Reader Valissa has taken to providing economist jokes in comments, but the members of the discipline so often seem eager to make themselves the object of ridicule that efforts like hers sometimes seem redundant.
The latest sighting is a remark by Scott Sumner, a professor of economics at Bentley University. As you will see, it criticizes Modern Monetary Theory because it is….realistic.
Too much verisimilitude is a cardinal sin in economics, since it becomes hard to write things up in formulas hard enough to scare laypeople but not so hard that you’d need to be a real mathematician to devise them. So they posit hyper-rational consumers with perfect information and amazing computational powers in pretty simple situations, when in reality people have crappy information and aren’t all that smart and reality is really really complicated and kinda scary too. Which is also enough to make anyone plenty emotional.
Cullen Roche has graciously allowed me to cross post his commentary on the Scott Sumner remark in question, which I suspect will become a classic, in a bad way. From Roche:
One of the greatest strengths of the MMT approach is that it is not based on theory or mythology. This is why I often say that the name can be misleading. The core of MM “Theory” is just a description of our fiat monetary system’s “Reality”. When MMTers discuss the actual operations of the monetary system we are not theorizing. We are discussing the actual operations. This is why we reject so much of the economics that is taught in textbooks predicated on defunct gold standard beliefs and the thoughts of men and women who have never actually been involved in monetary operations or the mechanics of what makes an economy and/business work in the real world.
And therein lies one of the great problems with modern economics. It is based too much on pie in the sky thinking and not based on what is happening on the ground, in the trenches. Warren Mosler, widely regarded as the founder of MMT, created the theory because he was in the trenches and recognized that what his textbooks taught him did not reflect the reality of the operations he was involved in on a daily basis. And while no economic theory is perfect, I think this is by far MMT’s greatest strength. We can all theorize about how best to implement our conclusions from MMT, but the heart of the operations of our autonomous currency issuing fiat monetary system are undeniable.
That is why I am astounded by recent comments such as Scott Sumner’s, who today writes:
I wasn’t able to fully grasp how MMTers (“modern monetary theorists”) think about monetary economics (despite a good-faith attempt), but a few things I read shed a bit of light on the subject. My theory is that they focus too much on the visible, the concrete, the accounting, the institutions, and not enough on the core of monetary economics, which I see as the ‘hot potato phenomenon.’
That’s exactly right. We don’t create Crusoe Islands (as Robert Murphy does) or monetary systems without banking systems (as Sumner does). We are working within our reality and applying analysis and solutions based on that which is visible, concrete, provable through accounting and obvious through the institutions who implement these operations. If you want to know why we’re in this current mess look no further than the thought process above which claims that we need to focus less on reality and more on mythology. They got us into this mess and now we’re all sitting around waiting for them to get us out. Meanwhile, those of us working in the trenches in reality just get ignored…..
Sumner’s comment reads like a case example straight out of Thomas Kuhn’s The Structure of Scientific Revolutions. Most people brought up in an old paradigm (and Sumner was trained at Chicago) find it hard to wrap their mind around divergent ideas. We cited other examples in ECONNED, of Paul Samuelson being unable to understand Keynes’ General Theory and instead relying on a line of argument that Keynes explicitly rebutted to shoehorn it into neoclassical economics, or Paul Cootner and other economists rejecting Beniot Mandelbrot’s findings that financial market price data was not normally distributed but fell into wilder, more difficult to model patterns of randomness.
If nothing else, this remark shows that MMT is now beyond Gandhi’s “First they ignore you” stage of revolutions and is somewhere between being ridiculed and fought, which is considerable progress.
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Let’s be clear, MMT is destined to be the new orthodoxy. As much as MMT wears the same clothing as original Keynesianism, it is marred by the same hypocrisy of Keynesianism.
MMT does not, and cannot, address financial speculators. Like Keynes’ original vision, all that it hopes to do is eliminate the upside of the down-part of the so-called “business cycle.” The hope, apparently, is that the rentier class, the speculators, will stop creating business cycles because they can’t make money over the whole cycle. That’s utter stupidity. A fifty percent duty cycle is just as good when you get to determine when you transition from the up-cycle and the down-cycle.
A sure thing is a sure thing.
The big problem with MMT true-believers is that they are trying to work within the system and effect incremental change. By doing so, they embrace and perpetuate the rot of the present system.
I understand your desire to hamstring financial speculators but unfortunately there is no economic system that can do that save maybe a marxist one (MAYBE! Not so far though). The constraining of speculators falls upon the political system which is outside any economic theory. The strength of MMT is that it makes clear that distinction. If anything MMT would help in allowing the population to realize that the desires of speculators are not necessary concessions for a strong economy.
MMT’s an example of “If ifs and buts were candy and nuts…”
Instead of saying, “Assume a can opener”, it, like all reformism, says “Assume non-corrupt politicians who really care about the public interest…Assume good government…”
So it’s really just as detached from reality as other economic thought experiments, even if it does have a better intent.
The simple fact is that kleptocracy will never do anything MMT says it should do. (Well, only some MMT practitioners are assertive enough to be normative about it. Some are cowardly enough to say “MMT doesn’t imply any prescription.” Yeah, thanks for nothing.) That’s because it’s a kleptocracy. The same goes for all other reformism.
The result of all this is that, as much as I hate to say it, MMT ends up in the same category as the likes of, “We need better Democrats.” It’s (politically) impossible and merely a waste of time and energy.
(If anyone can provide evidence that the MMT education program is helping to convince people that the deficit and debt are phony issues, then I’ll happily amend this criticism to say it has educational value. But it seems to me that non-elites are already figuring this out on their own. Every poll says the people care more about jobs than the debt, and they probably never heard of MMT.
To me the best use of it would be to follow through on its implication that all money is created by society in order to be used, that money has to have a high velocity, while hoarding it is illegitimate. This should be the main thrust of the education. And once this is established, it can be applied to all “property”. So in that way MMT could have worthwhile applications for principle.)
I think MMT does in fact lend itself more to a just and humanistic economic thinking simply due to the fact that it accurately describes the realities of a fiat monetary system, and shows the lie underlying the assertions of the Geithners of the world that there is simply not enough money for humanitarian needs, but there needs to be enough for the financial system. By showing what really goes on, anyone with even a moderate sense of justice will see how unfair it is that banks get to create money out of nothing and all the rest of us (including govt) have to pay for it. By showing that selling govt bonds is a choice not a requirement it allows for the option that govt can print money without debt creation and at least opens up the possibility that govt can work for the people without getting in hock to wealthy interests and being enslaved to the “bond vigilantes”. These ideas are a natural result of an accurate picture of the monetary system, and if MMT is embraced, will be a natural outcome. The reason the entrenched interests have ignored and now deride MMT is because they see the danger to them in the embrace of this precise view of the system. If MMT is taught and embraced no one can hide behind the supposed complexity and “wizardry” behind Fed operations etc. Economic justice is the next logical step from MMT, and as it becomes more accepted and powerful, expect some very loud angry resistance, including all sorts of ridiculous slurs — socialism! Marxism! Fascism! The current masters will not give up their control easily, and of course will try to coopt and corrupt MMT as soon as it becomes more influential. Its won’t be an easy or short road but MMT is a positive evolution for sure.
Well, then I guess that “it’s inherently progressive” is the part of “MMT” that is a “theory.” It’s certainly not the reality.
Very nice comment Yankee Frank.
Acquaintance with MMT has, if nothing else, polished my rhetorical skills such that I have a decent chance of defeating deficit fear mongering in my RL circle. It may be that attempter spends his days among like-minded individuals, but as for me most of the people I encounter have nagging doubts about “loans to China” and Social Security’s soundness. Others are infected with Austrian admiration for deflation & liquidation and seek to inflict vile scare stories on the ignorant. These ideas need to be exposed and refuted.
attempter is absolutely correct that MMT presupposes a government interested in the prosperity of its people. He criticizes it on that basis. But what what would be the use of a theory that supposes a kleptocracy? Surely it’s important to discuss the workings of good government, which we can then compare to the horse thieves running ours. Most MMT economists are quite vocal about the fact government is not acting in the best interests of the people. They are nearly the only ones saying anything about it, and they are certainly not milquetoast enablers.
The average person hasn’t given up on reform. One reason may be they’ve bought into establishment economics. We “can’t afford” health care, “can’t afford” pensions we’ve already paid for. Once you see through the lies it’s far easier to understand the magnitude of the problem.
I did say I was open to the argument that MMT can be a worthwhile educational tool, and I’m glad to hear you’re having success with that.
I guess the right way to frame it is: “Here’s what should be done, and what would work if government could work. But the fact that government refuses to do this, that it in fact does the opposite and systematically lies about what the problems are and what needs to be done, proves that this system cannot work. The same goes for the mainstream media.”
That would square it with the fact of kleptocracy, and purge it of any sense that we should actually fight to enact it, as opposed to taking its political impossibility as more evidence that reformism itself is impossible.
And like I said, I really like it as part of the critique of propertarianism.
I think MMT fits rich people, corporatism and facism like an Armani suit.
They say we don’t need to tax as long as inflation is low. Government bond issuance is unlimited as long as this is true. Then when it comes time to pay on the bonds, after interest rates did rise due to inflation and the interest expense goes way up for the taxpayer, if you are “sovereign” with your own currency you can just print it to pay off debt. (with some little law changes and also ignoring the most powerful groups in the world). Then you just run the currency down to nothing and we are on the road to prosperity.
Then they like to ignore the history of the world where this has been tried and didn’t work with disasterous results. I’ll not mention the W or Z cases, because that is just so overdone and almost trite to the point of being dumb at this point. And we all know that the Ws printing money to pay off WW1 has nothing to do with anything :)
But one thing that I have wondered about lately is why are most Mexicans poor and Carlos Slim the richest man (with identifiable assets) in the world? The fact that he owns monopoly productive assets and everyone is paid in and maybe saved pesos is the only reason I can think of.
Then most of south and central America has been doing MMT for many, many decades now. If I had the energy to look into it, I would probably find out the Soviet Union were devout MMTers too, except the ROW was unappeciative of the theory when it came time to settle foreign payments and chose gold over rubles.
I greatly admire Cedric’s amusing rhetorical tactics, but in this case he or it excels him or itself. The apophasis of “not mentioning” W or Z because the point is “overdone” (like meat) as opposed to being wrong (like bullshit) is superb!
But to simultaneously assert that the Soviet Union was run by MMTers, while pointing with pride to his or its own refusal to provide evidence (“If I had the energy to look into it”): This is genius!
Truly, Cedric is no mere bullshit artist, but a master. I bow to him or it.
@Cedric Regula
“I think MMT fits rich people, corporatism and facism like an Armani suit.”
Hardly, recently L. Randal Wray wrote: The perspective adopted is unashamedly progressive and unapologetically critical. As we always said in the 1960’s, “question authority”. If I haven’t pissed-off somebody each week, I’ve failed. http://www.economonitor.com/lrwray/2011/07/06/lessons-we-should-have-learned-from-the-global-financial-crisis/
If MMT policies get adopted you can expect most of the policies that are in place that allow the FIRE sector to acquire huge ill-gotten gains will be eliminated.
“They say we don’t need to tax as long as inflation is low.”
Not quite, they say we don’t need to tax as much. There are other reasons to tax such as to create a demand for the currency. Here are some other reasons given by the old head of the NY fed: http://hiwaay.net/~becraft/RUMLTAXES.html
“Government bond issuance is unlimited as long as this is true.”
This is a common miss-perception about MMT. One that MMTers need to work harder to correct. Nowhere do they actually say unlimited deficit spending is a good thing, they’d say it is highly inflationary. More on this on Naked Capitalism: http://www.nakedcapitalism.com/2010/07/deficits-do-matter-but-not-the-way-you-think.html
“Then when it comes time to pay on the bonds, after interest rates did rise due to inflation and the interest expense goes way up for the taxpayer, if you are “sovereign” with your own currency you can just print it to pay off debt.”
Interest rates are a policy variable. The decision to sell interest bearing bonds is a policy variable. Tax rates are a policy variable. How a nation uses these policies to effect the economy comes down to decision making. Here is a great post about what would happen if the government just “printed” money rather than issue bonds: http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html
“(with some little law changes and also ignoring the most powerful groups in the world). Then you just run the currency down to nothing and we are on the road to prosperity.
They are in favor of reasonable price stability. As for the powerful groups in the world, some of them need to be challenged. If you’re like most people you feel the elites are taking this country and others in the wrong direction.
“Then they like to ignore the history of the world where this has been tried and didn’t work with disasterous results.”
No, they are the most well versed in economic history of any group of economists I’m aware of. They are curious about things mainstream economists have no interest in such as labor economics, institutional economics, history of money, sociology of money and more. They are aware of what did’t work and just as importantly what does work and why.
“Then most of south and central America has been doing MMT for many, many decades now.”
Argentina did a job program with incredibly good results. Many south american countries adopted floating exchange rates. That’s about it regarding countries following MMT prescriptions. Since you brought up Mexico specifically here is some Wray wrote regarding it: http://www.cfeps.org/pubs/wp/wp51.htm
Attempter writes:
That’s not even wrong.
1. MMT describes real operations, real financial flows of taxing and spending. Saying MMT is “reformist” and that it “assumes non-corrupt politicians” is like saying plumbers are “reformist” because plumbers assume non-corrupt code enforcement officers.
