FINAL THOUGHTS ON THE AUSTRIAN SCHOOL
* This post was written in 2011 before Mr. Roche founded Monetary Realism, a post-MMT school that was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought. For more info on the difference in views please see here. For more on MR’s views please see here.
(If you’re interested in reading part 1 of this post please see here)
Robert Murphy of Austrian school fame has posted some final thoughts on MMT. It’s my opinion that the Austrian perspective is confused about the actual workings of a modern fiat monetary system so some clarification is necessary. In his commentary Mr. Murphy makes three final points:
POINT #1: The accounting identities don’t prove the things that the MMTers think they prove, at least not by themselves.
The goal of Mr. Murphy’s initial article was to show that a modern fiat monetary system need not involve government spending in order for the private sector to save. Mr. Murphy has created his own mythical world where there is no government sector.
In a classic case of confirmation bias, Mr. Murphy has created this mythical anarchist world that he likes to refer to as “Robinson Crusoe economics”. What he has done is created an anarchist world and then filled in the pieces to prove his point. The only problem is, we don’t live in a world that even remotely resembles the Robinson Crusoe world. We live in a world where there is a highly developed government, a foreign sector and a highly productive private sector.
Mr. Murphy “proves” his point in this example by showing that Crusoe can save in coconuts. And this is quite true. If the private sector of the United States desired to save in coconuts they most certainly could (assuming they lived on this mythical island). They don’t need any government money or government spending to save. Unfortunately for those of us that live on planet earth in the USA, we must transact in USD. Why? Because we live within the organized society that our forebearers designed for us and what we call the United States of America. When they designed this society they created a common currency. And in return for specific benefits of this society they created a tax liability that was only payable in the currency of the USA. So, while Mr. Murphy might be quite content collecting coconuts in his free time I can assure you that he saves in US dollars in order to meet his tax liabilities. How do I know this? Well, I know it because the book he so prominently pushes on his website is sold for 22 DOLLARS and not 22 COCONUTS:
You’ll notice that he is not selling his textbook for 22 coconuts. No, he is selling his book for 22 dollars. And some portion of that $22 goes to Uncle Sam. More importantly, those $22 dollars can ONLY come from one place – they must be spent into existence by the government of the USA. If they are never spent into existence then they never exist in the first place. So, you can see why Mr. Murphy is eager to collect his book payments in USD and not in coconuts. He must fulfill his tax liability in the currency of the USA.
Now, I am using this example a bit tongue-in-cheek, but it is applicable in a broader sense. In doing business in the USA we incur a tax liability and that tax liability can only be extinguished via US dollars. If you take a basket of coconuts to the IRS on April 15th they will tell you to go sell the coconuts and exchange them for USD. Payment of taxes ultimately involves savings in the currency that the USA deems as proper for extinguishing tax liabilities. And that means accumulating the same currency that only the USA can spend into existence….
POINT #2: Neither the Austrians nor the Keynesians deny that the Fed could print whatever amount of money is necessary, in order to avoid a technical default on government bonds.
We don’t agree at all according to Mr. Murphy’s own commentary. First of all, we should better understand the Fed and Treasury’s symbiotic relationship so as to avoid the myths villainizing the Fed at all times. And hyperinflation is a rejection of state money (the same state money that Mr. Murphy rejects the existence of – contradiction there – yes). But let’s not get off point here. In an interview that is prominent on his website with Fox Business Mr. Murphy compared the US government to a shopper in a grocery store who can’t pay for all of his food and asks the store for a line of credit to be extended. This proves that Mr. Murphy is being disingenuous in his comments or just flat out doesn’t understand the fiat monetary system.
A currency issuer can never become insolvent in the currency that it issues if its debt is denominated entirely in that currency. This is NOTHING like a household which is ALWAYS revenue constrained. Warren Buffett cited this point in a recent CNBC interview:
Buffett says the U.S. will not “have a debt crisis of any kind as long as we keep issuing our notes in our own currency.”
So, Mr. Murphy’s comparison to a shopper at the grocery store is entirely incorrect. It is not even remotely applicable. So his comment here is either a change in his entire position (an admission of being wrong) or he is being disingenuous in claiming that we agree. Clearly, Mr. Murphy does not recognize the fundamental difference between a currency user and a currency issuer.
POINT #3: Even in its textbook version, “crowding out” is consistent with higher private sector saving. What is being crowded out is private investment.
I covered this in the original post so I won’t belabor the point, however, Mr. Murphy attempts to prove his point by falling back on the loanable funds market. Mr. Murphy’s use of the loanable funds market proves his lack of understanding with regards to basic banking operations. As Dr. Scott Fullwiler has previously explained, the entire idea of the loanable funds market is flawed:
“This model (loanable funds market) is simply inapplicable to our current monetary system in which bank loans are created “out of thin air” without the requirement of prior reserve balances or deposits to “fund” the loan’s creation. Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases.”
In a modern banking system banks are never reserve constrained. An Austrian colleague of Mr. Murphy’s has shown this to be true. So, the entire point on crowding out is dead in the water….
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* Edit – This article is nothing personal against Mr. Murphy. I am sure he’s a good man and a fine American. His teachings represent a broader perspective by a wide audience. So while some of these arguments may appear directed at him, I can assure you they are not. They are merely meant to show how a broader school of thinking is, in my opinion, misguided and/or incomplete.
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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336 Comments
Ouch. This guy has a PhD from NYU…
He can only save in coconuts to the extent that the coconut tree ‘deficit spends’ coconuts.
If the tree decides not to produce any coconuts, there can be no saving.
In the Robinson Crusoe world, the palm tree is the government.
Awesome.
Ha! That book isn’t worth even a single coconut!
One of the biggest misunderstandings is that “funding” deficits by “money printing” is completely different to “funding” by taxes or the issue of securities. In reality, the same reserve accounts at the Fed are credited and debited regardless of the “funding” method.
Economists who refute MMT seem to think that the process of government spending is like collecting acorns from a tree (taxes) in order to be able to throw them (spending). This is just flat out wrong if when the government is the monopoly supplier.
Any economist who is still trotting out the old loanable funds market has no idea what he/she is talking about. You would think that two rounds of QE and continue loan declines would change that, but apparently some people just can’t connect the dots. Murphy is an embarrassment to all economists.
Mr. Roche,
I am in the process of understanding MMT. Most of the so called “inflation” have shown up in commodities that are traded in the futures market. This seems to suggest that this increase in price is due to speculation and QE1/QE2, etc. has given an excuse for bank’s investment divisions to speculate in these markets. In order to turn this speculation into huge profits these banks now have to find a greater fool to offload these futures positions at high prices. In this case the greater fool is the small-investor or retail investor. I think Bernanke and his buddies are in the process of creating an environment and they won’t stop until every man on main-street believes Gold and other commodities are going to the moon. It is clear Mr. Bernanke is taking care of elite bankers.
I wonder in the future if workers-wages can also be traded in the futures markets (btw Yale Economist Shiller have suggested that and called it employment-insurance in his book ‘The New Financial Order’) then FED and the bankers at their will can create wage-inflation as well. What do you think about such a change from MMT’s perceptive?
Yes, if you review the margin data (huge change) vs money supply (little change) you can actually prove this to be the case.
>(the same state money that Mr. Murphy rejects the existence of – contradiction there – yes)
Cullen this is silly. Mr Murphy does not deny the existence of the government money monopolly.
What would you say such a thing?
Cullen,
I have to say I am disgusted by the way you wage your arguments here and in the previous post about Austrians. You are using a long list of “uncivilized” ways to carry an argument:
- ad hominem attacks
- interpreting the words of people your way
- dodging questions, often by repeating meaningless facts that are not to the point
- saying something is so, if you do not like it, leave (What about your belief in American democracy – am I not allowed if I do not like it to vote to change it? Am I not allowed to think of better ways to do things?)
- stating things as fact, which are by no means so
This shows only one thing – you are dogmatic about MMT. I am really sorry to see it. I would embrace Ed Harrison’s approach, as Austrians and MMTers have a lot in common.
InvestorX
I disagree that Cullen has been “uncivilized”. Look at yesterday’s thread. Cullen posted an unbelievable amount of detailed responses to all comers (he must have been at it all day!). I’d say he has been remarkably patient.
