Just passing this comment along from the always excellent blog of Steve Randy Waldman.  He touches on MMT today:

Hi Steve,

Nice overview. I like how you’ve attempted to generate a discussion rather than an attack and defend style approach. It’s much more conducive to productive debate. Anyhow, I’ve covered most of these topics on my site. You might be interested in my treatise on the subject (link below). I approach MMT from a (free) market practitioner’s perspective so it’s much more sympathetic to the austrian school. Although I am not an austrian I do sympathize with many of their beliefs – particularly when it comes to govt overstepping its boundaries. I do, however, recognize that some level of government intervention is not only necessary, but quite useful. So, I think I am straddling more of a middle ground when it comes to the Austrian vs. Keynesian debates that MMT often devolves into….

Anyhow, my initial thoughts:

1. I prefer fiscal policy over monetary policy because of the channels through which they function. Monetary policy is most effective when it benefits the banking system. Our banking system is a system which produces little, but takes much. Yes, it is a vital component, but it is not the engine of economic growth.

The US economy is at an interesting juncture here as 30 years of monetary policy driven focus has resulted in a massively indebted household sector. I don’t have the time to get into the nitty gritty here, but I would argue that the flawed theories of the 70’s are largely to blame. A multitude of factors have resulted in an increased role of the Fed, explosion in the size of the banking sector and a shrinking middle class and imbalance in household balance sheets. The current predicament can be traced back several decades in my opinion. So, it’s not necessarily that fiscal policy is some holy grail (or that monetary policy is useless). It’s that monetary policy can be detrimental when it is relied upon too heavily. Fiscal policy, on the other hand, can be much more focused and precise in its efficiency of distribution – assuming it is applied effectively. The last 24 months certainly prove that fiscal policy can be allocated poorly. So it’s no holy grail…

2. This is a political constraint. Not an operational constraint. The level at which the public rejects the sovereign currency is hyperinflation. That is a very different phenomenon than inflation or even “high inflation” in my opinion. You might be interested in my thoughts on this subject:

3. Yes.

4. The real value of money is in the underlying goods and services that that money can purchase. I like to think of the tax system as “the glue that binds”. Think of it like a partnership between govt and pvt sector. We all agree to use this common currency with the assumption that govt will properly regulate its supply in accordance with its demand. If either party breaks their part of the agreement the other party can reject the currency. I’ll copy and paste from my treatise:

The willingness of the consumers in the economy to use these notes is entirely dependent on the underlying value of the output and/or productivity, the government’s ability to be a good steward of the currency and the ability to enforce its usage….The government cannot force the “value” of its currency on its citizens. The value of these notes is ultimately determined by the goods and services that are produced by the citizens and the value that other citizens are willing to pay for these goods and services. Therefore, government has an incentive to promote productive output. Otherwise, they risk devaluing the currency and possibly threaten the stability of their currency system. Paying its citizens to sit at home doing nothing, buy cars they don’t need or purchase homes they can’t afford are unproductive forms of spending (sound familiar?). If government is corrupt in its spending and becomes an institution that is mismanaged and detracts from the private sector’s potential prosperity then it is only right that the citizens revolt, denounce the sovereign currency and demand change.

5. Again, I think we’re veering towards a hyperinflation discussion. See above.

6. Don’t necessarily disagree.

7. Again, I view the tax system as the glue that binds. A breakdown in the tax system results in hyperinflation and hyperinflation is the result of exogenous forces discussed in the paper above.

8. Yes. If the tax system collapses the gig is up.

Thanks again.




Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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.

More Posts - Website

Follow Me:

  • DH

    Your SSRN download failed to work.

  • Cullen Roche

    Works on my end….

  • Obsvr-1

    yes, this was a good read and critique. The concern over the “prickliness” of the blogosphere is true across the blogosphere. I find TPC to be a great forum, fantastic discussion threads and a generally “un-prickly” group, and Cullen having the patience of Job.

    ***** from the article

    I’ll end with a few miscellaneous comments:

    * I’d like to see more attention paid to quality-of-expenditure concerns. …

    — reply: I agree with this point, this is a subject that causes a lot of angst and debate. “If gov’t can spend virtually without restraint, the sky will fall, everyone will lose confidence in the money, foreign investor will flee, hyper-inflation will ensue etc, etc.”
    However, it is difficult to take on every topic when trying to educate on the monetary foundation (MMT). Not to say that the economic, political and social issues are not interesting or important, they are, but not understanding the fundamentals of the underlying system causes much debate, tangents and churn.
    Unfortunately the public is inundated with FED speak; economist infighting; endless statistical and analytical misrepresentation; information overload; MSM hyperbole and political bias; and endless Washington political wrangling which keeps the public in a confused or distracted state. (Could very well be the plan by the “insiders”)

