All Your Dorks Are Belong to This

Paul Krugman has another post up about the difference between money and debt.  He raises a relevant question which starts to get to the heart of the real matter at hand:

“My concern is that when saying that money and debt are the same thing, it’s way too easy to lose sight of the real distinctions between monetary and fiscal policy that remain.”

If this were the movie Inception I’d be in the dream sequence one level deeper than Paul Krugman because I don’t quite think he’s asking the right question.  The real question is not about confusion over monetary policy and fiscal policy, but the NEXUS of monetary policy and fiscal policy.  In essence, does it matter whether a government self finances through direct deposit issuance or finances itself by selling bonds to the private sector?

As I explained previously, the design of our system is as such.  Paul buys a bond at auction which gives the government a bank deposit which allows them to spend the deposit into Peter’s account.  In short form, most government spending is bank deposit in (from Paul), bank deposit out (via government spending to Peter) PLUS net financial assets as bonds (to Paul).  If the government were to self finance it wouldn’t sell the bond.  It would just issue a net financial asset to Peter in the form of a bank deposit.  Spending is primarily based on the relationship between current income relative to desired saving so there shouldn’t be much of a difference in all of this on an inflationary front (though one could argue that bonds are slightly less liquid than cash, but I think we’re splitting hairs there).  Peter ends up with a deposit in either case and the private sector ends up with a net financial asset in either case.  No big deal, right?  Not quite.

Paul will still want to save in something that protects him from potential purchasing power loss of cash.  So he’ll go out and search for a financial asset to provide that savings/income need.  Now, the government could issue bonds to meet this need, but then we’re just sterilizing the deposit issuance and nothing is solved from the change in the system via direct deposit issuance.   This is basically what the government does now and it’s hugely supportive to the private equity structure of “rentier capitalism”.   If the government doesn’t issue the risk-free assets then we end up in an Izabella Kaminska world where there aren’t enough risk free assets and banks go crazy supplying the private sector with close (less stable) alternatives.  We all know how that ends up.   It’s inherently destabilizing.

So what this all really comes down to is rather simple.  It comes down to whether we want to have a private sector banking system and a government that supports that system.  Paul Krugman’s original question touches on this, but not quite in the right manner because the Fed, at the end of the day, is a public/private hybrid entity designed to support private banking.  The alternative to this system is to start tearing down the walls of the Fed and start taking a jackhammer to the foundation of private banking.  The government must choose to use the Fed and Treasury to support the capital structure of private banks or it must not support it and accept the destabilizing effects that will inevitably result in bailouts and government intervention.   You can’t have it both ways.

In sum, yes, we could theoretically self finance, but a lack of risk free asset issuance will simply result in a destabilizing banking system.  So we can self finance and issue the bonds, but then why bother changing the institutional structures from what they are today if this all ultimately ends up supporting the private equity structure of private banking in the end anyhow?  It’s not even worth the trouble.  On the other hand, the only way to self finance with direct deposit issuance without also creating an inherently fragile private banking system is to bring the banking system under the government umbrella in that dirty “N word” (no, not your favorite word, Quentin Tarantino).  But then a bunch of bureaucrats end up managing their own form of the shadow banking system….

I’m afraid the best we’re going to do in altering the current system is to better regulate the banks and better understand the actual structure of the monetary system we have.  The platinum coin created a great thought experiment for everyone and hopefully provided some important lessons and understandings about government spending and our monetary system, but this dream sequence is ending and it’s now time to wake up to the reality of our monetary system designed largely around the existence of private banking.  

*  For the real wonks, Scott Fullwiler has the only post up on all of this that displays a total understanding of the concepts at hand, but I’m not sure he’s deep enough in the dream sequence….

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Can someone tell me if the money for IOR is printed or if it comes out of Fed profits? I can’t find an answer to this, and it’s a vital part of Krugman’s argument that IOR is functionally equivalent to debt because IOR still involves interest payments.

    • Up front, I don’t know the answer. However, IOR is certainly not physically “printed” (on paper bills)… but you already knew that I think. My two cents: I would highly suspect that it has absolutely NOTHING to do with Fed profits, since I have the impression that the Fed is absolutely free to independently expand their balance sheet without bound, the only restriction being their charter/mandate to continue to support the private banking payment system, the public’s demand for physical cash (bills & coins), and to implement monetary policy, ostensibly for the good of the nation (i.e. target an inflation rate, or employment rate, or whatever).

