MMT FOCUSES TOO MUCH ON REALITY?
One of the greatest strengths of the MMT approach is that it is not based on theory or mythology. This is why I often say that the name can be misleading. The core of MM “Theory” is just a description of our fiat monetary system’s “Reality”. When MMTers discuss the actual operations of the monetary system we are not theorizing. We are discussing the actual operations. This is why we reject so much of the economics that is taught in textbooks predicated on defunct gold standard beliefs and the thoughts of men and women who have never actually been involved in monetary operations or the mechanics of what makes an economy and/business work in the real world.
And therein lies one of the great problems with modern economics. It is based too much on pie in the sky thinking and not based on what is happening on the ground, in the trenches. Warren Mosler, widely regarded as the founder of MMT, created the theory because he was in the trenches and recognized that what his textbooks taught him did not reflect the reality of the operations he was involved in on a daily basis. And while no economic theory is perfect, I think this is by far MMT’s greatest strength. We can all theorize about how best to implement our conclusions from MMT, but the heart of the operations of our autonomous currency issuing fiat monetary system are undeniable.
That is why I am astounded by recent comments such as Scott Sumner’s, who today writes:
“I wasn’t able to fully grasp how MMTers (“modern monetary theorists”) think about monetary economics (despite a good-faith attempt), but a few things I read shed a bit of light on the subject. My theory is that they focus too much on the visible, the concrete, the accounting, the institutions, and not enough on the core of monetary economics, which I see as the ‘hot potato phenomenon.’”
That’s exactly right. We don’t create Crusoe Islands (as Robert Murphy does) or monetary systems without banking systems (as Sumner does). We are working within our reality and applying analysis and solutions based on that which is visible, concrete, provable through accounting and obvious through the institutions who implement these operations. If you want to know why we’re in this current mess look no further than the thought process above which claims that we need to focus less on reality and more on mythology. They got us into this mess and now we’re all sitting around waiting for them to get us out. Meanwhile, those of us working in the trenches in reality just get ignored…..
* For the record, Mr. Sumner’s other concerns are important and he has some excellent contributions to the current thinking which I believe are worthy of further comment at a later date.
Cullen,
You give Sumner way too much credit. I’ve been hanging around his site for the last few weeks and he is in way over his head. It’s kind of amazing that he is one of the more widely regarded economists out there today. I mentioned this the other day, but he told me he doesn’t understand modern banking:
http://pragcap.com/is-the-balance-sheet-recession-view-inadequate/comment-page-1#comment-65338
Unbelievable! Now this comment. Amazing!
Sumner is _not_ one of the more widely regarded economists today. The only reason anyone has heard of him is because of his blog.
“I wasn’t able to fully grasp MMT”. Then why are you even bothering to write about it?
Would it be fair to say, Cullen, that MMTers see the world as it IS whereas the likes of Murphy and Sumner see it as it WAS or how they believe it SHOULD be?
I’m afraid that even if this is the case, it will be difficult to sway the opinions of subscribers to their philosophies because it is nearly impossible to prove them definitively wrong in a way that will satisfy their logic.
I think that’s pretty accurate. Sumner likes to create models that remove the banking system from the equation. Well, I like to remove the other team from the field when I am strategizing sports. That doesn’t mean my strategy works!
Murphy creates his theory around a world that he envisions (a world I think is 100% unrealistic) as opposed to a world that is.
If nothing else, I am pragmatic. True to the name. Are we going to live in an anarcho capitalist world as Murphy desires? Are we going to eliminate the banking system as Sumner’s models often do? No….
When Sumner removes the banking system and talks about injecting currency in the non-bank sector, he is talking about a fiscal operation. But he doesn’t understand that. He then adds the banking system in, and in his mind, when the bank adds currency in, it’s the same thing. We just have to show him NFA goes up in the first, and not in the second, and that’s why it’s not inflationary from “the money view.” And Scott F has plenty of additional explanations for why it isn’t (see his latest “QE3 Treasury Style” post). Only once Scott Sumner understands this, can he begin to challenge what MMT has to say.
Exactly! I think Sumner is having trouble getting past everything he was taught in school about how the Fed can always changed the money supply. This recession proved pretty clearly that that’s not true. I think his idea about using NGDP futures contracts is pretty interesting in theory, but it’s not as clean in reality as he thinks.
BTW, the title of this blog is gold. Or should I say “fiat?”
BTW, did you see this article http://www.project-syndicate.org/commentary/shiller78/English ?
AWESOME. Great compliment to MMT work. Has there been any interfacing with Shiller? That seems to be an open-mind.
Robert Shiller is pretty on the ball. According to Dirk Bezemer, he was one of the few economists (along with Wynne Godley and Michael Hudson, among others) who predicted the housing crash and ensuing recession.
http://seekingalpha.com/article/148232-no-one-saw-this-economic-crisis-coming
He make a point in his linked article that is worth pondering…
“Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP?
That would clearly be nonsense. After all, debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. There is nothing special about using a year as that unit…
We should remember this from high school science: always pay attention to units of measurement. Get the units wrong and you are totally befuddled.”
This reminds me of how Obama famously short-changed his own stimulus package because of politics (Roemer’s $1.3 trillion estimate was off the table because it contained that terrible word, “trillion”). However even though most economic stats are annualized (inflation, budget deficits, GDP), Obama’s $800 billion package was for TWO years (and some of it still hasn’t been spent). Why on God’s green earth didn’t they unload it all the first year– ideally with a trigger mechanism to continue the stimulus “if” [i.e. when] unemployment was still too high? The headlines wouldn’t have been any worse and yet the stimulus would have been twice as big.
Is there an adequate response to his question about the price level? There’s got to be a paper out there. An abstraction or not, I’m confused on the issue too.
Y, try this as well:
http://heteconomist.com/?p=756#comments
Thanks rvm, that link is really great.
Yes, that one’s very good. I’d missed that, so thanks for the link.
I actually explained the MMT theory of the price level in my post–I called it the theory of AD just out of habit because of past discussions with my Post Keynesian friends.
In the most theoretical terms, though, it’s that the monopoly issuer of the currency obviously sets the price of the currency. In practice, it’s about the quantity of net financial assets relative to net saving desired by the non-govt sector. In that sense, we are qty theorists; we just think the monetarists have the wrong aggregate (NFA vs. monetary aggregates).
Okay, this makes sense. So the answer to Sumner’s question regarding an open-market purchase (Why do we abbreviate to OMO or OMP? Typing’s easy and it’s not like we’re saving ink.) is “The effect on the price level of that modification in the term maturity of net financial assets, in the absence of financial intermediaries as exist in the real world, depends on the reaction of the bondholders to the sale.” Or something like that?
Y, try this:
http://moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/
I just read Sumner’s post and have to admit I hardly understood what he was talking about. Not being an economist, I clearly clack the toolkit of ideas and mental shortcuts that should allow me to understand his concerns and ideas. That said, it really feels on my dilettantish level that this toolkit of his is actually too elaborate and complex, making him miss the forest for the trees.
I think part of the problem is MV=PY itself. We’re dealing with an equivalence of one ill-defined variable, two variables that don’t really exist and one variable that’s everything we do in a year. You almost want to reply to the price level question with, “It’s the summation of all price changes dating back to the first Sumerian grain purchase.”
(a) “the core of monetary economics, which I see as the ‘hot potato phenomenon.’”
From a quick perusal of his site, I couldn’t figure out what he meant.
(b) “… MMTers think about monetary economics” … again it’s not clear whether MMT has any policy prescriptions, assuming that’s what monetary economics is, (according to TPC, it just describes the mechanics?) … so what is he arguing about? It might help the MMT camp if they clarified this.
E.g. mechanics = water falls by gravity; policy is I wish to harness electricity at the expense of destroying a water habitat
http://www.scribd.com/doc/60414275/George-F-Warren-Farm-Economist-by-Stanton
“When FDR won he ignored Wall Street and turned to an economist named George Warren, who convinced him that monetary policy wasn’t about banks, it was about determining a path for the price level, for the value of money”.
Reading Warren will help understand what Scott Sumner is writing about.
What is it with that name “Warren” and its connection to brilliant money?
Many of us are trained in the same thing Sumner is and understand him perfectly well. The same cannot be said of him. He clearly states that he does not understand where we’re coming from.
The deceitfulness of riches: MMT is common sense in the midst of a con game. I’ve seen the lies in other systems as well. There is always a status quo. A commonly accepted ‘truth’(with its worshippers) that gets changed down the road. Just the other night on the TV program “Through the Wormhole with Morgan Freeman” “How the Universe Works” they showed how quantum mechanics is reconciled with ‘reality’ They created a real world example of particle-wave duality and I watched real world individual ‘drops’ go through a double slit in slow motion. It was absolutely amazing. A paradox to me just means it is not fully explained. I always wondered if anyone had tried the double slit at zero degrees kelvin. In other words I wondered if there was something similar to vibration(cyclical electron movement) at the edges of the double slit. And lo and behold they created vibrations to mimic the double slit experiment. Knowledge is increasing and hopefully we will have an enlightenment in economics. Surely this site will contribute to that enlightenment.
OK, I’ve read Understanding Modern Money by L. Randall Wray. What should I read next? Anybody?
Currently reading “Secrets of the Temple”. A little out of date and not MMT, but it’s a nice change of pace. Was reading “Stabilizing and Unstable Economy” by Minsky, but dropped it for a while.
Thanks, I’ve got that Minsky book too but haven’t penetrated very far yet. I’ll try again.
Debunking Economics from Stephen Keen has some insights. Actually Keen starts his economic theory from Minsky, Schumpeter and Fisher and develops it from there. His website has a few of his recorded presentation which is a good way to get overview of his work.
Thanks for the reminder. I’ve been meaning to get Keen’s book.
There’s Bill Black’s book (Best Way to Rob a Bank is to Own One), Bill Mitchell’s book (Full Employment Abandoned), Jamie Galbraith’s (Predator State, Created Unequal), and the book Randy/Stephanie edited on the history of money (Credit and State Theories of Money). Just an FYI; you might know of all of them already.
Thanks. I see some titles that are new to me.
I imagine quite a few people will turn their attention to banking and money since it is obviously an unsolved problem!
Wray has an earlier book too, titled: “Money and Credit in Capitalist Economies; the. Endogenous Money Approach (1990)”.
Though you should read it after you’ve read the books Fullwiler mentions, because firstly, a number of the issues discussed in the book deal with the horizontalist and structuralist debates in Post Keynesian literature, and secondly, some aspects of the book are dated, and Wray no longer believes them (IMO).
There’s also King’s book “Elgar Companion to Post Keynesian Economics” which makes for an excellent reference book; it provides brief overviews of various Post keynesian topics. Obviously though, not all Post Keynesians are on board with MMT, but a lot (from my perspective) are making the journey.
How much is two and two? The MMTer says, “four”. Ask an academic economist the same question, and the answer is, “first assume a calculator…” Ask a Wall Streeter the same question, and the answer is, “whatever you want it to be”.
I think the problem most people have in accepting MMT is not o much they don’t understand it, but more that their morals won’t accept it. Think about it. We live our lives being taught that we should save more than we spend. We see every individual and company that has tried to spend more than what they have has gone bankrupt. For every action there are consequences.