2. MMT insists that money is created for “public purpose” and is to be evaluated from that perspective. In the current political context, reformist or no, that’s a huge win if people can be brought to understand that (a process that is happening slowly but surely.
* * *
I guess one measure of non- reformist cred would be to do one’s homework before throwing one’s weight around ….
Come on folks. MMT may provide some level of transparency of the financial system but implementing it would not solve our problems.
MMT does not address the POLITICAL ECONOMY that is one of the core tennants of ECONNED. Without addressing inherited wealth and its influence on social policy as well as private ownership of any/everything it is a useful educational distraction for a small bunch of financial geeks….try describing MMT to a lay man w/o any financial background.
I would also argue that MMT needs to broaden its “theory” to describe our international monetary system and the complexities of exchange between countries short and long term….for educational purposes.
@psychohistorian
“MMT does not address the POLITICAL ECONOMY that is one of the core tennants of ECONNED.”
The descriptive MMT is just that descriptive, describes the facts without a political bent. The prescriptive side is of course political.
“I would also argue that MMT needs to broaden its “theory” to describe our international monetary system and the complexities of exchange between countries short and long term for educational purposes.”
Something MMTer Dr. John Harvey wrote http://www.amazon.com/Currencies-Capital-Flows-Crises-Determination/dp/0415781205/ref=sr_1_2?ie=UTF8&qid=1311546344&sr=8-2 ? or Wynne Godley http://www.amazon.com/Monetary-Economics-Integrated-Approach-Production/dp/0230301843/ref=sr_1_1?s=books&ie=UTF8&qid=1311546634&sr=1-1 ? There are only a dozen or so MMTers. They seek out and answer criticism as you can see time and again. They teach classes, write books, write blogs, give interviews, publish academic research, run for senator (!), construct policy and maybe have some time left over for their families. Still judging from the comments people are saying they aren’t doing enough. Give me a break. Go read some of the MMT primers I’ve linked to, read a book, then if you still disagree with what they say then they’d love to hear from you. Lets raise the bar, it would be good for everyone. This divide and conquer needs to end.
@attempter
“The simple fact is that kleptocracy will never do anything MMT says it should do.”
Quite right. This has MMTers pretty depressed about the future. However if you don’t like something, just going to the G8 summits to protest isn’t going to be effective. To be effective you need to have a plan for change and get people behind this plan, not simply demand change. MMT has a two pronged approach which seems to be progressing. First target academic economics by alerting them to the flaws in mainstream theory and providing a correction with papers like this: http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf The second prong is to make this information understandable to a broader audience. For starters there is http://pragcap.com/resources/understanding-modern-monetary-system and http://neweconomicperspectives.blogspot.com/p/modern-money-primer-under-construction.html
“The result of all this is that, as much as I hate to say it, MMT ends up in the same category as the likes of, “We need better Democrats.” It’s (politically) impossible and merely a waste of time and energy.”
At the core, if we have no government we get bad outcomes. If we have bad government we get bad outcomes. There is no getting around the need for good government. That said, MMTers design their policies keeping in the front of their mind politician’s and big business’ long history of colluding to screw the majority. MMT policies are thus designed to minimize their ability to do that.
Attempter,
I’m with you on a lot of things, but you can’t fault a policy for assuming good government. Every policy assumes good government. We can imagine all kinds of monsters under the bed regarding ANY policy if we assume bad government.
If you think all governments are irredeemable that is another thing, but it certainly doesn’t invalidate the operational realities of MMT.
This is a straw man. MMT does not seek to be a Theory of Everything, unlike neoclassical economics. It just describes how the plumbing works in a money system backed by government taxing authority as opposed to commodity holdings (or feathers, which the Mayans used).
Now some MMTers like Randy Wray advocate other stuff, like fixing the price of labor rather than the price of money, but that has nothing to do with MMT, but it can understandably lead to a lot of confusion.
“MMT does not seek to be a Theory of Everything”
As far as I can tell, they sure seem to be trying. In fact, I think MMT stands for Micro Macro Theory. They claim they understand the plumbing (doubtful too – I haven’t seen much on Shadow Banking – other than they noticed it’s there and it blew up – just like the rest of us noticed. They want Minsky in the theory now. OK, we got a theory with a singularity smack dab in the middle. And what they do understand is really not that enlightening to most economists and others in the know anyway). Then they say since they understand the plumping, people and organizations can sit on sinks and drink from toilets.
If they were bottled up as something like the Micro Theory of Fiat Currency, and somehow got that right without the highlighting and conflating of minor points and de-emphisizing the biggies, they would be less annoying.
Disclaimer: I don’t like over-reliance on monetary policy no matter whom explains or implements it – including Sumner and his fondness for macro monetary head games. I also think that fiscally funding kleptocrats, the military-industrial complex, corporatism (including Healthcare, Inc) and imperialism sounds like a big problem too. How’s that for a couple of depressing sentences?
Minsky is seen by MMTers as a precursor to MMT insofar as his views on budget deficits etc. seem very similar (although he did think deficits could get ‘too big’ and that’s where MMTers disagree with him).
As for a Theory of Everything, I seriously doubt it. I had a conversation with Mosler the other day and I said that I thought that MMT relied too much on neoclassical economics for their microeconomic theory. He totally flipped the lid, and rightly so.
As far as microeconomics go, MMTers seem to largely agree with Steve Keen’s deconstructions of neoclassical theory and instead take an institutionalist perspective. So, the whole thing is really about market power and income distribution rather than supply and demand and equilibrium and all that.
I didn’t realise that MMTers thought like this (i.e. agreed with me) for ages and I was in regular correspondence with them for three or four months. They just don’t deal with this stuff that often because they’re generally macroeconomists.
So, the big questions: is the institutionalist approach a Theory of Everything or does it seek to be? I don’t think so. I think it more so rests on taking things as they come and applying a few basic principles, usually related to market power and income distribution.
http://en.wikipedia.org/wiki/Institutional_economics
Maybe “Theory of Everything” is the wrong phrase. Applied MMT As The Solution To Everything might describe it better.
I’m not willing to give up on supply and demand yet, tho equilibrium is a slippery thing. But I know there are plenty of powerful people against supply and demand working without their consent and direction.
But I’m tired of thinking about economics today already and am heading for the gym. I’ll have to read about institutional economics later and find out where that has been all my life.
I don’t think that’s the case either. MMTers only insist that were their policy proposals taken up governments would have much more space in which to engage in economic policy.
There would still be an infinite number of problems to deal with and new ones would arise every day. But MMT would give policymakers more tools to deal with these problems.
One of the central features of MMTers — and ALL post-Keynesian economists — is that they don’t view the world holistically. They’re almost Gnostic in their insistence that the world is a very uncertain place and that Grand Theories are just ideological constructions.
While we may come across as pontificating sometimes, its not in the vein that we solutions to all the world’s problems (there was an interesting debate a while back on unemployment in South Africa where major institutional and racial problems were raised vis-a-vis a government employment program, for example), but that we think we can offer far more scope for policymakers to formulate solutions within.
Randy Wray regularly quotes his mentor, Hyman Minsky, who always emphasized that “there can be no ‘final’ solution” in the real world.
Cedric burbles: “And what they do understand is really not that enlightening to most economists and others in the know anyway”
What a odd litmus test to apply. “Others in the know”? What others? And what are they “in the know” about? Do enlighten us, assuming that you are, indeed, “in with the in crowd” of those “in the know.”
Yves,
I don’t understand your support for MMT without putting it within the context of POLITICAL ECONOMY as expressed in your book. I can’t see how MMT fixes the inherited wealth and ownership of everything issues humanity faces.
This is a straw man. MMT does not seek to be a Theory of Everything, unlike neoclassical economics. It just describes how the plumbing works in a money system backed by government taxing authority as opposed to commodity holdings (or feathers, which the Mayans used).
Perhaps that’s its problem. We have MMTers like Phillip Pilkington out there advocating MMT “solutions” to the problem that don’t recognize, let alone address, the root cause of the problem, which is leveraged financial speculation. By masking the symptoms instead of treating the disease, MMT merely ensures that the harmful virus that is leveraged financial speculation will continue to survive and thrive.
To be fair, though, neoclassical economics shares that same exact blindspot, and that’s my fundamental problem with all theories of political economy: political economy is itself a straw man as it does not describe reality and the role of the leveraged financial specultor in driving economic depressions.
The funny thing is that I far prefer MMT over abominations like the neoliberal Chicago and Austrian schools. I just think that MMTers, like all rationalists, are so enamored with the beauty of their ideas that they fail to understand the practical consequences of those ideas in a world that is also occupied by realists, whose addiction to power always manages to harness rationalist justifications to serve their own ends. I firmly believe that MMT will be the next economic orthodoxy because the reasonableness of MMT is just as manifest as that of Chicago School monetarism, which was just as manifest as the neoclassical Keynesian synthesis.
“Perhaps that’s its problem. We have MMTers like Phillip Pilkington out there advocating MMT “solutions” to the problem that don’t recognize, let alone address, the root cause of the problem, which is leveraged financial speculation.”
I almost love the fact that I’ve become the ‘generic bad guy’. Better to be hated than not to be loved.
But, in all seriousness, I never advocated anything remotely like this. I’ve always railed against financial leverage. And I’ve tried as hard as I can to provide a macro model that would help prevent this.
@PP,
I’m glad you are enjoying your noteriety. Unfortunately, narcissism was labelled as such before you came along, so you missed out on achieving broader fame. :-)
And I am not accusing you or MMT of being pro-speculation. As Yves would say, that is a straw man.
Wow, Tao, very insightful comment.
I was under the impression the Mayans used cacao beans, didn’t they?
Not really, you still need to know fundamental biology if you want to fight cancer.
@Tao Jonesing
“MMT does not, and cannot, address financial speculators.”
I don’t think you are familiar with the vast amount of literature MMT has on this. Check out Mosler’s proposals for banks for starters: http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html
“The big problem with MMT true-believers is that they are trying to work within the system and effect incremental change. By doing so, they embrace and perpetuate the rot of the present system.”
There are two aspects to MMT, descriptive and prescriptive. There are very specific proposals from MMTers very specific proposals to prevent the government from running amuck and spending irresponsibly, protecting the environment, ending the cruel practice of keeping people unemployed as a means of controlling inflation and more. However none of these proposals will make any sense unless people first get their minds around how our monetary system actually works.
There are two aspects to MMT, descriptive and prescriptive.
The descriptive/prescriptive dichotomy is a false one that spawns signficant blind spots. How you see the problem dictates the solution. Once a viewpoint becomes the orthodoxy, you see the problems you expect, and you don’t see the problems you don’t expect.
Speculators, Minsky’s financial “innovators,” find and exploit such blind spots to drive cycles from which they can profit, to everybody else’s detriment. In his Stabilizing an Unstable Economy, Minsky documents how speculators invented ways around reserve requirements and other regulatory limitations and by so doing “broke” Keynesianism in the 1970s.
Many of Mosler’s proposals on banking are nothing new. While I think implementing such proposals are a necessary first step to ending leveraged financial speculation, they are nowhere near sufficient. Leveraged financial speculation needs to be criminalized, and the limited liability of the corporate form should not apply in cases where leveraged financial speculation is found.
Given the faux debate over the debt ceiling, I understand why there’s been an uptick in MMT discussions. I even think MMT provides some great solutions to near term problems. My issue is that monetarism of any form– whether that of Keynes, the neoclassical synthesis known as “Keynesianism,” Milton Friedman’s Chicago School, or MMT–does not and cannot address how borrowed money is used.
As leveraged financial speculation is always and everywhere the cause of depressions like the one we find ourselves now, I’d like to see an economic theory that focuses on eliminating levergaged financial speculation instead of arranging the rest of society to cope with the fallout when leveraged bets go bad.
“The descriptive/prescriptive dichotomy is a false one that spawns significant blind spots.”
It’s the dichotomy described by STF. http://www.nakedcapitalism.com/2010/08/guest-post-modern-monetary-theory-%E2%80%94-a-primer-on-the-operational-realities-of-the-monetary-system.html
“How you see the problem dictates the solution. Once a viewpoint becomes the orthodoxy, you see the problems you expect, and you don’t see the problems you don’t expect.
I think that tends to be true for any dogma. MMTers remain the most open minded people out there, and are pragmatic rather than dogmatic unlike most other economic schools of thought. In other words, they love a good idea regardless of who proposed it.
“Speculators, Minsky’s financial “innovators,” find and exploit such blind spots to drive cycles from which they can profit, to everybody else’s detriment.”
The struggle between competing interest never ends, it’s one of the defining features of capitalism.
” In his Stabilizing an Unstable Economy, Minsky documents how speculators invented ways around reserve requirements and other regulatory limitations and by so doing “broke” Keynesianism in the 1970s.”
From what I can tell Keansians fought each other and Montertiarism won by default. W. Godley’s text book Macroeconomics sorts out the big conflicts and MMTers have built on it.
“Many of Mosler’s proposals on banking are nothing new.”
Why re-invent the wheel?
“While I think implementing such proposals are a necessary first step to ending leveraged financial speculation, they are nowhere near sufficient. Leveraged financial speculation needs to be criminalized, and the limited liability of the corporate form should not apply in cases where leveraged financial speculation is found.”