      Hope you find someone who actually knows!

    • Of course, everything I “know” about it I’ve probably gleaned from reading these very pages. Master Roche has occasionally bestowed upon me the accolade “in paradigm” and has kindly allowed me to jump in and answer questions on occasion. … Don’t let me frighten you!… MR is not some kind of creepy cult! BTW, are you new here? Have you been issued a purple robe yet?… come right in and take and seat, grab a cup of cool-aid and relax… I’m sure the Master will be with you shortly…. But the man’s a…He reads poetry out loud, all right. And a voice…he likes you because you’re still alive. He’s got plans for you. No, I’m not gonna help you. You’re gonna help him, man. You’re gonna help him. I mean, what are they gonna say when he’s gone? ‘Cause he dies when it dies, when it dies, he dies! What are they gonna say about him? He was a kind man? He was a wise man? He had plans? He had wisdom? Bullshit, man! And am I gonna be the one that’s gonna set them straight? Look at me! Look at me! Wrong! …. Ahhh, The heads. You’re looking at the heads. I, uh – sometimes he goes too far, you know – he’s the first one to admit it! Hahahahaha!

  2. It seems to me that eliminating the private banking system entirely would be overkill. I believe there are benefits to having decentralized, competitive banking as a way of allocating capital.

    Most of the small, medium, and large commercial banks and CUs do a decent job of allocating capital, are reasonably well-regulated, and when they get in trouble, can be resolved without shaking the economy to its foundations, ISTM.

    The megabanks, as they currently operate, are the problem. The benefits they provide (other than to insiders and the connected) are greatly outweighed by the costs.


    This make sense to you?: x’ = A(x,t)
    Then this is for you:

    Please forgive me if this message is repeated. Every time my message seems to have gone into the ether it eventually comes back. But if that’s the case here, it will have been more than six hours… a new record! I think perhaps it was just too long for the 1st page of comments.

    Anyway, the gist of my disappeared message was regarding a post I’d made to Cullen… but he didn’t take the bait:

    But now that I know you’re a Kalman estimator, state space, and dynamic systems guy, I can fill you in on what I was really getting at with Cullen:

    It seems to me that the economy, the BLS, and the Fed constitute a plant, an observer (estimator), and a controller, resp, in one big feedback control system. In other words the Fed sets as its goal a target rate of inflation, say. It collects data from the BLS (the CPI, for example), and then it uses a control law (“Taylor Rule?”) of some sort to move the levers (OMO and overnight target Federal funds rate) to achieve this target inflation. At least during more normal times, when we’re not at the ZLB (like during Greenspan’s “Great Moderation”).

    What I was really getting at in my question to Cullen, is what happens to MR’s theory of banking if this feedback loop were made into an explicitly continuous time (or at least high sample rate discrete time) signal? Does that change anything?

    One of my favorite descriptions of how the fundamentals of the system works is contained in Scott Fullwiler’s article “Krugman’s Flashing Neon Sign.”:

    In that piece, Fullwiler uses the phrase, (over and over again) “…and this happens as a consequence of the Fed defending it’s overnight target rate.” His whole argument seems to be, in some sense, predicated on this fixed target overnight rate, and his argument makes a lot of sense!

    Krugman, in his response to Scott, reluctantly concedes (between the lines anyway) that Scott is perhaps *technically* right, but only in a short term sense. He then brings in some neo-classical theory I don’t understand, to essentially state that, “Well, yes Mr. smartypants, that’s how you could describe the system over a short time frame… like between Fed meetings [every 6 weeks?], but in the BIG picture, over LONG time frames, the Fed is setting a different target, not an overnight interest rate, … and thus in the BIG picture, given these obvious neo-classical relationships [I think Krugman calls it a "teachable moment"], you are wrong, and I am right!!”

    Here’s the 1st of two of Krugman’s responses:

    Here’s the 2nd:

    So what I was essentially getting to with Cullen, is “Does Krugman have a point here?” We can make that explicit by making the CPI a continuous signal, subtracting it from the target inflation rate (to create a continuous error signal), and feed that through the Fed’s control law, to produce a continuously changing target federal funds rate. How does that affect Fullwiler’s description? And MR?

    See the thing is, that I’m sure that a continuous CPI will be very noisy, and it will need to be low-pass filtered, thus introducing a phase lag into the system (perhaps six weeks?), and thus the end result may not be much different than what we have now. It wouldn’t have a zero-order hold though (like we do now).