Nonsense. He is too kind if anything.
You’ve gotta love how all these gold bugs tell everyone to buy gold and yet, in their personal lives, they do nothing but transact in dollars. You can only buy Murhpy’s book in dollars. So, while he hates the system and wants it torn down, he has no problem benefiting from it and selling millions of books in the process.
How do these guys even have an audience? It’s a bunch of old rich guys complaining about how the greatest economic engine in the history of man has suddenly failed them (as they collect dollars in exchange for fear).
Don’t get mad. Get even. I disagree that I have been uncivilized. I think I have merely squashed his argument and you are upset by it. So, instead of respond to the meat of the argument you have decided that I am waging an unfair war. That’s fine, but you’d further your cause better by proving me wrong rather than claiming that my tactics are dirty…..
If you’ve got an argument then make it. I am perfectly happy to hear what you’ve got to say.
You have squashed nothing, elementary logic has squashed your argument and made you look silly. If i have to best pick a word for you, it would be dogmatic. You are no better than krugman, he just as well twist things and infers to others things never said or meant.
For your reference and the coconut deficit spend supporter, people can save in both money and property.If money supply growth is constrained only to the level of GDP growth, one can save still if the central bank increases the money in circulation. Government deficit spending does not necessarily have to be the first ‘spender’. Then the CB can increase reserve requirements to choke off inflation. In effect a central bank can do the job you infer ONLY the government can and should be doing in order to enable savings. Your MMT argument has been put on false premises foundations and by the rules of logic therefore you cannot have a true deduction/induction.
Cullen,
I am catching you all too often in inconsistent statements. The Fed by charter is NOT the gov’t, the Fed cannot BE and BE NOT the gov’t as a matter of convenience for you.
Banks do create money, because credit is money. In fact they first loan, then they borrow from either the Fed, private citizens or other banks to provision for reserves. Are you saying credit is not money? There are roughly $2.4 trillion of consumer loans outstanding, that was booked as economic activity when produced, what have these producers registered as receivables? The banks register the interest as it arrives or as they have scheduled as well as profits regardless the fact that the money has not been earned yet.
You just can’t have it be both black and white on every subject all the time.
Cullen,
You are twisting my words again. I am not mad, I am disgusted by your way of arguing and disappointed from you. I do not think you have crushed his argument, because you have not used logic or anything else (e.g. empirics) to do it, but I do not care if you have or not. Actually I am sad that you have not – I hoped you could do it
MY point is about your method of waging a debate. Your excursions to the coconut island are too freqent, your twisting words and statement is too often, your dodging answers is too frequent, your arguing about semantics never stops etc.
So you are dogmatic and there is no point of arguing with you, it is like arguing with the gramophone.
InvestorX
What answers do you want? You are slinging mud and not debating….The only thing disappointing here is your attempt to make an argument….
Not only do Austrians not understand fiat money: they don’t even seem to understand a lot of basic economics. For example, take those simple supply / demand graphs that appear in every basic economics text book.
An article published by von Mises entitled “What is Austrian Economics” thinks those graphs are invalid because “It is not possible to collapse tastes or time schedules onto one curve and call it consumer preference. Why? Because economic value is subjective to the individual.” Well, amazing as it may seem, about 99% of those who adhere to conventional economics (and who accept the above sort of graphs) have tumbled to the fact that everyone’s tastes and preferences are different. Doh!
The article also makes the absurd claim that “The concepts of scarcity and choice lie at the heart of Austrian economics”. No they don’t: the allocation of scarce resources is what economics is all about, as it explains in Chapter 1 of every basic text book. It’s not just Austrian economics that is all about scarcity and choice.
The above Austrian article is here:
http://mises.org/etexts/austrian.asp
This quote is not to be found on the link you provided. And probably it comes from a branch of AE called Exreme Subjective Theory or so. So the name of the branch says it is extreme, and it is not a common Austrian belief.
InvestorX
“More importantly, those $22 dollars can ONLY come from one place – they must be spent into existence by the government of the USA … Payment of taxes ultimately involves savings in the currency that the USA deems as proper for extinguishing tax liabilities. And that means accumulating the same currency that only the USA can spend into existence…. ”
No. The endogenous banking system can lend it into existence, without the government running a prior deficit. And if the government is not running a deficit, it’s not spending anything into existence.
Also, the banking system doesn’t require reserves to pay taxes, either on behalf of customers or for its own account. It only requires the difference between tax or borrowing inflows and government expenditure outflows – i.e. the amount of any net increase in its operating account at the Fed. The amount of that change, and even the total level of the account, are always negligible in context, and bear no relationship to gross tax inflows.
“The Fed doesn’t print money”
It’s a wonder that while MMT insists on its own contrived construction of “operational realities” on the one hand, it has the gall to put foward this flimsy detail as any kind of argument about anything.
of course the government is fiscal
the MMT complaint relates to recognizing crediting of bank accounts as opposed to printing; rather a lame distinction
No, it’s a rather important one because once you understand the real operations of a fiat monetary system you recognize that the Fed is not entirely necessary as is. You guys all want to abolish the Fed yet you’re making this claim that it performs this necessary function. Again, the austrian argument is filled with many contradictions….
you frequently miss the very point of a response
the MMT distinction is not what you say it is
its between crediting accounts and printing; not between fiscal and monetary
the former is lame; the latter is worthy of debate
So, if the Fed is this vital entity with the unlimited almighty power of printing money then surely it must exist. So why do the Austrians want to abolish it? Who would “print the money” then? Or is this the point where we all go live in the anarchy world with no govt spending???
My goodness, you’re missing the point here. I have nothing to do with the Austrians, or defending them. I’m interested in your interpretation of MMT. That is all.
Well, let’s see about those words you put in my mouth:
I said:
“Also, the banking system doesn’t require reserves to pay taxes, either on behalf of customers or for its own account. It only requires the difference between tax or borrowing inflows and government expenditure outflows – i.e. the amount of any net increase in its operating account at the Fed. The amount of that change, and even the total level of the account, are always negligible in context, and bear no relationship to gross tax inflows.”
So obviously, I didn’t say the currency doesn’t exist, because I said the Fed provides that relatively small operating balance in that currency – to the government.
It’s the same argument. Where does the money come from? It comes from somewhere. It didn’t just magically appear in the banking system. And of course, the US govt created it and spent it into existence. Go back to the initial existence of the banking system. It didn’t just magically appear with USDs. It was deposited there by someone in the govt who deemed it legal tender. Only then could the banks begin all their other shenanigans.
Clear?
Go back to my first comment:
“More importantly, those $22 dollars can ONLY come from one place – they must be spent into existence by the government of the USA … Payment of taxes ultimately involves savings in the currency that the USA deems as proper for extinguishing tax liabilities. And that means accumulating the same currency that only the USA can spend into existence…. ”
No. The endogenous banking system can lend it into existence, without the government running a prior deficit. And if the government is not running a deficit, it’s not spending anything into existence.
__________________
You said $ 22 can only come from one place.
I said no, and why.
I didn’t say the dollar didn’t exist as a reference currency, obviously.
The point as you articulated it was about $ 22 – not about one dollar.
I’ve been consistent all the way through.
Okay, so let’s just make the bankers rich by having them be the ones that extend all the credit to everyone. All vertical transactions net to zero! That’s been happening for 20 years and look where it got us….
OK, lets nationalize and have a single bank – the central bank.
That’ll sure confuse the MMT point on reserves – there won’t be any.
Yes, let’s create all sorts of mythical worlds that aren’t applicable. If the oxygen leaves the air tomorrow you will die. Did I just prove that you are going to die tomorrow? Or did I create a totally unrealistic scenario to confirm my bias?
a little levity, that’s all
I am not trying to be difficult so my apologies.
I’ve gotta run. Be back later.
Are you actually asserting that money would come from private banks, or from banks with a charter from the government. The first basically legalizes counterfeiting, the second is just a delegation of state power to a private entity. The state still creates the money, just via delegation of authority.
@ anon:
“creating money out of thin air” is a myth!
If banks could, we would not have any debt crisis! People who claim this have not understood anything! And even if they could, why would anybody be so dumb and take debts from banks that dont even have money, and even put a liability at risk, for nothing real in eschange? I mean think it all through and you will become aware that it is a paradogm.