There is probably a great overlap with your thinking and Wray’s. Rather than a financial transaction tax he proposed certain activities just be made illegal.
“Given the faux debate over the debt ceiling, I understand why there’s been an uptick in MMT discussions. I even think MMT provides some great solutions to near term problems. My issue is that monetarism of any form– whether that of Keynes, the neoclassical synthesis known as “Keynesianism,” Milton Friedman’s Chicago School, or MMT–does not and cannot address how borrowed money is used.”
That last sentence just isn’t true. I think you need to first bring yourself up to speed on MMT so you don’t mislead readers in this conversation.
“The struggle between competing interest never ends, it’s one of the defining features of capitalism.”
Leveraged financial speculators, who by definition bet with other people’s money and leave them to absorb the losses, have no more of a LEGITIMATE interest in what they do than pedophiles have in getting easy access to child pornography. My problem with MMT is the same as my problem with all economic theories: it legitimizes evil (I don’t see how you can look at the harms caused throughout the ages by leveraged financial speculation and consider it to be anything other than evil).
From what I can tell Keansians fought each other and Montertiarism won by default. W. Godley’s text book Macroeconomics sorts out the big conflicts and MMTers have built on it.
You miss the point. First, there is Keynes’ general theory. Second, there is the neoclassical synthesis aka “Keynesianism,” which bears little resemblembance to the former. Regardless, at heart, both are monetarist theories. There are different flavors of monetarism, you see.
There is probably a great overlap with your thinking and Wray’s. Rather than a financial transaction tax he proposed certain activities just be made illegal.
Great! But let’s make sure that there’s no corporate limited liability for illegal activity. If a corporation engages in illegal leveraged financial speculation, shareholders should face jail time, too. Do that, and we’ll see such speculation dry up over night.
That last sentence just isn’t true. I think you need to first bring yourself up to speed on MMT so you don’t mislead readers in this conversation.
No, I really don’t have to bring myself up to speed on MMT. MMTers have to bring me up to speed on MMT. If you have a pinpoint cite to educate me with, pony up. But you would have done so already, if you could.
Again, my primary criticism of MMT is that it is, at heart, no different than any other theory of political economy, which exists to legitimize evil as being just one of many “competing interests.” As you’ve demonstrated, MMTers don’t even realize that’s what they’re doing. To you, as to all economists, leveraged financial speculation is just another acceptable practice, even though it is always and everywhere the cause of the problems you attempt to “solve” through monetarism, which cannot fully address such speculation.
I like your italics trick Tao, I’m going to give it a try. :)
My problem with MMT is the same as my problem with all economic theories: it legitimizes evil (I don’t see how you can look at the harms caused throughout the ages by leveraged financial speculation and consider it to be anything other than evil).
You’re speaking to the choir regarding seeing the leveraged speculation as something completely rotten. First of all, you need to understand why it is rotten. MMTers practically on a daily basis blog about it. Secondly you need to have solutions. Banks play an essential role of assessing creditworthiness. Mosler calls this their public purpose. It’s why we have private banks with skin in the game instead of government making those decisions. Any actions banks engage in that reduces their incentive to make good loans should be made illegal. You also can find commentary where they criticize the Commodity Futures Modernization Act of 2000 for allowing all kinds of new speculation on commodities causing volatility (http://www.blogtalkradio.com/newcaptainsofindustry/2010/12/30/economist-round-table-economics-101-for-politician), they want the FDIC to take into receivership the big insolvent banks (http://www.zerohedge.com/article/bill-black-and-l-randall-wray-demand-bank-america-finally-open-it-books). Sheila Bair’s commentary that the FDIC could have done it but was blocked by Geithner (http://www.nytimes.com/2011/07/10/magazine/sheila-bairs-exit-interview.html?pagewanted=all) only makes the MMTers look more responsible in retrospect.
You miss the point. First, there is Keynes’ general theory. Second, there is the neoclassical synthesis aka “Keynesianism,” which bears little resemblembance to the former. Regardless, at heart, both are monetarist theories. There are different flavors of monetarism, you see.
I was taught monetarism in school, years went by and I kept waiting for it to all make sense. Monetarist’s loanable funds, solo model, inter-temporal governmental budget constraint etc etc.. It made SOME sense on the gold standard, in current times it is all ass backwards. Saving doesn’t cause investment. The federal reserve can’t control the quantity of deposits, they control the price (interest rate). There is no inter-temporal budget constraint, there is a economy wide spending constraint where there is a limit over how much can be spent without triggering demand-pull inflation. Taxes for a currency issuer doesn’t exist so the currency issuer can get it’s own money to spend, but to take money away from others.
I know where you’re coming from from generally disliking ANY economic school of thought. I think MMT is different though. MMT’s best selling point is that explains monetary operations as they actually are. As one commentator JKH recently put it “…one thing I pay attention to is at least its ATTEMPT to anchor the development of any sort of theory with some kind of balance between the system we have now and an alternative system that might be possible.
Theory is vacuous if it is entirely severed from some connection to present institutional realities. If there is no connection, there can’t be a logical destination for whatever usefulness the theory purports to have.
No, I really don’t have to bring myself up to speed on MMT. MMTers have to bring me up to speed on MMT. If you have a pinpoint cite to educate me with, pony up. But you would have done so already, if you could.
Lazy. :) You do need to bring yourself up to speed so you don’t make false statements about MMT. It’s dishonest and harmful to those reading this who don’t know better. I’m not a MMTer, but I consider them my friends. As such I ask them to alert me any time I misrepresent them so that I don’t turn people off to their hard work by mistake.
As STF put it in the comments here MMT isn’t a final solution, it is open to new ideas, open to making old ideas better. From what I can tell your views and MMT’s are probably perfectly compatible.
Agree wholeheartedly with your last paragraph Tao. That’s the key.
“As leveraged financial speculation is always and everywhere the cause of depressions like the one we find ourselves now, I’d like to see an economic theory that focuses on eliminating levergaged financial speculation instead of arranging the rest of society to cope with the fallout when leveraged bets go bad.”
Um, have you read ANYTHING by, say, Bill Black, Jamie Galbraith, Michael Hudson, Yves Smith–all MMT’ers or sympathizers? Have you read Wray’s analysis and proposals for dealing with money manager captalism? Have you read Jan Kregel?
Instead of ridiculous blanket statements attempting to thwart MMT that are actually consistent with it, why don’t you go find some specifics that you disagree with to show you actually have a clue what you’re talking about.
Yes. Indeed, I have read Black, Galbraith, Hudson and Smith extensively. I own and have read books authored by each of them (and Jamie’s more intelligent father, too).
But you cannot lump what they have said into a general MMT approach. Many label Hudson as Marxist and Galbraith, like his father, Keynesian.
But what would little ignorant me know about those big words?
Again, for the people who have a hard time comprehending what they read, my objection to MMT is my objection to ALL economic theory: it perpetuates evil. You can’t incrementally change evil and expect good. To do so is irrational, yet, MMTers portray themselves as the smartest, most rational guys in the room (witness Phil Pilkington). Attempting to “reform” existing economic theory as MMTers do– after all, they just claim to be modern not revolutionary– leaves the rot intact.
But i guess the smell of that rot brings you comfort, so you ridicule me when I argue that MMT is just as naked as the current emperor of political economy. Yes, it seems more humane, more logical, more reasonable, but That’s an illusion.
Tao,
That’s a bit negative , I think.
I like to think of the Science of Economics as kind of like an antelope’s thighbone. It gives you something to lean on when that great big black monolith appears in front of you.
@Tschaff: “However none of these proposals will make any sense unless people first get their minds around how our monetary system actually works.”
This is not that easy for regular people to do, especially given the fact that the media scream “Debt ceiling crisis” every 10 seconds or so.
I know it’s hard for regular people, because I AM one.
Maybe it would help if those “in the know” would stop referring to MMT and start talking about MMR — Modern Monetary REALITY.
@Carla I’d recommend watching these videos or reading the transcripts over here: http://www.netrootsmass.net/fiscal-sustainability-teach-in-and-counter-conference/
Yves — You lost me after Pilkington’s tenth obnoxious post.
How absolutely cringe-worthy. Hasn’t this guy gotten the memo about how a scientist’s first priority is to describe reality (as best as he is able), rather than formalizing bits and pieces of it, idealizing those situations so as to remove any “messiness”, and only then theorizing about that?
(with ‘this guy’ i mean Sumner, obviously, though it seems to come out wrong with the way I’m quoting the response to Sumner; it’s a sort of early morning and I hadn’t quite gotten to my dose of coffee yet. Anyway, the fact that he has to explain himself for not ignoring reality should be proof enough that Sumner’s type of economics isn’t a science of anything.)
Hasn’t this guy gotten the memo about how a scientist’s first priority is to describe reality (as best as he is able), rather than formalizing bits and pieces of it, idealizing those situations so as to remove any “messiness”, and only then theorizing about that?
That’s pretty much the problem. The undergraduate study of economics requires the heavy use of concepts like ceteris paribus, which is OK only as far as it goes, which isn’t very far into the real world. What I object to isn’t so much the oversimplification of relationships in the way undergraduate economics is taught, but the fact that the textbooks tend to leave out the actual list of factors that are being ignored in order to show how things relate to each other. The real-world result of this is that people who have taken a few economics courses have a false sense of security about how the world works.
Personally, I think every lesson should conclude with a paragraph laying out all the factors that are being left out and that could influence outcomes. I also think that every first-year student of economics should be required to read The Affluent Society. And then spend a sophomore year in France.
isn’t it “The Structure of Scientific Revolutions”?
Whoops, I should never go from memory after midnight, thanks!
MMT has risks just like every choice we make on a daily basis. I would like proponents to address the downside risks. Can Cullen, Randy, or Yves write a summary of the downside?
Dear Shrek;
My impared intellect tells me that the case is being made that the ‘benefits’ of the MMT far outweigh the ‘benefits’ of the ‘other guys.’ In one sense, the ‘downside’ of all systems, spring from, as HAL would say, “human error.” Besides, the ‘downside’ of any system usually shows up in the application, or experiment phase. The old guard, (or more accurately, neo old guard,) is manifestly unequal to the modern challenges. Change is hard, granted, but quite feasable.
Devaluation of the value of the dollar, much faster than we’re used to. Basically screws everyone who saves for a rainy day, or retirement. It’s QE infinity, an even bigger ponzi.
The whole idea rests on the hope that printed money being invested in production will produce and sell enough goods that can be taxed, which will thereby offset the money printing, preventing inflation. Somehow.
It’s b%llshit, basically, but no different than the scam the Fed runs anyway. Just faster, and with even more middle men and women taking a slice.
“The whole idea rests on the hope that printed money being invested in production will produce so many goods and employ so many workers that the taxing of them will offset the money printing, and that taxing will prevent inflation. It’s a perpetual motion machine, truly magical.”
That’s said a little more clearly.
I think Scott Sumner puts his finger on the weakness of MMT (and prompts the usual unscientific attacks), which I have described in comments here before as a lack of scale. I think MMT is logically correct, but you cannot conclude from that alone that its application – ie using reserves to fund government spending – would not be inflationary. You need some sensitivity parameters. If reserves are indeed a hot potato, as Scott Sumner puts it, an expansion of reserves could, other things equal, be expected to be inflationary. In other words, MMT needs a theory of the price level. As it is, MMTers just quote cases (eg Japan, QE), like lawyers rather than scientists.
Also, if I may say, I have been thinking about money for years, as both a central banker (not directly involved in monetary policy ops but sitting behind the team that was) and an academic (who actually used Wray’s book in a monetary economics course), and I am still not satisfied with my own understanding of money. I have instinctive doubts about people who are so cocksure of their own ideas that they go round telling everyone else that they “don’t understand the monetary system”, “don’t get it”, etc.
Inflation is the cudgel with which neo-liberal economists keep govt from doing its real and only legitimate job: to help the people live better lives. From your comments I know that you subscribe to the neo-liberal understanding of inflation and as such, you are part of the problem. Your crew have been predicting massive inflation in Japan for 20 years now and just stick your heads in the sand and say, “any day now” when your mistake is pointed out. Its time to admit that not only do you not understand money, but you don’t understand inflation or anything to do with the real workings of the economy, which is frankly pathetic given the time you’ve had to come up with some theory that is even partially predictive of major economic events. Neo-liberal economics is responsible for more starvation, suffering and outright thievery than any theory in history. If the neo-liberal crew had anything approaching a conscience, shame, honor or integrity they would’ve shut up by now and gone home to hang themselves.
Indeed.
Thanks for the demonstration of one of my points, Frank!
The lack of inflation in Japan despite the expansion of reserves can be explained by an elevated demand for safe assets like reserves during a financial crisis. That is why I said “other things equal”; the demand for reserves varies. Note that QE was reduced in Japan during the more tranquil years before 2008.
Now you tell me your mechanistic explanation of WHY the increase of reserves in Japan did not cause inflation.
