MMT And Emerging Markets

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

So Joe, I really enjoyed our MMT discussion from last week.

Joe Weisenthal (0:22)

I did too. And it was kind of interesting because we never really did like an introductory to MMT episode. We immediately started with a critic. Although, as some people pointed out, A, the criticism wasn't too harsh, and B, we did sort of introduce the concepts.

But now we're gonna go backwards and sort of keep building the foundation, right?

Tracy Alloway (0:45)

Well, actually, I would argue we're going forward. And we're picking up from where we left off in that previous conversation, which was, I think at the end, we were discussing about whether or not MMT could ever work outside of the United States.

Joe Weisenthal (1:04)

Right, so obviously when people talk about how the US can have much higher sustained deficits than other places or than we've had, they're like, well, yeah, sure, of course the US can, but that's only because the dollar is the global world reserve currency. And so the accusation towards MMT is that it's generalizing from the US example to something that wouldn't be applicable to countries that maybe don't enjoy that same status for their currency.

Tracy Alloway (1:35)

Right, exactly. The argument is that the US is in some way hashtag blessed with a number of financial attributes, such as the reserve currency status and the safe haven nature of US treasuries relative to other assets, and that it is special in some way and that you can't apply MMT to other jurisdictions, in particular, developing or emerging market economies. There was one other thing that that conversation actually brought up, and this was the notion that, well, we haven't really seen any real life applications of MMT just yet.

Joe Weisenthal (2:11)

Right, so the argument is that, and of course, this gets into the distinction between MMT as a descriptive framework, basically MMT's attempt to describe the money system, how it actually is, versus the implications, the prescriptions, where it's like, okay, well, if you know this is how the money system works, then this is the policies that you can do. And the argument is that we really don't know what it would look like for any country to adopt some of the prescriptive side of MMT and whether the sort of fiscal latitude that MMT's as many countries enjoy would actually improve the economy.

Tracy Alloway (2:51)

Absolutely right. So there's two big questions that came out of that big discussion. One of which is whether or not MMT works outside the US, and the other is whether or not the prescriptive social policies of MMT could actually work in some capacity. So I'm really pleased to say that we have a guest on today's show who can deal with both of those two very, very large and complex topics. Our guest is gonna be Fadhel Kaboub. He's someone who's able to talk about both these things. He's an associate professor at Denison University.

And he was actually suggested by Nathan Tankus on Twitter as a possible guest. And I should say Joe, because we did get some blowback from people who said that our last MMT guest was too much of a critic.

Fadhel comes recommended by Stephanie Kelton as well, who said that he's doing some very, very interesting work outside the US.

Joe Weisenthal (3:46)

Great. Well, these are, I have a lot of questions, so let's get started.

Tracy Alloway (3:50)

Fadhel, thank you so much for joining us.

Fadhel Kaboub (3:53)

Thank you for having me on the show.

Tracy Alloway (3:54)

So maybe just to begin, you could give us an overview of how you got involved in this topic and why so many people on Twitter are pointing to you as the expert for MMT outside of the US experience.

Fadhel Kaboub (4:10)

Well, when I was in grad school about 20 years ago at the University of Missouri, Kansas City at UMKC, where a lot of the MMT scholars were based there, Randy Ray, Stephanie Kelton, Matt Forstater, and others, at that stage in the early 2000s, most of the discussion around MMT was focused on the US, Canada, Australia, countries that are advanced countries, countries that have full monetary sovereignty. And I grew up in a developing country. I grew up in Tunisia, and I was always interested in, how does this apply? How does this transfer? What are the differences? What are the adjustments that need to be made? And that's how it all started in terms of me trying to expand some of the MMT and the post-Keynesian literature in general in the context of developing countries. So one of the things that is still, to this day, a point of confusion about what MMT says, it's a very basic definition of what monetary sovereignty is. And even though we keep saying monetary sovereignty, most people hear pass it, and they just hear sovereignty, sovereign government, which is what the general public and even mainstream economists understand as political sovereignty, a country that has its own borders and its own flag and its own army and its own currency, which is not completely what MMT is saying. So monetary sovereignty is defined, as far as I'm concerned, in the following way. It's four basic elements that need to apply. One is yes, a country issues its own currency, its own sovereign currency. Number two, it's a country that imposes taxes and fines and fees on its population in that same currency, the national currency, and that's pretty straightforward. Most countries can do that. And then three and four is where developing countries become a category of their own and start losing some degree of monetary sovereignty. So number three, it's a country that only issues debt denominated in its own national currency. And as you know, most developing countries, because of trade deficit, they have external debt, which means they issue debt denominated in dollars and euros and Japanese yen. And that's where they start losing degrees of monetary sovereignty. Number four is also related to that, which is fixing the currency or trying to stabilize the exchange rate at a particular level, pegging the exchange rate to the dollar, to the euro, to other strong currencies. And so both are related to the trade deficit issue, both are related to the external debt issue. So that means that you don't have a binary where a country either has monetary sovereignty or doesn't. It's really degrees of monetary sovereignty. So when you look at that, the US, Australia, Canada, these are countries that enjoy full monetary sovereignty. Japan is the same.