Its not money what is being created in the banking system, its only claims on THE money, that has been spend into existence by the state, there is only FED money and the rest is only claims on money= debts.
If i were to have a saussage, and two people had a paper that claims that saussage, do all we three have a saussage?
All that “…out of thin air” bla bla is a complete myth, its that myth that keep the current system going, but noone wnat to touch that, Carl Walker had proven this already in the 50th, that claims on money are not money (in his book “Das Buchgeld” book money/ fiat money)
So the fed is not necessary? Aren’t you denying thus its existence and influence on the economy? Surely you are not describing the real world we are living in. Arent you committing the errors you wrongfully attribute to others? You cannot build a solid theory on weak foundations.
if you read closely, i am talking about private banking. My last sentence was that banks can only work with “FED” money….
Imo you just take over blindly dogmatics from other economic models!
Anon, I think you are confusing a vertical with a horizontal transaction. Bank lending is considered horizontal, which nets to zero. Your $22 liability is considered someone else’s $22 asset. See here:
http://moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/
no confusion at all
non-bank taxpayer pays taxes with horizontal money
taxpayer’s bank pays with reserve debit
government spends or central bank buys a non-government asset, crediting reserves
No, banks only leverage govt money.
not clear because its wrong
banks don’t “leverage” HPM; Canada has a zero HPM requirement
the banking system is not short HPM when it makes a loan – which is why Canada can run a zero requirement system
HPM is for clearing and settlement, not for making loans
nothing special about loans and HPM
you got him here, mmt’ers need to read their selgin and white.
Additionally, this debate is easily squashed. If the US govt decided to eliminate its currency overnight then the banks would be without “money”. It’s that simple. So his argument is totally nonsensical. They can’t transact in USD if the USD doesn’t first exist.
A bit of common sense goes a long way…..
Of course the govt has to have created the currency in order for a banking system denominated in that currency to exist.
That doesn’t mean banks are reserve constrained. You’re missing the whole point in your semantic argument.
Cullenito,
Money is a legal tender for all debts, public and private and a medium of exchange. This is by definition. It has NOT been conceived to be a store of wealth, but a store of value, therefore money is a derivative of economic activity, not engine of. MMT is bunk, you are a dogmatic just as much as an incuisition priest ever was
Read my treatise. I never said that money has any intrinsic value.
There’s more to fiat “value” than just productivity. I particularly like Keynes’s theatre ticket analogy. The ticket itself has no value. It is the show itself that is valuable. And the ticket is attributed value by its users because the theatre deems it as the only form of entry to the show. A fiat currency works the EXACT same way. There are multiple linkages in a fiat currency. A good show isn’t enough to meet them all…..
http://pragcap.com/resources/understanding-modern-monetary-system
I value most the debate here, but I openly admit that MMT does not pass the sniff test of either common sense or the rules of elementary logic.
Where dogmatic followers of a theory (like you or Krugman) discredit yourselves most easlily is applying the theory in different environment, you have simply forgotten that these theories are not universal, but apply to a vacuum environment and that is explicitly said with ‘all other things being equal’.
Let me just be specific, I would be glad if you really put some thought into this.
Money creation (and deficit spending as a form of it) as you say has no intrinsic value, it is the value of what you acq
Sorry, pressing a tab+enter by mistake submitted my post.
Money creation (and deficit spending as a form of it) as you say has no intrinsic value, it is the value of what you acquire with it. Therefore by increasing the supply of it, you can influence the behavior of speculative holders of money, not of investors in productive assets, who by definition seek to optimize the return of their assets and hold as little cash as possible and if they have unused for production purposes ‘wealth’ it is already in another form. For that reason money printing cannot influence their economic behavior. The speculators with the ability to borrow from the Fed are most priviledged by money printing: they can frontrun (and they do) everyone else. This is how the Fed recapitalizes otherwise insolvent banks.
Back to our economic setup: the gov’t prints, hands it to Joe, who buys the goods produced by Xing in China. There is no way that tweaking of the money supply or deficit spending can incentivise Joe to work for the goods he acquires through gov’t transfers. Until gov’t is not allowing real wages to drop, employment will not pick up in the US, but will continue to increase in China where the deficit spent money gets accumulated. Keynesian theory was not conceived for an open economy with such a setup and judging by his famous ‘when facts change, I change my mind’ I believe he would have been keen to admit that his theory does not work in Americhina.
Basically all this happens because money is not the engine of economic activity, it is not even the fuel, it is the roar that gets produced when the engine works, the higher the rotational speed the greater the noise and the impression of wealth creation, the lower the speed the more gloom and pessimism you get. For this purpose, a legit economic theory must aim at increasing the velocity of circulation of money, not increasing the amount of money because if it does not move, it is dead.
Go revise you MMT stance if you wish.
You are not completing the linkages I described and in doing so you are misinterpeting me. If you’re going to so ardently hate something you should at least try to understand it. You clearly do not.
This is what the Austrians like to do. They like to create these unrealistic scenarios without actually thinking them thru. In this case, anon has created this mythical world where USD’s exist without the government having first created them. As if USD’s are a construct of the US banking system and not the US government.
Uh sorry buddy, but banks didn’t create the US Dollar. The US Dollar was created by our government and can only be created by our government.
Yeah, they completely reject the idea that a sovereign currency is a construct of the state. In doing so, they totally miss the point. They ignore the fact that savings denominated in USD has to come from somewhere and that the banking system didn’t just magically create all these dollars on their own. No, they were created by the USD govt. The daily operations of the US banks aren’t constrained by the amount of reserves in the system. But taken to its logical extreme, they are constrained in their ability to transact in US to the extent that USD must actually exist! It doesn’t take much common sense to get past this point and quite frankly, I am surprised that some sharp people can just unwittingly overlook such an obvious point….
Bill and anon believe they have some “gotcha” moment when the reality is that he is proving my very point. The fact that the banks even have USD in the first place is a construct of the states creation of this currency….This is beyond common sense and should be very easy to understand. A currency which doesn’t exist cannot have a banking system denominated in that currency….
Cullen, these are not rational people. There is a group of austrians who honestly believe the world could exist without any form of government. I can kill that argument in a paragraph.
If we have no taxes and hence no formal government we would have to rely on private militias for protection. Now, Robert Murphy says we can all be protected by these private armies for hire. It would work by paying into an insurance fund. Of course, when seen logically it’s easy to see the flaw in this. No one would want to pay for the military insurance in peace time. So, in peace time the army would have no funding and would be small by necessity. But as soon as a nuke lands in NYC everyone would get scared and buy army insurance. Then we’d have a surge in military. The only problem is that they’d be entirely untrained and unprepared for battle because they’d be mostly new hires. The only way to have a well prepared and stable military is by having consistent funding for an army. In a free market system that is just no realistic. Free markets work in ebbs and flows and the funding into a private army would collapse during peace time. That’s how free markets work. And in doing so, it would make us most vulnerable most of the time.
As you said, a little common sense goes a long way.
A better example of how ridiculous the anarchy argument is is the police. Who would police everyone? Private security forces, right? So, if your neighbor decides to have a party at 3AM and you call your security force, what would happen? They go over and knock on the drunk neighbors door and the neighbor goes:
“Dude, who the f$ck are you. Get off my private property. I didn’t hire you to police my house. You have no authority to infringe on my civil liberties!” (door slams in face of security officer).
Some higher entity has to give these people the authority to do these sorts of things. A private security force will never be seen as having this authority because 95% of the citizens won’t be under contract with them.
An even scarier thought is with the private armies and advanced weaponry. Who controls all the US nukes? Who controls the nuclear subs? Do you really want your crazy ass neighbor, who owns a private military force, with his finger over the button? Uh, no.
None of it makes sense at all.
So I’ll just repeat here from the thread above:
I said:
“Also, the banking system doesn’t require reserves to pay taxes, either on behalf of customers or for its own account. It only requires the difference between tax or borrowing inflows and government expenditure outflows – i.e. the amount of any net increase in its operating account at the Fed. The amount of that change, and even the total level of the account, are always negligible in context, and bear no relationship to gross tax inflows.”
So obviously, I didn’t say the currency doesn’t exist, because I said the Fed provides that relatively small operating balance in that currency – to the government.
