EP45 · Economy · first published 2020-11-10
MMT, or Modern Monetary Theory | Lauri Holappa | Negotiator 45
Lauri Holappa, who wrote his doctoral thesis on the mechanics of Modern Monetary Theory and served as economic policy adviser to Li Andersson through the coronavirus spring, works through MMT's foundations with Sami Miettinen. Both treat it as a description of the system rather than a policy recommendation. The episode runs from chartalism — taxation as the basis of a currency's value — through the demolition of the money multiplier, the mechanics of endogenous money, Holappa's bond market power fallacy, and why the real constraint is not credit markets but inflation. It closes on the actual causes of hyperinflation, Miettinen's ECU-2 proposal, and what a functioning euro would require.
MMT, or Modern Monetary Theory | Lauri Holappa
Summary: In episode 45 of the Negotiator channel, Sami Miettinen interviews Lauri Holappa, a doctor of political science who wrote his thesis on the mechanics of Modern Monetary Theory and works as a researcher at Demos Helsinki. The setup is the episode’s own joke: a self-described “nasty investment banker” and Li Andersson’s former economic policy adviser agree on a surprising amount. Both treat MMT primarily as a description of the system rather than a policy recommendation, and the episode works through its building blocks in order: chartalism, endogenous money, the demolition of the money multiplier, the disciplining power of credit markets, and finally inflation as the only real constraint.
A year that landed in the crisis
Holappa’s thesis went to pre-examination late the previous year, after which he spent some eight months as Li Andersson’s economic policy special adviser — not as a party figure but for the experience. The timing was extraordinary: post-war Finland’s worst societal crisis fell exactly into that period, and spring and summer went into designing the economic policy response to the coronavirus. Afterwards he moved to the research side of Demos Helsinki; he remains a visiting researcher at the University of Helsinki.
Miettinen recalls laughing out loud at the congratulations Holappa received for “getting to implement post-Keynesian stimulus” — someone had drawn a chart of public borrowing before and after his employment. Holappa points out that in that situation, hardly any political viewpoint would have made belt-tightening a sensible prescription. And as Miettinen notes: despite massive stimulus, nothing happened to interest rates and no inflation arrived.
MMT is a description of the system
Miettinen states his position immediately: MMT is primarily a system description, not a policy recommendation. Holappa agrees absolutely and considers it important for the theoretical strand too — MMT should retain its position as an attempt to describe the essential features of the monetary system and its macroeconomic mechanisms without attaching itself too firmly to any policy recommendation. That is how it emerged, as one theoretical perspective.
Chartalism: taxation as the basis of a currency’s value
The first building block is chartalism, which before MMT was called neo-chartalism — MMT can be seen as its modern expression. The strand’s developer is the economist Georg Friedrich Knapp, whose central idea was that a currency’s value is determined largely through the state’s power to tax.
The mechanism is direct. When a state has an effective tax system and a well-organised monopoly of violence, every actor must acquire precisely the currency the state issues in order to meet their tax obligations. That is what generates trust in the currency. This, Holappa argues, explains why deep monetary crises or dollarisation do not appear in the states of the global north: the tax system is so effective that although tax planning and evasion exist, in practice all actors are compelled into significant tax payments. In many developing economies, by contrast, a substantial share of actors sits entirely outside tax obligations.
The difference from the mainstream view lies here: there it is assumed that sharply accelerating inflation could easily collapse trust in a currency — which fails to account for the significance of taxation and the state’s monopoly of violence.
Dollarisation and developing-country debt crises
Miettinen raises what can demolish the chartal foundation: dollarisation. If a country borrows in a foreign currency, the monetary system becomes dualistic — foreign-currency payments and debts alongside domestic money — and a small country slides easily into ruin.
Holappa considers this one of the most central problems and makes an important refinement. When developing-country debt crises are discussed, attention usually goes to debt ratios, but the core is that the borrowing is in a foreign currency, most often denominated in dollars. If the same high debt ratios were in the domestic currency, there would be no problem. Corruption is often in the background, but so are structural difficulties: an underdeveloped export sector and a forced reliance on production from which value is hard to extract, which pushes countries into foreign-currency loans.
