up my own mind.

I am more and more coming to beliee that money is almost entirely fictional, and all the questions about money are really "why do people believe this?" and "what will change what we believe?"

[Tenzin Rose · Rating 4 out of 5]

Great book, I’m slowly connecting the dots on how the modern financial system works. I really wish MMT (at least the descriptive side of it; less the prescriptive) would rebrand into something as bland as Modern Monetary Operations. I get it, MMT is better for PR but the term gets misconstrued as a political ideology - it’s really just trying to explain the modern fiat system.

Mosley breaks it down in clear English and while the book is short, to truly comprehend it you have to validate the cause/effect with your own thinking until the intuition is crystallized. Will def need to read it again.

At its core, you can’t argue what is being delivered: a sovereign nation that can spend & print their own money can never go insolvent. Taxes create the demand for currency and fiscal policy is what puts currency in circulation (along with defining the cost of money).

That said, where does this system go wrong? Centralization & dependency on the Fed to control the markets (we’re close to Chinas model then politicians will let you know). With ZIRP asset prices tend to rise (inflation?) creating inequality.

I removed a star as some of the policies around the Fed are out of date which can create confusion for the reader (not the authors fault).

[Cameron Mitchell · Rating 5 out of 5]

Fascinating read about reserve banking and what can be done. Ill have to re-read because of the content was vast but short.

[Alex · Rating 3 out of 5]

there are clearer explications out there

[Patrick Gendron · Rating 5 out of 5]

Warren Mosler’s book Soft Currency Economics was a refreshing dive into the monetary policies of sovereign currency issuing govts and a timely reminded of what the real constraints are in these systems.

The book starts out with Mosler analyzing the sovereign debt crisis that emerged in Italy in the early 90s. Markets had severely discounted Italian sovereign debt on the errant belief that market forces could force nations into default on debt payable in their own currency, and that austerity was the only solution. This was contrary to Warren’s understanding of what are called fiat currencies, where governments always have the ability to meet all obligations in those currencies in a timely manner.

The Italian bonds did not default and Warren Mosler’s understanding of fiat monetary systems was proven to be sound. This started a movement that was eventually called Modern Monetary Theory (MMT). MMT has since been used as a lens for looking at sovereign monetary systems in a way that ensures that govts act for the public purpose and achieve their stated goals of full employment and price stability.

Despite this book being written over 30 years ago, the information is more relevant than ever. The neo-classical economists from the days of gold backed currency still dominate the discourse about monetary policy and are still recommending austerity as the solution. We need Mosler’s MMT lens more than ever!

Technical and financial limits imposed by the federal budget deficit and federal debt are a vestige of commodity money. Today’s fiat currency system has no such restrictions. The concept of a financial limit to the level of untaxed federal spending is erroneous.

This not to say that deficit spending does not have economic consequences. It is to say that the full range of fiscal policy options should be considered and evaluated based on their economic impacts rather than imaginary financial restraints.

If more people learn about MMT, current macroeconomic policy can begin to center on how to more fully utilize the nation’s productive resources. True overcapacity is an easy problem to solve. We can afford to employ idle resources (like unemployed labor).

Mosler reminds us that obsolete economic models have hindered our ability to properly address real issues. Our focus has been directed away from issues which have real economic impacts to meaningless issues of accounting. Our collective attention on issues of income, inflation, and unemployment have been overshadowed by the conversation about the national debt and deficit.

Warren Mosler urges us to stop restricting the range of possible policy actions that we can deploy. The major economic problems facing the United States, and other sovereign currency issuing nation states, are not impossible to deal with. Only a misunderstanding of money and accounting prevents us from achieving a higher quality of life that is readily available.

[Keith Wheeles · Rating 2 out of 5]

Brief, breathless, long on claims and short on rigor. But this is an influential strain of thinking and it will likely leave a mark. 'This Time Its Different' (Reinhart/Rogoff) suggests that we don't really know what the limits of Public Debt/GDP are (they make some quantitative guesses). MMT seems to argue there are no limits. And while R/R wrestle with how large magnitude public debts are liquidated (either through inflation or default), MMT treats it as a residual that falls out - doesn't seem to consider default as an option. More generally, at first glance it is extrapolating outside of observed parameters (a modeling peril) and not treating expectations (possible loss of trust that is enjoyed inside observed parameter limits). Makes me think.

[Fred Lorenz · Rating 4 out of 5]

Interesting

Obviously a hedge fond manager figured it all out. And if one can say one truth about hedge fond managers: they are mosly extra ordinary smart! Yes I hate to say this, since I don’t like those professionals with red Ferrari‘s and huge Condos in major cities, but they are damn smart. So they must have something right here.
The good thing is, MMT, if used the right way, could be like quantitative easing for the less well off and might bring more justice to society.

[Xiang Yang Ng · Rating 4 out of 5]

A book about the MMT which is expressed from a perspective of a money manager. I think that the book lacks academic rigor and fails to reference history of other countries that have endured hyperinflation or currency default. That said, I considered the explanation of the workings of the Fed to be plausible and thus logical to describe his MMT theories, though I still have doubts about the latter.

[Lookout · Rating 4 out of 5]

Very short

Warren mister can communicate his knowledge in a clear way. Don't know if I buy what he sells. He demonstrates how money has changed from being based on gold to one being based on fiat it is not scary as it sounds. Money is a creature of the state being that money gets its' value from the fact u.s. requires taxes be paid in u.s. dollar. Warren Modeler argues hyperinflation is a risk but unlikely to happen soon. I t is a good start.

[Robert J · Rating 4 out of 5]

Two thumbs up

Excellent for understanding how the current (2019) U.S. monetary system functions. Mr. Mosler's descriptions allow for easy understanding, especially for a novice like myself.

[Danilo Flechaz Muñoz · Rating 3 out of 5]

Libro muy breve sobre MMT. Recomendado por Kelton (2020), quien considera a Mosler como la persona que cambió su perspectiva sobre el déficit en economía. Si bien no es técnico, es denso teóricamente, especialmente en el funcionamiento entre las tasas de interés.

[Stephen Hemingway · Rating 4 out of 5]

Probably doesn't pay enough attention to the role of interest rates, but worth a read.

[Nathan · Rating 4 out of 5]

I really wish I could grasp the discussion on financial institutions better. This is a book that will take years to really understand, but well worth the investment

[BERNARD HILTON · Rating 5 out of 5]

Excellent background into how our monetary system works and how it could be much better.

[Norton · Rating 3 out of 5]

Short textbook of sorts on MMT. Not a bad overview but some of the explanations could have been fleshed out. Also some of the concepts are a little over my head.

[Gordon Kwok · Rating 4 out of 5]

Great short book on the fiat monetary system and the myths about the deficit.