Also, it is clear that the currency must exist in order for the government to impose tax liabilities in that currency. Since I stated early on above that the currency exists, obviously, I’m stating also that there is a reference object for the tax liability.
What I have questioned is not that the currency must exist, but that it must be provided by the government or Fed throught deficits or lending, in the amounts that reflect a requirement for payments of gross tax flows or gross borrowing -which is what MMT says in the way it describes gross reserve requirements for those payments. That is not how the reserve system works.
It’s the same argument. You’re just not drawing it out to its logical extreme. If the govt had never spent any money in the first place there would be no money in the banking system. It’s that simple. You are trying to draw that out to a modern world where the currency already exists. But the bottom line is that if the currency never exists then there is no USD in the banking system which can be leveraged up.
Now, could a modern economy (with USD already in the banking system) grow and expand without adding any new currency over time? Yes. And what would happen is that the participants in that economy would increasingly rely on horizontal money to live (because they would not have access to vertical money) because their tax liabilities would continue to increase, but the only thing they would be able to extinguish that liability with ($USD) would be stagnant. And they’d go ever into debt because all horizontal transactions involve the creation of a net to zero. So, our banks get rich reaping the fees and everyone else is saddled with debt. What happens to the rest of the pvt sector? Throw in a current account deficit and bam. Look around you. It’s happening. The economy sucks.
Treasury actively uses TTL accounts at auctions when it wants to – to avoid net reserve drains.
Hmm. It’s possible I’m reading Anon incorrectly.. but it seems he’s saying that things *could* work another way, in another monetary system, while you’re saying that they *do* work this way, in this one.
Which is the whole point of MMT, I think. It’s applicable to the system we have today, not the system in Europe or the system we had in 1970.
Right. I am not talking theory. I am talking reality.
You’re misinterpreting the word “leverage” here, just as horizontalist critics of Wray used to do. Leverage is used by MMT’ers to essentially mean “short position.” “Leverage” is used this way all the time in finance. So, banks in Canada, when they lend, create a short position for themselves in reserve balances; that is, they need to get reserve balances if they ultimately have to settle the payments made by the recipient of the loan. This is true even though there are no reserve balances held overnight. The point has nothing to do with being reserve constrained or the money multiplier. Given the confusion the word “leverage” caused years ago (i.e., “leverage” has multiple meanings), though, I stopped using it and replaced it with “short position” or something equivalent.
He’s making an even more extreme error. He’s actually claiming that a banking system denominated in USD could exist without the govt having first created the USD. Common sense is very uncommon.
This is interesting, lets do a thought experiment. What if the treasury didn’t deficit spend? Could banks still make loans? Could government still collect taxes with bank loan money?
The answer to all these questions would seem to be yes IF the Fed is accommodating of the need for reserves. It wouldn’t have any treasuries to buy, but it could buy or lend against the financial assets of banks.
The point on taxes is that the construction of the MMT argument is biased toward the pre-existence of deficits rather than surpluses. There may be good arguments for this, but the preconditions for paying taxes is not one of them.
True. Either a deficit or a loan from the govt/cb (i.e., surplus position) will create reserve balances for the non-govt sector to use to settle a tax liability. My MMT colleagues usually leave out the latter, for some reason. The case would seem to be stronger if both were included.
Yes, I remember asking Warren how the govt could tax more than the total of cumulative deficits and he replied “by loaning the funds to be taxed to the non-govt sector”. So, yes, the govt can be in “surplus” and still tax, but this is a very funny case. Which is why most MMT blogs ignore it, I guess.
And of course the loan from the govt will have to be repaid and for this to be able to happen the govt will either have to deficit-spend in the future or to forgive the loan, which is functionally the same as deficit spending.
Scott, am I missing something?
posted a reply. hasn’t shown up yet. hopefully it will.
Think of it a different way. If the Tsy issues bonds to drain all reserves, and the cb doesn’t engage in open market operations to manage the target rate, then to pay taxes the cb must lend the reserve balances.
This is actually a very common arrangement in non-Anglo-Saxon monetary systems. Marc Lavoie has written about this extensively, and refers to it as an “overdraft” system, in contrast to the “asset-based” system of the Anglo-Saxon nations.
This is why, if we are going to be precise about how the monetary system works–and that’s one of the competitive advantages MMT’ers claim for themselves–then we should say that there are 2 sources of reserve balances: previous govt deficits and loans from the govt/cb. Even more precise is to point out that aggregate reserve balances change (only) via a change to the cb’s balance sheet.
good precision
but why are reserves needed any more than the net change in the government’s balance at the Fed – which is usually negligble through netting, including TTL transfer and expenditure outflow effects? The netting, which is the purpose of cash management in any operation, mitigates the net requirement for reserves to back inside/outside money transactions.
Anon, hopefully Scott will reply. He is the banking genius and I am clearly not conveying my point very well. My apologies.
Thanks for keeping it civil.
Cullen
THere’s no netting on Fedwire.
There are intraday overdrafts, instead–a loan from the Fed.
Scott, thanks, no problem with that. But, again, loans from the CB have to be repaid, aren’t they. And these on aggregate can be done either with reserves resulting from deficit spending or with additional loans from the CB (a roll over.) So, if we don’t allow roll overs, then you still get deficit spending as the only source of reserves in the system. Correct?
These systems are always rolling over.
Also, it’s not always the same banks in the overdraft position. The cb just needs to have enough loans outstanding at any point in time to meet the banking system’s reserve requirement (where applicable) and payment settlement needs.
But Scott, while it looks like this is different from deficit spending, in fact this is just deficit spending in disguise of constant lending. The non-govt sector is always indebted to the govt in this setting via loans from the CB. Why is it materially different from the govt “giving away” funds tot he non-govt sector?
My point was the same as Anon’s point–not all reserve balances in circulation that banks use to settle payments with the govt sector come from previous deficits. In fact, even in the US, since most daily settlements with the govt will probably result in daylight overdrafts at the Fed, it’s more often the case that reserve balances to settle payments with the govt sector come from a Fed loan. I wasn’t trying to say that could only happen in a surplus, but (as I said above) clearly if there were surpluses, that could be the case, too.
Doesn’t Treasury also transfer balances to TTL accounts on the same day it receives payment at auction settlements? Isn’t that part of its cash flow planning?
That would avoid the requirement for Fed intervention other than unexpected dislocation.
i.e. with TTL transfer, the reserves aren’t drained from the system, and banks can still square their reserve positions interbank
The TTL account isn’t perpetually replenishing so there are instances when banks need to find reserves at the CB.
Scott, my point is that a loan of $1 from the Fed is functionally identical to $1 deficit-spent, if it is constantly rolled over (in aggregate) Both are vertical money injected into the economy. Both serve to satisfy non-govt sector’s demand for NFAs. A rolled-over loan from the Fed is an NFA of the non-govt sector just as G-T is.
The transfers to Tsy by banks and from Tsy to TTL’s aren’t netted, though. The first requires previous reserve balances or an overdraft to the reserve account. Fedwire is an RTGS, so each transaction has to occur separately.
Peter D,
A loan from the Fed is absolutely not NFA for the non-govt sector. The bank has added reserve balances (asset) and short-term borrowings from the Fed (liability), so change NFA=0, unlike a deficit in which the liability remains with the govt. That’s why, when you calculate NFA, you have to subtract all central bank loans from the total qty of tsy’s plus currency plus reserves. Hope that makes sense.
Scott, what I meant is that if this loan comes with an implicit promise of constant roll over and never needs to be paid off (by the non-govt sector as a whole, not by the specific bank) then it is functionally serves as a vertical money injection.
If I give you money that you never have to pay back then we can call it a loan but in reality I just gave you a grant.
If we don’t allow roll over, however, then there comes a time when the non-govt sector as a whole has to repay the loan to the CB. And it can do so only with reserves injected by govt/cb.
Now, if CB just grants reserves to the non-govt sector, I don’t know how those are tracked. Do they appear in the govt deficit numbers? The Fed’s “deficit” (is there such a thing)? I remember ESM asked exactly this question on Warren’s site regarding the funds for QEI that Bernanke famously described as changing numbers on the accounts at the Fed, but nobody replied. Regardless, the consolidated govt sector has to vertically “spend” one way or another.
