This is a post I wrote last summer clarifying some points that I have learned about Modern Monetary Theory. The genesis of the post was a gross mischaracterization of Modern Money Theory (MMT) by Paul Krugman in a piece called “I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)”, which Paul Krugman had written in July of last year.
Last week Paul Krugman again attempted to take on MMT in another piece called "Franc Thoughts on Long Run Issues." in that post, Krugman makes the same bogus claims about MMT’s saying deficits don’t matter in a fiat currency regime.
Even non-MMT fiat currency sceptics like me have figured it out. Personally, I see something cynical about these repeated bogus claims.
For example, in March, Dr. Krugman wrote:
As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary.
Clearly he understands the MMT position. Yet last week he wrote:
MMT (modern monetary theory) types… insist that deficits are never a problem as long as you have your own currency.
See the difference?
Statement #1 is correct. Statement #2 is incorrect – and a repeat of what he said last summer. Since Krugman made statement #1 prior to statement #2, I am left guessing why he has returned to the mischaracterization which is the subject of this post.
P.S. – In the end, this is about interest rates. Why is Paul Krugman worrying about the US losing access to the bond market when the term structure of the yield curve largely reflects expected future policy rates? We just saw this is true after the Fed moved to permanent zero at the last FOMC meeting. “The 0.375% US Treasury note maturing on 31 July 2013 is now yielding only 19 basis points.” The Fed can do as much ‘financial repression’ as they want by keeping rates below the headline inflation rate since it has monopoly power in the market for base money. Inflation and currency depreciation are the issues – not a steeper yield curve.
P.P.S – The real issues are currency sovereignty, fiscal space and malinvestment. What we should really be worried about is stopping people worried about the US becoming the next Greece turning the US into the next Japan.
Here’s the original post.
Paul Krugman wrote a post today regarding MMT called "I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)." The gist of Krugman’s post was to refute Modern Monetary Theory’s view on money and deficits. Krugman writes:
Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate.
But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone.
Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we’re talking theory, not practice. But I can’t go along with his view that
So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.
Krugman goes on to use a model with strongly monetarist/neoclassical embedded assumptions to make his points. Jamie Galbraith responded in the comments and I am posting his comments here. But, first, a few words.
I agree that deficits matter. But I take a more Austrian/austerian view in general – so of course I would say that.
However, as I understand MMT, Krugman’s post mischaracterizes both MMT and Galbraith’s statement. There are two separate issues here that should be disaggregated and treated in isolation. The first issue is about money and government’s source of funding. A separate but related issue is deficits.
On the funding side of things, it sounds like Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world and that taxes don’t fund government spending, requiring government to issue bonds for a shortfall. Remember, a fiat currency is one that is created by government. Government can satisfy any commitment in that currency if it so chooses. It could theoretically credit accounts electronically to fulfil its commitment, laws permitting – no bonds necessary.
From the government’s perspective, there is no functional difference between any of its obligations like bank notes, electronic credits, or treasury bills and bonds. As the Ten pound note says, “I promise to pay the bearer on demand the sum of [fill in the blank sum][fill in the blank fiat currency].”
So, the U.S. government could legitimately stop issuing bonds altogether if it wanted to. When people complain about the admittedly enormous government debt, they don’t think of the mechanics of the issue. As I see it, in a fiat money environment, the first function of the Treasury bonds is to serve as a vehicle to add or subtract reserves in the system to help the Federal Reserve hit a target Fed Funds rate. The second is to give holders of government obligations a return on their investment. After all, bank notes or bank reserves don’t pay much if anything.
–If the U.S. stopped issuing treasuries, would it go broke? (also see On debt monetization)
This is where the austerian in me says "government could simply pay for things with money it prints electronically out of thin air." You may not like this fact but that’s operationally how fiat currency works. I would argue that this eventually leads to currency revulsion (Krugman talks about using lumps of coal as money) and inflation.
[W]hile there is no operational constraint on government because of the electronic printing presses, there is an effective constraint in the form of debt and currency revulsion and price instability (large measures of deflation or inflation). On countries like Greece or Portugal in the Eurozone, the operational constraint is a lot more real than it is on the U.K. because of currency union. The same is true for countries with a currency peg or large foreign currency debts like Latvia, Hungary or Dubai.
–On the sovereign debt crisis and the debt servicing cost mentality
So the problem for deficits is not national solvency but inflation and currency depreciation. That makes me worried about deficits. If that makes me an inflation hawk and anti-deficit, then so be it. Nevertheless, MMT does say the same thing about deficits, namely that they can lead to inflation. But MMT also says that inflation is not a problem when you have an enormous output gap from 17% underemployment. MMT proponents recommend deficit spending to close that gap. But you can’t spend at will under MMT; eventually the output gap closes and inflation becomes a big problem.
Notice that Galbraith never specifically mentions deficits in his statement. I don’t think he’s talking about deficits at all. His statement goes more to how government funds itself i.e with fiat money that it creates. He also speaks to his view that U.S. banks are forced to accept the government’s money because they want to do business in the only legal tender currency unit of taxation. While Galbraith may be more sanguine about the prospect of currency revulsion in the medium-term than I am, he never mentions deficits.
So Krugman clearly misunderstands MMT because it sounds to me like he’s saying the same thing. Someone correct me if I’m wrong.
Here’s what Galbraith said in the comments in response:
James Galbraith
Townshend VTJuly 17th, 2010
4:01 pm
Paul’s argument is that *infinite* inflation is a theoretical possibility. Well, yes. It happened in Germany in 1923.
There is no reason to cut Social Security benefits or Medicare now, with effect in the future, in order to avoid the theoretical possibility that some combination of policies might at some time in the future give us the economic conditions of post World War I Germany.
Those conditions were desperately resource-constrained.
In the actual world we live in, government does not have to "persuade the private sector to release real resources." In the actual world, the private sector has already released those resources by the tens of millions of people.
All the government has to do, in the actual world, is mobilize those resources, which it does by issuing checks, preferably to pay people to do useful things.
There is no reason why this should be considered "costly." Done correctly, in economic terms it amounts simply to the reduction of the waste that is associated with unemployment.
Nor is it necessary, when the government issues a check, that it issue a bond to "borrow" the money behind that check. The check creates money in the first place. (Yes, it does this from thin air, by changing numbers in bank accounts.)