    Stated another way, what if we were to make the Fed funds target rate explicitly a DEPENDENT variable (dependent on the target CPI, the estimated CPI, and the Fed control law). Does that change Fullwiler’s and Cullen’s story about how the system works? Does it lend credence to Krugman’s argument?

    Oh, I guess I should point out somewhere that Fullwiler also got back to Krugman: (it’s actually an update at the top of the “Krugman’s Flashing…” article above).

    Here’s a good summary and set of links to pretty much the full debate (you can find other sets with a few different people, but the core articles seem to be the same):

    • I am sorry if I don’t address the main points directly – I started writing the comment earlier before I saw yours. I am also sorry to Cullen because I start off-topic but I would like to raise an important, in my opinion, point. I am going to put the debate(s) with Paul Krugman in a wider context.

      “I spend almost all my time here trying to figure out what those “mathematical relationships” are at the lowest level… trying to understand the rules of the game that’s being played out all around us.”

      - this is what I am doing, too, but I have very little time.

      “The really really hard part of this is going to get economists to agree to precisely define terms, states, and relationships between states.”

      In my opinion it is even worse.The intuitive models related to money taught at Econ 101 used as a closure to all other models are fundamentally incorrect.

      Here comes the core mistake made by the neoclassical economists and so-called “New Keynesians” (Krugman) – the loanable funds model does not describe the current economy. In all “official” textbooks banks are considered to merely re-lend deposits or even worse, reserves. Only recently has Paul Krugman started admitting that the money multiplier is misinterpreted but he still probably has no clue what’s wrong – despite scathing critique written by Scott Fullwiler at the time of the debate with Steve Keen. The “canonical model” of banking and how the finance sector is plugged to the wider economy are factually incorrect. Banks create debt and deposits at the same time (as atomic transactions in the database sense) and in a modern reserve banking system this process draws reserves, supplied by the central bank. Looking at the balance sheet of a bank we can see that a new loan creates a new deposit (liability for the bank, asset for the borrower) and new debt (asset for the bank, liability for the borrower). The bank liability – the deposit – is new “broad money” created ex nihilo and corresponding to new spending power often (but unfortunately not always) related to goods and services which are yet to be produced – in the best case to “productive investment”. I am not saying that lending process is not constrained by bank capital and other factors. The key point is that all the models based on re-lending money saved by “patient” agents to “impatient” agents are fundamentally incorrect and useless. Paul Krugman’s IS-LM (actually later disowned by its creator, John R. Hicks) uses a “loanable funds” market as a closure. This is wrong. All the DSGE models use “loanable funds” as a closure. This is wrong. It is not true that spending power of the borrowers comes from the savers and the market equalises supply and demand of funds at a certain interest rate. This is how it worked in the coins-based economy without lending institutions. According to D. Graeber (Debt: The First 5,000 Years) similar systems were rather uncommon. The spending power of borrowers comes from the banks and saving in financial assets is a result of injecting new money to the system by borrowing. (Strictly speaking the quantity of financial savings – including the stock of deposits – increases at exactly the same time the loan is extended.) This is the Kaleckian “investment” flow driving the whole economy. But if some agents start borrowing for speculation to buy non-productive assets (Minsky, Keen) or for consumption they would never be able to afford financing – we are in a deep trouble.

      We should consider the whole banking system (and more – the financial sector) as a distributed database consisting of linked balance sheets. This is the environment where all the financial stocks and flows exist. Accounting rules define what is an equivalent of Kirchhoff’s current law. Ever wondered where sectoral balances come from? They are the result of aggregation of individual transactions occurring in the system between groups of agents which have to conform to double-entry accounting rules..

      On top of that we have real economy with physical means of production, commodities and services – and physical assets. We have to analyse the interaction between both.