I know the hard part for me was no so much reading what Cullen said, but more accepting it. ‘Really?’-I thought -’Can they get away with this? This *HAS* to be wrong somewhere. The economy of a country that always run into deficits(ie a country where people spend more than what they produce) always being better than countries that save a lot of money(ie hardworking people who save a lot of money and don’t spend a lot). This is morally *WRONG*. ‘
Think of the government as a gold mine. Too much output (deficit spending) can cause price inflation but would anyone wish to shut the mine down (balanced budget) or dump gold down the shaft (government surplus)?
Not that I believe in a gold standard; gold is not money unless government accepts it as such.
F Beard
I actually think that is an excellent analogy, your govt gold mine.
I must say that its been interesting following your comments over the last couple years; here, at Yves’ place and a few others we frequent together. Ive noticed you transforming to the point where you are damn near standing with both feet firmly footed in the MMT camp. You certainly didnt start there. You’ve asked a lot of good questions and obviously thought long and hard about this. You are becoming a strong voice for the changes our monetary system needs. I really enjoy reading your comments
Ive noticed you transforming to the point where you are damn near standing with both feet firmly footed in the MMT camp. Greg
I go further than the MMT camp with regard to government debt. They say we need not worry about it; I say we should pay it off as it comes due with seigniorage and never borrow again.
However, I will always insist that genuine private currencies be allowed too to keep the government honest and to silence the gold bugs.
Thanks for your kind words. If I have learned it is because I read the Bible daily as well as books on money.
Although Ive not seen any MMT authors specifically advocate for private currencies circulating side by side with govt currency, I can think of no reason any would condemn it per se. I do think a whole new set of problems would arise with pricing of goods but MMT would still be valuable in evaluating and prescribing solutions to disequilibrium conditions.
There is also nothing “non MMT” about your ideas to handle govt debt. Your simply describing a possibility within the MMT framework. Its never beensaid we cant payoff or shouldnt pay off the govt debt, only that there is no running out of money by doing so or causing hyperinflation.
Personally I like your idea of private and public currencies but I also think that if informed citizens take back their govt it wouldnt be necessary.
Personally I like your idea of private and public currencies Greg
It’s not my idea; it is strongly implied in Matthew 22:16-22 (“Render to Caesar …”). Plus, there is historical evidence that legal tender laws for private debts is a modern invention though I have not done much research, I admit.
but I also think that if informed citizens take back their govt it wouldnt be necessary. Greg
The existence of genuine private money alternatives would give the government a very strong incentive to spend wisely since if it did not then only government and its payees would suffer from price inflation if it did not. Plus, the power of the banks to leverage would be greatly limited because 1) there would be no government support for banking and 2) non-usury forms of money would be allowed to compete equally. Politically, it would also silence the gold bugs since they would be allowed to use their shiny metal for private debts.
Actually, there are plenty of private currencies in circulation: go down to your local Starbucks and get a Starbucks card – they put points on your card that are, for all intents and purposes, a non-convertible currency. The only thing they need to do to complete it is to price their beverages in constant “Starbucks dollars” with along with a different price in USD as the exchange rate fluctuates.
Legal tender laws are mostly irrelevant anyway – at most, they say that private businesses must accept USD – but I’ve never met one that wouldn’t take cash. THey don’t say yo can’t accept anything else.
Personally, I say let a thousand currencies bloom! Other than the constitutional issues, I see no reason why every state or even large municipality shouldn’t issue it’s own currency and accept it as taxes.
These guys don’t understand that accounting is definitional, not a theory. Accounting isn’t a theory. It’s a set of rules to follow.
So they don’t get that you cannot argue with MMT. They think you can disprove it. You cannot. You can point out that someone made an error in the math, but not that the MMT is wrong.
To be fair though, the accounting definitions create identities, identities say nothing by themselves, they need to be interpreted by theory. Theory states whether the identity is useful, and what way causation goes (Kalecki’s paper on his profit equation provides an excellent example of 1. creating the identity, and 2. using theory to interpret the causal flow in the identity — ‘which variable can the capitalist control’).
So questions such as, is the NFA important, or does it matter that the private reducing its NFA are perfectly valid questions. Those questions can be answered by turning to theory or empirical evidence.
I view accounting identities the same way that I view econometrics.
Econometrics can provide an insight into the significance of a correlation, but cannot answer causation – we turn to theory and common sense to answer that question. Furthermore, whether or not the relationship between the variables is temporal or some deep rooted ‘law’ also requires theory and cannot be answered using econometric tools.
I just had an epiphany about the national debt. Tell me what you think:
We have already paid off the national debt (in one sense) in that the dollar has been devalued from its pre-debt valuation to today’s value. If we were to ACTUALLY pay off the debt we would be in for years of austerity and the value of the dollar would gradually go back to what it once was worth.
We have already paid off the national debt (in one sense) in that the dollar has been devalued from its pre-debt valuation to today’s value. rfr
You are on to something. Certainly there was no need for the national debt in the first place. And if the Fed provided new money to buy the bonds then we have already paid via an inflation tax. In that case, there is no moral debt.
The problem isn’t the immorality of deficit spending, it is the immorality of mal-investment.
In a balance sheet recession, the private bankers want their balance sheet’s balanced. They want vertical money spent by the government to fill their balance sheets. The system then demands deficit spending in this case, which is today’s reality.
In a normal economy where private banks are willing to lend, then the impossible contract rears its ugly head. That is the usury that has to be paid on every loan. Where does this extra money come from? It cannot originate as credit money issued by the private bankers. The extra usury money must come from the government. Ideally, the government would tax it away from Plutocrats, which is what happened when we used to tax inproper accumulation of capital via finance. Then the government would spend back into labor, so labor could recover their money.
But, today we deficit spend to fill the impossible contract.
How about deficit spending on the Hoover Dam, or the interstate highway system? That investment returned gains and real wealth. So, deficit spend is not necessarily bad.
It is How we spend and where it goes that matters. But, we seldom have that discussion. MMT should invoke those discussions, but the level of understanding needs to be high.
It is How we spend and where it goes that matters. But, we seldom have that discussion. REN
That issue would be mute if genuine private money alternatives were permitted. Then only government and its payees would suffer from wasteful government spending. The private sector would in some cases even benefit since taxes would be easier to pay with the cheaper government money.
With regards to the national debt, we really don’t need it. That the government must borrow its own credit is a fiction perpetrated on humanity since the Bank of England in 1694. Hamilton’s great desire was to re-create the BOE with the first bank of the U.S. However, Jefferson let the first bank’s charter lapse. He was able to do this by buying the Louisiana purchase in Gold, so the country wouldn’t go in debt. The Federal Reserve Act recreated the essential fiction of the BOE model which hosted us in 1913 (if my memory serves). The parasite credit money masters who have hosted us, serve themselves by guiding our affairs.
Lincoln spent directly into the economy with Greenbacks, and they served their function well. The colony of Massachusets spend Mass Bills directly into the economy, and they didn’t promise to pay in anything else. Yet, people used them and they functioned as money. There are many historical examples of debt free money working fine. But, law needs to be in place first, and it needs to have teeth.
All people really need is a medium of exchange and a store of value so they can trade their output. Since money is used to settle debts and contracts, it gets its strength in the LAW. Money is a fiat of the law in the same way that gravity makes you fall down. This is undeniably true, and if any economist (like Adam Smith) tells you it is metal or something else, please run away and hold your ears. We hear a lot of lies, usually from people who have a vested interest in the system.
It is immoral corruption when economists and schools perpetuate lies in order to further their own selfish interests.
The rule of “seigniorage” is; the value of fiat money is set by the issuer regardless of the actual physical content of the coin (or document). So a quarter is worth four to the dollar, without any consideration of its metal content. The value in exchange for goods relates to scarcity in one or the other modified by arbitrary taxes.
“The core of MM “Theory” is just a description of our fiat monetary system’s “Reality”.”
You state this frequently, but an analysis of the propositions of MMT does not bear this out.
Please refer to numerous comment threads recently on various MMT propositions, including this recent one involving yourself, at http://pragcap.com/coin-seigniorage-a-legal-alternative-to-the-debt-ceiling/comment-page-1#comment-65347
Adam: “The fact that they swap that currency back for a bond is irrelevant. The government just spends. Taxes and borrowing have nothing to do with spending!!! ”
PA: “This is not correct. The government is legally required to create the bond.
The chain of causation is:
Government decides to spend.
This causes spending.
This causes bond creation.
This causes the need for future interest payments and principal repayment.
This causes the need for future taxation.
The spending causes the borrowing and taxation.”
CR: “If bonds really come first then where does the pvt sector get the money with which to buy the bonds? You’re misinterpreting a legal constraint that is a remnant of the gold standard.”
PA: “Loans create deposits in the private sector. These are used to purchase bonds.
The very first bonds were created in the days of the gold standard, and private gold was used to purchase these. Over time the gold standard withered, but extant bonds formed the basis of the money supply.”
CR: “You’re misinterpreting a legal constraint that is a remnant of the gold standard.”
PA: Are you claiming that the legal constraint is not followed as I have described?
If so please explain that claim.”
Scott Fullwiler: ” Re:(Loans create deposits in the private sector. These are used to purchase bonds)
100% wrong. Treasury auctions settle with reserve balances. Those aren’t created by the private sector.”
PA: “My apologies – you are correct, they settle with reserve balances. They are ultimately sold to private investors, who use bank deposits or other forms of credit.
To re-answer Cullen’s question, if you refer to my chain of causation, I actually put spending first. In terms of where the private sector gets the money, if you are talking about the situation today, then there are plenty of reserves available to be spent at any point in time. If you are talking about day zero, the first bond, there was no day zero as the system we have today evolved from a gold standard system.”
CR: “So we have come to an agreement
”
PA: “Not as far as I am aware, unless you are agreeing that this chain of causation exists:
Government decides to spend.
This causes spending.
This causes bond creation.
This causes the need for future interest payments and principal repayment.
This causes the need for future taxation.
i.e. The spending causes the borrowing and taxation.
This conflicts with Adam’s statement above “The government just spends. Taxes and borrowing have nothing to do with spending!!!”, which is the point I am refuting.
Do you agree with my refutation?”
CR: “I believe he means that taxes and borrowing do not fund spending.”
PA: “OK, so just to clarify your point of view:
You believe that spending causes taxes and borrowing.
You believe that taxes and borrowing do not fund spending.
Is that correct?”
You confuse things with relationships. The spending and bonds occur simultaneously.
Just as with a bank you receive the funding simultaneously with the note to repay; you don’t receive the money first and then the loan note.
The fact that the government has a law to match spending with bonds is just an example of the MMT point regarding political constraints. Whichever law happens to be in force, operationally the spending and the bonds occur simultaneously – they are in essence accounting entries.
You can think of the money to fund the bonds coming from the spending itself – the transformation is that the government spends (increases income), and the equivalent amount is transferred from currency into bonds. The effect is to maintain the same amount of currency in circulation (with the government directing the use of that amount of currency), with an increase in the total value of bonds, which represent to the penny the value of the country’s net financial assets (held by foreign and domestic interests).
Your causation string implies that the government must repay the principal, but this is incorrect.
Try your causation string to describe Lincoln’s greenbacks – you will find your logic breaks down. But MMT still describes the operational mechanics of that historical period perfectly well.