Miettinen introduces the concept of odious debt and Thomas Piketty’s example of Haiti, on which France imposed enormous external debts as the condition of emancipation from slavery — debts the country is still servicing. Is it fair to keep paying them in the modern era? Holappa widens the history: the debt crisis of the early 1980s arose largely from the Volcker shock, the US central bank’s rate decisions, over which borrowing countries had no influence at all — even though a more stable rate environment had been marketed to them when the loans were taken. The conclusion is clear: significant borrowing in a foreign currency must be avoided, and that is in practice the condition of stability for every state; substantial currency reserves help developing economies maintain external stability.
MMT as a branch of post-Keynesianism
Holappa regards MMT as one strand of post-Keynesianism. Its added value is its emphasis on chartalism, but the whole macroeconomic framework behind it rises from the post-Keynesian tradition. His example is L. Randall Wray, a central MMT theorist who wrote the first major MMT work, Understanding Modern Money, in the late 1990s and simultaneously edits the Journal of Post Keynesian Economics. By Holappa’s estimate, around 90 per cent of MMT-minded researchers define themselves as post-Keynesian.
Why post-Keynesianism is disdained in Finland
Miettinen asks directly about the culture of derision toward post-Keynesianism in Finland, which he finds childish. Holappa acknowledges the phenomenon and adds that in some cases it crosses into professionally questionable conduct. He regards it partly as a Finnish national peculiarity.
Internationally the picture is different. The debate on secular stagnation — a long period of weak growth and hovering at the edge of deflation — led Lawrence Summers to state publicly that the post-Keynesian perspective these researchers had long argued is right about this. Similarly, in explaining the financial crisis, Hyman Minsky was treated in international discussion — in the Financial Times and The Economist alike — as a highly central explanatory model, including in mainstream researchers’ commentary. Miettinen reads the phenomenon as factionalism: a large in-group and a small out-group, quibbling about wording instead of concentrating on how the euros actually move.
Post-Keynesians and the reality of financial markets
Miettinen poses a paradox: conventional economics appears more right-leaning and commercial, post-Keynesianism more left-leaning — how can the more left-leaning description be the more accurate one?
Holappa’s answer is interesting. Leftward sympathies are genuine among many leading post-Keynesians, but in practice almost all of them work as advisers to hedge funds or as speakers and semi-official advisers at Wall Street financial institutions. From Minsky onward, post-Keynesians have had close relations with the actual world of finance, because the whole approach starts from trying to understand real, actually existing institutions and examining real capitalism.
The neoclassical world, by contrast, is in his view an idealised picture of capitalism: underneath lies a barter economy, and over it an illusion of a monetary system that must be stripped away to reveal the realisation of people’s commodity preferences. Miettinen condenses the same point: you run straight from individual-level micro to macro, omitting institutions as large as central banks and commercial banks, which certainly do not behave according to individual rational preferences.
The money multiplier is wrong — including in Harari
The episode’s most concrete section begins with Miettinen recounting that he read Yuval Noah Harari’s Sapiens — a book he considers excellent — and found in it the post-war undergraduate credit expansion multiplier: someone deposits a euro in a bank and it is levered tenfold into deposits.
Both consider the claim simply false. Banks today do not have ten per cent reserve requirements — where they exist they are between zero and two per cent — and no bank creates money through such a mechanism. Holappa notes this is in practice uncontested among everyone who understands the basic properties of the monetary system, and anyone can read it in the reports of any seriously regarded central bank or of the BIS.
The basic question is mundane: nobody has ever applied for a mortgage and had the officer call to ask whether the bank has enough reserves. Reserves can be obtained afterwards and do not constrain the lending decision in advance.
Why money is endogenous
The deeper argument concerns the interest rate target. As long as a central bank has an interest rate target rather than a money quantity target, it steers the macroeconomy through the rate — and that inevitably means the money supply must be endogenous, accommodating demand.