Operationally, this is a free reserve in the banking system. The reason the government issues a bond later, is that the banks like to have a higher rate of interest than they can earn on reserves, and the government likes to oblige them.
This is why Treasury auctions don’t fail: the government has already created the demand for the bonds, by issuing checks to the banking system.
If the government spent but declined to "borrow," what would happen? Nothing much. Banks would hold their reserves as cash rather than bonds, and their earnings would be a bit lower. It is *not* true, as a rule, that people (or banks) move readily to substitute lumps of coal for dollars, unless the price level is already moving up and out of control.
It is very difficult to get other people to accept coal in place of dollars!
Paul’s logical error here is that of assuming-the-consequent. He assumes the inflation which causes dumping of money. But if there is no dumping of money, the inflation will not generally occur.
Yes, again, it’s technically possible that the banks and others would start dumping dollars and buying up oil, wheat, rubber, and so forth (and leasing storage facilities for the stuff) thereby driving up the price level.
I wrote — correctly and deliberately — that bankruptcy, insolvency and high real interest rates were not risks. Inflation *is* a risk.
By this, to be clear, I mean an ordinary garden-variety increase in the inflation rate is a risk — not the *infinite-inflation* scenario.
Inflation, though unattractive, is not remotely comparable to bankruptcy or insolvency, unless you get to Paul’s *infinite* inflation scenario. So what about that?
In his model, it is driven by his monetarist (quantity-theory) simplification, that the increase in money flows directly into prices. But this is just a modeling error. In the real world, especially in broadly deflationary conditions, people — and banks — simply hang on to cash. There is a Paul Krugman who understands this, from close study over many years of the Japanese stagnation.
However, and again, in the present state of the world economy, and for the foreseeable future — and except for the energy sector — surely a small rise in the inflation rate is a trivial risk.
My position is that the government should focus on real problems: unemployment, care for the aging, energy, climate change, and the disaster in the Gulf of Mexico.
The so-called long-term deficit is not a real problem. And the capital markets demonstrate every day that they agree with this judgment, by buying long-term Treasury bonds for historically-low interest rates.
JG
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Great post. I too noticed Paul’s critique of MMT last week, and how it contrasted with his post back in the spring, which you cite.
Great observation on Dr. Krugman being “locked in monetarist/neoclassical embedded assumptions”. I wonder if this also explains his support for QE policies, which the MMT and MMT-lite community has been skeptical or even hostile towards, not to mention Joe Stiglitz skepticism too. Perhaps it reflects his strong anchoring in the neo-classical/new Keynesian synthesis, with the neo-classical frame having difficulty with fully resolving itself within an MMT framework
Thanks for the re-post, Edward. In my experiences writing about and talking to people about MMT, many just fundamentally reject it as a descriptive model, even when they can’t explicitly find any fault with it. I gave Wray’s book to a banking executive friend a few years ago and received it back with a note explaining ‘thanks, but I just didn’t like it’.
Neoclassical monetarism, on the other hand, seems to have an innate, bordering on religious, appeal. People prefer the idea that governments will be “punished” for their profligacy and capital/resource misallocations. Look at the commentariat at Zero Hedge, for instance. Most hold the unshakeable belief that the Federal Reserve will eventually have to suffer for its “money printing” sins.
Who knows what Krugman is thinking here. Maybe this is his way of calling MMTers crackpots, or maybe he’s setting the foundation for some framework of eventual agreement. It could simply be that neoclassical economics is his dogma and he’s not ready for the reformation.
Jamie (and you, Yves) had the better of the argument last year, and you still do today. Then again, Krugman was not engaged in legitimate debate, he was lying.
Krugman is a particularly effective liar because he uses the truth to distract everyone from seeing the falsehoods he slips in, whether as an initial assumption or an operative fact. He is the “liberal” pied piper.
And I like Krugman. I just don’t trust him.
The reason for the “mischaracterization” is that you fail to quote the entire Krugman sentence from the post last week. Here it is in its entirety:
“Regular readers of comments will notice a continual stream of criticism from MMT (modern monetary theory) types, who insist that deficits are never a problem as long as you have your own currency.”
Note, he is talking about the commenters. And if you do read his comments, the regular MMT commenters indeed claim that deficits don’t matter, if you control your currency (they may believe the inflationary qualifier, but they don’t mention it).
I see. No matter how much everyone involved knows the basics of a point, unless its advocate explicates each and every one of those basics in each and every comment, its detractor is justified in claiming he doesn’t imply the omitted basics.
Yes, that’s a familiar mode of argumentation. It reminds me of the way teachers demand of student writers, “assume I know nothing about the subject”, as a mechanism to beat down the more imaginative writers and give a boost to the grinders.
But one would think reasonable people arguing in good faith would be above such tricks. Therefore, see my comment below for my assessment of Krugman’s “good faith”.
Except NYT commenters (and readers) DONT know the basics of MMT (and if they did, then this blog post wouldn’t even be necessary). Again, there are a set of regular commenters, who would essentially post the same comment on every blog post of his, nearly every time, claiming, as Krugman states, that deficits don’t matter, without the inflationary qualifier.
But either way, your comment “No matter how much everyone involved knows the basics of a point, unless its advocate explicates each and every one of those basics in each and every comment, its detractor is justified in claiming he doesn’t imply the omitted basics” applies to Yves’ blog post equally.
Bottom line is that Krugman, in this instance (he may have on other instances), wasn’t mischaracterizing MMT. He was correctly characterizing the position explicated multiple times, by “MMT types” in his comments.
(I’ve been trying to post a refutation of this, and it won’t post.)
One problem is that MMT people do not stick to scientific argument; they make it a campaign. For example:
(1) http://moslereconomics.com/action/
(2) http://neweconomicperspectives.blogspot.com/2011/08/why-wont-progressives-act-like.html?showComment=1312723896138#c2817337597532208630
The emphasis is on quantity of argument, not on quality, so not surprisingly, many of the comments are from MMT followers whose own understanding is woolly.
Moreoever, this harassment naturally annoys its targets, and it would be understandable if they became more hostile.
for what it’s worth, I’ve never seen an macroeconomic school which DIDN’T engage in campaigning. The right-wing “deregulate everything free trade trickle down” shills are the worst.