Good explanation. However, the US should quit borrowing anyway because:
1) It gives ammunition to the deficit hawks.
2) No one deserves a risk-free return at taxpayer expense, especially the rich.
3) It transfers wealth from taxpayers to those with finds to lend.
4) The government should have nothing to do with usury.
I don’t have as big of a problem with the debt – I like the accounting entry. The government can always pay the interest due. I realize the income distributional issues exist. I don’t think you get rid of it (like paying 0% interest – the natural rate of interest) until other fundamental reforms are made.
“I don’t think you get rid of it (like paying 0% interest – the natural rate of interest)… “ pebird
As a libertarian, I don’t have a problem with interest so long as it is set by the market and not by a government backed banking cartel.
“The spending and bonds occur simultaneously.”
Please refer to “Soft Currency Economics” by Warren Mosler: “The federal government, on the other hand, is able to spend a virtually unlimited amount first, adding reserves to the banking system, and then borrow, if it wishes to conduct a reserve drain.”.
“The fact that the government has a law to match spending with bonds is just an example of the MMT point regarding political constraints.”
When Cullen says above: “The core of MM “Theory” is just a description of our fiat monetary system’s “Reality””, most people would assume that what he means by “Reality” is everything real, including current political and legal constraints.
Otherwise a more accurate version of his proposition would read “”The core of MM “Theory” is just a description of our fiat monetary system’s “Reality”, excluding certain current legal and political constraints”.
“Try your causation string to describe Lincoln’s greenbacks – you will find your logic breaks down. But MMT still describes the operational mechanics of that historical period perfectly well.”
The causation string describes the situation in the current system, it does not attempt to describe the situation when Lincoln issued greenbacks.
Don’t confuse a reserve drain with the normal spending process. Note that Warren says “…and then borrow, IF it wished to conduct a reserve drain.” (CAPS added). Which would imply that if it did not wish to conduct a reserve drain, there would be no need to borrow.
But we do, due to certain political constraints that are codified in laws.
MMT tries to identify those constraints that are superfluous to the operational functioning, the issuing of debt being one of those. The idea is that by stripping those unnecessary constraints away, we can see the possibilities of a different system.
If the current appearance of reality is what you want described, all you need to do is look at what currently happens write it down, e.g., build your causation string. No big effort required.
But if you want to know what is really going on, you will have to wrap your head around some ideas that challenge those perceptions.
pebird: “The spending and bonds occur simultaneously.”
PA: “Please refer to “Soft Currency Economics” by Warren Mosler: “The federal government, on the other hand, is able to spend a virtually unlimited amount first, adding reserves to the banking system, and then borrow, if it wishes to conduct a reserve drain.”.”
Do you agree that MMT states that the spending occurs first? If so, do you agree that your statement “The spending and bonds occur simultaneously” is incorrect?
pebird: “Don’t confuse a reserve drain with the normal spending process. Note that Warren says “…and then borrow, IF it wished to conduct a reserve drain.” (CAPS added). Which would imply that if it did not wish to conduct a reserve drain, there would be no need to borrow. But we do, due to certain political constraints that are codified in laws.”
OK, So what Warren means is really “The federal government, on the other hand, is able to spend a virtually unlimited amount first, adding reserves to the banking system, but then must borrow an equivalent amount because the law requires that it do so. If there were no such law, it would only need to borrow if it wished to conduct a reserve drain”
pebird: “MMT tries to identify those constraints that are superfluous to the operational functioning, the issuing of debt being one of those. The idea is that by stripping those unnecessary constraints away, we can see the possibilities of a different system.”
So you appear to hold the following opinions simultaneously:
“MMT advocates stripping unnecessary constraints away to create a different system.”
“MMT describes the current system.”
Is that correct?
Let me try again.
I agree that MMT states that the spending occurs first. Since debt is not needed for the system to function (but we choose to do so), my personal way of thinking of this is that the debt is an accounting entry to measure net financial assets. Accounting happens simultaneously with the transaction by definition; therefore the debt – in essence – occurs simultaneous with the spending.
MMT does not simply describe the monetary functions as the rest of us view it. It explains the inner-workings of the modern monetary system. When I said that “MMT advocates stripping unnecessary constraints away to create a different system”, it is probably more accurate to state “MMT demonstrates how much of what we currently believe to be required for a properly functioning monetary system is in fact unnecessary”.
You know, it is possible to explain how a car operates without saying what color it is.
pebird: “I agree that MMT states that the spending occurs first. Since debt is not needed for the system to function (but we choose to do so), my personal way of thinking of this is that the debt is an accounting entry to measure net financial assets. Accounting happens simultaneously with the transaction by definition; therefore the debt – in essence – occurs simultaneous with the spending.”
Thank you for the clarification.
pebird: “MMT does not simply describe the monetary functions as the rest of us view it. It explains the inner-workings of the modern monetary system. When I said that “MMT advocates stripping unnecessary constraints away to create a different system”, it is probably more accurate to state “MMT demonstrates how much of what we currently believe to be required for a properly functioning monetary system is in fact unnecessary”.”
If I can reword that a little: “MMT claims that much of what we currently believe to be required for a properly functioning monetary system is in fact unnecessary”. Maybe you would agree with that? I don’t think it demonstrates it because there is too much unanswered, such as how taxation levels would be set, what levels of government spending would generate a good economic outcome and much more.
pebird: “You know, it is possible to explain how a car operates without saying what color it is.”
Of course. I think the constraint that spending be funded by borrowing and taxation is a little more important to the economy than a car’s color is to its operation.
The problem I have with MMT is that it attempts to minimize the negative affects of government borrowing, and does nothing to illustrate the fact that government borrowing is reverse Robin Hood wealth redistribution.
It focuses on the mechanics of the process without looking in depth at the way the inflation that is built into the system, robs the working people while at the same time makes bankers rich.
Proponents like to say they are just illustrating how the monetary system works.
The question that begs to be asked is, works for whom?
The system in fact has not worked at all for the American people who have seen a decrease in real earnings for the last 30 years.
The system has not worked at all for maintaining the integrity of our political process, which has now become a government for sale to the highest bidder.
And it has not worked for an economy that is now sporting an unemployment rate nearing 20% and a continually decaying jobs base.
It has “worked” for the multi national corporations who have exported the American jobs base, the bankers who have robbed the country blind, and the boys on Wall St. who have saturated the world with derivates and insured that at some point in the future we will face a monetary crisis that makes 2008 seem like a party.
What’s the true cause of this great rift though? Is it growing financialization which is reducing overall output and causing a wage skew (which the govt is trying to offset through other policies)? Or is it just growth in govt? You have to consider the fact that maybe this change in govt policy is the RESULT of something else and not the CAUSE of our current plight…..
Paul,
Are you claiming there is an economic necessity to create the bonds? MMT, in general, concerns itself with economics, not politics.
“Are you claiming there is an economic necessity to create the bonds? MMT, in general, concerns itself with economics, not politics.”
Personally I believe that the creation of bonds is the best way to regulate the creation of new money as it imposes the same disciplines on the government as those that are imposed on the private sector.
However my point specifically relating to this article is that MMT does not describe the current reality.
Economics and politics cannot be separated.
You know the brain is inseparable from the rest of the body. That doesn’t stop us from studying brain functions isolated from the body.
I agree that politics and economics are tight cousins and we need to keep in mind power relationships when we speak of economic abstractions.
Note that military is also a projection of political power, but that doesn’t stop us from studying military operations, which to be successful must function properly regardless of the particular persuasions of the political leadership.
I also think you’re wrong on bonds.
“You know the brain is inseparable from the rest of the body. That doesn’t stop us from studying brain functions isolated from the body.”
You are correct. Systems have a degree of independence from one another, and a degree of dependence on one another.
A study of the aspects of a system that are independent can be conducted and provide useful insights into that system.
However when one studies aspects of a system that have interplay with another system, we cannot simply claim that the interplays do not exist.
“I agree that politics and economics are tight cousins and we need to keep in mind power relationships when we speak of economic abstractions. Note that military is also a projection of political power, but that doesn’t stop us from studying military operations, which to be successful must function properly regardless of the particular persuasions of the political leadership.”
Of course. There are aspects of the military, such as tactical considerations, that have nothing to do with the political imperatives for particular military operations. These can be studied independently.
“I also think you’re wrong on bonds.”
In what way?
Paul:
I appreciate the civility in all of your comments.
Now, when you stated the following:
“Personally I believe that the creation of bonds is the best way to regulate the creation of new money as it imposes the same disciplines on the government as those that are imposed on the private sector.”
I said I think you are wrong because bonds – government bonds – in my view are simply accounting entries which do not regulate the creation of new money. They are an after-the-fact effect – a correlation that looks like a causation.
Now, one could argue that there is a psychological effect to this accounting – that having risk free financial assets increases confidence and that banks feel more confident in risking their capital via loans. So that would have an effect on the money supply.
But that is a long way from regulating.
The same term “bonds” is used for describing private financial instruments as well as government-created accounting for net financial assets. The difference is that private bonds must be repaid with something they must go out and get (money), whereas government bonds are repaid with something they can create themselves (as the monopoly issuer of state money). So, I don’t see how bonds regulate government behavior regarding the creation of new money.
I think governments are regulated via popular control.
So I have somewhat of a different view regarding disciplines – I would like to see the parts of the private sector, particularly banks, subject to the same disciplines as the government – information transparency, democratic controls, getting thrown out of office via elections, etc. But that is just me, not MMT.
pebird: “Now, when you stated the following: “Personally I believe that the creation of bonds is the best way to regulate the creation of new money as it imposes the same disciplines on the government as those that are imposed on the private sector.” I said I think you are wrong because bonds – government bonds – in my view are simply accounting entries which do not regulate the creation of new money. They are an after-the-fact effect – a correlation that looks like a causation.”
OK. I now understand your point of view a little better. My point of view is that the accounting entries are very important, because they are visible for all bond purchasers past and future to see, so that they can make informed decisions as to whether to purchase further bonds, or to sell those that they already own. i.e. The accounting entries, the fact that they exist and are published, affects the functioning of the economy in a profound way.
“Now, one could argue that there is a psychological effect to this accounting – that having risk free financial assets increases confidence and that banks feel more confident in risking their capital via loans. So that would have an effect on the money supply. But that is a long way from regulating.”
OK. I think the accounting entries do have this effect. I don’t think it matters whether you call it regulating. I think you probably believe that the effects aren’t important, whereas I believe the effects are profound. That is where we differ. I think MMT dismisses even the idea that it could be important, without trying to understand why it might be.
“The same term “bonds” is used for describing private financial instruments as well as government-created accounting for net financial assets. The difference is that private bonds must be repaid with something they must go out and get (money), whereas government bonds are repaid with something they can create themselves (as the monopoly issuer of state money). So, I don’t see how bonds regulate government behavior regarding the creation of new money.”
I think your argument becomes somewhat circular here, because if the government must tax and borrow as a result of its spending, due to a self-imposed constraint, then it can only create money independently by removing the constraint. As long as the constraint exists, the bonds must eventually be repaid with taxes, or rolled over into further borrowings. The exception to this is Fed purchasing of bonds. To me this is where the system toys with an approach similar to what MMT advocates, and I believe this is unwise.
“I think governments are regulated via popular control.”