We’re talking 20 years here — so I guess the demand for safe assets doesn’t vary so much. I do think I’ve mixed up inflation and interest rates in the discussion of Japan but as I understand it inflation has to do with supply and demand — so as long as economies are producing enough of what the people require and desire there should be no inflation. MMT predicts (based on logic AND empirically supporting historical data) that inflation should not occur in an economy that has slack demand and adequate supply. That is why we have not seen massive inflation in the US despite being awash in reserves. That is not to say that throwing cash at banksters, so-called monetary intervention, did not create inflation in commodities due to speculation, which it clearly has (all those excess reserves just had to be thrown somewhere destructive and useless apparently), but, as I understand it (and like Keynesianism), MMT does not prescribe QE in our current situation, it prescribes fiscal interventions in order to make up for a lack of demand as the private sector deleverages. Now, I am not an economist by any stretch so if I am technically off here I apologize. My point was that the abject and utter failure of neo-liberal economics to provide for a stable and just economic system has doomed it to the dustbin, it just apparently hasn’t got the notice yet. And as I see it, any inability to understand money and inflation probably has to do with the terrible economics education provided by neo-liberal educators. I guess I just don’t think its that complicated really; it seems to me that huge effort has gone into making economics appear complicated so that we plebes don’t bother our simple little heads over what goes on behind the curtain over there in Oz. Theoretical physics, organic chemistry, artificial intelligence, and some types of engineering problems are heinously difficult. Economics not so much.
I’d like to add that one of the strengths of MMT is that it is the first economic theory that treats money as what it is — economic engine oil. That’s it, nothing mysterious, magical or imbued with mystical properties. I think people have a hard time grocking that because large quantities of it give the holder immense power, and too little or too much, in certain circumstances, can cause horrible destruction.
No doubt US unemployment does represent spare capacity that is holding down US inflation (although some of will be structural, such as mortgage brokers whose jobs are never coming back), but the change to paying interest on reserves was certainly a thing that was not equal. When the BoE first paid interest on reserves in 2006, the stock of UK reserves rose by about 2000% in one day, with no obvious effect on prices or the exchange rate etc.
By the way, I think the idea of money as a lubricant is pretty old – certainly before MMT – and it is not exclusive to MMT now. In fact I used it in my own blog post http://reservedplace.blogspot.com/2009/04/easing-understanding.html , which you and any other readers looking for a non-technical discussion of monetary policy operations might find interesting.
Neoliberalism advocates trickle down from the top. It seems that MMT justifies the direction of money downward, to people who will spend it, increasing demand.
“The lack of inflation in Japan despite the expansion of reserves can be explained by an elevated demand for safe assets like reserves during a financial crisis. That is why I said “other things equal”; the demand for reserves varies. Note that QE was reduced in Japan during the more tranquil years before 2008.”
It looks to me like that elevated demand for safe assets came from government spending. Government spending — as has been shown time and again — allowed the private sector in Japan to net save.
Here’s the balances from Bill Mitchell:
http://bilbo.economicoutlook.net/blog/wp-content/uploads/2011/02/Japan_sectoral_balances_1981_2010.jpg
And an alternative (though similar) dataset from the Financial Times (Martin Wolf):
http://static.seekingalpha.com/uploads/2010/1/13/saupload_sectoralbalances.png
So, what we see here is that the government sector (and the external sector) have allowed the private sector to net save. Since these net savings earn little if they just sit ‘under the mattress’, the private sector seeks out safe assets.
Thus, I think that the Japanese scenario can be explained by the increase in government spending. As the government spent more and more and issued more and more bonds, the demand for the bonds increased due to the fresh spending.
This seems to me perfectly in keeping with MMT and seems far less superficial than your explanation — which, no offense, but isn’t really an explanation at all, but just a description.
This makes no sense to me. The fact is, that even with massive bond sales, meaning that most of the government spending was not money-financed, between 2001 and 2004 there was still a large increase in reserves of about 5% of GDP, representing an increase in base money of about 50%. What is YOUR explanation of why this did not generate inflation?
“This makes no sense to me.”
That’s because you don’t understand MMT. Sorry, I’m not being offensive, but you clearly don’t.
“The fact is, that even with massive bond sales, meaning that most of the government spending was not money-financed…”
This makes no sense. Of course government spending was ‘money financed’. They didn’t directly trade bonds for goods and services. Money was spent — more specifically, reserves were issued — and bonds were then issued that drained reserves to some extent.
But of course this was ‘money financed’. You don’t hand out Social Security checks or payslips to public sector workers in bonds.
“What is YOUR explanation of why this did not generate inflation?”
Because this has no bearing on how much money is actually being spent in the economy. MMTers view money as entering the economy endogenously. This is a key point.
The money multiplier and all that claptrap is just rubbish cooked up by academics inside their heads. See:
http://bilbo.economicoutlook.net/blog/?p=10733
Private sector net spending is determined largely endogenously. If the private sector decide to net save (or deleverage) there is no reason to assume that increased government spending will lead to inflation.
Indeed, Japan have found over the past few years that when they cut government spending they get spurts of deflation. This indicates that private sector savings (or: deleveraging) desires are rather strong.
“…between 2001 and 2004 there was still a large increase in reserves of about 5% of GDP…”
Note that during this period interest rates flatlined, just as MMT predicts:
http://bilbo.economicoutlook.net/blog/wp-content/uploads/2009/04/japan_interest_rates.jpg
The build up in reserves led to the overnight rate falling to its base. However, this did not lead to significantly more lending. Another indication that the Japanese private sector were either net saving or deleveraging and had no desire to spend sufficiently to cause inflationary pressures.
“Because this has no bearing on how much money is actually being spent in the economy”
That’s the point. I am asking “why not?”.
I think you know what I mean by money-financed. The order is rather irrelevant, but if I, as a former central banker, assured you that governments usually borrow before they spend, would you take any notice?
“That’s the point. I am asking “why not?”.”
I gave you the link above. I’m not going to write a whole piece debunking the money multiplier and outlining the endogenous theory of money in the comments section. Read Bill Mitchell’s piece. It’s excellent. I’ll clarify any points that you’re not clear on.
“I think you know what I mean by money-financed.”
I understand what you’re talking about. But I think that the way you think about it leads to confusion.
All operations are ‘money-financed’. Whether bonds are issued and what the effects of this are are a secondary concern. Gotta get the causality right — otherwise you’ll get the whole thing wrong. The bonds are issued to maintain the interest-rate, and when they’re not (as was the case of Japan, it was because of dogma that makes no sense under close scrutiny).
“The order is rather irrelevant…”
No its not. This is where you don’t understand MMT.
If I issue money FIRST, then issue bonds I’ve just created the money that will be soaked up by the bonds.
This is contrary to the mainstream approach where the bonds are used to acquire money that is already in existence. There’s a HUGE difference. And until you grasp that, you won’t even begin to grasp MMT.
“…but if I, as a former central banker, assured you that governments usually borrow before they spend, would you take any notice?”
I don’t understand. Who am ‘I’ in that sentence? A stockbroker? A player in the bond market? The general public?
I can only assume that I’m an MMT adherent and in that case, if you made that assertion I’d simply say that you’re wrong.
Exactly which Bill Mitchell post should I read? There are a lot!
Since MMTers like to emphasise how the money system really works as opposed to textbook accounts, I am telling you, as someone who used to be involved, that governments issue bonds to raise money before it is spent, and not the other way round. And managing short-term interest rates has little or no part in the decision to issue and when – in fact in the UK, as well as Germany and France, debt management is no longer done by the central bank. By the way, are there any MMTers who have worked in central bank operations?
“Exactly which Bill Mitchell post should I read? There are a lot!”
The one I just pointed to:
http://bilbo.economicoutlook.net/blog/?p=10733
“I am telling you, as someone who used to be involved, that governments issue bonds to raise money before it is spent, and not the other way round.”
Well, thanks for the assertion. It may appear this way to some working within the banks and that’s what they might think they’re doing, but that doesn’t mean much. The Treasury issues bonds, the Fed spends — so unless you were working at both at the same time engaging in all these operations I think you should be a bit more humble in your assertions.
“And managing short-term interest rates has little or no part in the decision to issue…”
Open market operations are used to manage interest-rates.
Here:
http://en.wikipedia.org/wiki/Open_market_operations
They need bonds to manage interest-rates. These bonds are issued as new reserves enter the system. You may not see the two things as being connected, but that doesn’t mean that they’re not connected.
“By the way, are there any MMTers who have worked in central bank operations?”
I’m not sure. Warren Mosler has 40 years experience trading securities and is the one who noticed many of these phenomena. Bill Mitchell is in daily contact with the central bank of Australia.
I don’t mean to be offensive, but just because you worked somewhere doesn’t necessarily mean that you understand the institution. You may have been in a position that didn’t facilitate a good overview. Or you may have been so blinkered by what you’d read in textbooks that you weren’t able to get a good perspective.
More on this from Scott F. noting that ‘reserve issuance precedes bond issuance’ is a logical rather than a temporal statement:
http://www.nakedcapitalism.com/2010/08/guest-post-modern-monetary-theory-%E2%80%94-a-primer-on-the-operational-realities-of-the-monetary-system.html
“This all leads me to the often noted MMT point that “spending comes before tax revenues are received or bond sales.” If one expands this a bit to include loans from the Fed, then this statement is absolutely correct in terms of the operational realities of the monetary system. That is, according to both the tactical and accounting logics, taxes credited to the Treasury’s account and the settlement of Treasury bond auctions can only occur via bank reserve accounts, while the original source of banks’ balances in their reserve accounts can only be previous government deficits (which are net credits reserve accounts) or loans from the Fed (repos, loans, purchases of private securities, or overdrafts—note that an outright purchase of a Treasury security by the Fed to add reserve balances requires a previous government deficit). Therefore, it very much is the operational reality that for taxes to be paid or bonds to be settled, there has to have been previous government spending or loans from the Fed to the non-government sector, and this is true whether or not the Fed is legally prohibited from providing overdrafts.
However, the statement that “deficits or Fed lending logically precede tax payments and bond sales” should not be interpreted as “MMT’ers think there is no legal obligation that the Treasury have balances in its account before it spends or are otherwise ignoring the existing law prohibiting Fed overdrafts for the Treasury.” As I noted above, it is clear that the Fed cannot legally provide overdrafts to the Treasury, and every MMT’er does in fact understand this—the key is to understand what “deficits or Fed lending logically precede tax payments and bond sales” does and does not mean. That is, when MMT’ers say the latter, they are effectively saying “deficits or Fed loans logically precede taxation and bond sales as an operational reality of the monetary system” (the general case), and this and the statement “the Treasury must have positive balances in its account prior to spending under current law” (the specific case) are in fact not mutually exclusive. Both can be and are true—the government can and does require itself through its own self-imposed constraint to obtain credits to its own account at the Fed that were created via previous deficits or Fed lending before it spends again.”
Aha! So Scott Fulweiler (who I generally find to be more reasonable than some of the more fervent MMT disciples) is explaining why my eye witness account of how government bond auctions are actually (as opposed to logically) organised might just be true. That’s a relief for me!
Forty years of active market experience or an economist with regular contact with the central bank (or even a central bank research economist) won’t cut it. MMT needs someone who has experience of how the plumbing works. If it doesn’t, that should worry you.
I had a look at that Bill Mitchell post, and, while I agree that the textbook multiplier is misleading, the post does not disprove a positive relationship between reserves and broader money, which I think is sufficient for Scott Sumner.
“Aha! So Scott Fulweiler (who I generally find to be more reasonable than some of the more fervent MMT disciples) is explaining why my eye witness account of how government bond auctions are actually (as opposed to logically) organised might just be true. That’s a relief for me!”
Temporally, maybe. But logically, no. And I think the latter is the key point — as it’s what policymakers ‘need to know’.
Also, if the whole system was understood correctly it wouldn’t operate like this. Even if we continued bond issuance (which we don’t have to), we could have an overdraft system that would make the process much easier.
“I had a look at that Bill Mitchell post, and, while I agree that the textbook multiplier is misleading, the post does not disprove a positive relationship between reserves and broader money, which I think is sufficient for Scott Sumner.”
No, but QE disproves a relationship between reserves and broader money. And that’s a bit of an elephant in the room these days. The Bill Mitchell post kills the idea that central banks can control the money-supply which is the important point.
So, let’s get this straight: Although MMTers claim to offer a more realistic analysis of how the money system works, they have no known supporter with a hands on background in monetary policy operations. Yet despite that, you have the cheek to write that “if the whole system was understood correctly it wouldn’t operate like this”. Thank you for demonstrating the empty arrogance of MMT.
I note that you revert to case law in response to my argument that Bill Mitchell’s post does not mechanistically disprove the absence of a positive relationship between reserves and the price level. Such a positive relationship would be sufficient for Scott Sumner, because he is basically proposing a mechanism that adds reserves as long as NGDP is below target. In other words, it is like a car accelerator in that you don’t calculate how far to push it, you just push it until you get the speed you want, which will require different pressure according to whether you are going uphill, over soft ground, etc.
To paraphrase George Bernard Shaw, we are a nation separated from each other by a common language. Why hasn’t there been “inflation” in Japan? There has been. Oh, my bad, no one can agree on the definition of inflation. And then there’s the problem of, even though we don’t know precisely what inflation is, from an individual perspective, there’s good inflation (when my income goes up for any reason) and bad inflation (when anything I want to buy goes up in price for any reason). How in God’s name can you develop a policy when no one, I mean no one, can agree on what it is you are trying to achieve in the first place. We supposedly feel so much better today because the definition de jour of “inflation” gives a very benign reading. But measured in the same method as the late ’80’s it is off the charts. Apparently we suffered merely from mass hysteria in the ’80s and now feel so much better because of…what?…economic “science”. I’m not making this up! Well here’s my ceteris paribus. Figure out what precisely you want to achieve and define it in English so that the term is read and understood by your audience. Then and only then can you move past “so far, so good”. (BTW, my recollection of the inflation monster of the ’80s was it was the best of times. No matter how much whatever I wanted to buy went up, my income went up by way more. On the other hand, now that inflation has been tamed….let’s just say that there are some kinds of dog food that are starting to look very tasty.)