“Regular readers of comments will notice a continual stream of criticism from MMT (modern monetary theory) types, who insist that deficits are never a problem as long as you have your own currency.”
Maybe Yves can do some data mining on NC and see if we’ve ever seen this phrase used by MMTers here.
“who insist that deficits are never a problem as long as you have your own currency.”
Then maybe we can clear up who it is that is spreading the misunderstanding. We then should advise the Big Guys whom are spreading these false rumors and disparaging these fine works. Maybe they will pull their minions’ typing licenses and clear up the whole problem.
Then we can move on to clear up any other misconceptions, like the taxpayer can pay back infinite debt once inflation does rise and we find out interest rates on the infinite debt are rising too. I read the Krugman post and that was his main point I took away, but I’ve noticed that this sentence appears to be invisible to MMT readers.
I hope we don’t hear “who insist that deficits are never a problem as long as you have your own currency.”
when clearing up the next misconception.
Not to say they aren’t good for a laugh. This one warms my feathers:
http://www.youtube.com/watch?v=qoVlcWvxffc&feature=feedf
I’m not sure if this helps, but I do know 2 MMTers who said that: Dick Cheney and Ronald Reagan (the latter seems to have been an early follower). Only, sadly, they converted to Austrianism before the theory could be proven.
But I guess it is beyond Krugman to note that politicians only listen to him when they’re in that part of the ‘business cycle’ in which there is demand for his ‘insights’.
It’s a fact that Krugman has a record of exactly this kind of alleged “misunderstanding”. Another example was how he repeatedly “misunderstood” the position of those like Simon Johnson who were calling for the breakup of the TBTF banks, insisting that we considered that measure sufficient by itself, no matter how many times he was corrected on that point. (He probably used the word “panacea” at some point.)
So my question to the Krugophiles is, how many such “misunderstandings” do you need to have pile up before you start to suspect there’s no misunderstanding at all, but instead systematic lying? (And I didn’t even place the “misunderstandings” in the context of Krugman’s overall pro-globalization, pro-corporate, pro-bank, pro-health insurance racket, pro-bailout record.)
“But then where will we find our better elites?”
1) I do read Krugman regularly, and don’t remember him saying that Simon Johnson considered TBTF was sufficient. A link would be nice.
And regarding your other claims of his positions, of course, I cannot speak for him, but here is where it appears he stands from his blog posts:
1) Pro-globalization: He is certainly pro-globalization. That in itself is not bad. No one is saying we shouldn’t be trading internationally. What specifically about his pro-globalization viewpoint do you find wrong?
2) Pro-corporate: Not even sure what this means. However, he is a huge labor union supporter and a supporter of stronger regulations, so he holds at least 2 major (if not the biggest) “anti-corporate” positions.
3) Pro-bank: As in pro “well functioning, well regulated bank system”? Probably. Otherwise again, not sure what you mean.
4) Pro-health insurance racket: Well, here, its pretty clear you are doing exactly what you are accusing him of. He is NOT a fan of ObamaCare. He accepted it as an improvement over the current system, because it greatly expanded coverage. He has taken the Obama administration to task many times for not pushing single payer. In fact, during the 2008 Dem primaries, one of the biggest reasons for his support for Hillary Clinton over Obama was her single payer approach to Health care, as opposed to Obama’s health insurance based approach.
5) Pro-bailout: He was pro-bailout as a necessity to prevent financial ruin (which may have not been true, but it wasn’t an unreasonable position to hold). However, he wanted this to come along with much stronger regulations, as well as wiping out shareholders, and/or giving government equity in the banks, so it would benefit from shouldering the risks. Again, not an unreasonable position if you believed that the economic system was at great risk.
1) I do read Krugman regularly, and don’t remember him saying that Simon Johnson considered TBTF was sufficient. A link would be nice.
If you really read Krugman regularly, then you saw him do that many times. You’re a subscriber and inside the paywall – you hunt down the links from 1.5-2 years ago.
(I’ve also compiled a long, multi-post (over a dozen) evidence record regarding Krugman at my blog. It contains links to everything I mention here. So anyone who wants to see my evidence is welcome to go there.)
You also saw him as astroturfer #1 for the health racket bailout, a major austerity assault. You saw him explicitly deny there’s a kleptocracy or a class war. You saw him explicitly deny that corporate power is a problem. (Oh yeah – you deny it too. “Pro-corporate: Not even sure what this means.” Um, it means being a fascist. Look up the economic definition of that.) You saw him go silent on the Permanent War he previously pretended to oppose. You saw him fiercely argue for the same petty chicanery he previously lambasted Bush for, like secretly paying hacks for favorable media coverage (the Gruber incident).
2) Pro-corporate: Not even sure what this means. However, he is a huge labor union supporter and a supporter of stronger regulations, so he holds at least 2 major (if not the biggest) “anti-corporate” positions.
Not sure what this non-sequitur means. I can well believe he’s a supporter of the capitalist unions. Why wouldn’t he be? He’s pro-capitalist, pro-corporate, like I said.
3) Pro-bank: As in pro “well functioning, well regulated bank system”? Probably. Otherwise again, not sure what you mean.
Pro-fantasy? You insult Krugman’s intelligence here. I find it hard to believe he’s stupid enough to believe banks can function or be regulated “well”. No, what I mean is crystallized, for example, in his post where he openly admits “Goldman Sachs is bad for America”, yet says we still need to bail them out and live under their tyranny in perpetuity. Oddly, he doesn’t say why we need to do this.
4) Pro-health insurance racket: Well, here, its pretty clear you are doing exactly what you are accusing him of. He is NOT a fan of ObamaCare. He accepted it as an improvement over the current system, because it greatly expanded coverage.
In other words he lied, and you’re claiming that he snookered you, at least. Here you are still making a fool of yourself repeating those lies when Obama himself long ago admitted the thing wouldn’t expand coverage!
one of the biggest reasons for his support for Hillary Clinton over Obama was her single payer approach to Health care, as opposed to Obama’s health insurance based approach.
You mean, he supported Clinton’s alleged plan over Obama’s because he supported Clinton, period. And then once Obama became the Democratic president, he supported whatever Obama was doing. You really need to get your cause and effect straight.