      The trouble is that you have students who in the age of 18 (without any prior life experience and not having studied electronic circuit theory) have to cram in order to pass Econ 101. In order to pass the exam they have to internalise the loanable funds model. They have to build intuitive models in their minds, to start thinking in terms of supply-and-demand curves – also for tokens called “money”. Now we have undoubtedly very intelligent and well intentioned people (like Paul Krugman) who nevertheless can only intuitively think in terms of loanable funds. Paul Krugman will keep repeating his “in liquidity trap” without being able to even imagine the essence of the debt-deflation process – that some agents intend to repay their debt what leads to destruction of spending power, while others refuse to spend out of stock of their savings. Who gives? In the absence of adequate budget deficit spending (MMT , Monetary Realism) and/ or current account surplus the system settles at the lower level of economic activity. Let’s look at the obscene housing bubbles which burst recently – first in Japan, then in the US, UK, Ireland, Spain. So back to the topic of the main post – in my opinion we won’t get Paul Krugman to agree on the mechanics of functioning of the banking system because this would endanger his mental models of the economy at the macro level, based on IS-LM. Paul Krugman needs to believe that outside of liquidity trap the increase of quantity of money (“dead presidents”) will lead to increase in investment and possibly inflation. We have to look at the flows as the state variables describing the system (deficit spending, private investment – contributing to aggregate demand now and investment decisions realised in the future) not the stocks (which are also relevant, especially real stocks such as real capital but at the different time scale).

      Do we have an alternative theory? I think so. I strongly believe that the alternative school of thought I keep in mind has a very strong influence in China – not on universities which largely follow the mainstream Western macroeconomics but among central planners, people who have “Red Phones” on their desks. We have to keep in mind that the Chinese call their economic system a “socialism with the Chinese characteristics” which is basically a cross between laissez-faire at the micro level and central planning / strict state control at the macro level. The reforms bearing fruits in 2010s were seeded in the late 1970s and germinated in the 1980s. The Western socialist reformers who contributed at the early stages were Wlodzimierz Brus and Kazimierz Laski. Both of them belonged to economic school of Michal Kalecki. It was not “orthodox Soviet Bloc Marxism” any more. The Kaleckian reformist school could be considered more “post-Keynesian” than Marxist. Kalecki was not initially trained as an economist, he studied engineering. He was able to build correct mental models of macroeconomic reality precisely because his mind had not been already possessed by the classical marginalist thinking and supply-and-demand curves explaining everything.

      Please do not assume that I am a socialist, I lived in the Soviet Bloc and I consider that system utopian. Stalinist communism was even worse – it was evil. I am merely trying to investigate which approach in macroeconomics is working better – looking at the West stuck in the ruts of never-ending recession and China powering ahead. If you are able to look past left-wing sympathies of the author there is one book I can recommend. It is in my opinion not obsolete at all, despite belonging the the era of “slipstick” rather than modern computers and Internet. (It was written in 1952).

      It is “Theory of Economic Dynamics” by Michal Kalecki – available from Amazon for $15. It is not the Bible but you may even find answers to your questions related to mathematical modelling of macroeconomic processes in that book.

      NB the Fed cannot spend. Its presence in the feedback loop changes very little regardless what signal is considered to be the error signal to be minimised. It is only capable of inducing a recession by jacking up interest rates to halt accelerating inflation. Not so good in stimulating the economy even outside the deleveraging (liquidity) trap – private debt-financed expansion actually leads to financial instability. It is the government which can and should spend.

      Financialisation and encouraging “saving” or rather mega-hoarding and debt expansion is not good, we have to get back to Keynes and Lerner.

      • Adman, wow,.. a lot there. Very nice. You are well ahead of me on working this stuff out. OK, so Kalecki.. I’ll put him on my reading list.

        BTW, any thoughts on lluvatar’s ideas on addressing the time delays you wrote of as difficulties in using x’ = A(x,t) earlier?

      • Shoot, that Anonymous above is me. Also, what of Keen’s debunking of neo-classical theory in his book? Have you read that? Good? Bad?

      • Also, if I wanted to familiarize myself with the neo-classical basics, do you know of a good concise text? Wrong or not, I guess I’d just like to know where they’re coming from with more clarity.

      • I went back and read your original post again. I think I didn’t understand some basics there, like what you meant by “flows” exactly, so before I embarrass myself too much I need to look up those refs!

        Also, I like your Kirchoff’s law analogy! That’s the kind of very basic “law” we all need to be able to agree on before we can get anywhere… an it sounds like you’re saying that Krugman and the neoclassicals are NOT on board with that!

      • Adam, lluvatar, … one other think, just briefly. Regarding testing economic theories or policies out. I’m sure economists somewhere must have established “laboratory” like conditions to check at least SOME of their ideas in a more or less controlled environment. Something more akin to a psychological experiment than anything else I’d guess.