“Oh, my bad, no one can agree on the definition of inflation.”
News to me.
–noun
1.
Economics . a persistent, substantial rise in the general level of prices
I’m fine with the dictionary definition. I think you’d find it hard to find anyone who’s not.
“…a persistent, substantial rise in the general level of prices”
I guess you missed the part about “precise”. In the context of using the term inflation to define a serious policy objective, your answer is insulting and indicative of your typically flippant responses. You sir have a problem with unknown unknowns.
My quoting a dictionary to define a term that you said didn’t have an agreed upon definition is insulting? Okay.
The term is perfectly precise. Policymakers measure the inflation of core goods on a temporal basis. If these increase continuously over a period of time we measure how long this time period was and how large the increase was. That is the CPI — or inflation rate.
Policymakers then make policy in response to this rate. Different policymakers have different opinions about the consequences of inflation, but its perfectly well defined.
Like I said, separated by a common language. To you the term “general” is precise? How about I use an example. The Fed is mandated to contain inflation. No? Yet B.S. Bernanke says the Fed was doing QE2 with the express goal of raising the prices of stocks. So, why do I not see anyone comment on the fact that the Fed has publicly admitted violating its mandate. Oh, I see, the rise is not “substantial” Mr. PP would argue. Well I’m confused. On 11/3/10 Mr. B.S. announced QE2. The previous day the S&P 500 closed at 1,193.57. On 6/30/11 when QE2 concluded the S&P 500 closed at 1,320.64, 10.6% higher. Well done, Ben. Now, by any definition I have ever seen, a 10.6% rise in the price of something in six months is “substantial”. (Please verify that with your Webster’s) Obviously contrary to what you said Mr. PP, there are others who are like me unable to understand the definition of “inflation”. I am also astonished by the fact that, while Mr. B.S. has on numerous occasions spoken of the need to assure some “general price” inflation (he must have a copy of your Webster’s), it speaks volumes that even the Village Idiot could find incontrovertible evidence to demonstrate that a large percentage of middle class incomes are locked in a deflationary death spiral. Come to think of it, you may have proved my very point by you comments. If I truly cannot find anyone else who cannot understand the definition of “inflation” as it is used in setting economic policy as you say, that is the problem. Thanks for clearing that up for me.
Yes, I think the term ‘general’ is precise. It’s antonym is ‘particular’.
So, a ‘particular’ rise in price would be if, say, cabbage started to rise due to a cabbage crop wipeout.
A ‘general’ rise in price would be when most prices are rising simultaneously which would indicate demand-pull inflation.
The Fed says that they should ‘control inflation’. Was this contradicted by QE? No. They thought that QE would expand employment and output and this would ensure that no inflation took place. They were wrong. But still, no inflation did take place due to QE.
As for stock price rises, this is not ‘inflation’. It is not measured in the CPI and rightly so. Stock price rises have no direct link to a rise in aggregate demand. So, stock prices can rise while unemployment is high and output low (as happens now). Therefore it makes sense not to measure them as part of inflation.
Here’s a really good question though: why do people fetishize about inflation all the time? Why are there so many myths surrounding inflation and its measurements? In short, why is there so much ANXIETY around inflation?
Well, I believe someone did an article on that on this very site before… something about fetish worship or something… can’t remember the writer… but he went through the real causes of inflation pretty well…
If anyone who reads this exchange has trouble understanding what George Bernard Shaw meant by being “separated by a common language” then I give up.
Ciao!
That’s one of the most sophistical defenses I’ve seen in my life.
“You’ve proved me wrong so I am now going to claim to speak the English language in a different way than you.”
Wow. Just wow.
To Just Tired,
Good point. If my income goes up while my costs remain the same, that’s profitability. Good. But my income is your expense. And if your income is the same, you see an inflation that I can’t. Inflation is in the eye of the beholder.
And if all costs, incomes, expenses go up by the same percentage, so that we have a “general” rather than a “relative” price change, ie, a dictionary inflation, then financial assets backed by debt become devalued; the money they’re paid back with is “worth” less. Inflation is therefore what the central bank is most concerned with. Preserve the values of financial assets no matter what happens to the rest of the society?
“But my income is your expense.”
No, its not. It’s REALLY not.
“Inflation is in the eye of the beholder.”
No, its not. Its measured as an aggregate. You’re falling for Just Tired’s (DownSouth’s) solipsistic nonsense. He/She essentially claims that inflation is a subjective measure (because he/she is so self-centered, perhaps?). It’s not. It’s an aggregate measure. I.e. It measures ALL core prices; not prices from the POV of one consumer or producer.
Without this definition ‘inflation’ is a relative measure and it is useless for anything except for Just Tired to impress people with his/her shabby rhetoric and word-twisting. ‘Inflation’ is only a silly concept when it is defined by silly people like Just Tired.
How do you discuss things with an idiot? “General price level” is a precise term? General price of what? Oh, the “general price level” of stuff. Very precise. Which stuff? Substantial increase” is a precise term? You live in Humpty Dumpty’s world where everything means exactly what you say it does. That is what is necessary for you to continue to spew your incoherent ramblings in response to virtually everyone’s posts. Look at this thread for example. You dominate the dialogue with nonsense and non sequiturs and then, in to demonstrate your keen intellect you dismiss others thoughts, including mine, as coming from another “silly” person. When it comes to the Webster’s definition of inflated, I don’t even have to look it up to find the meaning in your case. Your knowledge of the subject matter and your ego are considerably inflated IMHO. Go look that up!
Allis — You get it! The definition of inflation is purposely left in Pilkington’s Humpty Dumpty land precisely because it effects different groups in different fashions. He just demonstrates his ignorance when he dismisses your statement that one man’s income is another man’s expense (or woman as the case may be) When I pay my doctor or lawyer it is an expense to me and income to him. If it doubles in a year do you think they give a darn? PP wants to take a simple concept and use his Humpty Dumpty terms to make us think it’s way more complicated. When union plumbers were making more than senior CPA’s in the 1980’s and buying new homes with pools, 4 wheel drive trucks and ski boats, there was a very large class of workers (remember those guys who make stuff) that would have never voted for taming inflation. And recall in my first post, I said that inflation then, if recalculated using today’s rules was an absolute non-event. But when the masters of the universe realized that it was cutting into their life styles all hell broke loose and it was declared a national emergency. Tell me please, anyone out there, you know it is true that using today’s rules to calculate inflation in the 80’s made put it at what is now considered an acceptable level. Why then did Volker have to jack up interest rates to 20% PA and yet now we pat ourselves on the back. There is only one answer and that Cui Bono. (For those without PP’s Webster’s that basically means see whose ox is gored and look in the opposite direction). If you want the inflation bogey man to go away, you’re going to have to start by defining precisely what it is and precisely why is it to be so feared. They fooled us once, shame on them. If they fool us again, shame on us. BTW my brother was the union plumber and I was the CPA. Obviously with the help of about 1 million illegals, I have been able to turn the tables. And for the record, he is still willing to do that kind of work.
Anticipating one more sewage flow from PP, I want to make one additional point. I remember the 80’s very well. When the intellectuals were shouting that inflation was the bogey man dragon that had to be slayed at all costs, I did not know anyone who experience it’s ill effects first hand. It was good times for anyone willing to work. However, we were bombarded by stories of Weimar Germany and all of the other theoretical affects until the inflation bogey man got a life. To this day, I maintain that no one can have a serious discussion of the issue and I cite as my authority for that statement, the fact that we truly cannot agree on how to measure it in the first place and the response I got from Humpty Dumpty.
Don’t tire yourself out, brother. Your name may have changed but your inability to engage anyone except reflections of your own self has not. Cool it.
I think the pot just called the kettle black.
I think DownSouth was once again called on his/her bullshit. But hey…
“but you cannot conclude from that alone that its application – ie using reserves to fund government spending – would not be inflationary. ”
Sumner himself says that reserves aren’t inflationary if they earn the same as the target rate. Every MMT policy proposal does this. So, from his perspective, you’re wrong.
“MMT needs a theory of the price level.”
We went through this in the comments over at Fullwiler’s blog post:
http://neweconomicperspectives.blogspot.com/2011/07/scott-sumner-agree-that-mmt-policy.html
Once money enters the economy MMTers basically have the same theory of the price level as Quantity Theorists, we just use different nomenclature.
Fullwiler summed it up there:
“Regarding your final paragraph, as I explained in my post’s final paragraph, MMT’ers are quantity theorists—I said we have a quantity theory of AD [aggregate demand], but I meant the price level in the language you’re more familiar with (the former is Post Keynesian language). At any rate, as I said there, we’re quantity theorists, but we just think monetarists are looking at the wrong aggregate—we prefer net financial assets of the non-government sector as our M, relative to desired net saving of the non-government sector as our V. Further, at a very basic, simplified, theoretical level, because the government sector is the monopoly supplier of net financial assets to the non-government sector, it is also the price setter (or, in more casual language, the monopoly issuer of the currency is the price setter). It’s sort of an MMT version of the fiscal theory of the price level.
Finally, let me add that we don’t find a monetary base explanation of the price level useful. Aside from QE (which, again, necessitates or at least results in the overnight rate being equal the remuneration rate), the monetary base is 100% endogenous. Currency is added to circulation as the private sector desires to hold more of it via bank vault cash (which is replenished when banks purchase more from reserve accounts). Reserve balances are related to payment settlement needs and (where applicable) reserve requirements, and are provided endogenously based on demand for them. Thus, it is economic behavior that drives the monetary base, not vice versa. Certainly the desired monetary base can be affected by interest rates set by the central bank, but there again it is the effect of the interest rate on behavior that is of interest and the causative factor; the change to the monetary base in that case is largely a residual effect.”
Where MMTers differ from Quantity Theorists is HOW money actually enters the economy, which is a very important aspect of the process.
RebelEconomist: “MMT is logically correct, but you cannot conclude from that alone that its application – ie using reserves to fund government spending – would not be inflationary. You need some sensitivity parameters.”
I agree. MMT proponents say the government can print money as long as inflation remains low. That makes sense to me, but how much money can they print before inflation becomes a problem? I’m sure a spare billion here or there would not be a problem, but how about a trillion. Five trillion? No point in talking money unless you at least attempt to quantify it.
Interestingly the Fed conducted an MMT experiment by buying a trillion or so in commercial trash at absurdly high prices. That’s printing money, while pretending not to commit that cardinal sin, but the benefits accrue primarily to plutocrats rather than the government or the avergae person. Why didn’t they buy houses at bubble prices instead? That would put money into the system.
What troubles me even more about MMT is their prescription for reducing the money supply – increase taxes and burn the revenues collected. It may be a good idea, but it’s so utterly unrealistic to expect any government to do that that it’s hardly worth discussing.
Not that other monetary theorists have exactly covered themselves in glory. Steve Keen points out how it’s long been shown empirically that MB expansion follows rather than leads M2 expansion, yet conventional monetary is based on exactly the opposite!
Nor does conventional monetary theory have a good handle on inflation, mostly using ex post facto excuses as to why it occurred at time X but not time Y. I think a missing factor is that inflation is partly a mass psychology (“animal spirits”) issue.
Nevertheless I think MMT has a long way to go before confidently offering panglossian solutions.
“That makes sense to me, but how much money can they print before inflation becomes a problem?”
RebelEconomist is seriously misrepresenting the MMT view here.
How much money can be spent before inflation occurs? That all depends. But generally speaking when resources are fully and efficiently utilised (I mean by resources ALL resources, from labour to capital equipment) then you reach the point where more spending will prove to be inflationary.
To speak the post-Keynsian jargon: when aggregate demand begins to outstrip aggregate supply, inflation results. Or: when stuff stops being produced for sale, then any added money will just increase the amount of spending while leaving the amount of goods and services at the same level. As ‘money growth > available purchases’ inflation results.
Just about out the door for the gym. But one more comment first.
I’ve noticed oftentimes MMTers get vague about where this government spending comes from.
There are two choices.
1) they print it – which is presently illegal – the Fed can only print and buy assets, usually treasury debt.
2) the treasury issues bonds to real investors.
If we assume for a moment that MMT is reality based, then it’s either choice 2, or the Fed doing QE and getting treasuries in return (QE2).
So MMT says the USG can do that until inflation increases and it doesn’t matter if the government racks up an overwhelming debt load.
Then presumably the government sends us a big tax bill because now it’s time to control inflation. Since the average American consumer is quite adept at banking, they have adequate cash reserves and cash flow to handle the tax bill.
Another thing to consider in the US is that we send much spending to Asia and the Middle East, so we have to inflate them first – before we can count on import inflation moving the CPI needle in the US.
I realize MMT is a Very Serious Thing. Good luck with that.
The gym you go to is under a bridge, am I right? Not the one I go to, for good or ill.