5) Pro-bailout: He was pro-bailout as a necessity to prevent financial ruin (which may have not been true, but it wasn’t an unreasonable position to hold). However, he wanted this to come along with much stronger regulations, as well as wiping out shareholders, and/or giving government equity in the banks, so it would benefit from shouldering the risks. Again, not an unreasonable position if you believed that the economic system was at great risk.
None of that garbage was ever reasonable or moral to believe. The only moral, rational, and practical policy (assuming the impossible hypothetical of a legitimate, public interest government) in 2008 would have been to let the banks go down, directly bolster Main Street, and use whatever force necessary to finish off the now-crippled bank tyranny once and for all.
1) Pro-globalization: He is certainly pro-globalization. That in itself is not bad. No one is saying we shouldn’t be trading internationally. What specifically about his pro-globalization viewpoint do you find wrong?
Words fail me. The absolute scorched earth record of globalization going back decades, and reaping its ultimate consequence today, is too self-evident to need to be argued. Globalization is nothing but the process of instituting corporate dictatorship through stateless autocratic administrative entities. Their own cadre Rodrik admits it’s mutually exclusve with democracy or national autonomy. We can add, with any economic order but mass enslavement. It’s a crime against humanity.
Either one’s a human being with a soul and a conscience or the lowest, most evil criminal filth. By now the very heavens cry out for justice.
I can feel your enragement in many areas that I did not even consider. For me the whole situation boils down to one main point. The banks have been given the privilege to create money in form of debt. The concerned managers of those institutions have abused this privilege to enrich themselves by overextending debt to unsustainable levels and with no regard to systemic risks. The bankers used the great wealth accumulated by this abuse of their privilege to influence the institutions that are supposed to watch them as well as the legislator. In my opinion, those people who enriched themselves under this scheme should be removed from any function that smells of money and made to live a life of the presently unemployed.
This would be the implementation of the spirit of the rule of law that has been violated seriously over the past few years. The western society is based on this principle of the rule of law.
The discussion about whether deficits matter or not is obvious: of course, deficits do matter. It is like a journey and at each stop you have to add an additional load to carry for a meal. There is no way that it will go on indefinitely. The only question is, if we face hyperinflation (loss in the value of the currency) or deflation.
sorry it has to read: loss of trust in the value of the currency
You say:
I do not see what is austerian about this. Whether operating in this way would inevitably lead to currency revulsion would seem to be dependent on the socio-cultural context and on whether there is full employment and thereby the potential for hyperinflation.
part of what I posted was deleted.
Here is what I posted originally.
You say:
“the austerian in me says “government could simply pay for things with money it prints electronically out of thin air.” You may not like this fact but that’s operationally how fiat currency works. I would argue that this eventually leads to currency revulsion.”
I do not see what is austerian about this. Whether operating in this way would lead to currency revulsion would seem to be dependent on the socio-cultural context and on whether there is full employment and thereby the potential for hyperinflation.
MMT is in large part a theory of inflation; other than that, there’s not much to it; yet that’s the part they are least aggressive in communicating
And governments also credit bank accounts in a gold standard system; it’s quite silly to differentiate on that basis
MMT prescribes that deficits don’t matter until they matter
there is no financial planning for deficits
they just wait for inflation to show up, and then prescribe fiscal policy to kill it
in that sense, deficits today don’t matter
that’s what they mean
and that’s why Krugman is correct
no, just put in smart automatic stabilizers. it’s once of the few things that actually work well in the current system
MMT goes wrong at the outset when it refuses to recognise that nowadays central banks normally have monetary policy independence, and hence governments are generally not allowed to run overdrafts at the central bank. Once this is accepted, the key MMT beliefs that governments do not need to borrow to fund deficit spending and taxes drive money are falsified. Of course, most governments retain the power to instruct the central bank in an emergency such as a war, but such a move would be costly in terms of lost monetary credibility, so these residual powers are rarely used. Of course, the leading MMT lights like Randy Wray understand this fact of central bank independence, but they choose to dismiss it because it would undermine their wider scheme for full employment etc.
That’s when they claim to be misunderstood – they browbeat everyone saying they are the only ones that understand MMT, meaning the “plumbing of monetary policy as practiced by central banks”, then when someone points out it doesn’t work that way under existing law, then they say they meant how MMT (their dream) would work, if it weren’t encumbered by all these laws and old wives tales about fiat currency failing for some reason.
Not to mention once they theorize how it would work, there is this really high tech printing press that has a calibrated dial on it that has a mark for full employment, then there is a orange color coded band for the inflation setting, then a red color band for currency revulsion – and everyone, even keynesians, agree we shouldn’t set the dial to that setting.
“MMT goes wrong at the outset when it refuses to recognise that nowadays central banks normally have monetary policy independence, and hence governments are generally not allowed to run overdrafts at the central bank.”
This is a mischaracterisation of the MMT viewpoint. MMT doesn’t ‘refuse to recognize’ this. Here’s Scott Fulwiller on this very point, at this very website:
http://bit.ly/fi4Tg1
“There is probably nothing more central to MMT than the idea that the government does not need its own money, since a currency-issuing government is by definition the source of its own money. Taxes, in the MMT framework, have the effect of giving the government’s money value, and also serve the purpose of managing aggregate demand. But since it does not need its own money, it also does not need the bond holders, wherever and whoever they are (and the last time I checked, China’s government created yuan, not US dollars).
Of course, governments—particularly when they are operating on an outdated understanding of the monetary system—can and do impose constraints upon themselves. In the US case, laws previously written by Congress forbid the Fed from providing direct overdrafts to the Treasury. As such, if the Treasury wants to spend and its balances are dwindling, it must either tax or issue bonds to do so. Unfortunately, this self-imposed political constraint is the starting and ending point for Krugman and most others, even as it has little to no economic significance according to MMT.