        What if we were to try to use online gaming to do something similar? You might have to offer real cash prizes to participants to get them to do it. But imagine setting up some kind of synthesized “economy” online, and then trying out different policy ideas (or perhaps checking out theories). Have several game “rooms” that each player is randomly assigned to. Each room has identical initial conditions, except that each will implement a different government/Fed policy, for example. These could be multi-day type games. A pretty fuzzy thought I know… but I’m always wondering, “How do you know if this model is really correct?” Is there such a thing as an “experimental economist?”

      • I have explicitly said “Accounting rules define what is an equivalent of Kirchhoff’s current law.” I have never had KVL in my mind. As to other points I will respond in the evening (it is early morning in Australia).

        • Adam, regarding economy + BLS + Fed as a feedback control loop, one thing I didn’t touch on here but is pretty obvious: the issue of controllability and the more fundamental issue of observability. We probably strike out on both! I think your statements implied as much when you asserted that the Fed can’t do much except screw everything up. I guess we’re closer on the observability front (i.e. closer to having an observable system), but the idea that the Fed, through it’s limited set of inputs to the plant, can actually control much is probably overly optimistic to say the least!… again, those terms (obs/cont) only apply to the “linearized” system (pretty much a prerequisite for me, since I don’t know much about non-linear controls except to try to linearize about the current nonminal!). When I was in grad school (early 90s), “robust controls” were big… basically it was a way (maybe you already know) to incorporate plant uncertainty into a linear plant. At least that’s how the CalTech guys approached it (I didn’t go there, but my prof did — he was brand new). Then you build a linear controller that does the best possible job (by some measure) on all the plants in the set. It was a clever way to keep everything linear so you could use a vast array of mathematical tools on it…. not that it didn’t get complicated with having to solve non-linear equations (coupled Riccati eqs mostly, I think)… but the theory was fairly elegant. I remember the Matlab toolbox our prof had made was called “mu tools” … I think “mu” (Greek letter) was a measure — like an upper bound, for example, on how bad you were doing. Memory’s a little foggy here! Of course at a minimum you hope to stabilize them all (all possible plants in the set you’ve described). Never used it in the real world though!… and never kept up too much w/ the literature, since I soon went down the signal processing and tracking path… and now FPGA implementation path in my career. Never had need of building anything more than a SISO (single input / single output) controller in my career.

          Another prof took a different approach.. don’t recall much except the words “H-infinity” and “H1″ control, and how they were duals of each other and how you could use the simplex method (operational research) to solve the H1 problem, and thus solve the other. Or something along those lines!

          • I am not convinced that we can consider the economy at the macro level as a system which can be linearised and we just want to put it in a negative feedback loop so that the external noise is eliminated. Steve Keen tried to model the economy using predator-prey-type equations (Lotka–Volterra) but I think that the system is even more non-linear. Stock market indices charts suggests that. I agree that the monetary policy of the 1990s-2000s targetting inflation rate was an attempt to implement a negative feedback loop. Yet the “Great Moderation” did not last forever. The component which is higly non-linear is related to investment and speculation – the more something grows the more people throw money into it, until it breaks down and collapses (George Soros – theory of reflexivity in economics). Even worse, agents often throw borrowed money into the bubble (Ponzi) what leads to saturating the economy with private debt in the long run. Because of the non-linearity I am not convinced whether Kalman filters can be used to estimate the “deep” parameters of the model. The macroeconomic reality is also quite non-stationary (evolving in time). Obviously I might be wrong – until someone gives it a go we don’t know for sure.

            NB my background is (also) electronic engineering but I mostly have been doing embedded programming since I graduated over 20 years ago so while I do understand what you are writing about this is not something I would be able to follow without looking up various things on the Net.

            The process of “financialisation” as described by Michael Hudson leads to growing instability and in the long run damages the productive economy. It is very easy to say “let’s get rid of the Wall Street”. Chanting slogans won’t change anything. Everyone knows that the political system is dysfunctional and has been subverted by various interest groups. What may make a difference is replacing the old paradigm in thinking about the economy by the new one. The mistakes made by the followers of the neoclassical economics often seem to be trivial to someone who has not been brainwashed (or “educated at leading Western universities”). A person who has read and understood books written by Dan Ariely would wonder how even moderately educated people might ever consider making assumptions about “rational agents optimising their utility function in time”.

            Anyway let’s see how the current situation evolves in time.