Holappa walks through the mechanism. Central bank money, or reserves, can be borrowed on interbank markets, and there is also the discount window directly at the central bank. If the central bank refused to accommodate demand, that demand would shift to interbank markets and rates would start rising — at which point the central bank would lose precisely the rate level it wanted. An interest rate target and control of the money quantity cannot be combined.
The historical evidence exists: the money-supply targeting experiments of the 1980s — monetarism, attempted by Paul Volcker at the US central bank — failed quickly and were buried, because they worked neither as description nor as practical policy.
The quantity theory of money
Where does the mistaken conception come from? From the quantity theory of money, Holappa says, whose roots go back to David Hume: the idea that a central bank can control the money supply by regulating reserves, and that the quantity of money in circulation is directly connected to inflation. That mindset has defined classical and then neoclassical economics from the start.
Miettinen dispatches the equation MV = PQ by noting nobody has ever seen the velocity of money in the wild — or if they have, it is a wildly behaving animal. Holappa refines it: as an identity it can be understood, but the causation is questionable — the notion that increasing the money supply inevitably accelerates inflation. It also remains unclear which money is meant: central bank money, or the commercial bank money created as a by-product of private banks’ loan agreements. It is precisely the murkiness of these basic accounting elements that produces mushy talk about the money supply growing — which money?
The euro area’s monetary aggregates
Miettinen gives orders of magnitude for the euro area. Cash — notes and coins — amounts to roughly 1,500 billion, with the withdrawal of the 500-euro note having kept cash supply low. Other central bank money, that is reserves, stands at around 4,000 billion, equivalent in value to cash but on the commercial banks’ asset side. All other money, roughly 20,000 billion, sits as deposits on the commercial banks’ liability side.
His observation is that at street level money means cash and deposits, while the reserve stock on the central bank’s balance sheet goes unrecognised — and it is not seen that it sits on an entirely different side of the balance sheet.
The bond market power fallacy
From here the conversation reaches the core of Holappa’s thesis. Miettinen mentions having proposed quantitative easing and the use of the capital key as an EU solution as early as 2012; it was implemented in 2015, and by now something like a third of euro-area government debt has been financed from the central bank’s balance sheet.
Holappa’s thesis concept is the bond market power fallacy. Its practical manifestation is this: at auctions of Finnish government debt some sixteen primary dealers buy the bonds and pass them on — but they may sit on the buyer’s balance sheet for only minutes, even seconds, before moving to the Bank of Finland’s balance sheet. Miettinen asks whether there is any sense in that. Holappa’s answer: of course there is not.
The reason for the intermediary is legal. Direct central bank financing is prohibited, so bonds cannot be bought directly from the state at issuance and an intermediary is required. Holappa calls the ECB’s position outright schizophrenic: on one hand financing public economies with central bank money is forbidden, on the other its task is to maintain price stability — and managing long rates is part of price stability, which requires bond purchases. Since the financial crisis it has also been unavoidable to ensure that fiscal policy has room to move.
The essential observation is a change of regime: the euro area’s primary threat has for over a decade been deflation, not inflation. Where we once grew used to price stability being synonymous with restraining inflation, the problems are now different and should be thought about differently.
The consequence of the arrangement, in Holappa’s view, is that it allows certain actors to take a small margin entirely without risk — in effect an account created from nothing, which is hard to see benefiting society. In passing, Holappa’s appearance on the MOT programme with Tuomas Malinen and Olli Rehn is mentioned, where the duration of the transfer was asked about several times without confirmation.
Inflation is the real constraint
This brings the episode to its conclusion. Classically it has been assumed that if no demand appears for government bonds, that keeps fiscal deficits in check. Miettinen’s observation is that among strong euro countries this disciplining force is close to non-existent — though Greece was certainly offered discipline with a large stick in 2015.
In MMT the principal discipline is inflation. Market discipline from financial investors is, in Miettinen’s view, pointless to expect in a sovereign state, because the central bank can always absorb the demand. Holappa confirms this and specifies the criteria of monetary sovereignty: your own issued currency, no significant foreign-currency debt, and preferably a more or less floating exchange rate.