MMT’s approach to this self-imposed political constraint is more general. A currency issuer under flexible exchange rates that allows itself to receive overdrafts in its central bank account will see the interest rate on its debt equal to the central bank’s target rate at the very lowest. This is because the central bank cannot achieve its target rat in this case unless it pays interest on the reserve balances created by the government’s spending net of balances drained by taxes, and these central bank outlays will reduce the profits it turns over to the treasury (a de facto interest payment by the treasury). This is what I like to refer to as the strong form of MMT regarding interest on the national debt. If the treasury instead decides to issue short-term bills, or is required to by self-imposed constraints, these will arbitrage against the central bank’s target rate; if it issues longer-term bonds, these will mostly arbitrage against the current and expected Fed targets. I call this the semi-strong form, and explained it in more detail here and here. Randy Wray does, too, here. Losing access in the semi-strong form is a non-starter—the arbitrage opportunity grows stronger as the non-govt sector can borrow at a lower rate, and there are primary dealers and thousands of hedge funds that would love to take advantage of that trade.”
That addresses how the CB sets interest rates under existing or made up rules.
It doesn’t address the fact that the Treasury is forced to borrow under actual existing rules.
It doesn’t matter that they need to borrow. Sure, if they ran their system more effectively they wouldn’t have to borrow, as it is a self-imposed constraint. But even within the current system most MMT prescriptions can be carried out.
And for more on the constraints (which MMTers DO recognise) here’s a bit from a personal exchange with Scott F:
“What is missed is that MMT is talking about tactics while cb independence is about strategy. MMT is about the fact that given a deficit, either interest must be paid on reserve balances or some interest bearing alternative to reserve balances must be offered either by the cb or by the Tsy, whether there is CB independence or not. Yes, it’s absolutely true that in modern times the Tsy has been the one taking on this role by virtue of the fact that it is not usually allowed to run an overdraft in its account at the cb (or the cb is required to purchase govt debt in the “open market”).”
Scott also pointed out that under current law the Treasury actually has the last say — due to its being able to issue giant platinum coins with any value minted on them they like.
This is the kind of talk from the MMT people that makes me pull my hair out. The are always referring to laws as “voluntary constraints” or “self-imposed constraints” and saying things like “these laws have no economic significance”.
The fundamental social institutions and rules governing the economic transactions in a society do have economic significance! They are difficult to change, and their existence imposes operational constraints on officials.
Don’t you think MMT defenders should be putting a lot more effort into proposing and advocating for specific changes to existing laws, so that the system functions more like the highly idealized unified “sovereign governments” of MMT theory?
As it stands now, MMT proponents are constantly advocating policies that no actually existing government officials or bodies can implement without major changes to fundamental laws and institutions. MMT really has to pull its head out of their rote, cult-like repetitions of the same old formulas, and start paying more attention to how to change the real world.
That’s completely unfair. MMTers are macroeconomists we’re not policymakers. We’re not a political movement. If you want the laws changed, write a petition or call your elected official or something. If you want to understand a powerful way of looking at the macroeconomy and the monetary system turn to the MMT folks.
Oh, and as I point out above, the key policies that MMT proposes (Employer of Last Resort and Payroll tax cut) can be undertaken in the present set up. The government just has to issue bonds to run the deficits. No problem. Japan have been doing it for years.
The MMT analytical platform is a logical contradiction.
What exists is not real.
Ya, MMT backs unfunding social security with the payroll tax cut. Something dear to the hearts of progressives and just about everone else.(except the Irish, possibly. Tho I heard they got their pensions wacked already.)
No, not ‘what exists is not real’. But ‘what exists can be changed’. There’s a difference. If we accepted your logic Keynes would have been ‘wrong’ to critique the gold standard because it was ‘real’. That’s a nonsense argument… and I suspect you know it but you’ve got some sort of emotional need to refute MMT.
Also, for the last time MMT POLICIES CAN BE ENACTED IN THE CURRENT SYSTEM. How many times do I have to say that to get through. Our ideas for central banks will make the process easier and more saleable but it IS NOT NECESSARY.
Oh, and Cedric, you’re wrong on two points — again (how often do you have to bang your head against a wall until you realise it’s not going to cave?).
First of all, MMTers don’t advocate ‘underfunding’ Social Security, they argue that it should be funded out of general revenue because the tax has inflationary implications and puts constraints on businesses to hire and workers to consume.
Secondly, the Irish have a payroll tax equivalent. It’s called PRSI.
Under current rules, the Treasury can simply use jumbo coin seignorage. It’s not forced to borrow, it’s just a choice.
(And Congress, of course, could reintroduce Greenbacks aka US Notes aka Legal Tender Notes at any time.)
But anyway, one of the points of the MMTers is that handcuffing your government by giving the power to create and destroy money to private bankers — “monetary independence” is a *bad idea*. Democratically elected governments *should* have control over money, not private cabals. If people distrust your government so much that they won’t accept its money, (a) the government has bigger problems than the money, and (b) MMT doesn’t really apply because you don’t have modern money — you’re effectively on a gold standard.
There isn’t ANY actual modern monetary system that allows Treasury to be generally overdraft at the CB.
We’ll need a short form definition of MMT so their disciples won’t get so confused when posting around the internet and telling us how things work.
I’ll propose this as a rough draft, but I admit I haven’t read all the “Publish or Perish” works of the University of Kansas City, Mo – so it’s possible I may have missed a published misunderstanding that’s been re-understooded in another published text.
1) The real MMT, not to be confused with make believe MMT, does not allow the Fed to print money and give it away. They must loan it or purchase some sort of debt instrument.
2) The treasury can mint up what is quite actually a very tiny platinum coin from 1 oz of platinum (market value presently $1798) and stamp on it a face value of $1 trillion. Under existing earmark, er, I mean law, the Fed must print up and pay the treasury 1 trillion US dollars.
3) When we are talking about make believe MMT, we will enclose those comments in bracketed smiley faces for clarity, and anything is possible in this case. We generally will add that anything we say has been successfully tried before in history, but the reader is forewarned not to believe that part.
That should be a pretty good start.
That’s what you consider to be a definition? Or was it a joke? Because it neither defined anything nor was it funny.
Of those who say nothing, few are silent…
That’s pretty funny.
well said, RebelE
its a sleight of hand
“MMT goes wrong at the outset when it refuses to recognise that nowadays central banks normally have monetary policy independence, and hence governments are generally not allowed to run overdrafts at the central bank.”