            • Non-linear aspects: I completely agree!! I don’t think it’s clear at all that linearization or EKF’s are going to be useful (as you point out). I guess I was wondering, that if you could linearize (at each time-step, in the EKF manner)… I’m wondering if even THAT overly simplified system would pass the controllability/observability tests (even during the “Great Moderation”) given the system in place. I think not! For example, the “Great Moderation” might be interpreted as “unobserved states” (really just ignored stated, i.e. the private debt/GDP ratio) growing w/o bound. And perhaps even if they were observed, those states were “uncontrollable” given our current system. Perhaps a “debt Jubilee” function is required to reach those types of states (for example, I’m not saying I’m sold on the debt jubilee idea).

            • Since the obs/contr tests are straightforward, it’d be interesting to try that if someone had an accurate non-linear model for the middle of the “Great Moderation” years. You might argue it puts an upper bound on how well we could have done if we’d taken another path: for example, if looking back we decide that what we REALLY should have done was targeted a modest financialization level (perhaps 10% of economy in finance) and minimized ponzi lending… given the controls in place at the time, could we have even done that with the overly-simplified linearized system! If the answer was “no” then there’s no use in asking the question w/ the non-linear system because that system will just be that much tougher.

                • Dan Ariely is doing this at the micro level (he is a psychologist working on behavioural economics).

                  I am not sure whether such an experiment would work at the macro level because people may not behave in the same way as in the real life (please read Ariely to see how tricky is to make people behave in a “natural” way in a controlled environment). Also – do we really need to do it?

                  We do have theories which describe the macroeconomic reality quite well. How did the American or British governments finance winning the WW2? What was the unemployment rate in 1950 in the US or in Australia?

                  The trouble is that these theories have been rejected are erased from the academic teaching and later from the social conscioussness (via the mass media) – initially for political reasons. They remain largely unknown to the people living in the West.

                  The “platinum coin” debate is an attempt to inject these ideas back into the mainstream and you can see people like Krugman or Rowe wriggling desperately, trying to defend incorrect models and put the genie back into the bottle.

                  A few months ago I asked a co-worker who had grown up in Mainland China about whether governments have to borrow pre-existing money in order to spend (or the sky will fall over) – or whether the governments are not fiscally constrained. He gave the correct answer without any hesitation. That’s why the Chinese are powering ahead with their “state capitalism” model – and we are stuck in a persistent stagnation and recession until the “financial capitalism” is dismantled – because financing expansion by the rising level of the private debt is no longer a viable option and the defence spending in the US is not high enough to finance all the R&D needed to maintain the overall technological supremacy of the West. This is the “experimental economics” at the 1:1 scale – and the experiment is open-ended.

                • Never heard of Dan Ariely. Thanks for the reference. I’m sure my “online gaming” exercise would fail the test in several important ways… but still, if you could… and this is a BIG BIG if… get some buy-in on that from some of the various schools of thought, I wonder how it would turn out. In other words, Market Monetarists get to make the rules for their world, Austrians for theirs, MMTers for theirs, neo-classicals for their, etc. Then it’s like a contest to see who does best. You’d have to agree ahead of time on how to measure “best” though.

                  Yeah, I know, a lot of problems with that! Perhaps the biggest problem… aside from designing the game and making sure you had real motivated participants, and that their behavior would in some way approximate real-world behavior and getting buy-in on the set up and the rules and the measures of outcome would be…

                  … the LAST thing economists want to do (I’m guessing) is put their ideas to some kind of test!! They’ve enjoyed a comfy armchair world of philosophizing about this one little aspect of reality (while the rest of reality-studying academics is regularly subjected to some sort of experimental verification, or at lest some kind of check against reality), with really NO consequences if they’re wrong, … and it’s doubtful they’d want to give that up by risking losing face in some sort of competition. I think the Austrians actually built that right into their theories, didn’t they?: that the truths they describe are “self-evident” and cannot be subjected to verification!… hahaha!

                  This test I describe would attract a lot of interest from all of us amateurs though! Ron Paul people would be cheering the Austrians on, and … …uh… well, actually, that might be the bulk of the spectators! I’m not sure MMT or “free banking” advocates would be able to draw very big crowds!

                • BTW, when I say the various schools could “make the rules” for their world, I just mean they could act as dictators regarding economic policies… not that they could alter the rules of how the world operated outside that.

      • Adam K, Nick Rowe makes a similar argument to Krugman re: the “feedback loop” here:

        basically saying, like Krugman, that “in the short term, Keen is correct, but that’s of no significance because the CB targets inflation, and thus in the mid and long term Krugman and I are correct.”