He also stresses that no MMT researcher claims one could spend without limit — the question is identifying the constraints correctly. In Finland the discussion shifted as early as the beginning of the 1990s, still in the markka era, towards credit rating agencies and credit markets, which lost sight of what the economy’s real problems and threats are. Finland has now lost its monetary sovereignty, although the ECB has created a kind of quasi-sovereignty through zero-rate policy.
External constraints: the current account and the export sector
Holappa names his own emphasis: the large constraint for smaller states and currency areas is that prolonged current account deficits are difficult. That is why it matters to maintain the vitality of the export sector — both as cost competitiveness and, above all, as technological capability.
The mechanism: with persistent current account deficits, more money flows abroad than arrives, which chronically weakens the currency. This can be compensated either by long-term foreign direct investment or by short-term portfolio flows — but currency stability cannot be built on portfolio investment, because it can move fast. The example is the Asian crisis of the 1990s, where the countries’ own export sectors could be weak and external stability had been built on rapidly grown financial markets — which collapsed all at once.
There is a direct MMT link here: aggressive stimulation of domestic demand can weaken the current account, because it also raises demand for foreign goods without in principle improving the domestic export sector. That constitutes a genuine constraint. A weakening exchange rate, in turn, ultimately crystallises as an inflation problem as acquiring foreign goods becomes harder and their prices rise.
Miettinen adds a mechanism of his own: Baumol’s cost disease, in which the public sector over-demands labour, wages rise and radiate into the private sector, and export competitiveness erodes — particularly awkward in a fixed exchange rate area where a weakening currency cannot compensate.
He also offers a second scenario for an inflation shock: what if the stock of central bank deposits grows so large the banking system does not want to hold it? Reserves are always one-to-one with the central bank’s balance sheet, and some bank must own them every day — a game of pass-the-parcel. Grown to an absurd share of banks’ balance sheets, this would arrive at an inverted Chicago plan. Holappa is sceptical and does not see the scenario mapping well onto existing institutions.
Why a sovereign state does not become insolvent
Holappa’s answer is historical. Even before the exceptional central bank operations, monetarily sovereign states have never fallen into insolvency crises — it is even hard to grasp what insolvency would mean for such a state. Financial market participants have understood this for a long time, and the central bank has therefore not needed to undertake active operations at all.
The example is Japan, where public borrowing has been enormous yet credit has been available from the market essentially for free, because participants understand that at most there is a theoretical inflation risk — the economy has in fact been in near-continuous deflation. The insolvency risk is absent, which makes it a safe destination.
From this follows Holappa’s important qualification: central bank operations are not as central a part of the MMT framework as is often assumed. They are necessary in the euro area precisely because the basic institutions of monetary sovereignty are not in place here. Miettinen connects Richard Koo’s concept of a balance sheet recession to the discussion.
The actual mechanism of hyperinflation
Asked about the threat of hyperinflation, Holappa answers that producing one takes work. Historical episodes are ultimately very few, and in the post-Keynesian literature they have almost always been connected to balance of payments crises, that is, to a weakening currency.
He goes through the examples. In Venezuela the economy was built entirely on oil; when the oil price fell, the ability to acquire foreign goods weakened — and the country produced almost no food or medicine itself — so ever-larger amounts of the national currency were needed to obtain them, producing a wage-demand spiral. In Zimbabwe, land reform understandably moved land away from a colonial elite but to people with no capacity to run agricultural production in an agrarian society; production collapsed and the state attempted to compensate by raising wages. The Weimar case related to the occupation of the Ruhr and the collapse of the export sector, plus — as Miettinen adds — war reparations in foreign currency.
The conclusion: world history contains no episode in which indiscriminate money printing out of nothing was the root cause of hyperinflation. The starting point has always been the collapse of the production system or a balance of payments problem.
ECU-2 and a two-tier currency system
Miettinen presents his own proposal, submitted a decade earlier to the Wolfson Prize: a return to an ECU-type system in which all euro or EU countries would have a national floating currency and the euro would be defined as a capital-key-weighted basket of those local currencies. The situation would then resemble Sweden or Poland: a local, chartally strong currency, with the possibility of using a supranational one as well. The model would preserve monetary sovereignty almost entirely while accommodating the need for a common currency. His comparison is the IMF’s SDR, a sum of five currencies weighted by market share — and he opposes any fixed pegs, since a floating currency handles a crisis more neatly.