Who is talking about the government writing bad checks and asking the Fed to cover them? Certainly not the MMTers. Congress authorizes spending and the Treasury writes checks (actually marks up spreadsheets/ledgers). This is the nature of fiat money. The government has to supply money so people can pay taxes. Issuing bonds for the debt does a couple of things: gives the fed a way to create a safe harbor for investors and also the ability to manipulate interest rates.
You don’t talk to enough MMT people. They are always implying that the “government” can spend money into existence by “crediting bank accounts”, and that they can do this whenever they want, and are unconstrained by the requirement that they write checks on accounts that contain sufficient funds. They also like to say things like. “taxes don’t fund spending” and “borrowing doesn’t fund spending”.
But, of course, the Treasury Department cannot spend money into existence by crediting bank accounts. When they say “the government”, MMTers are talking about a fictional idealized government in which the spending authority and the monetary authority are the same unified entity. That sort of “government” does not exist in the United States. The closest we can get to the MMT idealization of government fiat money creation is the substitute two-stage system in which the Treasury issues debt and the Federal Reserve – which follows its own policies, not subject to executive branch commands – then buys up the debt.
But that two-stage system depends legally and institutionally on the ability of the Treasury Department to issue debt, and so was absolutely no help when Congress threatened to prevent the treasury from doing this. No debt issuance; no crediting of bank accounts to finance deficits.
It took the MMTers forever to wrap their heads around these problems, fond as they were of blowing them off with hand-waving dismissals as “voluntary constraints”. Finally we started to get some proposals such as the Big Coin gambit, a proposal whose clever financial and legal ingenuity was matched only by its sheer political preposterousness.
What I don’t get is why folks who are constantly going on about the many benefits of the sovereign governments of MMT models, governments which are the monopoly issuers of the money of account, and can finance full employment programs and countercyclical deficit spending through seamlessly integrated fiscal and monetary policies, in which desired fiscal actions are supported by the simple monetary action of crediting bank accounts, are not busy advocating changes to our institutions of economic governance so that the actual government can more effectively carry out the policies in reality that the idealized governments of MMT theory carry out on paper.
“They also like to say things like. “taxes don’t fund spending” and “borrowing doesn’t fund spending”. But, of course, the Treasury Department cannot spend money into existence by crediting bank accounts.”
You’ve misunderstood. When we say that ‘borrowing doesn’t fund spending’ we’re talking about the world as it presently exists. Don’t listen to Rebel Economist on this, he’s engaging in obfuscation.
Here’s how it works IN THE REAL WORLD TODAY:
(1) Government credits bank accounts.
(2) Government issues bonds.
(3) Bonds are used as an interest to control interest rates by ‘mopping up’ the excess reserves issued for new spending.
If you look at this properly you’ll see that borrowing is not funding spending. Why? Because new reserves are issued and it is these, essentially, that are used to ‘buy’ the newly issued debt. Hence, the debt is not funding spending — i.e. the debt is not being used to gather funds which are then used for spending.
Don’t listen to Rebel Economist. He’s shown time and again that he doesn’t understand the fundamentals of either MMT or real world banking operations.
I’m not worried about Rebel Economist. I have read the various scriptures that MMT constantly refer to, and looked at the arguments they give for thinking that taxes and borrowing do not fund spending. And I have found those arguments wanting
As convincing as your opinion may be, perhaps you should point out why.
As I point out above, the bonds are largely there to ‘soak up’ excess reserves — the very reserves that were spent into the system by the government. They are not issued to ‘get revenue’ (i.e. to borrow) money to be spent.
Please point out where you find this argument ‘wanting’.
And interesting side-point Philip, is that the banks are using OTHER people’s money to buy those bonds and earn the interest.
I’ll save my comments on the theoretical aspects of MMT for another day. Here I’ll address their key policy prescription, which is that central banks should accommodate any and all banking system demand for additional reserves and that the government should employ fiscal policy, namely tax rate modification, to address the business cycle, and particularly the inflation that may result from the first part of MMT policy.
IMO, this prescription dooms MMT to complete irrelevance. 70 years of collective experience with macroeconomic policy has demonstrated that fiscal policy, while sometimes absolutely required, is by far the more blunt tool than monetary policy. Congress cannot move with nearly the speed and agility of the Fed in responding to economic crises or even to the need for fine tuning. The notion that Congress could adjust tax rates to respond to economic conditions as quickly as the Fed can make monetary policy decisions is absurd. Even if they could, how would you implement a tax code that could, in theory, vary from 0% to 100% over the course of a year? What would be the economic impact of having tax rates fluctuate widely over short periods of time? It certainly would not be a lever to simply control inflation and unemployment. How would you deal with the lags between implementation and effect that are known to be even longer and more variable than the ones associated with monetary policy? The distortions and deadweight losses associated with such a policy would be enormous.
How would you like to have bought a new house and car because the economy was hot, job secure, and now you are leveraged to the hilt for the next 10-20 years and then the government announces you get a big tax hike too?
“70 years of collective experience with macroeconomic policy has demonstrated that fiscal policy, while sometimes absolutely required, is by far the more blunt tool than monetary policy.”
He/she says with interest rates near zero and the economy in the doldrums.
Also, fiscal policy did quite well countering some of the major worst recessions over the past few decades — especially the 1974-75.
Minsky analysed the 1974-75 recession in detail in ‘Stabalising…’. Here’s a key passage:
“In 1975, because of Big Government and the large increase in government debt, the default risk of business and bank portfolios decreased. As business liquidated inventories, they decreased their indebtedness to banks and acquired government debt. Banks and other financial institutions acquired liquidity by buying government debt rather than by decreasing their assets and liabilities. The public, both households and business, not only acquired safe assets in the form of bank deposits and savings deposits, but were able to decrease their indebtedness relative to income. The existence of a large and increasing government debt thus acted as a significant stabilizer of portfolios during the threatening period of 1975. [You can see the large ’75 deficits here: http://bit.ly/mC7eeU%5D”
The ‘fiscal policy was trumped by monetary policy argument is a myth. People should really get more familiar with the facts.
You completely failed to address my point, and just stated your opinion as if it were some sort of fact.
Nowhere did I say anything about monetary policy “trumping” fiscal policy or vice versa. I simply remarked on the relative speed which which changes to either could be implemented. I also asked about the unintended consequences of having a marginal tax rate that could fluctuate from its present level to 100% to 0% and back in a short period of time.