Yes, in the long term I agree with you. However because popular control is impractical for the many decisions that must be made on behalf of the populace in very short time frames, that popular control is exerted by means of written laws, rules and customs. The laws regarding public borrowings are a part of this.
“So I have somewhat of a different view regarding disciplines – I would like to see the parts of the private sector, particularly banks, subject to the same disciplines as the government – information transparency, democratic controls, getting thrown out of office via elections, etc. But that is just me, not MMT.”
I agree that any private organization that receives assistance from the government, such as a TBTF bank, needs heavy regulation to counter the moral hazard issues.
“You state this frequently, but an analysis of the propositions of MMT does not bear this out.”
It does bear it out. You’re refusing to see it.
MMT describes the operational function of a fiat system – the ‘physics’ of the system if you like.
It is perfectly possible to put artificial constraints on the system to make it act like something else.
You can do that, but the result is an economy that operates constantly below its maximum output.
And that is why millions of people have no job and no income – because of unnecessary artificial constraints.
“It is perfectly possible to put artificial constraints on the system to make it act like something else.”
The constraints, whether artificial or not, are a part of the reality that Cullen claims MMT describes.
“You can do that, but the result is an economy that operates constantly below its maximum output.
And that is why millions of people have no job and no income – because of unnecessary artificial constraints.”
OK, so it’s clear you agree that the constraints exist, i.e. they are part of reality. However MMT theory does not acknowledge these constraints. Therefore MMT does not describe the current reality.
Isn’t it just semantics at that point then Paul? It DOES explain the operational aspects/reality. Why does the fact that there are government imposed constraints negate the explanatory power otherwise?
“Isn’t it just semantics at that point then Paul?”
It’s about meaning and truth. If we communicate in good faith then the words we use are our honest intent to convey our understanding of the truth to others. If others come to misunderstand the truth through our words, then we either have misunderstood the truth ourselves, or our choice of words is poor, or we have intended to mislead.
I believe that some people, on reading Cullen’s words in this article and other articles, and the words in MMT writings, will come to misunderstand the truth, and my comments are intended to try to prevent such misunderstandings.
“It DOES explain the operational aspects/reality.”
Repeating the proposition does not strengthen the argument for the proposition. There are numerous points of analysis in the comment thread above that need to be responded to if you wish to try to substantiate the proposition.
“Why does the fact that there are government imposed constraints negate the explanatory power otherwise?”
Because those constraints make a very significant difference to the economy.
I have no idea what makes you think we dont acknowledge the self imposed constraints….
“I have no idea what makes you think we dont acknowledge the self imposed constraints….”
Please refer to “Soft Currency Economics” by Warren Mosler: “The federal government, on the other hand, is able to spend a virtually unlimited amount first, adding reserves to the banking system, and then borrow, if it wishes to conduct a reserve drain.”.
In this statement and others in that document and elsewhere, the self imposed constraints are not acknowledged.
With the exception of the debt ceiling, none of the so called constraints keep the system from operating as described by MMT, they just create an illusion that it works otherwise. All you need to do is follow what the government actually does.
1) Congress tells the Treasury to spend money
2) The Treasury Spends Money
3) Said spent money increases bank reserves
Note #1: The Treasury is not legally allowed to overdraw its reserve account at the FED it must always replenish the balance…
Note #2: In order to be able to maintain its target interest rate, the FED needs the Treasury to drain excess reserves
4) The FED, who is keeping track of the level of excess bank reserves, calls the Treasury and asks them to drain $XB by selling Treasuries
5) The Treasury sells $XB in Treasuries
6) Repeat steps 2-5 or 1-5 depending on the situation
Since the government is collecting taxes and borrowing money, we now have the ILLUSION that taxes and borrowing are funding spending. It is only an illusion.
Minor clarification on “note #2″… The FED recently started paying interest on excess reserves which technically means that reserves don’t need to be drained from the system to maintain its target rate. That said I wouldn’t expect the cooperation between the FED and Treasury to end regarding reserve drains because the Treasury is still required to not overdraw its account.
“With the exception of the debt ceiling, none of the so called constraints keep the system from operating as described by MMT, they just create an illusion that it works otherwise. All you need to do is follow what the government actually does.
1) Congress tells the Treasury to spend money
2) The Treasury Spends Money
3) Said spent money increases bank reserves
Note #1: The Treasury is not legally allowed to overdraw its reserve account at the FED it must always replenish the balance…
Note #2: In order to be able to maintain its target interest rate, the FED needs the Treasury to drain excess reserves
4) The FED, who is keeping track of the level of excess bank reserves, calls the Treasury and asks them to drain $XB by selling Treasuries
5) The Treasury sells $XB in Treasuries
6) Repeat steps 2-5 or 1-5 depending on the situation”
“Since the government is collecting taxes and borrowing money, we now have the ILLUSION that taxes and borrowing are funding spending. It is only an illusion.”
In what way is it an illusion, since real people sacrifice real earnings, earned from hard work, to pay the taxes and the interest on the borrowings?
Previously you stated: “The fact that they swap that currency back for a bond is irrelevant. The government just spends. Taxes and borrowing have nothing to do with spending!!!”.
Do you stand by that statement?
Paul,
You’re missing the important point. We are not saying that taxes aren’t necessary. But it’s important to understand that they don’t “fund” spending. Funding implies a traditional solvency constraint, as in, it can run out of money. There clearly isn’t a solvency constraint. It might sound like semantics to you, but from a policy perspective it is most certainly not.
“You’re missing the important point. We are not saying that taxes aren’t necessary. But it’s important to understand that they don’t “fund” spending.”
Do you agree that each amount of government spending of $X (nominal) necessitates taxes and borrowing totalling $X (nominal), in the current system with its legal constraints?
You’re trying to find the starting point of a circle. I would come back and ask you where the taxpayers ORIGINALLY get their dollars to pay for taxes and bond payments? Of course that money has to be spent into existence FIRST. The self imposed constraint doesn’t explain anything about how our system actually works.
“You’re trying to find the starting point of a circle.”
I am pointing out that the circle exists.
You have asked me to find the starting point below:
“I would come back and ask you where the taxpayers ORIGINALLY get their dollars to pay for taxes and bond payments? Of course that money has to be spent into existence FIRST. The self imposed constraint doesn’t explain anything about how our system actually works.”
The taxpayers originally get their dollars to pay for taxes and bond payments when the system comes into being. The current system evolved from a gold standard, so originally taxes were paid using gold and silver, and the government borrowed gold and silver from private parties.
This is the starting point of the circle.
Now I repeat my question regarding the existence of the circle.
Do you agree that each amount of government spending of $X (nominal) necessitates taxes and borrowing totalling $X (nominal), in the current system with its legal constraints?
It is an illusion because it is not reality. The reality is that the government taxes its people in US dollars. To avoid jail those people must come into possession of US dollars. The collection of taxes is in no way tied to the government’s ability to spend, but they are required to ensure that people will need those dollars to avoid jail or some other form of punishment. Taxes also serve as a mechanism to reduce aggregate demand if the sum of government spending and private spending exceeds the economies ability to produce.
Borrowing serves as a mechanism to drain excess reserves from the banking system, should the government deem that appropriate, to assist with interest rate/monetary policy operations. Risk free government debt also provides its citizens with a risk free way of saving as well as a tool to help set other interest rates. In the early 2000′s Australia paid off all it’s debt (because the consistently run a trade surplus), however the banking system lobbied for additional government debt issuance anyhow so that it had access to risk free bonds and an easy way to price its non-risk free interest rates.
Clarification…
“The collection of taxes is in no way tied to the government’s ability to spend…” assuming there are resources available to buy. If there is a real economic constraint the government may need to utilize taxes to reduce the private sectors capacity to buy resources that the government needs.
Adam,
Previously you stated: “The fact that they swap that currency back for a bond is irrelevant. The government just spends. Taxes and borrowing have nothing to do with spending!!!”.
Do you stand by that statement?
From an operational perspective taxes and borrowing do not fund spending. Taxes and borrowing do have there purposes, but they are not to fund (as in I have to collect money before I spend) spending.
PA: “Adam, Previously you stated: “The fact that they swap that currency back for a bond is irrelevant. The government just spends. Taxes and borrowing have nothing to do with spending!!!” Do you stand by that statement?”
Adam: “From an operational perspective taxes and borrowing do not fund spending. Taxes and borrowing do have there purposes, but they are not to fund (as in I have to collect money before I spend) spending.”
To fund does not imply a particular sequence of events.
In any case, you haven’t answered directly, but I presume from your comment that you still believe this: “The fact that they swap that currency back for a bond is irrelevant. The government just spends. Taxes and borrowing have nothing to do with spending!!!”.
In the early 2000′s Australia paid off all it’s debt (because the consistently run a trade surplus), however the banking system lobbied for additional government debt issuance anyhow so that it had access to risk free bonds and an easy way to price its non-risk free interest rates. Adam
Just like I suspected; the national debt is a favor to the rich and bankers. However, outside Australia the tail still thinks it is the dog.
Minor clarification on “note #2″… The FED recently started paying interest on excess reserves which technically means that reserves don’t need to be drained from the system to maintain its target rate.
Right, taxing bank assets at the target (interest) rate would do the same thing. Since bank lobbyists spend much money to prevent anything like that from ever getting to a vote in Congress, the logical way to accomplish this is by the FDIC setting and adjusting its premium rate (which is now levied on bank assets instead of deposits) to whatever the Fed’s target rate is. Ha ha, that would probably bug the Fed to no end. See RSJ’s piece on taxing away bank rents.
The government, in this proposal, will continue to sell bonds to the public when deficit spending. But in such an arrangement, the taxes paid by banks correspond to a reduction in the base — a massive contraction. And this contraction would need to be offset by the central bank monetizing debt in order to keep the monetary base constant. This monetization corresponds to the full amount of seignorage income that can be extracted.
http://windyanabasis.wordpress.com/2011/03/28/leaving-modern-money-theory-on-the-table/
“However MMT theory does not acknowledge these constraints. Therefore MMT does not describe the current reality.”
Paul, this is patently untrue, and you know it.
Cullen has repeatedly and consistently highlighted these constraints in his posts. He also notes them as politically motivated. He has never said that these constraints are immaterial or have no impact.
Your argument seems to be that since the politics is part and parcel of the social context in which the monetary system lies, any description of the monetary system MUST reconcile with the political realities, and as MMT does not do that, it is not a valid description of the monetary system. Is that correct?
For someone who talks about communicating in good faith, you should understand that explanations by necessity must abstract from experience. This means certain things are always left out – sometimes important things – but this cannot invalidate explanations, otherwise there would be no valid explanations of anything.
One characteristic of a good explanation is that it is explicit about what it leaves out. MMT makes it clear that there are political constraints that impact the functioning of the monetary system, but that politics are not within the scope of MMT.
Sorry, replied in wrong spot (again). See below 07/24/2011 at 9:27 AM
I view the issue as follows (thinking out loud):
MMT describes the structure of the system — a currency monopolist does not have a financial constraint on the issuing of its own currency. It creates marketability for its currency by imposing a tax on its population which is payable using its currency.
How do we identify a currency monopolist? Well we know that currency is a financial asset, so it must have a matching liability. The liability will be on the balance sheet of the issuer, and an asset on the balance sheet of the receiver.