Peter D,
“If I give you money that you never have to pay back then we can call it a loan but in reality I just gave you a grant. If we don’t allow roll over, however, then there comes a time when the non-govt sector as a whole has to repay the loan to the CB. And it can do so only with reserves injected by govt/cb.”
That’s like saying that household debt is a “grant” because the household sector as a whole never pays it off. I think you’re trying to draw an analogy where it ultimately is not useful. Loans from the Fed, like household debt, are not NFA for the non-govt sector, by accounting identity. I don’t see any reason to go further than that.
“Now, if CB just grants reserves to the non-govt sector, I don’t know how those are tracked.”
It never does. It’s always an asset swap or a loan.
“Do they appear in the govt deficit numbers? The Fed’s “deficit” (is there such a thing)? I remember ESM asked exactly this question on Warren’s site regarding the funds for QEI that Bernanke famously described as changing numbers on the accounts at the Fed, but nobody replied. Regardless, the consolidated govt sector has to vertically “spend” one way or another.”
What it would be is a reduction in the Fed’s equity. Like when Warren suggested the ECB provide a $500B transfer on per capital basis to EMU national governments–that would have been a “grant,” and it would have been an increase in reserves on its liability/equity side and an offsetting reduction in its equity.
Hope that helps!
Scott, sorry to be a pain, I must be really bad at communicating this stuff. Please, bear with me.
Not exactly. First, household debt as a whole can be totally paid off, however unlikely this may be. But the real difference is that here we’re talking inter-sectoral debt – namely, b/w the govt and non-govt sector, while household debt is inter-sectoral.
OK, don’t call it NFA. Anon and yourself said that deficit spending is not needed to inject money into the economy. Let’s start at point 0. You have the CB and just one bank B. Now, no deficit spending occurs. Instead the CB loans $X to B. Fast forward to time t. Time to repay the loan to CB. Where can B get $X to do so? It only has the original $X loaned, so, it can give those back but then there is again no money in the economy! So, either CB rolls over the loan or additional $X gets deficit spent. What I claim is that this functionally is exactly the same. The govt sector still has to make the money available for the non-govt sector, it is just that in one instance it is called the scary word “deficit” and in the other it is a loan from the CB. Inflationary and so forth effects for the economy are exactly the same!
Right, understood. But suppose that all the ABS swapped in the QEI was totally worthless – all the collateral loans defaulted etc. Then the Fed just basically lost all that money. I think you answer this point here:
OK, does this reduction in equity have any real life consequences? Can the Fed go bankrupt? No, the Fed, as the issuer of currency can no more go bankrupt than the Tsy – actually, even less so, since it is actually the Fed that issues the currency in the current institutional arrangement. So, this reduction in equity per se is totally meaningless just as the deficit numbers per se are totally meaningless – the only real life consequences are inflationary in both cases.
In fact, reduction in equity for the CB is completely analogous to the deficit of the FA – if the CB and the FA were operationally consolidated then the two would totally conflate.
Above I meant to say “while household debt is intra-sectoral”
“Scott, sorry to be a pain, I must be really bad at communicating this stuff. Please, bear with me.”
No worries. Could also be that I’m just bad at interpreting.
“Not exactly. First, household debt as a whole can be totally paid off, however unlikely this may be.”
Assuming the household sector always pays cash to buy houses and cars seems like a huge stretch to me, at least in a capitalist system.
“But the real difference is that here we’re talking inter-sectoral debt – namely, b/w the govt and non-govt sector, while household debt is intRA-sectoral.”
No. I’m talking about the household SECTOR, whose debt would be held by the financial, non-financial business, and international sectors.
“OK, don’t call it NFA. Anon and yourself said that deficit spending is not needed to inject money into the economy.”
Just being picky, but better never to use the word “money” when you’re trying to be precise. It’s one of the most imprecise words there is. Along with “liquidity” and “liquidity trap.”
“Let’s start at point 0. You have the CB and just one bank B. Now, no deficit spending occurs. Instead the CB loans $X to B. Fast forward to time t. Time to repay the loan to CB. Where can B get $X to do so? It only has the original $X loaned, so, it can give those back but then there is again no money in the economy! So, either CB rolls over the loan or additional $X gets deficit spent. What I claim is that this functionally is exactly the same. The govt sector still has to make the money available for the non-govt sector, it is just that in one instance it is called the scary word “deficit” and in the other it is a loan from the CB.”
I generally agree with this. That’s why I always say (as above) “either a govt deficit or a Fed loan are necessary for the non-govt sector to pay taxes or buy Tsy’s.” I’m trying to equate the two, at least in some ways.
“Inflationary and so forth effects for the economy are exactly the same!”
I agree and disagree here, though the disagreement part could be the result of a miscommunication somewhere.
Disagree: This would seem to assume that a govt deficit and a govt surplus have the same effect on desired spending of the non-govt sector at all times. I don’t think there’s any chance that is true. Perhaps that’s not what you were intending to say, but your use of words makes it sound that way.
Agree: the loan is only to the banking sector to settle its payments and meet reserve requirements where applicable. It has no additional effect on the banking sector’s ability to do anything. And the qty of reserve balances provided would be the same with a govt deficit or surplus. The only slight difference would be the debt service paid by banks in the case of the Fed loan. Further, the CB’s that have used the “overdraft” approach weren’t somehow providing less stimulus compared to those using the “asset-based” procedure. Still further, my contention in principle 9 of my paper on the the general principles of modern central bank operations is that all of the systems are actually “overdraft” systems, for the most part, since even the Fed uses repo’s with primary dealers to add/subtract reserve balances on a day-to-day basis at the dealers’ banks (which would then be circulated to banks needing them via the fed funds market). Repo’s are a CB loan to the non-govt sector, which means that there isn’t even a debt service difference between the two approaches. Prior to Lehman, repo’s outstanding were greater than the qty of reserves in the US, so the US was clearly an “overdraft” system for the most part.
“Right, understood. But suppose that all the ABS swapped in the QEI was totally worthless – all the collateral loans defaulted etc. Then the Fed just basically lost all that money.”
That would be an increase in NFA of the non-govt sector, yes.
“OK, does this reduction in equity have any real life consequences? Can the Fed go bankrupt? No, the Fed, as the issuer of currency can no more go bankrupt than the Tsy – actually, even less so, since it is actually the Fed that issues the currency in the current institutional arrangement. So, this reduction in equity per se is totally meaningless just as the deficit numbers per se are totally meaningless – the only real life consequences are inflationary in both cases.”
Completely agree, obviously.
“In fact, reduction in equity for the CB is completely analogous to the deficit of the FA – if the CB and the FA were operationally consolidated then the two would totally conflate.”
Completely agree. I said exactly this in “Helicopter Drops are Fiscal Operations” 1.5 years ago.
So, Peter D, it sounds like we are pretty much in agreement. I think the disagreement was more a miscommunication, as I was interpreting your point as suggesting that a Fed loan in the case of a govt surplus was just as stimulative to the economy as a govt deficit. I don’t anymore believe that was the point you were trying to make.
Scott, thanks for much for your reply.
I actually was making this point, but now after reading your reply, I realize I was probably wrong and need to think about it some more
Interesting. I think the way to think about it is to separate the point you were making into to separate points, as I did above in my “disagree/agree” reply. You kind of (accidentally?) found your way into a rather specialized discussion on cb operations (“asset-based” vs. “overdraft”), and your insight was correct (or, at least, it’s the same conclusion I’ve reached, which I happen to think is correct, anyway).
Do I understand correctly that the difference in stimulatory effect is that govt deficit creates a corresponding deposit in the banking system which then can be used to buy stuff etc, while a Fed loan is only to allow inter-bank clearing (no stimulatory effect per se) and payment of taxes?
I am trying to think of it at point 0 for the economy with no cash, deposits or reserves (trying to be precise and not use “money”!) The govt has two options to jump-start the economy
1) Deficit spend by creating a deposit for the non-govt sector and a corresponding reserve balance at the Fed.
2) Tell the banks “create all your horizontal money and I’ll back it up by lending you the necessary reserves to clear and pay taxes with”. This option is a bit harder to think about. Suppose for simplicity we only have one commercial bank B, so, no reserves needed for inter-bank clearing. Now this bank B gives a loan to a customer C, which creates a deposit as we all know. Now when C needs to pay taxes, the Fed loans reserve balance to B, B reduces C’s deposit by the amount of taxes and the Fed reduces B’s reserve balance by the same amount.