    >> Should we rely on legislators to make direct public investment choices? Should we put funds in the hands of individuals and then allow consumer preferences and private capital markets to shape the economy? How? Via tax cuts? A job guarantee? Direct transfers? ***** Perhaps the government should delegate management of public funds to financial intermediaries, and rely upon banking professionals to find high value investments? ****
    — Reply: This is the scariest sentence in his entire article !! I hope he was being sarcastic. That would be a disaster if it became the adopted policy, as we know, the FIRE and other sectors has a virtual lock on the body politic using lobby, campaign contributions and the revolving door of plutocratic incest.

    Great post !

  • SS

    I have to admit – i am super disapponited in SRW’s effort here. I read the first few paragraphs expecting a tour de force debunking MMT. But he did wht everyone does and built a strawman. All that effort for nothing. You shouldnt have even bothered responding.

  • JWG

    Intelligent and thoughtful critique that was sharp but not strident. This sort of critique prompts a thoughtful rebuttal and results in improvement of the underlying thesis; SRW is doing MMT-ers a favor. A closed system focus and an underweighting of the variable of human behavior seem to me to be MMT soft spots.

    In terms of doing MMT-ers a favor, I wonder what TPC sees coming over the next 90 days or so. Will QE2 end on schedule? If it does, will this be deflationary in effect (equity values down; fixed income values up); inflationary in effect (equities up in value; fixed income values down) or just a wash because the Fed’s balance sheet won’t actually start to shrink? So far, TPC has generally been on target and the inflationists and deflationists have both been wrong.

  • BK

    Can you provide your thoughts please on what he said near the end?

    “•MMT-ers sometimes blur the distinction between “private sector net savings”, which is necessarily backed by public sector deficits or an external surplus, and household savings, which need not be. In doing so, MMT-ers rhetorically attach the positive normative valence associated with “saving” to deficit spending by government. This is dirty pool, and counterproductive. The vast majority of household savings is and ought to be backed by claims on real investment, mediated by the liabilities (debt and equity) of firms. There is no need whatsoever for governments to run deficits to support household saving. When household savings increases, an offsetting negative financial position among firms represents increase in the amount or value of invested assets, and is usually a good thing. Household savings is mostly a proxy for real investment, while “private sector net financial assets” refers to a mutual insurance program arranged by the state. It is a category error to confuse the two. Yet in online debates, the confusion is frequent. Saving backed by new investment requires no accommodation by the state. It discredits MMT when enthusiasts claim otherwise, sometimes quite aggressively and inevitably punctuated by the phrase “to the penny”.”

  • Peter D

    The discussion there is also great, with the two heavyweights Scott Fullwiler and Nick Rowe getting to the core of MMT view of fiscal sustainability. This point is so basic, I am surprised that (a) it is not presented in a clearer, more accesible detail in MMT blogs and (b) that it is only now that such people as Nick Rowe are actually getting to it – even after spending all the time on Winterspeak etc. Seems like the fault of MMTers for failing to make their case clear and the fault of the critics for failing to ask the right questions. The whole Krugman post wouldn’t be there if the MMT view of fiscal sustainability was presented clearly from the get go. Instead the MMTers are spending to much time on splitting hairs between insolvency and currency debasement.

  • Scott Fullwiler

    I wrote 25k words explaining the MMT view on fiscal sustainability back in 2006, so it’s all there for anyone who wants to actually look. It’s also been linked to dozens of times in posts and comments. I would agree, though, that blog posts haven’t generally discussed this–as far as I can tell, my paper is the only MMT output that actually gets at this issue from the IGBC perspective, though Bill has addressed parts of it a few times.

  • Scott Fullwiler

    For those that don’t want to wade through the paper, the PPT is here, from 2005:

  • Peter D

    Scott, sure, but think of it: the paper is not even in the Mandatory Reading on Warren’s site.
    And sooner or later anybody learning of MMT would want some view on fiscal sustainability from MMT. Why not create a short version with some bullet points and put it prominently on MMT blogs? One doesn’t need 25K words. Just as you explained to Nick Rowe and a shorter than even the more detailed rebuttal to Krugman, like:
    – The orthodox view on fiscal sustainability is
    – The MMT critique is:
    Links to more detailed expo:
    The fact that such critical piece is not prominently featured is a real oversight, I think.

  • Scott Fullwiler

    Completely agree. I’ve never been able to convince the others that the core issue is the interest rate on the debt and how it is set, not the fact that the govt spends by crediting bank accounts.