Your response reminds me of the response I received from another MMTer on here or a different blog when I responded to his claim that the Fed has no choice but to accommodate changes in banking system reserve demand if it wants to keep the Fed Funds rate constant. I pointed out that while that statement is strictly true, the Fed changes its Fed Funds target on a fairly regular basis, so in reality that argument doesn’t mean nearly as much as the MMTers seem to think. Reaction? Total meltdown followed by a slew of ad hominem insults.
I have no issue with some of the fundamental propositions of “MMT”. The supply of money is largely endogenous. No quarrel there. The textbook money multiplier is not representative of how the banking system actually operates. No quarrel there. A monetarily sovereign government does not need to borrow in order to spend and cannot, strictly, go bankrupt. No quarrel there. Orthodox economics errs by focusing on barter models and ignoring the effects of money and financial systems. Again, no quarrel there. But then, somehow, it all devolves into money being the ONLY thing that matters, constraints on banking system reserves being the only economic problem, and tax rates being the lever by which the inflation created by the first two statements is controlled.
“I simply remarked on the relative speed which which changes to either could be implemented.”
If an Jobs Guarantee program were implemented the speed would be, for all intents and purposes, instantaneous.
“I also asked about the unintended consequences of having a marginal tax rate that could fluctuate from its present level to 100% to 0% and back in a short period of time.”
I don’t think anyone would advocate a tax-rate of 100% on anyone.
“Your response reminds me of the response I received from another MMTer on here or a different blog…”
I didn’t engage in ad hominem attacks. And I don’t think I had a meltdown. In fact, in comparing me to someone you portray as a dogmatic loon it’s you that are engaging in ad hominem — albeit at one step removed. Grow up.
“…the Fed has no choice but to accommodate changes in banking system reserve demand if it wants to keep the Fed Funds rate constant. I pointed out that while that statement is strictly true, the Fed changes its Fed Funds target on a fairly regular basis, so in reality that argument doesn’t mean nearly as much as the MMTers seem to think.”
The Fed still has to accommodate those changes if it wants to hit its targets. This is key, the Fed doesn’t aim to hold the Funds rate constant — but it does strive to hit its targets. So, in essence it’s the same thing. To hit its targets the Fed MUST accommodate the changes. So, your supposedly loopy interlocutor was right.
Your response reminds me of the response I received from another MMTer on here . . . . Total meltdown followed by a slew of ad hominem insults.”
The evidence from this very thread demonstrates the exact opposite. I see posters like you, like Cedric, and anon, taking your cue from Krugman, and engaging in ad hominem insults.
We could build more automaticity into the fiscal adjustments, particularly with respect to government employment programs that can be running all the time, with employment targets that move up and down automatically in response to macroeconomic indicators.
those are all basic mmt proposals
Kruggers first problem was invoking Meatloaf in his discussion of MMT. “I Would Do Anything for Stimulus, but I Won’t Do That?” Child, Please.
If you’re going to talk about MMT, then you gotta get real. Bat Out of Hell, notwithstanding….we don’t need none of that Meatloaf sh*t.
No, we got to go to the LA Club Scene, circa 1988: Kruggers needs to get his Axl Rose on….
That’s right. If you want to understand MMT, then listen to Axl, Slash and the boys sing a sonnet about their heroin dealer, Mr. Brownstone. Here, you will find all you need to know about chasing the two-headed dragon of HRN and MMT. [Hell, this song is so dead-on, there’s even a couple stanzas devoted to all the government jobs created by the “full employment” policies of MMT!]
And it goes a little somethin’ like this….
I get up around seven
Get out of bed around nine
And I don’t worry about nothing no
‘Cause worryin’s a waste of my…time
We been dancing with Mr. Brownstone
He’s been knocking
He won’t leave me alone
No, no, no, he won’t leave me alone
I used to do a little but a little wouldn’t do it
So a little got more and more
I just keep trying to get a little better
Said a little better than before
I used to do a little but a little wouldn’t do it
So a little got more and more
I just keep trying to get a little better
Said a little better than before
We been dancing with Mr. Brownstone
He’s been knocking
He won’t leave me alone
No, no, no, he won’t leave me alone
Now I get up around whenever
I used to get up on time
But that old man he’s a real motherf**ker
Going to kick him on down the line
I used to do a little but a little wouldn’t do it
So a little got more and more
I just keep trying to get a little better
Said a little better than before
I used to do a little but a little wouldn’t do it
So a little got more and more
I just keep trying to get a little better
Said a little better than before
We been dancing with Mr. Brownstone
He’s been knocking
He won’t leave me alone
No, no, no, he won’t leave me alone
Shoved it in the bindle and I shot it in the middle
And it, it drove me out of my mind
Yowsa!
“I should’ve known better, said I wish I never met her Said I,
I leave it all behind.
Yowsa!”
Somehow you missed the last line.
Nah, I left it out on purpose.
MMT’ers never think they “should have known better”.
But good catch, though.
Well see that. They never would have caught it if somebody didn’t point it out to them
It is difficult for facts to overcome intuition.
Intuition: Money “printing” causes inflation, so reduce the federal deficit.
Fact: Since 1971, when we finally went off any semblance of a gold standard, there has been zero relationship between federal deficit spending and inflation. The proof it at: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
So, one can continue to wallow in intuition, or look up the facts.
Rodger Malcolm Mitchell
Intuition: Money “printing” causes inflation, so reduce the federal deficit.
The Quantity Theory of Money isn’t “intuition,” it’s a hoax perpetrated by folks like Mises and Friedman. That hoax is now a centerpiece of neoliberal economic dogma, which your facts can’t overcome.
I get a kick out of the way smart economists like to complicate things to make their theories seem hard to grasp for the typical sheep. It would be nice to think that the complexity of economies somehow does away with the truth found in simple logic. Creating fiat with no productive backing, except a hopeful stimulus affect after repeated failures, is eons away from scientific methology. Economics is not a science, and hope does not constitute good structure for theory. I have my own economic theory,if something seems to good to be true, than it probably is.
MMT vs Krugman = Pot vs Kettle
Investing in production and balancing trade – this is the solution. The Fed can’t solve the problem if Congress doesn’t act on some sort of balanced trade legislation – like import certificates which they failed to vote on back in 2006.