Am I doing this correctly so far?
Yes, essentially. Note that (2) is effectively austerity in the current environment, or at least waiting for the non-govt sector to sort it out. But note that (2) is also equivalent in terms of stimulative effect (i.e., none) to letting the non-govt sector sort it out while the cb uses open market operations to purchase govt debt from previous years (i.e., there’s a surplus in the current year but a positive national debt) to ensure enough reserves are circulating for the banking system’s needs.
This is an enlightening point. So, while banks aren’t reserve constrained they are constrained by their dependence on the US governement’s willingness to create new dollars, right?
As Peter said, the creation of new vertical money is deficit spending and only vertical money can be used to create horizontal money. So, in a way, the banks are constrained by the deficit. Is that right?
Not quite. There is absolutely no need for vertical for banks to create horizontal money. As Anon pointed out, there’s no reserve balances at all held overnight in Canada. What is true, instead, is (1) the govt must “name the thing” that will settle a tax liability (Keynes referred to it as “the power to write the dictionary”), and (2) creation of horizontal money brings a short position in vertical money (even if none exists presently, as long as the “thing” has been named).
That’s very different from the suggestion that “only vertical money can be used to create horizontal money.” When you say those sorts of things, it sounds to many people like a version of the money multiplier, which is clearly false. MMT’ers have learned the hard way to be careful how we say things in our academic research.
Your point on taxes can only be satisfied with US dollars is not exactly correct. The IRS routinely seizes property (coconuts perhaps) of many types to satisfy tax liens.
Jim
And what do they do with the houses? That’s right! They auction them off for….USD.
TPC – nice responses to Mr. Murphy. For what it’s worth, Mr. Murphy seems like a pretty stand up guy. I have never met him, but he has engaged me on his blog a number of times very respectfully and was willing to give me a chance on his turf. He is, of course, like most Austrians (and Keynsians), blinded by ideology, but I’ll give him some credit for taking a stab at this, even if it was with a butter knife
Again, nice comments. Appreciate the time.
The way discussions are carried out here, shows nothing different – ideological blindness and dogmatism.
I am searching for the truth about the economy’ workinga and am willing to synthesize all schools of thought. This is not possible here though, which is really sad. So this site is not “pragmatic”, when it comes to economic theory, only when it comes to trading markets.
InvestorX
Twice you mention dogmatism here while providing no counterargument.
Sly Stone sang, “Different stokes for differt folks”. Agree to disagree. You say tomayto, I say tomahto. Unfortunately, we can’t call the whole thing off.
But this much is true. If a growing society has a propensity to save, money needs to be created from somewhere. My mother told me money doesn’t grow on trees (like coconuts). Our government does not drop money out of helicopters either. We are no longer on a gold standard or any kind of fixed exchange rate. We issue our own currency and all of our debts are paid in that currency. We have lot’s of resources, both natural and physical. All sorts of other countries also desire to save in our currency. In all these last few decades since 1971, we have yet to run out of currency.
I don’t think any of those statements are wrong. I am not an economist and have never played one on TV, but from my perspective, the MMT “operational realities” make perfect sense. Just my humble opinion.
Mr Roche-
My perspective is one that comes from understanding Austrian thought first, and finding your website and other MMT materials later. I have found both to be illuminating and a worthwhile lens analyze problems.
With that disclosure and caveat up front, I believe you are missing the bridge that could connnect your two viewpoints: the Austrian definition of savings is different but not imcompatible with yours/MMTs. I think a honest openminded Austrian would not argue with the math that Govt deficeit or net exports are required for the private sector to accumulate FINANCIAL assets. But the austrian view focuses on productive capital assets more so than financial assets. So, to close the loop by borrowing a favorite Austrian metaphor – If you burn the furniture, sure it will keep you warm in the winter, but then question then becomes, do the financial assets you accumulated in that time buy you new furniture of the same quality?
The way things are going now, and I have bought furniture lately, I say no.
Mr. Panza:
I think you raise a fundamental point. The Austrians are essentially supply-side economists. This is where you get coconut economies, etc. It also leads to confusing nominal and real, in fact inverting the relationship at times.
The biggest practical issue with MMT is behavior. In the real world and not one filled with coconuts, if every politician believed MMT as Cullen does do you truly think we would not end with hyper inflation? Cullen always says MMT is not about spending money with abandon (since the govt can spend at will UP TO a point of caustic inflation) but it does not take into account our (or most countries) political system.
Look at the level of spending we do even when 98% of the politicians truly believe they are driving the coun try into a wall long term. They wont cut anything of substance in that world. Do you really want to test them in a world where you say to them…you are allowed and indeed encouraged to spend and tax cut to your hearts content up to the point it becomes severely inflationary. A point Cullen cannot identify nor anyone can beforehand.
In what fantasy will these same politicians then go to their constituents and then RAISE taxes AND CUT BACK spending when the time is necessary and inflation begins to ramp severely due to their previous decision.
That is the missing part of all these theoretical discussions. And the only retort you ever hear is we need to put the right type of responsible leadership in govt so that does not happen. That answer is as fanciful as coconut island. The minute every politician changes to MMT theory is the day the path to hyperinflation is set in stone in. REALITY rather than in the economic textbook where you have rational thoughtful leaders rather than a bunch of skunks who care only about a reelection cycle.
And I have not even touched on the american people,95% of which will cry afoul if anyone raises their taxes or cuts a progra, they benefit from because some economic theory calls for it.
nottpc:
Your argument has some merit,(venal politicans, self-interested voters, and I would add, a very complicated monetary system to understand) but I would counter with:
Is it better to operate a nation’s economic system on a false belief, trusting that ignorance will result in better outcomes, or;
It is better to to operate a nation’s economic system on an actual description of the operation of that system, and hope that the democratic system selects reasonable policies most of the time.
A bedrock belief of the America system says that it is better to have an educated population, entrusted with universal voting rights, to arrive at an optimal system of living.
Nobody expects perfection.
Yea, would be better if the electorate were educated enough to know when the govt is heading towards inflation, and why, so that we are the leash on them. I’ve heard too many times the complaint against MMT b/c people would abuse it. I’m sorry, how does that affect whether it works or not?
A government constrained in size and power by limiting its spending capacity is not a democracy.
nottpc,
The problem you describe is a political accountability problem. It isn’t going to be fixed by any view of economics and money. You expect too much.
While I appreciate the impassioned defense of MMT and against the conventional wisdom, I wish that someone would make a similar plea against the faulty economic paradigm of the Federal Reserve. I have seen it some on this site, but it needs to be done more broadly. The fact that a Board of unelected officials has such power of the US economy, while executing an incorrect and misguided view of economics is frightening.
Where is the empirical evidence to suggest that zero interest rates promote lower unemployment? Without this facet of the Fed’s mission (i.e., full employment), their current monetary stance is indefensible. Yet during his press conference, Bernanke said in as many words that the Fed has limited ability to effect long-term unemployment. By extension, rates are low because unemployment remains high, yet rates have little effect on unemployment. Thus we are eroding savers and thereby damaging our nation’s ability to prepare for the coming Baby Boomer retirement, promoting speculation over investment, and lowering real wages.
The same people who (rightly) complain about stagnating income for the middle class and the bifurcation in real wages growth over time for some reason also support ZIRP and QE2 based upon the premise that as long as there is no wage inflation that the Fed may as well be as aggressive as possible monetarily. But flat wages combined with higher commodity prices means lower real wages by definition. Why exactly is this good?
Lastly, where is the empirical evidence that an activist Fed and unnaturally low interest rates promote economic strength? It certainly hasn’t in Japan and evidence in the US suggests that the move to monetary Keynesianism has coincided with a loss of jobs and a decrease in capital investment in the US. Yet the response of Bernanke and his ilk is that the problem here (post-1929) and in Japan more recently is that we did not do enough and that it did not occur fast enough. This is an unprovable counterfactual and a built-in retort to any complaints that their failed policies are not working. If the Fed fails, then people like Krugman will simply state that the problem was that QE2 wasn’t big enough. It won’t be because the policies are intrinsically wrong and completely lack empirical evidence for ever having succeeded.