“I’ve noticed oftentimes MMTers get vague about where this government spending comes from.”
If there’s one point on which MMTers are NOT vague it is where government spending comes from.
“1) they print it – which is presently illegal – the Fed can only print and buy assets, usually treasury debt.”
No, they issue reserves (i.e. credits bank balances — just keystrokes on a computer, as Bernanke has said). Yes, the Fed does this. Yes, they sometimes buy assets, but sometimes they just credit people’s accounts (Social Security etc.).
“2) the treasury issues bonds to real investors.”
The bonds are issued after the reserves are credited. The goal is to ensure that there are not too many reserves floating around the system. If there is the overnight interest rate (Fed Funds rate) falls to zero (actually it falls to the support rate which is 0.25% in the US).
Bonds are essentially a ‘clean up’ operation that allow the Fed to set the interest rate which is the key lever in monetary policy.
These are the absolute central ‘tenets’ of MMT. To say we’re vague on this is just weird.
“If we assume for a moment that MMT is reality based, then it’s either choice 2, or the Fed doing QE and getting treasuries in return (QE2).”
QE was an unusual policy measure. And it did exactly what MMT said it would do. It flooded the system with reserves and pushed the Fed Funds rate down to 0.25%.
“So MMT says the USG can do that until inflation increases and it doesn’t matter if the government racks up an overwhelming debt load.”
No they don’t. They insist that QE cannot cause inflation proper.
“Then presumably the government sends us a big tax bill because now it’s time to control inflation.”
I explained above how inflation occurs above and it has nothing to do with reserve issuance.
“Another thing to consider in the US is that we send much spending to Asia and the Middle East, so we have to inflate them first – before we can count on import inflation moving the CPI needle in the US.”
No they don’t. Much of the dollars sent to those countries are saved. They are used to by up US Treasury Bonds. This is not inflationary.
Phillip: It’s not “just weird.” It’s “just making shit up.” Standard Operating Procedure for the class of commenter of which Cedric is an exemplar. In his or its mind, you lose, since you spend minutes disentangling the lie it takes only seconds to emit.
@Alex, who says: “MMT proponents say the government can print money as long as inflation remains low. That makes sense to me, but how much money can they print before inflation becomes a problem? I’m sure a spare billion here or there would not be a problem, but how about a trillion. Five trillion? No point in talking money unless you at least attempt to quantify it.”
It appears to me that it all depends on for whom the government is “printing” the money. If the government is “printing” the money to save the bad bets of banks, then apparently $13 trillion doesn’t cause inflation. (We all know rich people–bank owners and the like–never cause inflation.)
But if the government is “printing” money for Social Security, Medicare and Medicaid, then $1 trillion would be disastrously inflationary.
Does it seem this way to ANYONE ELSE?
Great point Carla. It’s all about who the money goes to.
(ie. not the zombie banks).
“Interestingly the Fed conducted an MMT experiment by buying a trillion or so in commercial trash at absurdly high prices.”
Um, when did we ever say we were in favor of that? Answer: NEVER, because it wasn’t. The problem with people like you is you don’t know that you don’t know MMT, but you continue to criticize as if you do. I’d love to be able to discuss potential weaknesses of MMT with someone who actually understood it. That rarely happens, if ever, because we spend all of our time putting out fires started by folks like you.
“Um, when did we ever say we were in favor of that?”
Who is “we”? Are you part of a hive mind?
More importantly you fail to distinguish between the prescriptive and the descriptive. I never said that MMT proponents prescribed such an approach. Nevertheless it is descriptively very similar to how MMT proponents say the government can generate funds – print as needed. Does it matter if the Fed purchases assets for $1T that are only worth half that, or simply prints $0.5T in exchange for nothing? If the Fed printed $0.5T, handed it to the government, which in turn handed it to the holders of the commercial trash, how would that differ from what was done?
“The problem with people like you is you don’t know that you don’t know MMT, but you continue to criticize as if you do. … we spend all of our time putting out fires started by folks like you.”
A response like that sounds like it comes from a cult member. They all misunderstand us!
Tellingly, while you took offense at my reference to an “experiment” which actually lends credence to the MMT approach, you failed to address any of the serious questions and concerns that I raised. That doesn’t sound like someone interested in serious debate.
Who is “we”? Are you part of a hive mind?
He was referring to the official MMTers.
“(a)Does it matter if the Fed purchases assets for $1T that are only worth half that, or (b) simply prints $0.5T in exchange for nothing? (c)If the Fed printed $0.5T, handed it to the government, which in turn handed it to the holders of the commercial trash, how would that differ from what was done?”
(a) Yes it matters in that someone has $0.5T that they wouldn’t have gotten otherwise.
(b)Doesn’t happen in the real world, that would be a helicopter drop. Here is the nitty gritty http://neweconomicperspectives.blogspot.com/2010/01/helicopter-drops-are-fiscal-operations.html
(c)Same as B with an additional step. MMTers don’t ever say spend wastefully or bail out those who made bad bets. Just because government CAN do it, doesn’t mean they should. They are in favor of stabilizing the economy from the bottom up. If the economy collapses all loans will fail. I’ve noticed people who just gloss over MMT literature with a very skeptical mind take home two messages. Deficits don’t matter and government is the cure for every social-ill. It’s wrong and tragic that people don’t want to learn.
“ie using reserves to fund government spending”…
Reserves fund CREDIT expansion, not government spending (∆NFA=0).
Only direct government spending increases NFA’s.
Not exactly true, reserves come later. Credit expansion is driven by loan demand and offer (pretty much by expectations of the economy, interest rates, disposable income, debt, etc.).
Agreed.
I’m just saying that a real increase in the money supply comes from net government spending, not credit expansion.
Sumner is a political conservative who’s watched all his long-time ideological allies throw in with tea partiers and their demands for a balanced budget to put us into a depression,and the gold standard to keep us there.
It must be rather disconcerting to Sumner that the only sane people left are the people he’s always hated (like a diehard Red Sox fan saddened by the news a Yankees player saved a child from drowning). Meanwhile Sumner is like a stone wall, never wavering from the most important thing– thwarting the will of Paul Krugman (“If we adopt the view that monetary policy is the appropriate way to keep NGDP growing at an adequate rate, then we win and Krugman loses. So which will it be?””). Of course Krugman is no MMT fan either; so by saying no to MMT, he’s really saying yes to Krugman.
http://wallstreetpit.com/50558-an-open-letter-to-conservatives
Bottom line then, 1. Sumner’s objections have more to do with psychic equilibrium than general equilibrium and 2. Krugman is such a handy all-purpose villain, he should play himself on a TV show as a part-time govt assassin, like Ron Silver in “Heat Vision and Jack”.
http://youtu.be/sC8zC8vORqI
:o)
Much better link vis a vis Ron Silver. :o)
http://www.bestweekever.tv/2009-03-16/ron-silver-stars-as-ron-silver-in-heat-vision-and-jack/
“Sumner’s objections have more to do with psychic equilibrium than general equilibrium”
*Claps*
Whom cares what signage the school bus has on its side, if law its self…is thrown under it.
Skippy…lawlessness in my book *is* priority number one.
Shorter Scott Sumner: “That’s all very well and good in practice, but how does it work in theory?”
I am an old doctor and spent my life seeing the degeneration of bodies until death. I therefore feel that the economic and financial problems arise from the fantasy that money represents reality. Reality decays constantly, that is it is transformed, whereas money remains nominally the same. The only way to maintain the worth of anything is through labor. Labor injects value constantly into reality. What has to be and must be and eventually will be fostered is the ability to labor. No labor no reality. All the economic theories that take labor as a medium and not as an aim are empty.
@Jose L Campos
MMT views money is a claim on reality. The value of money isn’t derived from what material it is composed of but rather what it allows a person to exchange it for. To the best of my knowledge MMTers would completely agree with your statement that physical reality, which labor is part of, is essential to understanding monetary economics.
It’s refreshing to hear a voice of reason.
Excellent commentary, and to some point support of a ‘demourrage’ gesellian like money.
But I don’t think MMT’ers would disagree with you: the only constraints are real, not financial. (labour, non-financial capital, resources, etc.).
This was awesome.
I’m sure there must be U of Chicago graduates who are not insane; I just haven’t met any of them.
They have even infiltrated stats-based analytical football and basketball sites, and their insistence on analyzing what *isn’t* reality is quite persistent.
“the visible, the concrete” is always the rub with these people. Reality sucks for the those who live in the World of Should.
“I’m sure there must be U of Chicago graduates who are not insane; I just haven’t met any of them.”
[Dons Nomex undergarments] Raghuram Rajan may be an exception to the Chicago Insanity rule.
When I ran a stat-arb shop in the 1990s, we’d occasionally get resumes from Chicago grads. We knew without reading them that they were from B students, since the A students had learned that what we did couldn’t actually be done.
“When MMTers discuss the actual operations of the monetary system we are not theorizing. We are discussing the actual operations… Warren Mosler, widely regarded as the founder of MMT, created the theory”–
If it’s not a theory, shouldn’t they stop calling it a theory? Following up on the Kuhn reference, maybe “modern monetary paradigm” makes more sense, as in “really guys, we’re currently in THIS paradigm (and in the future we could end up in another one, it isn’t carved in gold for all eternity…)”
To say something is not a theory and turn around a line or two later and call it a theory is a little sloppy, no? In the time of Darwin, evolution was theory, in need of empirical build out. Today, it is a critical paradigm within which much of the biological (and now anthropological) sciences function.
Calling something a mere “theory” exhibits and invites doubt. So where is MMT in this regard, *in reality* per its own advocates?
I also don’t think they do themselves any favors by mixing policy prescription with system description. The policy prescriptions put forth by MMT-ers certainly have NOT followed from the “reality” of the “modern monetary paradigm” they say they’ve described.
So, if policy prescription and system description are entirely separable (and they are), then the aura put out by MMT-ers that their “theory” is inherently progressive is not sustainable.
If anything, in reality the real world effects (like pump and dump asset bubbles) and formal policy reality of the modern monetary paradigm to date is neo-liberal. Moreover, “deficits don’t matter,” to quote Dick Cheney, is also helping to roil the globe in other ways.
Without even being a deficit hawk, one can certainly contend that “modern monetary theory” has a lot to answer for.
“I also don’t think they do themselves any favors by mixing policy prescription with system description. The policy prescriptions put forth by MMT-ers certainly have NOT followed from the “reality” of the “modern monetary paradigm” they say they’ve described.”
In other words, they can’t call their policy prescriptions and their description of the way the monetary system really works by the same “MMT” name. It doesn’t work.
And it especially doesn’t work when the real world effects of “MMT” to date and the policy reality that grew up alongside “MMT” is not remotely like the Keynesian inspired policies of the so-called “MMT-ers.” (Even if the real MMT-ers are Greenspan and Rubin, etc).
See how confusing this is?
“See how confusing this is?”
It’s only confusing if you let it be. It mimics the flat earth, round earth debate.
The flat earth economists and politicians are sure we are sailing close to the edge of the earth and about to fall. They are willing to throw a few overboard to lighten the load and save the boat in its necessity to back paddle.
The MMTers disagree that the ocean has an edge.
You are positing two groups: anti-deficit rightists and alleged MMT progressives. That deficit based distinction is window dressing. I want to know what’s behind the curtain.
So I am deliberately introducing a third group, which worked and is still working the levers of monetary policy producing that new “monetary paradigm” which the MMT-ers propose they’ve described.
Because, I assume, they would like to be a little bit Keynesian (but not too much), MMT-ers are convinced salvation lies in the direction of the new “monetary paradigm.” Without being an anti-deficit rightist, I am not yet convinced that this new “monetary paradigm”– which certainly appears to rely on financialization of the economy– is not in fact a big part of the problem with the US economy today.
I’m am also not convinced that the new “monetary paradigm” bears much relationship to the populist Keynesianism that the MMT-ers are continually invoking. It may facilitate such legislative policies to contend that “deficits don’t matter,” but it seems to me that in a financialized economy, Keynesianism has been transcended.
At best, the Keynesian notes of the MMT-ers seem to put a little lipstick on a very fugly monetary pig. And I do mean a little lipstick–some of those “Keynesian” inspired policies, like a full employment plan that relies on minimum wage government work for a vast swath of the US population alongside a financialized capitalist– but perhaps really (fascist) corporatist– economy has simply GOT to be joke, (speaking of MMT jokes).
That they also envision this as a replacement for traditional unemployment, as opposed to a safety net to which one might resort at the end of a search for better employment, does not even manage to crawl into the center-right liberal endzone of enabling, in a small way, people to help themselves.
One can consider this a litmus test for how “progressive” the MMT-ers are, regardless of whether or not one buys their description of the new “monetary paradigm.”
On the other hand, if, policy wise, they really think their own policies are the BEST we can do under that new paradigm, then I do not agree with them that salvation lies in the direction of Greeenspan and Rubin, Paulson and Bernanke, etc.
Well said!
“like a full employment plan that relies on minimum wage government work for a vast swath of the US population alongside a financialized capitalist– but perhaps really (fascist) corporatist– economy has simply GOT to be joke, (speaking of MMT jokes). ”
That’s such an absolutely false characterization of the proposals that it’s clear–yet again–that you have no idea what you’re talking about.
Apparently and i is as clueless as you are.