        The actual words he uses are: “…the supply of reserves is perfectly elastic at 2% *inflation*. It is perfectly *in*elastic with respect to the rate of interest (except at very short horizons).”

        Again, there’s that question of the “error signal” the CB uses. You’re saying that the error signal doesn’t really matter here, correct? Inflation or interest rate… won’t make a difference. Fullwiler says the same.

        Rowe seems fixated on what he calls the “hot potato” effect (of outside money?), but not all neo-classicals agree with him about that:

        Fullwiler, in the intro here:

        responds to Rowe and Krugman, saying essentially, “fine, use the Taylor rule all you want for monetary strategy, but because on an operational day to day basis the Fed must target an overnight interest rate — a rate it could change anytime — it doesn’t affect what I’ve said. The Fed has no control over reserve levels, base money, etc, just the rate.”

        Later he takes a crack at the “hot potato” idea:

        stating flatly “There is no hot potato effect for currency in the real world.”

        BTW, just recently Sumner makes a plea to please “Keep banks out of macro” in response to an Economist article:

        … I’m assuming so he won’t have to learn anything about banks and banking!

  4. Wow, I had no idea how many dorks, uh, I mean folks have been drawn into this debate:

    Sumner, Beckworth, Rowe, Krugman, Fullwiler, Roche… you don’t see actual back and forths between ALL of those names that often… not that it’s happening here either I guess, but this Waldman fellow seems to be a clearinghouse of all the names involved.. including Coppola (commenting here on Cullen’s site right now).

    BTW, Nick Rowe was lamenting in his most recent post on this that “MMT types” weren’t criticizing him more. Well perhaps he’d be OK with some MR criticism. Here’s what he said:

    “I’m a bit surprised I haven’t got more pushback on this post, from the MMT guys for example. Not that they are the only ones who make what I think is the big mistake of saying that the real world is like the red/green world, in which the stock of government money is demand-determined, because a lot of very orthodox central bankers and New Keynesians say the same thing.”

  5. Cullen I think you are wrong and Krugman is right. If government could finance its spending only by printing it would imply inflation in some situations: increase in government spending financed by printing would cause that too much money would chase too little goods. But if government could finance its increased spending by borrowing on the market it would imply that private sector would spend less so there would be no inflation.
    So thanks to monetary policy government can spend more if it wishes to than if it would have only rely on fiscal policy (condition on being credible for the markets in its borrowing capabilities).

  6. Cullen, in Scott Fullwiler’s article that you link to here, they talk quite a bit in the comments section about “elastic” and “inelastic.” Also, Nick Rowe makes uses those terms in this article here:

    “In Canada, over a longer horizon, the supply of reserves is perfectly elastic at 2% *inflation*. It is perfectly *in*elastic with respect to the rate of interest (except at very short horizons).”

    I’m going to guess you don’t agree with Nick, but what does he mean “(in)elastic with respect to…” In what sense is elasticity/inelasticity with respect to something?

    So two questions: What’s elasticity/inelasticity and in what sense is it defined with respect to something else?

    I could guess, but it’s easier to hear the straight story.

    • Tom, I think (I could be wrong) tha Cullen would agree with Nick:
      “central banks target interest rates, and they achieve this by having a perfectly elastic supply of reserves at their target rate every day. “

      • Hi Cowpoke, … I looked for that quote you give… I think that was one of the commenters that was disagreeing with Nick that wrote that, “Tschaff,” wasn’t it? What Tschaff says seems to be a direct contradiction of what Rowe says.

        • Tom, it was that one, can you post The Rowe comment for please sir? I am Bizzy up and down the stairs here But am interested.
          If ya got time.

          • Cowpoke, not sure what you’re after. The Rowe comment was from the article. I posted it in my original comment:

            “In Canada, over a longer horizon, the supply of reserves is perfectly elastic at 2% *inflation*. It is perfectly *in*elastic with respect to the rate of interest (except at very short horizons).”

            Do you mean something else?

            • Thanks Tom, I have a better picture of it now., Thanks, I am going to Research this Elastic a bit more tomorrow

              Thanks Again Tom..

      • BTW, the “Ask Cullen” page still seems to be broken. Do you agree? New comments do not go at the bottom.

  7. Are traveler’s checks money or is that double counting? If you tear up the traveler’s checks what happens? Answer – you get IOeR (idle or unused money).