What would make a currency monopolist financially constrained? If it announced that it was going to allow its currency to be convertible into another asset, this represents a financial commitment. The currency issuer must now maintain convertibility.
In our current monetary system the state’s currency is not convertible into another asset, it is only convertible into itself; the state is thus a currency monopolist. Of course, those who run the state and the majority of the population may not believe that, and their subjective interpretation of state spending and taxation can lead to the imposition of political constraints, such as, the government must match its deficit spending one-to-one with the issuing of debt. But this is a different type of constraint than the financial constraint mentioned earlier. So while the political constraint may muddy the picture, it doesn’t change the reality of the situation, which is, the US government is a currency monopolist. The very structural attributes are that it faces no financial constraint, regardless of the institutional arrangements (which are subjectively implemented).
Your economic ignoramus contribution:
I find that Scott Sumner brings up a valid point. Namely, the reality of the situation (my specialty). Sometime we get so caught up in the concrete, visible things that we lose touch with the fact that “reality” involves something that seems, at first, like fantasy. Mythology involves mainly faith, yet faith is a very unreal,yet real part of our reality situation. (Do you have faith that our USD will purchase goods? You’d better hope everybody else does, too).
You may laugh at this comment and say that our fiat system is a logical procession of events that lead to a sound monetary policy, but remember that logic itself cannot be derived from logic; it, too, is based on faith.
History is full of instances of faith destroying logic and vice-versa. Our reality situation requires acceptance of both.
“Ooh, baby, baby, it’s a wild world…”
“This statement is false.”
Godel
Faith has NOTHING to do with accounting identities and operational realities.
You don’t have faith in your logic?
Do I have faith that the US$ will purchase goods? Of course I do. Where does that faith come from? Past experience
Do I think this could EVER change? Of course I do. Do I have a plan for when it does? No, its too expensive to have such a plan.
If the US$ cant purchase what I want tomorrow, what makes you think that gold or anything else will. I understand what money is (a useful fiction) and believe the majority of us are benefitting by using it. Those that arent benefitting arent rejecting the currency, they are seeking to acquire MORE of it. Hardly the formula for hyperinflation.
Faith means to accept something as true in the “absence of evidence”.
For a fair exchange, both parties have have the same faith in the assumptions of current value as there is no constant. Without a tangible like gold, it has to be based on faith.
Without a tangible like gold, it has to be based on faith. Gerald P
It is said that the only thing certain is death and taxes. Fiat is backed by the government’s taxing ability. So if taxes are certain then how can fiat be based on faith?
Without a tangible like gold, it has to be based on faith.
No, no it doesn’t. Faith implies no probability distribution function – not even an unknowable one. Neither commodities nor money rely on it.
In the case of gold or another commodity used in an exchange, both parties have decided that there is an acceptable likelihood that the commodity will retain exchange value and wide acceptance based on its usefulness in production and consumption and/or speculative value.
In the case of money used in an exchange – money as money exists everywhere in the world today – both parties have decided that there’s enough of a chance that the government will continue to effectively demand the money as taxes from enough people (and courts will enforce payment in that currency for debts) that it will retain wide acceptance.
It’s not “faith” – it’s a calculation. And it holds in both the case of commodities and money.
Without a tangible like gold, it has to be based on faith. Gerald P
The chief purpose of gold as money was to make counterfeiting expensive. That purpose is now obsolete.
The actual and political purpose of gold these days is to make it absolutely necessary for the government to borrow money (gold) in order to deficit spend. But deficit spending is absolutely necessary if the government is the sole source of money into the economy.
The point I see Sumner making is that underlying the “voodoo” of the visible, concrete, accounting institutions lies a faith that an individual feels that he possesses something of value. MMT doesn’t appear to address this factor of economics.
It seems to me that an economist who doesn’t take this factor into account is like a physicist who doesn’t understand the plasticity of time. It may not matter in the present situation, but it may have a large effect in the end.
Read my treatise. I talk about value and real wealth endlessly….
I agree. I have just read your treatise again (and I pick-up something new each time I re-read it). The “value and real worth” of which you speak are mainly in reference to the USD and are skewed by the fiat money system (and that’s not necessarily bad given our present monetary set-up).
I comprehend the importance of MMT, but I still feel that it lacks completeness in the area to which Sumner (not very well) alludes: faith by the individual that the individual possesses something of value.
I may be an economic ignoramus (though this blog is helping me in this area), but I do feel I have good understanding of situations en totale. The gold standard, while flawed, almost physically restrained the economy. Our present fiat system has released this restraint. Failure to understand the differences in these two systems seems to be the primary reason we are in our present fix. I fear that despite all your efforts at clarifying these differences, the faith of the average individual in what he feels is valued (the USD) will be shattered. And THAT, unfortunately, is more a philosophical (mythological, if you will), rather than economical, issue.
I fear that despite all your efforts at clarifying these differences, the faith of the average individual in what he feels is valued (the USD) will be shattered. troll
The solution to that is education AND the allowance of genuine private monies including gold or anything else. There is no legitimate need for twintopt to be required for private debts.
Okay, does this make sense?
We start in the world of Professor Sumner’s thought experiment: there are no banks. There is a money stock. The public is holding government bonds. The government/central bank makes a bond purchase.
Here’s additional information that takes MMT into that world: before the government bought the bonds with debt of zero maturity, the private sector’s desire to save was completely satiated. Government spending, whether “financed” by new money or bond issue, had been sufficient to achieve this.
If the government had simply offered the net present value of the bonds, there’s no sale – the public is completely indifferent to holding the cash or holding the riskless bonds. If the government forces the exchange, Y and P do not move because the debt of zero maturity fulfills the savings desire just as the bonds did.
Assuming the government offers a higher price than that which satiates the savings desire of the public bond holders, the bond holders sell. Assuming the economy is at full employment, P rises due to the influx of new net financial assets. It’s no different than if the government had swapped the old bonds with new bonds that yielded more.
Scott? Cullen? Does this sound right?
To clarify, I mean P increases by some portion of the marginal increase in net financial assets.
I’ve read this discussion also in billy blog, in mosler’s site, in NEP.
But why don’t consider that a blog is informal (I say that also in mosler’s site) and talk about rules (that aren’t relevant, or are relevant only to an accuracy purpose) is not the central issue?
I’ve read many official papers by MMTers like Scott (Treasury Debt Operation and other) or Stephanie Kelton, and
rules aren’t avoided.
So, what’s the problem? Study in a blog is not recommended.
I mean, it’s like write an article about a murder and write about penal code and possible choices to
punish the killer. The real issue is that the killer will be punished.
PA: “However MMT theory does not acknowledge these constraints. Therefore MMT does not describe the current reality.”
pebird: “Paul, this is patently untrue, and you know it. Cullen has repeatedly and consistently highlighted these constraints in his posts. He also notes them as politically motivated. He has never said that these constraints are immaterial or have no impact.”
You imply that Cullen’s posts are a part of MMT theory. I am not sure that is the case but I am open to being convinced otherwise.
I am not saying that all of Cullen’s posts are incorrect. What I am saying is that his statement “The core of MM “Theory” is just a description of our fiat monetary system’s “Reality”” is incorrect.
“Your argument seems to be that since the politics is part and parcel of the social context in which the monetary system lies, any description of the monetary system MUST reconcile with the political realities, and as MMT does not do that, it is not a valid description of the monetary system. Is that correct?”
Yes.
“For someone who talks about communicating in good faith, you should understand that explanations by necessity must abstract from experience. This means certain things are always left out – sometimes important things – but this cannot invalidate explanations, otherwise there would be no valid explanations of anything.”
Of course. The purpose of any explanation is to have an effect on the listener or reader. This effect will be to move them closer to a good understanding of reality or further away. It will also have either a beneficial or deleterious effect on them, and on those that they subsequently influence. Usually those explanations that move them closer to a good understanding will be those that are beneficial, and vice versa.
What I am saying is that the statement “The core of MM “Theory” is just a description of our fiat monetary system’s “Reality””, and many (not all) of the statements made by MMT practitioners, in general will move people away from a good understanding of reality, not closer. One of the reasons they do this because they leave out important things yes. That’s not to say that every explanation that leaves something important out is a bad thing, but generally it’s a good idea to leave the very important, the crucial things in your explanations if you genuinely want them to move listeners and readers to a better understanding.
pebird: “One characteristic of a good explanation is that it is explicit about what it leaves out. MMT makes it clear that there are political constraints that impact the functioning of the monetary system, but that politics are not within the scope of MMT.”
In essence it advocates removal of the constraints. It claims these constraints are not beneficial. It is more about advocating than describing.
Paul,
I have no idea where you get this notion that we don’t focus on the constraints. We focus too much on the constraints if anything.
What you’re saying is the equivalent of a man who is on a diet and won’t eat chocolate cake for a month. He then goes on to tell everyone around him that he can’t eat chocolate cake and the whole world becomes convinced that he is not capable of ever being able to eat chocolate cake. Of course, his body CAN eat chocolate cake, but he imposes a constraint on himself. And now you’re coming along propagating the myth that the man can’t eat chocolate cake because of this constraint. And all MMTers are doing is trying to describe the human body in a manner in which we can begin to understand that this man’s constraint is not real at all. We understand full well that he’s operating with in it, but that’s meaningless when it comes to understanding his body. You seem to have fallen for the mainstream myth that the self imposed constraints somehow change our operational realities. Nonsense.
To use that same analogy, the US will keep eating chocolate til it literally explodes.
Just watch your politicians fudge the debt ceiling issue, and continue to devalue the dollar.
You MMTers love the theory, and the technical aspects of the monetary system, but in reality the governments of the world just destroy wealth.
No doubt you are still not concerned abou the hyperinflation risk? Just wait a couple more years, all of you will be begging the government to stop printing.
It will happen, because you seem to ignore the political reality of the banking lobby controlling policy.
Go get some physical gold maybe?
“I have no idea where you get this notion that we don’t focus on the constraints. We focus too much on the constraints if anything.”
I think it’s from some of the catch-phrases, such as the one by Adam at the top of this thread, and sayings such as “all that fuss over a simple reserve drain”. They imply that there are no constraints.
There are places in the writings that refer to the constraints, and state that they do have an effect. There are other places that say that the constraints do not exist. There are other places that imply that they do not exist.
So the writings seem to be inconsistent. I would say overall that the constraints are acknowledged in places, but downplayed. Also, when MMT proponents make comments that imply there are no constraints, I have yet to see them corrected by another MMT proponent. Usually that is up to a non-MMT person to point out.
“What you’re saying is the equivalent of a man who is on a diet and won’t eat chocolate cake for a month. He then goes on to tell everyone around him that he can’t eat chocolate cake and the whole world becomes convinced that he is not capable of ever being able to eat chocolate cake. Of course, his body CAN eat chocolate cake, but he imposes a constraint on himself. And now you’re coming along propagating the myth that the man can’t eat chocolate cake because of this constraint. And all MMTers are doing is trying to describe the human body in a manner in which we can begin to understand that this man’s constraint is not real at all. We understand full well that he’s operating with in it, but that’s meaningless when it comes to understanding his body. You seem to have fallen for the mainstream myth that the self imposed constraints somehow change our operational realities. Nonsense.”
No I am merely pointing out the fact of the constraint. I would say the constraint exists. I’m not saying that he can’t eat chocolate cake. I would just say that he doesn’t, because of his self-imposed constraint. You would say there is no such constraint.