We already have MMT, the government debt is just that.
The Fed can do all sorts of things, MMT included. They don’t do more of it because it doesn’t work…
The economists involved in policy-making and advising are as corrupt as their employers.
Which ever theory about money one looks at doesn’t matter becasue all current theories have an underlying assumptions that there will some sort of BUA. From the post:
“But MMT also says that inflation is not a problem when you have an enormous output gap from 17% underemployment. MMT proponents recommend deficit spending to close that gap.”
One side says print money another side says cut taxes. Neither addresses the basic problem, “In an over populated, resource constrained and slow or no growth world where do the productive jobs come from to close the underemployment gap?” Another way to look at it is, “what type of future productive activity will provide well being?”
Obviously you hire unemployed real estate agents, loan brokers, construction workers and outsourced factory workers and give them jobs as government economists.
Different kinds of productive activities are necessary for well being. They are mostly known, few secrets there.
The problem is that our financial and business regulations push the productive activities out of the country. Of course, achieving well being is impossible that way.
Krugman is an Establishment liberal. It is important to understand what that means in terms of his famous “conscience”. It means that he supports the kleptocracy which loots us. It has, after all, given him his position, fame, and career. Krugman is duly thankful for that and will not turn his back on those who made him and provided him with such a nice lifestyle. This explains why Krugman studiously avoids criticizing Bernanke who first hired him at Princeton. His “liberality” expresses itself in asking the looters to loot us rubes a little less. He never actually questions their right to do so. Even with Krugman’s elastic conscience, concern is never allowed to get in the way of larger considerations, like his class and his lifestyle. His thinking is mired in the gold standard precisely because that is the paradigm used by the neoliberal looting elites. He might better, and more accurately, have talked about his being the “conscience of a neoliberal” or that his goal was neoliberalism with a human face. That is he wished to humanize and soften the edges of the looting, not stop it or prevent people like him from enjoying its fruits. If this seems to portray him as a dreadful hypocrite, I can only say that this is the role he has chosen for himself, and a very comfortable and well rewarded role it has been for him. The mistake those of us make in the rubiat who think his crocodile tears for us are sincere is that he is on our side. He is not. He never was.
If Edward Harrison could actually see government debt as merely part of the record of the necessary money created and injected into the economy by an agency (in this case government) and not part of some inevitable build-up to hyper-inflation he would argue more cogently.
government debt CAN’T be “merely part of the record of the necessary money created”, we already have a system that creates money, government debt must be seen only as a part of that system. Anything else would be delusional.
The issue of is about “the necessary money created”, the government has no way to know what is necessary, or rather, they only know that what THEY want must be necessary. It isn’t so, for obvious reasons.
It’s quite amazing how you never hear much from the detractors of MMT complaining about the private banks creating too much money and causing inflation. The MMT detractors use their Libertarian hatred of government to filter out anything useful MMT might say about the monetary system. In reality both politicians and bankers have caused so many problems with money creation that any sane individual would be looking for a better creation system.
Ed, I like your articles so much because you know how to leave a trail of breadcrumbs for the bewildered. I am one of the bewildered. Forgive me for my struggling confusion: The only thing I know is that we always go forward. I’m sure there is no such thing as “infinite inflation” because it is offset by infinite well-being. Maybe after a little catch-up. I’m sure we are now talking about the transitiion from physical “money” to electronic “money.” Electronic money is far more politcal than physical money. Nice. But it is all money. “Money” by itself is a blind equation, the gains from spending it are never considered. Money needs to be reconsidered and redefined by the gain it creates. Anything called money that is one-sided is a nullity.
Liberal economists has just been fighting the budget battle too long. The reason for all this gyration is because ideologically the evil ‘Bush Tax Cuts’ need to be the source of all badness. If deficits don’t matter at all then, well, how do you work out that the Bush Tax Cuts are evil? What is needed, for political purposes, is a way to demonize tax cuts and lionize government spending. So deficits have to matter to the extent that we need to tax more, but in terms of cutting budges, well, no, they don’t matter.
We already have a big problem with monopoly banking, now you want to make it worse, to have a single bank which cannot be held accountable, because, um, it’s the government which is supposed to hold others accountable.
If the police are the thieves, who is going to catch the thieves? MMT equals absolutely corrupt, absolute power.
With that in mind, please start reforming the financial system – I lake Glass-Steagall (a stronger version) and balanced trade, that’ll do for a start.
Down with monopoly banking… up with balanced trade, huh?
What’s the matter–don’t like the MMT FedGov monopoly minimum wage work farm? Reporting to the Goldman Treasury boyz doing smack with Bam and Timmy in the Oval Office doesn’t appeal to you?
That’s the problem – the banking industry and the Gov are like Siamese twins – we already have a Gov monopply on banking, the Fed is doing MMT as we speak, but it’s not workking.
You are saying that it’s the fault of the banks… Nonsense! Check who passed the FR Act and who voted Glass-Steagall down. The banks don’t have the power to regulate the government, it’s the other way around. If you can’t make the Gov to keep or reinstate simple changes (eg New Deal), what makes you think you’ll control that same gov when it’s given yet another monopoly power?
What’s wrong with balanced trade? All of our problems come from the lack of it. At this point banking is secondary, although the banks too cling to the poison of unbalanced trade.
Well, now you’re getting at the underlying problem: the government is controlled by private bankers.
The Federal Reserve can engage in money printing… but is only allowed to give the printed money to *private bankers*. The Federal Government could give money to people who aren’t bankers… but, oho, it’s prohibited from printing money, it’s required to borrow money and limited by a “debt ceiling”.
The system is currently set up so that the benefits of the seignorage, the money-printing, can *only accrue to bankers* — and further, so that the bankers can crush the value of any money-printing. Ow.
How to solve the political problem that, as one Senator said, “The banks own the place”? Good question. I think we need fundamental political reform. I’m not sure how to start.
Be clear on this, however: removing the government will simply give more power to the banks, which will control the money supply even more absolutely. The era of “wild banking” in the US in the 19th century shows what an economic mess that leads to.
We have no good alternative except to create a *reformed* government, one way or another.
Speaking of misunderstanding monetary policy, anyone catch the amazing Rick perry today? The future of America looks grim indeed