I’ve noticed every discussion of MMT ends with MMT proponents calling people stupid. Perhaps you can link me to some jibber jabber at least?
In particular, I would appreciate a breakdown of where the MMT description of how the economy works ends, and where MMT proponents start editorializing about how it should be run.
starts.
“I’ve noticed every discussion of MMT ends with MMT proponents calling people stupid.”
That’s funny, because I’ve noticed that every discussion of MMT STARTS with detractors calling MMT’ers stupid. Maybe if the conversation started differently, it would end differently.
Yet its still referred to as “The Theory of Evolution”.
Theory in the sense it is usually used by scientits does not mean, “We believe this to be true but we’re not sure” It means that, “Given the current state of collected data, this framework explains it completely without relying on outside agents (god or inflation expectations) to completely explain”
Yes, and the *theory of relativity* was gradually confirmed by a series of experiments.
Our current experiments are designed to “prove” MMT wrong by ignoring it.
Well, science may be a poor comparator all around as economics is inherently political and “good science” arguably wouldn’t be, although the application of evolution in anthropology is frequently fully theoretical in the sense that I intend–that is, as hypothesis (and also frequently political as well).
Yves, why are you criticizing Scott Sumner through Cullen Roche? I assume you had access to Sumner’s post; why not address it directly?
Hell, you don’t even provide a link to the “offending post”. Here…allow me:
http://www.themoneyillusion.com/?p=10178
Go ahead and read the damn post. Sure, one can disagree with Sumner. But his post isn’t unreasonable; far from it. And the discussion that followed in the Comment Section was outstanding.
Stop and think about how ridiculous Yves’ post is, along with the comments. [Feel free, obviously, to include mine.]
1. Yves’ post is about a paragraph cherry-picked from a Scott Sumner post.
2. But Yves “confronts” Sumner through the prism someone else, named Carmen Roche.
3. Carmen Roche also writes and entire post about the offending Sumner paragraph.
4. And the comments flow…
A single paragraph from a Scott Sumner post that wasn’t even read in full—gets passed through the prism of some other blogger and passed onto Yves and passed onto the commenters.
Are you kidding me? Talk about a Hot Potato.
Take the time to actually read the Sumner post. And if you’re really ambitious, check out the comments as well. Even if you disagree, you might just find out for yourself that it’s not nearly as ridiculous as its being portrayed.
http://www.themoneyillusion.com/?p=10178
I read it and was directly involved in the debate which took place in part at the NEP blog:
http://neweconomicperspectives.blogspot.com/2011/07/scott-sumner-agree-that-mmt-policy.html
I was very polite to Sumner and addressed his points fairly, but the ‘debate’ was a farce.
Yves certainly points to the quote with the biggest ‘LOLZ factor’, but if you look at the NEP ‘debate’ you’ll find that Sumner wouldn’t argue the point unless we would imagine a world without a banking system.
The MMTers were just phased after this. “Why on earth would you assume that?” we asked. No response.
Why not just assume, I don’t know, a world without $1 bills or a world without the government sector? Or anything else for that matter. A world with a single currency or a world at war.
Sumner never explained why he wanted to rely on these assumptions, but he insisted on them. As his quote shows most of us were very fair. We heard him out and tried to explain our point-of-view, but he insisted on extreme weirdness and was altogether very evasive.
So, no. As someone politely taking part in the debate I can confirm that it was, in fact, a farce.
“Sumner wouldn’t argue the point unless we would imagine a world without a banking system.
The MMTers were just phased after this. “Why on earth would you assume that?” we asked. No response.”
I have no idea what debate you’re talking about, but I can already imagine a reason for that.
Maybe it’s just stubborn pushback against the MMT tendency, like most other neo-liberal and neo-colonial financializers, to imagine a world without an economy.
Wow. You really have no idea what you’re talking about.
Dan,
I did look at the Sumner post. The quote above was not a distortion of his views when taken out of context. It fully deserves to be ridiculed. And per the later comments, he does not argue MMT in good faith.
Many readers have limited patience with MMT discussions, so I didn’t want to get into the weeds, particularly on a hot weekend. My main point was to highlight how ridiculous neoclassical economics is, and the more general and dangerous preoccupation of economics with theory over empiricism, which I treat much longer form in ECONNED. (And please don’t try arguing economics has become more empirical. It’s notion of empirical research is largely a joke, since the discipline defines “empirical” research around a very limited set of tools that so severely constrain investigation and analysis as to render it close to useless. And that isn’t my view, this comes more or less straight from the mouth of Nobel Prize winner and former president of the AEA Wasilly Leontief).
Well said, Yves!
Here here Yves! You’re a hero.
Friedman was a complete idiot but MMT has failed to survive on countless occasions. We don’t need to bring it back from the dead.
It would be helpful if you would write your ideas out in full somewhere, flow5, like on your own blog. I have a feeling that you might have something interesting to say, but your comments in various places tend to be too brief and cryptic to get your message across.
I wouldn’t put any money on it. I’ve seen this dude’s comments on loads of blogs. They come across as cryptic because they don’t make any sense — and trust me, I’ve tried to make sense of them.
He/She appears to conflate monetarism and MMT for one. Which is beyond crazy.
If I were to take a complete guess I would say that Flow5 is an Austrian School ‘theorist’ — which explains his/her inability to theorise quite well. I also say that because Austrians believe there is a ‘monetarist-Keynesian’ nexus operating in the halls of policy and Flow5 generally seems to conflate the two as well.
Flow5 creeps around MMT blogs ‘debunking’ measures of money-supply and the like. At first people were like: “We don’t advocate money-supply targets”, but this never got through and we eventually learned to chalk him/her up as a crank.
“Beniot Mandelbrot’s findings that financial market price data was not normally distributed but fell into wilder, more difficult to model patterns of randomness.”
It’s hard not to agree with the wildness and hard to predict aspects of Mendelbrot’s fractal theory of markets, but it does not imply randomness. Fractal theory confirms R.N. Elliott’s idea that the price patterns reflect growth and corrective patterns seen throughout nature, repeat at all degrees of trend and are produced by endogenous waves of social mood.
I think that’s probably just a case of finding an ordered system post-factum. ‘Social mood’ is almost certainly not conducive to patterning in any way, unless it’s post-factum. Otherwise we could predict future trends.
So, we’d have an equation that would have predicted the success of ‘Friends’ back in, say, 1987. That’s farcical.
If people find patterns within this melange of material post-factum, that’s fine. But its probably arbitrary to some extent and certainly cannot be usefully used to predict any future developments. It’s basically just a tautology.
In 1942 Elliott forecast a multi decade (or larger market top) in 2012. Will be interesting to see the accuracy of his theory that he later combined with Fibonacci.
Nostradamus predicted the rise of Napoleon, Hitler and 9/11 — or so I’m told. Frankly I don’t believe it. Because I don’t believe in people being able to predict the future — I don’t believe in UFOs either, or telepathy, for that matter.
http://en.wikipedia.org/wiki/Postdiction
It would be useful for you to read Mandelbrot’s Misbehaviour of Markets.
It is a magnificent destruction of Fama if nothing else.
It is hard to completely understand what he is saying from this one quote.
Please read Mandelbrot. He describes various forms of “randomness”. The bell curve is simply the most tractable form or randomness. At the time of the debate in the 1960s, he was arguing for the use of Levy distributions, which are “wilder” than normal distributions. That was anathema to the orthodoxy, it not only would put pretty much all of financial economics in the trash bin but it also meant they would be able to make little in the way of predictions.
You have to understand that economists are really astrologers in disguise. The reason they get paid more than other social scientists is they make predictions. The fact that their predictions are generally terrible does not deter people from using them, since having a prediction is very comforting to most humans.
This might help:
http://www.gnu.org/software/gsl/manual/html_node/Random-Number-Distributions.html
It’s almost impossible to take MMTers seriously when they posit disgraceful, intellectually dishonest strawman like this.
Care to elaborate. It’s a quote. Where’s the straw man?
Don’t chew on “loans create deposits” as if it’s the sum total of MMT, Brito. He’s another little gem to bubble up your brain:
The federal government does NOT incur any liability by borrowing in its own currency.
(1) When IS the liability incurred?
(2) Since the number we call the National Debt refers to the total money borrowed by the US, and since there is no liability incurred by that borrowing, why does anyone bother worrying about that number?
Doesn’t mean that Sumner is tacitly admitting the prescriptive core of classical economics?
Supposedly an objective science ruled by universal law & math.
Actually a body of moral rules.
“If people aren’t the ideal abstract economic agents posited by the texts….then so much the worse for the people”.
Disclaimer: For the record, I’m a MMTer, sometimes accused of being passionate in my support of MMT. MMT is great, in addition to being a wonderful hobby, it’s also lots of fun to discuss. As long as it’s never taken seriously by the PTB, and as long as it never does anything to threaten the kleptocracy, then I’m 100 percent for it.
The great thing about MMT is that it takes the focus away from all these alleged financial crimes that supposedly took place during the financial crisis. This is exactly as it should be because there were no crimes committed during the financial crisis. Do you see anyone from Wall Street in jail? I didn’t think so, that’s because no crimes were committed.
No one in jail = no crimes committed
Keep in mind that I was one of the few, the proud, who helped design the collateralized debt obligations that Goldman marketed to clients. In other words I helped my firm bet correctly against the housing market and therefore I personally helped mitigate the crash. Those of us who designed complex CDOs to bet against the housing market should be seen as heroes of the financial crisis, not as villains. Had more firms done as we did, and shorted mortgages, fewer unsound loans would have been issued, and there would have been either no housing crisis, or a much less significant housing crisis.
Also, it’s worth remembering that in the American legal system, people who merely act badly or unwisely, do not do time. Not that me or any of my colleagues ever acted badly or unwisely. On the contrary, we acted at all times with the highest standards of ethics and the greatest concern for our clients’s well being.
But even if one or two bad apples had done what some of our ignorant accusers say, we would hardly be guilty of committing crimes, merely of acting unwisely.
And so, to all of you ignorant, uninformed bankster critics out there, let’s cool it with the anti-bankster comments. Why not spend your time on more useful projects such as knitting or crochet or learning about MMT and discussing it with your friends on an economics blog? I’m a great believer in the status quo, therefore I support anything that gets rid of articulate status quo critics (such as DownSouth) and replaces them with wonderful commenters such as “and i” (“how tough are you, Internet tough guy”). I love that guy, as well as almost all the commenters on NC, with one or two exceptions.
And so to friends, colleagues, MMTers around the world, as well as natural allies such as Anonymous Jones and the fantastic commenter called “and i” (“how tough are ya, Internet tough guy”) high fives all around.
Come to Harry’s Bar, 36 Central Park South, anytime between 6 and 8 PM, just mention to the waiter you’re an MMTer, and the drinks are on me.
Apparently you’ve never read anything by MMT’ers Bill Black or Randy Wray on the financial system, or MMT sympathizers Yves Smith or Jamie Galbraith. If you had, you wouldn’t write such complete falsehoods about MMT.
I am curious to hear that Bill Black is an MMT adherent.
do you have a reference to show that?
So far MMT has struck me as the economic version of Scientology.
I know him. I’ve had dinner at his house. Shortly after Lehman, I sat in a room with him and other MMT’ers for hours over a 3-day period discussing the financial system and re-regulating. UMKC MMT’ers wanted him on their faculty, and now his office is down the hall from Randy Wray’s. He’s co-authored with Randy Wray. He’s an MMT’er. And MMT’ers are “Bill Black-ians.”
Dr. Bill Black is STF’s colleague at UMKC. His primary outlet is at the MMT blog, New Economic Perspectives from Kansas City.
The point is MMTers are tremendously interested in hearing what is going on in the trenches, including all the insidious rot in the FIRE sector much of which is put on display on this fine blog.
DownSouth? Someone was requesting your presence on the Links page today, I believe…
Sorry to bring you down, ass.
Here’s the thing, you jump the other night in mumbling cryptically about ‘executions and decapitations, mostly’, trying to be cute and threatening apparently.
So it’s obvious to me you’re a REAL internet tough guy, and I ask you how tough, knowing you can’t answer like a tough guy. Sure enough you mumble something cryptic about setting traps for mice with cheese before you slink off. Now you’re whining about me in MMT thread.
You got owned. Ha ha.
@ Good Bankster
There’s a term, which I can’t recall, for a concept: when a belief system is “so clearly untrue or unreasonable as to be laughable or ridiculous” (ie, absurd) that one cannot tell if an exposition of it is a satire or serious. Would you happen to know the term?
I’d call it a self-parody. The only self-parody here, however, if Good Bankster/Just Tired/DownSouth’s attempt at humour.
If you want to parody something properly you have to understand it first. Otherwise your parody in turn becomes a self-parody — because you look like an ignorant idiot who is too lazy to actually understand anything and prefers hearing the sound of their own voice.
That would be Poe’s law, allis.
Thanks, Cahal. “Poe’s Law’ it was. Very funny article (both Poe’s Law and the Good Bankster’s).
Surely you jest.