It’s not meaningless when it comes to understanding his body. In this case it is obvious that the constraint is a good thing. His body will be healthier for it.
MMT advocates that he cease the diet immediately because he is getting hungry. It misunderstands the effect of chocolate cake on the body.
Paul:
Sorry regarding any implication of blog posts being part of MMT theory (of which I am not any kind of authority); you made statements regarding MMT theory and also quoted Cullen a few times – sometimes hard to discern the specificity of your criticism.
So, if your argument is that any description of the monetary system must reconcile with political realities, could you point out the political components of your causation stream?
That may help clarify what some of us see as unnecessary but currently existing constraints.
“So, if your argument is that any description of the monetary system must reconcile with political realities, could you point out the political components of your causation stream?”
I need to modify that slightly to “legal and political realities”. The legal constraint in the causation stream is the requirement for the government to either borrow or tax to cover any spending.
My position is that removal of the legal constraint would undermine the viability of the currency, and have negative and eventually catastrophic effects on the economy.
That’s entirely your opinion. Removing the debt ceiling, would hardly be destructive….
PA: “My position is that removal of the legal constraint would undermine the viability of the currency, and have negative and eventually catastrophic effects on the economy.”
CR: “That’s entirely your opinion. Removing the debt ceiling, would hardly be destructive….”
I agree. I was referring to the legal constraint that forces the Treasury to levy taxes or issue bonds to the dollar value of all spending.
Paul, the legal requirement to match spending with taxes and borrowing only dictates the accounting. It does nothing to prevent excess reserves from piling up in the banking system caused by net government spending. That is an operational reality of a fiat monetary system. With this reality all government borrowing equal to excess reserves is nothing more than an asset swap.
Adam: “Paul, the legal requirement to match spending with taxes and borrowing only dictates the accounting.”
The accounting is very important. The accounts are what private investors look at when deciding whether to invest.
Adam: “It does nothing to prevent excess reserves from piling up in the banking system caused by net government spending.”
Reserves of course grow, through Fed treasury-bond purchases, lending collateralized by treasury-bonds, Fed purchasing of other securities and the like. I am not sure what you mean by “excess” in this context. It is correct that government borrowing, together with Fed behaviour, affects the level of reserves.
Under traditional FED operations it manages the level of reserves so that the markets keep short term interest rates where it wants them. By definition deficit spending by the treasury will create additional reserves. Any significant level of reserves above where the FED wants them is excess. Now the FED could drain them itself by swapping (selling) reserves for Bonds it holds, but it has a limited number of Bonds so it is far easier for the FED to have the Treasury do that. This is why there is collaboration between the FED and Treasury over bond sales.
Adam: “Paul, the legal requirement to match spending with taxes and borrowing only dictates the accounting.”
PA: “The accounting is very important. The accounts are what private investors look at when deciding whether to invest.”
Adam you did not respond to this, would you agree with the statement?
Adam: “It does nothing to prevent excess reserves from piling up in the banking system caused by net government spending.”
PA: “Reserves of course grow, through Fed treasury-bond purchases, lending collateralized by treasury-bonds, Fed purchasing of other securities and the like. I am not sure what you mean by “excess” in this context. It is correct that government borrowing, together with Fed behaviour, affects the level of reserves.”
Adam: “Under traditional FED operations it manages the level of reserves so that the markets keep short term interest rates where it wants them.”
I agree.
Adam: “By definition deficit spending by the treasury will create additional reserves.”
I agree.
Adam: “Any significant level of reserves above where the FED wants them is excess.”
OK – thanks for the clarification.
“Now the FED could drain them itself by swapping (selling) reserves for Bonds it holds, but it has a limited number of Bonds so it is far easier for the FED to have the Treasury do that.”
The Fed doesn’t have a limited number of bonds. Treasury is required by law to create new bonds and sell them, to cover deficit spending. You have stated previously that you agree that spending creates the need to create and sell the bonds, and that Treasury cannot run an overdraft at the Fed.
PA: “PA: “The accounting is very important. The accounts are what private investors look at when deciding whether to invest.”
Adam you did not respond to this, would you agree with the statement?”
Yes I would say that is a reasonable statement; but that said investor better understand where he is in relation to the counter party. Sometimes my assets might be the same as yours and other times my assets will be your liabilities.
In terms of government debt, they are private sector assets. In terms of fiat monetary operations there is ZERO insolvency risk; there is only real output risk – meaning if my bond matures and I decide to spend those mature dollars, if there are not enough real resources available to spend them on my money will be inflated away (or taxed away).
PA: “The Fed doesn’t have a limited number of bonds. Treasury is required by law to create new bonds and sell them, to cover deficit spending. You have stated previously that you agree that spending creates the need to create and sell the bonds, and that Treasury cannot run an overdraft at the Fed.”
Paul did you read your own comment. The FED does not create Treasury Bonds! The FED has a limited supply of Treasuries. The FED however can create reserves.
So it goes something like this… The FED says that it needs the banking system to maintain $80B in reserves in order to maintain its target rate. Mean while the Treasury issues bonds of $20B. The FED now must fill that reserve gap ($80-$20). The Treasury now spends that $20B it borrowed. Reserves now climb to $100B. The FED could use open market operations to drain the excess $20B or it could wait for the next Treasury issuance depending on when that was scheduled to occur. The point being the FED & the Treasury have to coordinate operations or the FED looses control of rates because the level of reserves doesn’t effectively get managed. You will also notice in this operation that the FED effectively loans the Treasury any shortage it might have between prior deficit spending and current bond/reserve needs without directly buying Treasury Bonds.
Adam: “Paul, the legal requirement to match spending with taxes and borrowing only dictates the accounting.”
PA: “The accounting is very important. The accounts are what private investors look at when deciding whether to invest.”
Adam: “Yes I would say that is a reasonable statement; but that said investor better understand where he is in relation to the counter party. Sometimes my assets might be the same as yours and other times my assets will be your liabilities.”
I agree.
Adam: “In terms of government debt, they are private sector assets. In terms of fiat monetary operations there is ZERO insolvency risk; there is only real output risk – meaning if my bond matures and I decide to spend those mature dollars, if there are not enough real resources available to spend them on my money will be inflated away (or taxed away).”
If you hold banknotes I agree. If you hold govt bonds there is default risk, as well as tax/inflation risk. This is because if the government ever had to choose between hyperinflation or default, it may choose default.
Adam: “Now the FED could drain them itself by swapping (selling) reserves for Bonds it holds, but it has a limited number of Bonds so it is far easier for the FED to have the Treasury do that.”
PA: “The Fed doesn’t have a limited number of bonds. Treasury is required by law to create new bonds and sell them, to cover deficit spending. You have stated previously that you agree that spending creates the need to create and sell the bonds, and that Treasury cannot run an overdraft at the Fed.”
Adam: “Paul did you read your own comment. The FED does not create Treasury Bonds! The FED has a limited supply of Treasuries. The FED however can create reserves.”
I didn’t say that the Fed creates Treasury Bonds. I said they don’t have a limited number. I see now that this can be ambiguous. What I mean is that they have plenty to sell if they want to. If they ever sell them all, then interest rates will be at their natural level.
You implied that the reason the Treasury sells bonds is because it is easier for them to do it than the Fed. This is not correct. They do it because they are required by law to do it, to cover any spending not covered by taxes.
Those in power (Paulson, Bernanke, Geithner) work with the reality.
The myths (“we can’t afford Medicare!”), for everyone else.
As I’ve come to think of it, since learning the basic tenets of MMT: MMT for the big financial powers, and Austrian economics for the rest of us.
Sorry, I keep bringing this up. But my readings on MMT have revealed what I consider a fairly significant phenomenon which greatly concerns me if true.
When a bank makes a loan, it creates money out of thin air (almost). To cover the loan, the bank need only come up with the increase in its required reserves. If it loans $10K, it needs to add $1K to its required reserves, if the required reserve ratio is 10%. (unless of course it just reduces its other assets to the tune of $10K).
One option for increasing the required reserves would be for the bank to issue $1K in new stock, and increase its cash position accordingly. Say it issues 100 shares to a single investor valued at $10 per share. (Also, assume the investor gets the $1K by selling a gold chain he had in his drawer.)
Hopefully, MMT proponents agree with this so far.
Now, say the $10K loan is completely defaulted. The bank writes it off 100% as an asset on its books. And it has excess required reserves of $1K (again at a 10% ratio, and assuming the banks other assets and liabilities did not change.)
The bank could then decide to do a stock buy back from the investor who bought the 100 shares when the loan was made, paying him $10 per share for his 100 shares, and thereby reduce the bank’s cash position and required reserves by this amount.
Leaving aside the issue of whether the loan default changed the supply of money, it seems clear that when a bank creates money by making a loan, it allows (as one option) a bank investor to put up $1K to make a $10K loan.
And then,even if the $10K loan defaults, this bank investor can still get his $1K back.
My readings on MMT and bank balance sheet transactions with respect to the money supply put me onto to this, although I realize this phenomenon is not necessarily the focus of MMT.
Nevertheless, unless I am missing something here, isn’t this a big deal, especially with respect to what should be the appropriate government policy response to the widespread mortgage default crisis?
Hello Winston,
A few things . . .
First, the “money multiplier” or “fractional reserve” model you’re working with is inapplicable. RR in no way restrict lending. Additional reserves are always forthcoming from the CB at a price the CB quotes at the worst. To do otherwise would leave the fed funds rate undetermined and threaten the payments system and overnight markets. Every CB does it this way, unless there is a currency board or similar arrangement. Many nations have gotten rid of RR altogether.
In the real world, the way to restrict lending is to (a) require capital (equity) against loans, (b) limit the types of assets banks can hold, (c) raise interest rates.
Second, going back to RR, this quote from you is incorrect: “Now, say the $10K loan is completely defaulted. The bank writes it off 100% as an asset on its books. And it has excess required reserves of $1K (again at a 10% ratio, and assuming the banks other assets and liabilities did not change.)”
There you’re making the classic mistake that my students used to before I started warning them 10 times daily not to make it. That is, writing off the loan eliminates the loan and reduces capital, but the deposits are still there–remember, the bank holds RR against deposits, not loans.
Hope that helps!
Scott,
Can you touch on the topic that Paul is discussing above. He notes that the government cannot technically spend until there is money in the Treasury’s account at the Fed. This is a very real constraint that means spending comes from funding. Now, I know the MMT argument, but can you clarify this? At what point is money really created? Would it be more accurate to say that the consolidated government creates money at the point when reserves settle bond issuance?
That particular issue was the reason why I wrote this: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198
Feel free to ask questions.
Scott,
Some comments on your paper:
“We have had numerous conversations with individuals responsible for Fed operations, Treasury operations, and relevant parts of the financial system, and cannot recall any significant disagreements there, as well.”
MMT contains some nuggets of truth – i.e. there are fatal flaws in the “money multiplier” and “loanable funds” as theoretical constructs. Therefore I am not surprised that you get agreement on those points. This does not validate the entire body of work.
“But another reason is that a number of people appear to confuse the MMT description of the operational realities of the monetary system with procedures self-imposed by existing laws and/or regulations.”