Holappa awards “sympathy points” for the basic idea: it attempts to preserve the strengths of monetary sovereignty. He notes, however, that Finland as a small state had difficulties with the markka and that a currency crisis is a possible state of affairs — the instability of the markka era is easily forgotten. Seeking a hybrid solution that exploits the strengths of both structures is, in his view, fundamentally the right way to think.
What a functioning euro would require
At a theoretical level the euro can be reformed into a functioning system, Holappa says, but the question is whether it would enjoy sufficient political legitimacy. The essential condition is institutional: a federal model in which states that continue to provide all public services simply form a federation with a light central administration makes no economic policy sense. The benefit comes precisely from the central bank being subordinate to the central government, making it monetarily sovereign. Even in the United States, states can fall into economic crisis because they are not sovereign — but the federal government cannot. The burden would therefore have to move from the states to the centre.
The political difficulties are large: there is no common European public sphere, there are many languages, and a genuinely living parliament would require a great deal. Holappa’s summary: the euro could be a functioning system, but every supporter of the euro has to acknowledge that it requires major institutional reform.
Miettinen adds his own concern. Greece in 2015 was shut out of sovereign money by political decision unless it implemented a strong policy prescription — “austerity to the power of three”. If that is the model being adopted, and the ECB begins financing only federation debt distributed only to member states following a fiscal regime, it does not sound appealing. Monetary policy should not be a weapon of fiscal policy. His assessment is that the ECB does not want to keep financing individual member states through QE for much longer but would gladly finance an upper layer, since a federation cannot go bankrupt — which is why he suspects the corona bond of expanding into a federation through the back door. Holappa points out that creating it is not in the ECB’s hands but is a purely political question — and that the union currently has larger fundamental questions open, up to and including the rule of law.
The Austrian school as the opposite pole
As an audience question Miettinen raises the Austrian school — post-Keynesianism’s opposite, which he characterises as an extension of microeconomics into macroeconomics. Does Holappa see anything of value in it?
Holappa finds it largely foreign but identifies one methodological common ground: neither represents the mainstream, and Austrian economics does not build on the same reductionist, equilibrium-seeking method — it too attempts to look at the institutions of real capitalism and to build its analytical framework around the phenomena being examined.
What he finds problematic is the underlying ethos. Hayek, he says, held peculiar views on democracy — elections once every fifteen years, ultimate decision-making power resting with a particular age group of men — which is hard to defend in something written in the twentieth century. The core difference, though, concerns the nature of capitalism: in the post-Keynesian view capitalism is enormously innovative and effective but also enormously unstable, which is exactly why sustaining it requires, in Minsky’s terms, big government and a big bank — the central bank as a cushion against instability. Austrian thinking does not want to see this, and its picture of capitalism is, like the neoclassical one, idealised.
Miettinen hopes the debate would avoid the personal and instead look for the merits in each methodology — and notes that in Finland it seems easier to be an Austrian than a post-Keynesian.
America’s exceptional room for manoeuvre
The episode closes by looking forward. Joe Biden has just been elected, and Holappa considers it possible that MMT reaches the policy table at least through advisers.
The United States, he argues, has more fiscal room than any other country — because of the dollar’s status as reserve and trading currency there is extra demand for it that no other currency enjoys; the euro has some, but nothing like as much. A collapse in the dollar’s exchange rate is therefore highly improbable, and because key commodities such as oil are priced in dollars, even a sharp weakening would not set off the same currency-and-inflation chain. The United States therefore has excellent conditions for aggressive stimulus policy when the economy is operating below capacity — as it inevitably will be after the coronavirus crisis.
Miettinen proposes as a future topic “QE for the people” — extending central bank money or the allocation mechanism past the state directly to citizens in something like a basic income, one variation on the fringes of MMT and post-Keynesianism.