I have no issue with QE, given the prevailing circumstances at the time. But now we have moved from “crisis” mode to ongoing policy. Yet, if anything, the commitment to even more radical policy has only increased. Given this failed Fed paradigm and the fact that it will be defended ideologically by its purveyors as successful in theory with the only failure being that it wasn’t done aggressively enough, how do we break the cycle and move onto a more prudent policy that actually has the possibility of success?
There needs to be a real debate about Fed’s paradigm, yet most of the economic/financial profession seem to be in support of it–some for largely selfish reasons (e.g., Wall St who loves the effect of said policy on their bonus pool). It has become accepted wisdom that much of the fight for political ideology has had to be done through the courts by appointing like-minded judges. Perhaps we need a similar fight through appointees on the Fed Board of Governors.
I spend 50% of my time here decrying the Fed….stick around for a while….you’ll get your fill of Fed hate.
For me though, I am not really talking about decrying the Fed per se. I am wondering why there are so few voices challenging the very premises upon which they make their decisions–essentially their fundamental paradigm. There are people like Ron Paul who want to outlaw the Fed. There have been some murmurs on the Right about trying to eliminate the dual mandate. But I see very few people challenging the economic principles upon which they operate. The only one that really comes to mind is Doug Noland. There are others, but most of those have a selfish ideological angle they are pursuing, as opposed to a true intellectual disagreement. And as long as the opposition in ideological, its hard to see change occurring until the current methodology fails spectacularly.
The reason I brought this into an MMT thread is because I respect Cullen’s attempt to win people over to his viewpoint through constant debate and discussion done so in a constructive way. While I do not agree with all of MMT, there is much of it that I am willing to accept as true following lots of reading and debate.
On the other hand, I see almost no debate or constructive discussion about the Fed’s belief system and the principles that they hold to be true which underpin all of their actions. Ideological discussions sometimes, but really very few questioning the empirical evidence supporting or disputing the efficacy of their actions. How can we have a Board of Governors at the Fed, in which even the so-called hawks are unwilling to vote for any rate normalization? There is such broad consensus that even the dissenters are not really dissenters–they simply believe in lower degrees of the same ideology of interventionism and easy money.
How do we productively move forward from here when that is the case?
I’ve done a huge amount of work on this within my QE work. And the foundation of that is a belief that the Fed’s existence and involvement in the market is an extension of flawed monetary theory and policy.
Cullen,
I know you have addressed the Fed in many of your discussions on QE2. In your opinion, how can this debate be advanced to a point at which it becomes something more than a fringe belief. You have done great work advancing you MMT ideas through discussion and debate. And there seem to be others on other blogs advancing MMT to others.
How can we do the same with the debate over the Fed? not just its actions, but the flawed nature of its underlying ideology and belief system. When people criticize the Fed’s action, its just written off as arm chair quarterbacking. What I want to see is a debate over the the Fed’s failed view of economic and monetary policy.
Bernanke has almost single-handedly re-written the history of the depression such that it is widely held that it was caused by central bank mistakes and inactivity. And then he uses this view to justify all that he does to day. It is misconception built upon misconception. Yet economists, academics, and financiers of all political stripes seem to have bought into the Greenspan/Bernanke view of the central bank. And as long as this is prevailing thought, we will just get more Governors with the same belief system.
In my opinion, this is the single most important economic issue facing our country today.
Very well said, Ryan.
Go see the MMT publications at http://www.levy.org. There are literally dozens of pieces critical of the Fed there. Bill Mitchell’s academic research published on his CofFEE site does so, too.
keynesian economics is like socialism. its a great system, it just has never been implemented in the right way.
lol.
It seems several people on this blog believe that Govt Spending is generating inflation but I think the current rise in commodity prices are due to govt spending but due to banks speculating in the futures markets.
Right.
“Unfortunately for those of us that live on planet earth in the USA, we must transact in USD. Why? Because we live within the organized society that our forebearers designed for us and what we call the United States of America. When they designed this society they created a common currency. And in return for specific benefits of this society they created a tax liability that was only payable in the currency of the USA.”
That is wrong and misleading.
In the field of taxation the idea of America started to be lost in the late 19th century. A temporary federal income tax was first created only in 1862 to finance the Civil War and extended twice, it died in 1872 but was re-adopted by congress in 1894, only to be ruled “unconstitutional” by the Supreme court in 1896. In 1913 the sixteenth Amendment legalized it. Financing wars was the original and only reason for taxation.
Originally when one starts thinking about America’s real government origins one is immediately confronted with the most beneficial paradox in history which was a respected state trusted to protect the right of individuals to distrust it.
The coconuts are only used a analogy just like you use your little isle where some produce goods wile a few print a fiat currency and conveniently live at there expense.
You might want to review the history of US taxation. The states have always had the power to tax property. So your focus on the income tax is missing the forest for the trees.
States do not print money.
And who said the system should remain so? Who said there is no better system? Who said there SHOULD be no discussions of a different system?
Oh wait, the current system is a chartalist’s dream, so yeah – protect the status quo and dodge any notions of a discussion of a different system! Very progressive, Cullen, very democratic!
InvestorX
What? I complain about the system every day. No one ever said it was perfect. Are you here to have a real discussion or are you just becoming a nuisance?
Sancho Panza goes to the heart of the matter: the Austrian theorem is that currency serves no other purpose than to reduce the friction costs of barter exchange. Excessive governments intervention in markets – credit markets, goods, services, you name it – can only come at the expense of ‘real’ savings because by definition, governments cannot create wealth. Real savings are the pool of productive assets – the furniture – that governments nowadays seem hell-bent on destroying by, for example, bailing out any banker, broker or even country that squeals because of its own recklessness, but there is a legion of further examples. MMT appears rather vague when it comes to addressing these fundamentals.
> by definition, governments cannot create wealth
whomever wrote that never heard of “auto-catalysis,” “social species”, tribes, nations, corporations, thermodynamics, return-on-coordination or even reverse-entropy;
How silly of the rest of the world not to recognize that they’re all wrong & that the Austrian logical “meanderthals” are right.
Also, the author must not have heard that the government is us? Guess it’s not in Austrian land?
MMT is the correct school for describing the functioning of the modern monetary system. Kudos to TPC for schooling all of us in the particulars which many times are anything but straightforward.
However, this also needs to be tempered in that the comparison to a monetary alchemist is not exactly on point. An alchemist actually creates a good that everyone universally values.
For now, the dollar is similarly valued. When we start seeing a rejection or unilateral repricing in goods with our trading partners, that is when the jig is up. And I would humbly suggest that we are seeing moves in that direction right now.
Deficits and debts matter. And anyone who espouses a MMT position and yet does not recognize that fiscal insanity will eventually destroy us (and I mean in the next decade) has no idea what they are talking about.
Are you prescient11 because prescient 1-10 ‘s predictions failed?
what a genius comment.
You picked too easy of a target. The Austrians pilfered all of the money definitions from the Chicago School.
When you fall in love with the yellow metal, it is easy to confuse the nominal with real.
I think the best way for the average person to think of MMT is as a flows model, where the Austrian concepts are normally interested in the stocks model (resource allocation). MMT accounts for financial transactions, whereas Austrians account for the follow-on effects of those transactions.
Now, Wynne Godley and others developed what they term a stock-flow consistent model. But i still contend once the flows are accounted for, the long-term effects are going to be determined by how well an economy allocates its resources according to its desired goals. And this is why the Ausrians always have a good point. The economy-wide market system is constantly assimilating information based on micro-oriented choices, so that in the aggregate prices are a better signal for allocating resources than 10 guys sitting in a room who have no way of knowing what the economy demands and needs to supply at given intervals.
So it gets back to the age old debate about who best allocates resources — the economy itself or 10 guys sitting in a room. That is, the market or the government. And I suspect the Austrians have an allergy to government intervention because they understand the historical pattern of government tyranny and misallocating resources. At the same time, it may prevent them from having an open mind for learning new things about how the modern monetary system actually functions. Policy choices are separate from the system.
I have no problem with a smaller govt. It’s not at all incompatible with MMT. I have a serious problem with Mr. Murphy’s unrealistic belief that we could have zero govt.
I do have a problem with smaller government because most of the arguments made against it are fraudulent lies.