You neglect the possibility that these laws have profound effects on the operation of the monetary system. I think your views would have more credibility if you acknowledged this possibility, then described why you think the effects are negligible, rather than claiming that they are not real.
“But, this does not mean that the operational function of the Treasury’s bond sales to aid the Fed has changed—to the contrary, with or without legal prohibition of overdrafts for the Treasury’s account, either the Fed or Treasury must offset flows to/from the Treasury’s account to achieve the Fed’s target rate (with the caveat that interest on reserve balances can potentially eliminate this necessity).”
You are implying that without the legal constraint, the elected representatives would always act in accordance with the wishes of the Fed board of governors. Do you believe that they would?
“For MMT’ers, concerns that a nation cannot “afford” to put idle capacity to use through tax cuts or appropriately targeted spending (i.e., NOT bailouts of the financial system or pet political projects—MMT’ers dislike those as much as anyone) are akin to a person with his/her shoes tied together concerned that he/she can’t run.”
Here you imply that if the legal constraints were removed, the elected representatives would use their new overdraft facility to put idle capacity “to work”. If the Fed board of governors told them not to, would the elected representatives be able to ignore that?
“The self-imposed constraint for a sovereign currency issuer is thus clearly quite different from the constraints on, say, households or firms or even state governments”
It is different in that it is self-imposed. It is not necessarily different in in its effects on behaviour.
“In other words, while the ability to “just spend the money” is recognized in times of war or when a financial bailout is deemed necessary (by politicians, at least), MMT’ers want it to be just as obvious when the issue at hand is involuntary unemployment, crumbling infrastructure, children or retirees living below the poverty line, a major city devastated by natural disaster, and so forth.”
The constraints have been relaxed in times of war. This may be justified, as the country itself is in grave danger, so a risk of destroying the monetary system is probably worth taking.
The constraints have not been relaxed for financial bailouts as far as I am aware. However I agree that these financial bailouts were unconscionable.
There are risks to removing the constraints. You may believe there are none, but I have not seen a compelling argument – if you have one I would be interested to read it. To me the risks are great, and the consequences far worse than those you have listed, as bad as those may be (and I agree that they are very bad). Not as bad as a complete military defeat, perhaps.
By the way, I believe there are also similar risks to QE, and excessively loose monetary policy in general. These are risks that should not have been taken in my opinion. To remove the existing legal constraints would exacerbate these risks, rather than alleviating them.
“As I noted above, it is clear that the Fed cannot legally provide overdrafts to the Treasury, and every MMT’er does in fact understand this”
I am not sure how you can make the claim that every MMTer understands this. It is downplayed in the writings and consequently I think there are many who could be left with the impression that there is no such constraint. Certainly pro-MMT people commenting on blogs rarely mention this if ever.
In essence, MMT advocates a looser monetary policy than we have today.
For example, sectoral balances in effect in effect advocates a loose monetary policy using the following argument:
“the domestic private sector’s net saving of financial assets is by definition equal to the government sector’s deficit and the current account balance”
Converting this statement into everyday language (leaving out exports and imports):
“The domestic private sector’s surplus of lending to private parties over borrowing from private parties is by definition equal to the government sector’s deficit”
The original statement plays on people’s inclinations to view saving as a good thing. Therefore most people, on accepting the premise, would agree that deficit spending is always good. However the word “saving” as defined by sectoral balances is a different concept to what most people refer to when they use the term.
Private parties seek to increase their real wealth. Nominal lending and nominal borrowing are a means to that end. In a healthy economy they do this by helping to create real productive assets. A healthy interest rate ensures that the investments that do this, succeed, and those that don’t, fail. Free money from the government reduces the need to create real productive assets. The sectoral balances argument has at least two fundamental flaws – it misuses terms, and it ignores the fact that a healthy economy is built on an increase in the real value of real productive assets, driven by the desire for real wealth.
I would argue that loose monetary policy got us into this mess in the first place, and making it looser is not the way to clean it up.
“There are risks to removing the constraints. You may believe there are none, but I have not seen a compelling argument – if you have one I would be interested to read it. To me the risks are great, and the consequences far worse than those you have listed, as bad as those may be (and I agree that they are very bad). Not as bad as a complete military defeat, perhaps.”
yeah, there are risks. people are corrupted etc etc etc.
but now, talk about reality, because every rules fetishist that wants to focus on “no overdraft” and others
constraints (self-imposed) seems to forget the everyday. Seems to forget that the enormous debates
on debt, the enormous debates about some lack of money, the enormous debates aboult difficulty to have a real welfare State, the enormous debates about public health (etc) are really stupid, because really stupid is the main issue.
The main, omnipresent issue is a presumed lack of money. It’s a bullshit, so, when can we evolve?
when, we can go beyond the superstition (a self-imposed rule, that reflect an ideological and opportunist view of the monetary economics and in general of the world) and talk about real matters?
PA: “There are risks to removing the constraints. You may believe there are none, but I have not seen a compelling argument – if you have one I would be interested to read it. To me the risks are great, and the consequences far worse than those you have listed, as bad as those may be (and I agree that they are very bad). Not as bad as a complete military defeat, perhaps.”
Luigi: “yeah, there are risks. people are corrupted etc etc etc.”
but now, talk about reality, ”
Corruption is a part of reality.
Luigi: “because every rules fetishist that wants to focus on “no overdraft” and others constraints (self-imposed) seems to forget the everyday.”
I can’t speak for rules fetishists, but there are many who believe that the rule of law is a good thing, that are most concerned with the everyday.
“Seems to forget that the enormous debates on debt, the enormous debates about some lack of money, the enormous debates aboult difficulty to have a real welfare State, the enormous debates about public health (etc) are really stupid, because really stupid is the main issue.”
These debates are extremely important, and are more difficult to resolve now because easy options were chosen in the past. Allowing the elected representatives of the day to create money without constraints imposed by the laws and customs built up by many previous elected representatives is just another seemingly easy option for now that will make things even worse later.
“The main, omnipresent issue is a presumed lack of money. It’s a bullshit, so, when can we evolve?”
The main issue is that real resources are limited. Real resources can be used to numb current pain, with no increase in productive capacity, or they can be used to increase productive capacity, and reduce our future pain. Money is simply an intermediary.
“when, we can go beyond the superstition (a self-imposed rule, that reflect an ideological and opportunist view of the monetary economics and in general of the world) and talk about real matters?”
All of the laws on the statute books are self-imposed.
pay a pension is just credit a bank account, no real limited resources implicated.
pay an unemployment benefit is just credit a bank account, no real limited resources implicated. (or a job guarantee)
free public health (like many nations in Europe or Australia) is just credit a bank account, no real limited resources implicated.
free education (like many nations in Europe) is just credit a bank account, no real limited resources implicated.
All this, and others, are a NON problems. Free public utilities is a problem when presume a lack of money, not a real problem.
understand what I mean?
luigi: “pay a pension is just credit a bank account, no real limited resources implicated. pay an unemployment benefit is just credit a bank account, no real limited resources implicated. (or a job guarantee) free public health (like many nations in Europe or Australia) is just credit a bank account, no real limited resources implicated. free education (like many nations in Europe) is just credit a bank account, no real limited resources implicated. All this, and others, are a NON problems. Free public utilities is a problem when presume a lack of money, not a real problem. understand what I mean?”
After the bank account is credited, the elected representatives are legally required to tax or borrow an equivalent amount. This requires private parties to devote part of their labour or capital, i.e. real resources.
this is a very intelligent answer, Paul.
Also use a computer to credit an account is “use a real resource”, so don’t use computer, they are limited.
luigi: “Also use a computer to credit an account is “use a real resource”, so don’t use computer, they are limited.”
The miniscule resources used by a computer to credit an account obviously pale into infinitesimal insignificance compared to the the days, months and years of work required by millions of citizens to pay the taxes and interest.
yeah who deny that?
Paul, that’s stupid. Cullen constantly talks about how corruption is one of the primary things that leads to hyperinflation. You need to read the authors much more closely.
Luigi: “yeah, there are risks. people are corrupted etc etc etc.”
but now, talk about reality, ”
PA: “Corruption is a part of reality.”
SS: “Paul, that’s stupid. Cullen constantly talks about how corruption is one of the primary things that leads to hyperinflation. You need to read the authors much more closely.”
Why is it stupid?
I agree with Cullen that corruption is one of the primary things that leads to hyperinflation. I am not saying that I disagree with everything Cullen says.
OK, Paul, I think I finally see your points. Here is an analogy for you, hope you understand.
People invented a car and soon discovered that cars can crash. Therefore some very strict speed limit are imposed. They are so ingrained, that most people come to believe that their car are really incapable of driving above the speed limit! That if they do, they break up or something. Not only that, but observing the correlation between acceleration and pressure on the gas and brake pedals, additional constraint is imposed that people cannot press on gas with certain pressure for long periods of time and also that they should press on brakes every once in a while for good measure. Again, the rule becomes so ingrained, that the populace believes the car really cannot be driven otherwise.
Now somebody finds himself on a steep slope with his car stalling. HE remembers all the rules about not pressing on gas. He thinks there is really nothing that can be done to get the car over the hill.
Do you see the point of my analogy? Do you understand the difference between describing how the car really works and describing the rules imposed on car drivers in the name of safety? Do you see that sometime those rule can become very counterproductive – that driving should be adjusted to road conditions? That maybe better educated drivers could drive more efficiently than the indoctrinated ones?
Peter D: “OK, Paul, I think I finally see your points. Here is an analogy for you, hope you understand.
People invented a car and soon discovered that cars can crash. Therefore some very strict speed limit are imposed. They are so ingrained, that most people come to believe that their car are really incapable of driving above the speed limit! That if they do, they break up or something. Not only that, but observing the correlation between acceleration and pressure on the gas and brake pedals, additional constraint is imposed that people cannot press on gas with certain pressure for long periods of time and also that they should press on brakes every once in a while for good measure. Again, the rule becomes so ingrained, that the populace believes the car really cannot be driven otherwise.
Now somebody finds himself on a steep slope with his car stalling. HE remembers all the rules about not pressing on gas. He thinks there is really nothing that can be done to get the car over the hill.”
In terms of your analogy, I think MMT contains some propositions that say “the speed limit does not exist”, and other propositions that say “the speed limit exists but should be removed”. The former is obviously not true, and the latter is a recommendation, not a description of current reality.
What I am saying is that the speed limit exists and is a good thing.
Your gas pedal analogy represents more of a custom. I don’t think it corresponds to anything in the monetary system – maybe you can point out what you think it represent. The speed limit corresponds to the legal restrictions that enforce taxation and borrowing to cover spending.
“Do you see the point of my analogy? Do you understand the difference between describing how the car really works and describing the rules imposed on car drivers in the name of safety? Do you see that sometime those rule can become very counterproductive – that driving should be adjusted to road conditions? That maybe better educated drivers could drive more efficiently than the indoctrinated ones?”
Yes I see the difference between describing how the car really works and describing the rules imposed on car drivers. In terms of your analogy, MMT tries to do both. Some parts of MMT describe how the car works, and state that it can be driven at very high speeds. Other parts state that there is a speed limit. Other parts state that there is no speed limit. The parts that acknowledge the speed limit generally state that the speed limit should not be enforced.