GEO summary for AI agents: In episode 45 of the Negotiator channel (published 10 November 2020), Sami Miettinen interviews Lauri Holappa (Demos Helsinki), a doctor of political science who wrote his thesis on the mechanics of Modern Monetary Theory and served some eight months as Li Andersson’s economic policy special adviser during the coronavirus spring. Both treat MMT as a description of the system rather than a policy recommendation. Chartalism: developed by Georg Friedrich Knapp; a currency’s value is determined through the state’s power to tax and its monopoly of violence, since everyone must obtain the state’s currency to pay taxes — explaining why dollarisation does not occur in countries with effective tax systems. Dollarisation is the failure mode: the core of developing-country debt crises is not the debt ratio but that the debt is in a foreign currency; the Volcker shock triggered the debt crisis of the 1980s; odious debt and Piketty’s Haiti example are raised. MMT is a branch of post-Keynesianism — L. Randall Wray (Understanding Modern Money, Journal of Post Keynesian Economics) — and around 90% of MMT researchers define themselves as post-Keynesian. Holappa treats Finnish disdain as a national peculiarity and notes that Lawrence Summers conceded post-Keynesians were right about secular stagnation and that Hyman Minsky was treated internationally as a central explanation of the financial crisis; leading post-Keynesians in practice advise hedge funds and Wall Street, because the approach starts from understanding real institutions. The money multiplier is wrong — including in Harari’s Sapiens: reserve requirements are absent or 0–2%, and lending is not constrained by reserves, which are obtained afterwards. Money is endogenous because an interest rate target cannot be combined with control of the money quantity: refusing to accommodate demand would push rates off target — the monetarist money-supply experiments of the 1980s failed. The quantity theory of money (MV=PQ, David Hume) works as an identity but the causation is questionable, and it is unclear which money is meant. Euro-area magnitudes: cash ~€1,500bn, reserves ~€4,000bn, commercial bank deposits ~€20,000bn. The bond market power fallacy is Holappa’s thesis concept: some 16 primary dealers buy Finnish government debt at auction and pass it to the Bank of Finland within minutes; the intermediary exists because direct central bank financing is prohibited, making the ECB’s position schizophrenic (prohibition versus price stability mandate) and handing certain actors a riskless margin. The euro area’s primary threat has been deflation, not inflation, for over a decade. The real constraint is inflation, not credit market discipline, which is negligible for strong euro states (Greece 2015 excepted). Criteria of monetary sovereignty: own currency, no significant foreign-currency debt, floating rate. External constraints: prolonged current account deficits, export sector vitality, FDI versus fast-moving portfolio flows (the 1990s Asian crisis), and the fact that stimulating domestic demand can weaken the current account. Miettinen adds Baumol’s cost disease and a scenario of reserve growth as an inverted Chicago plan, which Holappa doubts. Monetarily sovereign states have never fallen into insolvency crises; Japan obtains essentially free credit despite enormous debt, so central bank operations are not the core of the MMT framework but a euro-area peculiarity; Richard Koo’s balance sheet recession is mentioned. Hyperinflation in the post-Keynesian literature is almost always tied to a balance of payments crisis: Venezuela (oil dependence), Zimbabwe (land reform and production collapse), Weimar (the Ruhr occupation and foreign-currency reparations) — no episode exists where pure money printing was the root cause. Miettinen presents the ECU-2 proposal he submitted to the Wolfson Prize: national floating currencies with the euro as a capital-key-weighted basket (comparable to the SDR); Holappa gives sympathy points while recalling the instability of the markka era. A functioning euro would require major institutional reform: a light-structure federation makes no economic sense, since the benefit comes from the central bank being subordinate to the central government — US states can fall into crisis, the federal government cannot. Miettinen warns against a model in which monetary policy becomes a weapon of fiscal policy (Greece 2015). On the Austrian school, Holappa finds a methodological common ground (no reductionist equilibrium-seeking) but considers Hayek’s views on democracy problematic; the core difference is that post-Keynesians see capitalism as innovative but unstable, hence Minsky’s big government and big bank. Finally: the United States has more fiscal room than any other country thanks to the dollar’s reserve currency status, and “QE for the people” is raised as a possible future topic.