Really what these people want is the ability to extort one sector of the economy at the expense of others. Or create a tribal system (Afghanistan) where THEY are the ones in power.
The world is complex the US in complex deal with it. Government needs to be large enough to be effective and to be effective it requires some size in some cases.
The Austrians seem to think that money grows on trees like coconuts. In addition, they make up their own definitions and accounting rules. They are in a non-parallel universe. There is no sense arguing if you don’t agree on what economist generally accept. Maybe they can create a country somewhere to see if their ideas actually work.
“The economy-wide market system is constantly assimilating information based on micro-oriented choices”
Except from those with choices but no money to generate the necessary market information, ie those in poverty.
Which causes the system to under-produce ‘needs’ and over-produce ‘wants’.
The current system has faulty signalling which means that it is driving along with the brake permanently on. Yet that wasted effort is sorted very quickly once you realise that the currency issuer has to balance everybody else’s budget, not just their own.
Their ideas are in full force in many African countries. Perhaps Bob Murphy would like to forego his comfy home, modern computer system, etc and run around the African desert for a few months? It’s like all these people who claim that austerity is so great. Oh yeah, quit your job and move to Greece, try to get a job and report back in 6 months. Tell us how you feel after you can’t feed your family.
I don’t think America is perfect. There are lots of problems right now and there are lots of things that need fixing, but in less than 300 years we have created the most advanced and prosperous nation that man has ever seen. And there is an entire segment of the population who wants us all to believe that the world is this horrible place that needs to be drastically reformed. Meanwhile, Bob Murphy is sipping a chi latte somewhere reviewing the comments on his new computer with the AC blasting on his face. What a life these guys all have ! They make millions scaring people into buying their books!
Cullen, since USD is dominant world reserve currency and since World Trade (and thus dealings in dollars) has exploded over past decade, the question is “How do all those dollars get created for other countries to use”. How does this aspect impact MMT?
Thanks Cullen….so presumably the risk once again reverts to “value-integrity” of USD….depreciation of USD and inflation.
I invariably appreciate your writings and insights.
Trading with the U.S. doesn’t preclude China from getting rid of Tsy’s, right? It’s just that they are earning interest with Tsy’s as opposed to holding USD. But if they did want to get rid of Tsy’s, what would happen? I don’t see why that would “close trade” with the U.S.
Think about it logically. If they are going to continue to accumulate USD via foreign trade then their only real option is to buy USTs. They can try to buy Chevron again if they’d like, but we all know how that ended. So, if they really want to eliminate their UST holdings they need to eliminate all future foreign trade with the USA. Not gonna happen.
Quote:”In fact, they’re dependent on us for growth via trade so we actually have them over a barrel.” Hahaha, this is very funny
I guess you’ll still find economists from the british emire out there arguing like that.
Sorry. I do realy not hope that the US is declining like the empire. But one has to be careful.
If the example of the coconuts learns us something, then it’s the fact that you need savings (or higher productivity – which is at the end the same) to progress. If the Chinese have huge amounts of savings they can progress. It doesn’t necessarily mean that the US is declining, but it might be that the US stands still – which is in the long run the same.
I can’t see any one ‘over a barrel’ here. And certainly not the biggest creditor in the world. Remember, only 40 years ago the US was the worlds biggest creditor. It replaced the british empire.
Britain collapsed because their economy started to stink it up. The declined because they stopped competing at a level with other countries. Do you really think the USA is declining or do we still have all the best companies, etc?
Britain collapsed because their economy started to stink it up. The declined because they stopped competing at a level with other countries. Do you really think the USA is declining or do we still have all the best companies, etc?
Well I do not think and hope that the USA is declining but it might stand still and therefore other countries (most likely China, Brasil… probably India one day) will move closer or overtake the USA in some sort (for now I think only economically but not military power). Unfortunately many goods today are made in China (whereas 40 years ago most was made in USA) and the US can not compete with industrial goods either (like Britain) today.
The US went from the biggest creditor to the biggest debtor. But as I mentioned you need savings (or rise in productivity) to invest and therefore to progress. The declining savings moved industry out of the US to cheap countries like China and India. The US is only the biggest economy because it is the biggest consumer – not producer any more.
But I really believe in innovation in the US and that these processes (decline of industry) can be turned around.
Absolutely correct Dave. US went from a net wealth crator to a net consumer and is declining relative to many other coutries. Trade with China is not only a positive, as it allows for the gutting of American industry and middle classes, as describe by you.
And what is MMT’s take on that – oh we have a C/A deficit, so we should increase the budget deficit. This is a pure accomodation of the foreign deficit, allowing America to overconsume and feel ok for a while at the same time. The problem will not come from the Chinese dumping of UST, the problem will come from a weaker and weaker US REAL economy. Accounting identities are just that – they do not show you the correct policy with regard to the variables.
InvestorX
Well I do not think and hope that the USA is declining but it might stand still and therefore other countries (most likely China, Brasil… probably India one day) will move closer or overtake the USA in some sort (for now I think only economically but not military power). Unfortunately many goods today are made in China (whereas 40 years ago most was made in USA) and the US can not compete with industrial goods either (like Britain) today.
The US went from the biggest creditor to the biggest debtor. But as I mentioned you need savings (or rise in productivity) to invest and therefore to progress. The declining savings moved industry out of the US to cheap countries like China and India. The US is only the biggest economy because it is the biggest consumer – not producer any more.
But I really believe in innovation in the US and that these processes (decline of industry) can be turned around.
There is a frighteningly high level of common sense in everything you write Cullen. Thanks for seeing the world so clearly and passing that vision on to the rest of world – much of which appears to be blind.
TPC, … reading Krugman’s book on a real world example of monetary policy in a micro-economy (the Whitehouse babysitting pool), it’s clear you don’t need spending. At the minimum you need a credible authority that will create and lend babysitting chits. Perhaps the disagreement between you and Mr. Murphy, is simply, he is saying you don’t **in principle** need to spend, whereas you are saying “that’s the way we do it in practice” (in practice means, the gov spending [like gov debt] is the price setter or reference).
At the minimum you need a credible authority that will create and lend babysitting chits.
And when it injects those chits into the economy, what do you think it is called? It is called deficit-spending.
To be clear: when you say “lend” you presume it will later collect on the loan. But if your credible authority is the only source of chits in the economy, then it can collect only on the things that it itself creates prior to that. So, on the whole, the only way the chits can be repaid is by deficit spending of the authority. It is really simple.
This is an excellent illustration of how semantics is the crux of the debate above. Your position is perfectly correct, but it doesn’t make mine incorrect.
I would characterize the chits as the government’s collective reflection of society to formalize what we would do one-on-one. For example, if I babysit your kids this Fri, you’ll sit mine on Sat. We both go out and have a good time. I would not call this deficit spending, it’s a barter.
You would say, the government creates a social program called USBabeSit and issues BabeStamps which are paid for by taxes paid with BabeStamps. It enforces one to do their share of babysitting because we need to pay those stupid taxes.
This program is funded by “deficit spending”.
I think MMTs can also sound a bit too arrogant by saying “it is really simple”. If it is so simple why can’t thousands of PhDs agree? The answer: academic bickering on semantics, and arrogance. But, I guess I don’t have that privelege as a non-econ-PhD.
Sorry, jt26, where do we disagree exactly? If you babysit for your neighbors and they babysit for you then indeed no deficit spending needs to occur and this is a non-monetary setup. Impractical for large scale economies, bla-bla-bla, we all know.
Now, you admit that an authority that established the chits needs to deficit spend them in your next paragraph. So, where is the disagreement again?
We don’t disagree in the mechanics; it’s semantics. I would not call this microeconomy necessarily deficit spending.
If USBabeSit gave everyone one voucher at the start of every month, then required a tax of one voucher at the end of the month, then there is no deficit spending … I would call that 1 month of “working capital”, but again that is a question of semantics.
BTW I didn’t make any comment about the practicality in large systems.
jt26, how does actual deficit spending differ from your USBabySit example that warrants a different name?
TPC, … BTW you should put a “no coconuts” logo (i.e. red-slahed coconut) on your site. Sweeeeet …
CB = Coconut Bank
)
Robinson Crusoe’s coconut surplus equals CB coconut deficit, by definition.
I second that.