@Good Bankster:
Think you blew your cover. If you were really a Bankster, I doubt that you would say “Not that me or…” (shudder)
Love your schtick, GB, good enough for The Onion, America’s Finest News Source. A recent article, you and your fellow lords might enjoy:
“Congress Continues Debate Over Whether Or Not Nation Should Be Economically Ruined.”
http://www.theonion.com/articles/congress-continues-debate-over-whether-or-not-nati,20977/
“Members of the U.S. Congress reported Wednesday they were continuing to carefully debate the issue of whether or not they should allow the country to descend into a roiling economic meltdown of historically dire proportions. ‘It is a question that, I think, is worthy of serious consideration: Should we take steps to avoid a crippling, decades-long depression that would lead to disastrous consequences on a worldwide scale? Or should we not do that?. asked House Majority Leader Eric Cantor (R-VA), adding that arguments could be made for both sides, and that the debate over ensuring America’s financial solvency versus allowing the nation to default on its debt—which would torpedo stock markets, cause mortgage and interests rates to skyrocket, and decimate the value of the U.S. dollar—is ‘certainly a conversation worth having.’”
. . .
“At press time, President Obama said he personally believed the country should not be economically ruined.”
Really, I think at some point you’ll have to tell your terrorist minions of the GOP to lighten up on the charade already. In providing cover to your Great Deceiver in the plantation house, they’re getting a bit carried away with the ad-libbing, to the point that your casino profits may be adversely affected. Some of the unwashed are also beginning to suspect something rank beneath the transparent costumes and all the silliness.
BTW, Your Grace, some of us would like to thank you personally for your supreme contributions to our society. Please furnish us with your home address in The Hamptons so that we may stop by in person to epresses our deepest appreciation.
MMT is nonsense.
Any theory with respect to money, is a theory of everything. Because money is at the core of everything.
Spend more than you earn(tax), go borrow.
Borrow more money than you can repay, go bankrupt.
Create more credit money than can be repaid, go bankrupt.
Bailout the bankrupts and your society implodes.
We are imploding, albeit in slow motion for the moment.
All the rest is blather.
You clearly haven’t even tried to understand MMT. I suggest you read Randy Wray’s Understanding Modern Money. He shows how the stories told re monetary systems are just that (he actually goes back to archeological records) and also describes how monetary operations work.
All your comment does is show uniformed bias. It doesn’t even connect with MMT.
Spend more than you earn(tax), go borrow. Siggy
Then under a gold standard, all gold mining should be shut down. Deficit spending by the US government is just the same as coining new money (except for the unnecessary debt). And yes, gold mining can cause price inflation when gold is used as money just as it did when South America was exploited.
Borrow more money than you can repay, go bankrupt. Siggy
I agree the US Government should not borrow but nevertheless it can always pay debt owed in currency it creates.
Like I said, my approach is the same as the Sioux when hunting rabbits.
I knew it was only a matter of time before NC & Sumner clashed. I try to read blogs that I don’t agree with, but I simply cannot stand Sumner. He is ridiculously dismissive and smug & often makes assertions that are completely at odds with the evidence.
He seems intent on exempting neoliberal economics from responsibility for inequality/crises, and has actually been arguing that it wasn’t under regulation that caused the crisis.
He has a great grasp of economic theory, but the fact that loans create deposits basically makes this theory null and void. I haven’t bothered to tell him, although he’d probably confirmation bias it away anyway.
He’s from the Chicago School of Propaganda. He’s one-off being an Austrian Schooler. In other words: he’s a theologian, not an economist.
(I’m actually running a piece on here about theology and economics tomorrow [shameless plug], keep an eye out — keep in mind that Sumner would be a perfect example of the type of economic ‘theorising’ I’m referring to there…).
If you haven’t, I’d recommend reading ‘Adam’s Fallacy’ by Duncan Foley which is an exposition of economic theology. After you read it, you realise how skewed economists visions of the world are, and arguing with them just seems pointless.
I can’t believe how ridiculous you are all being, you are exemplifying the virtues of religion and dogmatism, with insane massive generalisations and utterly meaningless rhetoric.
There is nothing wrong with thought experiments. It’s really quite obvious what Sumner is doing, he is simply asking how a change in the monetary base affects pricing, whereas the MMTers keep deflecting on some simplistic talking points about excess reserves (smugly assuming that “loans create deposits” even approaches any modern or sophisticated analysis of banking, which it doesn’t at all), however that is utterly irrelevant to the question of how the MONEY SUPPLY, not the central bank, affects the price level. So for the sake of argument, he is basically saying “assume the monetary base changes, regardless of how it happens”. There is nothing wrong with doing that.
sumner is positing something happening in a modern economy that never happens. ever.
I am not smugly assuming anything, thanks.
There is basically no link between base money and CPI:
http://www.cargocultist.com/?p=1303
There’s some more ‘meaningless rhetoric’ for your a pore over.
MMT is to classical economics theory what behaviorism was to psychoanalysis. Watson and Skinner were dead set on describing the “whatness” of behavior without getting into the “whyness” of it. This inspired the quip, “That is reckoned wisdom which describes the scratch but not the itch.” I doubt that MMT is much more than a taxonomy of the shapes of clouds. There be dragons!
Not bad analogy, but the jump from psychoanalysis to behaviourism was substantial, and in the long run positive for the development in psychology (and much of the insight still is good).
So if it’s the start of a more scientific economic theory (or at least financial shenanigans of it), then it’s good.
I can’t believe people think this “loans create deposits” talking point is even interesting, meaningful or new. Economists are already well aware about this fact, e.g.
http://rortybomb.wordpress.com/2011/06/14/interview-with-joe-gagnon-on-quantitative-easing-its-criticisms-and-the-argument-for-qe3/
“We know that the banks aren’t lending the money out. There’s little the Fed can do about that. So QE2 wasn’t aimed at the banks.”
This is why I can’t take (most) MMTers seriously, because anyone who has actually read ANY mainstream economic analysis would know this is a massive strawman.
“I can’t believe people think this “loans create deposits” talking point is even interesting, meaningful or new.”
sorry, but this is still not understanding what mmt is saying. the author (gagnon) still is suggesting that at some point the banks will lend out the ‘money’ they received as reserved after qe2, etc. but this is not actually what happens when a bank lends money. it creates the money out of thin air through the credit extension process
the mainstream view is that people with excess ‘money’ deposit it in a bank and then the banks turns that money and makes loans. so the mainstream view is that suddenly it becomes much easier for banks to create loans when they are provided with money. but this is mistaken, and mmt shows this
I do not care what actual MMT says, I’m responding to the hoards of incredibly pretentious commenters who keep spouting that talking point as if it has relevance to the point of things like QE2.
First of all, the majority of economists oppose any further stimulus, precisely because of this idea that banks are just sitting on their reserves. SUMNER IS NOT a representative of ‘the mainstream. Second of all, QE2 has never, ever been justified on the basis of banks lending their excess reserves, but rather on the basis of its flattening of the yield curve, and its effects on bondholders, not big banks.
@Barito IF banks expanded credit to the point where the excess reserves are gone they’d have loaned around $16T or around 100% of GDP. Not only would that push the economy way way way beyond its physical capacity, giving us horrible inflation it would also saddle the private non-govt sector with more debt, which is arguably much less stable than government debt.
To me (I speak just for myself) it seems more sensible to put in place policies which strengthen middle class incomes.
Mainstream economics is in the gutter — making excuses.
If you have half a clue about economics you’ll know once our arguments are truly taken on board it destroys mainstream economics. If you’re aware of the arguments and you don’t realise this then you’re incompetent or ignorant.
Seriously, I’m sitting next to a copy of Samuelson’s ‘Economics’. Which is far better written than the mainstream rot nowadays. And it has nothing about endogenous money supply.
The very fact that people can’t understand that when these fundamentals fall apart the rest of the theory goes with it is indicative of a serious fungus growing within the people you hold so dear. Get a new crew… these ones are a joke.
Monetarism is not the same as mainstream economics. There are thousands of economists within the mainstream that think monetary stimulus has no effect on AD, all undergraduates are taught the views of modern Keynesians who think this, as well as monetarists, so if you had a clue about ‘mainstream economics’ (which is an incredibly diversified field, if defined by what is practices in major institutions, from modern Bayesian macro to experimental and behavioural). If actually knew anything about economics, you’d know this.
Secondly, I’d be more impressed with MMT if the commenters that support it were not the most ideological and obnoxious people I have ever seen (second only to zero hedge commenters), who are prone to constantly pigeon hole people into the “mainstream” hivemind and use pretentious pop psychology. MMT may be a perfectly respectable school of thought (or simply ancient fiscal tautology, as Delong calls it), but its supporters are terrible terrible spokespersons.
That article does not at all explore the fact that loans create deposits.
Like all the problems with their theories, economists might pay lip service to the ‘LCD’ fact, but they then ignore it, compartmentalise it or so forth. They don’t realise it entirely falsifies the way they think about monetary policy/the banking system.
Homo economicus is similar, they say ‘we know people don’t behave rationally, we just use it for our models’ without realising the implications for their policymaking. Thaler and Sunstein inadvertently skewered libertarianism in Nudge when they explored this, by revealing that not only policy prescriptions, but ethical considerations are distorted by assumptions.
In summary: ‘yes, we know the earth revolves around the sun, but for the purposes of this theory…’
“That article does not at all explore the fact that loans create deposits.”
It does not need to, because it’s irrelevant, since the mechanism of QE2 is (as explicitly said by him) not through the banks lending their excess reserves at all. I have been seriously unimpressed with MMTers so far, they don’t seem to grasp basic macro, yet think they can dismiss about a century of research. There are two sides to monetary policy, the supply side (which is what you’re talking about, increasing the available capital to banks, usually to help them de-leverage), and the demand side (lower interest rates, lowering the yield curve, not related to excess reserves). Most of what you’re saying here was already being said by Keynesians against the ‘supply siders’, you know, things like SINCE EXCESS CAPITAL IS NOT BEING UTILISED, SUPPLY SIDE SOLUTIONS DO NOT WORK (and bank capital is no different). Seriously, very little I have seen said by MMTers hasn’t already been said by mainstream Keynesians years ago.
On the other hand, Sumner doesn’t care about the supply side of monetary policy, but the demand side, which makes excess capital irrelevant.
I am not a full on MMTer but I have MMT sympathies, simply because they are doing what economists are not: trying to explain how the banking system ACTUALLY works. The best explanation I’ve seen so far is Steve Keen’s who is probably on the crossover between MMT and Post-Keynesian:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
I’m not dismissing centuries of research; I’m dismissing people who think we have a fractional reserve banking system. You are right that Keynesians and MMTers come to similar conclusions, though, so perhaps we shouldn’t be fighting? No enemies to the left and all that.
Have no fear MMT. So long as your answer to all crisis is the government should spend more, then you will get your day in the sun.
Excellent point! Ironically, I think it is the same for Scott Sumner, who is proposing monetary splurge for different reasons. For countries with indebted voters, expansionary monetary policy is like heroin, and like the junkies they have become, they will grasp at any excuse that justifies another hit.
Here’s what MMTers really says:
Ultimately, without a budget deficit the non-government sector cannot save net financial assets in the currency of issue. That again is simple double entry bookkeeping, not high Keynesian theory or an apologia for “Big Government”.
http://www.nakedcapitalism.com/2010/03/parenteau-on-fiscal-correctness-and-animal-sacrifices-leading-the-piigs-to-slaughter-part-1.html
An economy needs spending because one’s spending is another’s income. If leakages increase due to taxes, saving, or imports and isn’t compensated for with increased injections from investment, govt spending, or exports then national income falls. This is just as uncontroversial as economics gets. See the link above for more details.
To many posters: As far as I know, there is a good consensus amongst most MMT’ers that banks SHOULD have failed and prosecutions and liquidation should have taken place.
A lot of star man arguments out there… or just plain confusion of issues. Like Yves said: It’s not trying to be a ToE.
But sure: let’s just make the people suffer because they were unable to get politicians making corporatecrats pay for their crimes!
“Every word is like an unnecessary stain on silence and nothingness.” – Samuel Beckett
And to think that was written by an Irishman in Paris, in the early 1950s.
In other words, *Before Pilkington*.
I can only imagine what Beckett might have said after being subjected to about two dozen MMT posts written *by* Pilkington.
Rebel-
I wrote (I believe) the earliest detailed analysis of government finance from an MMT perspective — a paper called “Do Taxes & Bonds Finance Government Spending?”, which was published in the Journal of Economic Issues in 2000. The paper explains the nuances of government finance — coordination of Treasury bond sales with government spending, use of TT&Ls to manage reserves, etc. I did not work at the Fed or Treasury, so I relied on their own accounts of how things work (Ann-Marie Meueldyke’s excelled U.S. Monetary Policy and Financial Markets is a Fed publication). Other publications give “straight from the horse’s mouth” testimony, e.g.
http://fraser.stlouisfed.org/docs/historical/brookings/17614_04_0003.pdf
http://www.newyorkfed.org/research/staff_reports/sr304.pdf
Scott Fullwiler’s excellent work builds on my earlier paper, providing insights at the most granular level.
I agree that the Treasury sells arranges bond sales ahead of time. But this is because the bonds are typically bought by a Special Depository, which pays for them simply by crediting a TT&L. This means that it “costs” the bank nothing to purchase the bond, but it puts ‘funds’ in the Treasury’s account, which can be swept (“called”) at a later point, in order to offset the deficit spending that would otherwise lead to a net injection of reserves. I think we understand the technical operations pretty darn well, simply because they have been well-explained by those who actually work behind the scenes.
Best,
Stephanie Kelton