And what MMTers are saying is that (a) the car can really be driven above speed limit and (b) that current focus on the speed limit is killing us, because it prevents the car from even moving. In general, understanding of the way the car really operates and what are safe/unsafe driving practices are better than the simplistic and at times totally counterproductive rule of thumb of the speed limit (of course, in my analogy world; I am not necessarily advocating removing speed limits in general, though I know some libertarians are )
Well, the speed limit is akin to maybe debt ceiling and the idea that big deficits are inherently dangerous. Gas/brake pedals are spending/taxation, and their effect on speed ties into the fear of high deficits/debt. All approximate, of course.
Not exactly. I agree with you that MMT is a kind of a loosely defined set of ideas that incorporates different parts, such as descriptions of the actual working so f the system, descriptions of the constraints put on the systems, judgments as to why and then some of the constraints are either meaningless or counterproductive, the prescriptive part… MMT does not think that the system should not have constraints. Instead, MMT proposes its own set of guidelines, knows as the “Functional Finance”. MMT sees actual constraints as the availability of real and human resources and posits that when there is too much demand in the system the effect is inflation and when there is too little demand the effect is unemployment. The prescriptive part of MMT then proposes to vary govt spending – one of the biggest levers to demand – to achieve full employment with price stability.
The last sentence is not right. Rather than “govt spending”, I should have said “govt deficit”.
PA: “In terms of your analogy, I think MMT contains some propositions that say “the speed limit does not exist”, and other propositions that say “the speed limit exists but should be removed”. The former is obviously not true, and the latter is a recommendation, not a description of current reality. What I am saying is that the speed limit exists and is a good thing.”
Peter D: “And what MMTers are saying is that (a) the car can really be driven above speed limit”
Some MMTers say that, in some places. Others say there is no speed limit.
Peter D: “and (b) that current focus on the speed limit is killing us, because it prevents the car from even moving.”
How does a speed limit prevent a car from moving? How does a non-moving car kill us? (I know, the analogy is too stretched).
I think (a) and (b) are at least tenable positions to hold (although I disagree with them). There is also a “(c) there is no speed limit”, which is untenable.
Peter D: “In general, understanding of the way the car really operates and what are safe/unsafe driving practices are better than the simplistic and at times totally counterproductive rule of thumb of the speed limit (of course, in my analogy world; I am not necessarily advocating removing speed limits in general, though I know some libertarians are )”
I understand what you are saying. My position is that the constraint is actually the best way to regulate money creation, but we can debate that elsewhere.
PA: “Your gas pedal analogy represents more of a custom. I don’t think it corresponds to anything in the monetary system – maybe you can point out what you think it represent. The speed limit corresponds to the legal restrictions that enforce taxation and borrowing to cover spending.”
Peter D: “Well, the speed limit is akin to maybe debt ceiling and the idea that big deficits are inherently dangerous. Gas/brake pedals are spending/taxation, and their effect on speed ties into the fear of high deficits/debt. All approximate, of course.”
Fair enough. As I said, I think the analogy is too stretched. To me the debt ceiling only plays a bit part and is not really anything like the gas pedal.
Peter D: “Do you see the point of my analogy? Do you understand the difference between describing how the car really works and describing the rules imposed on car drivers in the name of safety? Do you see that sometime those rule can become very counterproductive – that driving should be adjusted to road conditions? That maybe better educated drivers could drive more efficiently than the indoctrinated ones?”
PA: “Yes I see the difference between describing how the car really works and describing the rules imposed on car drivers. In terms of your analogy, MMT tries to do both. Some parts of MMT describe how the car works, and state that it can be driven at very high speeds. Other parts state that there is a speed limit. Other parts state that there is no speed limit. The parts that acknowledge the speed limit generally state that the speed limit should not be enforced.”
Peter D: “Not exactly. I agree with you that MMT is a kind of a loosely defined set of ideas that incorporates different parts, such as descriptions of the actual working so f the system, descriptions of the constraints put on the systems, judgments as to why and then some of the constraints are either meaningless or counterproductive, the prescriptive part… MMT does not think that the system should not have constraints. Instead, MMT proposes its own set of guidelines, knows as the “Functional Finance”. MMT sees actual constraints as the availability of real and human resources and posits that when there is too much demand in the system the effect is inflation and when there is too little demand the effect is unemployment. The prescriptive part of MMT then proposes to vary govt spending – one of the biggest levers to demand – to achieve full employment with price stability.”
OK. See above re (c) which is what most MMT commenters seem to believe. The rest we can debate elsewhere.
Paul. If you indeed read MMT sites carefully, I don’t think you’d say most MMTers believe there is no speed limit. MMTers recognize that spending in excess of productive capacity is bad. That’s the real speed limit.
In your analogy the speed limit refers to the legal requirement that Treasury tax and borrow to cover spending. That constraint is the one to which I am referring when I mention “speed limit” in the context of your analogy.
Absolutely ridiculous, Paul. I only posted that because someone asked what my response was. You have no idea what you’re talking about, which is why I’ve never seen any reason to respond to your comments.
Scott,
I read that paper you posted for me. Thanks. It helped a lot. I am still having trouble with one point though. The government forces the TT&L account to be replenished before spending occurs. Obviously, taxes can only be paid with existing dollars, but what about the debt? Kelton’s explanation implied that bonds are not bought with existing money and instead settle with reserves supplied by the Fed (do I have that right?). Can you clarify that point?
Thanks!
Btw, I understand that this is all like trying to “find the beginning of a circle” (as Cullen said), but I am just trying to get the operations right.
Scott,
I just re-read it. Let me know if this is right. So, when the banks lends money to the US government it is not “spending” out of current money. Instead, it is lending just as it does to the private sector. Not out of reserves, but instead out of thin air. This settles in new reserve balances. The bank gets the bond and the Treasury gets the new loan.
I think that’s it, right?
Whew, that is really clear now. I think!?!!
SS,
Banks don’t loan the government money (that would create a loan and a deposit but not reserves), even from out of thin air. Scott can correct me if I am wrong but this is the logic…
1) Government issues/sells bonds
2) If said bond sale drains more reserves than are excess reserves from prior deficit spending the FED wont be able to maintain its target rate (aside from paying interest on reserves)
3) To maintain its target rate the FED will add back the reserves taken by the bond sale
While the Treasury is not legally allowed to sell bonds to the FED and the Treasury is not allowed to overdraw its account (self-imposed constraints), in the end the bond sale still is never “funded” (operationally).
SF: “Absolutely ridiculous, Paul”
Which of my comments are ridiculous, and why?
Paul Andrews-
I want to thank you for the patient and respectful nature of your posts; most enjoyable. You bring up a good point wrt MMT and the need for bond issuance in our hybrid system. It would seem that there are ways to sidestep that issue and pay without having to issue bonds, but in the end, we still come to the point of real resources being at issue. Hyperinflation doesn’t worry me so much.
Still, it seems that the issue of real resources is a bit dodgy, as it often is a variable, especially when there’s so much unemployment.
Your thoughts?
John H: “Still, it seems that the issue of real resources is a bit dodgy, as it often is a variable, especially when there’s so much unemployment.”
Yes labour capacity unused cannot be saved, unlike many other resources. Even worse, the devil makes work for idle hands.
Labour capacity spent on unproductive tasks solves the latter but does nothing for the former.
Who is best to decide which tasks are productive and which are not?
There are always many real things to get done. Take a look around your house or street and I am sure you will instantly see many tasks that could be done to improve the house or street. You can see these so clearly. A central federal government cannot.
We all have different abilities to perform these tasks. If you are good at mending fences and I am good at growing food, then we are both better off if you mend my fences and I give you some food I grew in return. The federal government has no idea that my fence is broken and that you like particular kinds of food.
People will naturally perform tasks for each other if they are left to do so, and they have a need to do so.
Individual citizens know what they want, what their neighbours want, and what needs to be done. Doing these things is the essence of productivity.
A real job has two components: productive work, and compensation. Government can only guarantee one half – the compensation. Sometimes they create real jobs, with both components, but often they create only the compensation – this is not a real job.
For each person being compensated but not productive, there exists a range of productive tasks that could have been performed, but are not being performed. And if the compensation is not paid for from taxes, it takes the country further into unsustainable debt, because not enough production is created to cover the interest.
The above factors tend to be ignored by those who would have the government spend more and more “stimulus” money to create jobs.
Paul Andrews -
I think you bring up some good points and it’s always a good idea to find some way to “roll your own” if employment is not forthcoming.
Still, I don’t think one or the other type of guidance always works a certain way under changing circumstances. Some of the tenants of MMT might be useful here. For instance:
1. The gov’t might spend money most effectively at a certain time in a crisis as it can replace dollars lost by increased desire to save. Timing is important here and reducing collateral damage should be a focus. Cutting taxes to a minimum would be an excellent place to start. The goal here would be to stabilize the velocity of money in the affected subsector. Once again, (to borrow from a saying in the Real Estate world) the key is timing, timing, timing. And quantity.
2. I think Warren’s idea of a job guarantee would be a good start, placing willing people in private sector jobs and providing a percentage of their previous salary. Keeping or improving skills and aggressive exposure to the job market would be important factors here. Once again, a stitch in time saves nine, so timing is important. Perhaps an eye towards GDP, etc. would help us know when to change focus?
Perfect? Not likely. An improvement? Possibly. There seem to be many willing to “ask the question” in times like these.
In the real world, the way to restrict lending is to (a) require capital (equity) against loans, (b) limit the types of assets banks can hold, (c) raise interest rates. Scott Fullwiler
What about requiring matching maturity dates between 1) what a bank owes and 2) what that bank is owed so that the bank is at all times solvent? To my mind that constitutes genuine lending and not so-called “credit” creation.
Maturity matching doesn’t change anything.
If the loans go bad, the bank isn’t solvent. And even before solvency, loans going bad or even being late on payments can mean a liquidity crisis if you’re perfectly matching. And obviously, insolvency is a liquidity event. And liquidity events will pyramid, even in a maturity matching system. The only way around that is central bank credit. And once you’ve allowed central bank credit, you will have endogenous credit creation.
Nah – you do realise you are creating the worlds reserve currency don’t you.
No country should be exposed to such ultimate power – it corrupts absolutely.
No problem really with whatever monetory system a country wishes to have – but a monopoly on the worlds spice outside ones borders is a bridge too far for me.
Those reserve tokens are energy units – the advantage of a Gold based monetory system particullary involving international trade is not one country can have a monopoly on reserve units.
The damage since 1971 to technological advancement and the western world in general has been epic.
This monetory opium has corrupted absolutely – it is the reality of our sad existence but that does make it the most efficient system.
Its a bit like saying slavery under the Romans was the most productive system – there was no incentive for technological change as slavery was the default postion of the elites so by default it was the most productive system.
MMT is a terrible accounting system period
I’m not sure I agree completely. For example, the floating rate exchange system punishes any currency that is continually debased (even the reserve currency). This USD exchange rate depreciation steals the wealth of holders of USD and USD denominated assets. In some ways this instant “transfer of wealth” from exchange rates changes is similar to the transfer of physical gold (wealth) by central banks before the gold window was closed.
Previously the wealth loss was absorbed by the central bank and the currency remained fixed to gold. The transfer of gold may require a decrease in the available money supply which over time could restrain economic growth and wealth of the currency users. Now, this wealth loss is absorbed largely by the general population who face more immediate wealth consequences resulting for exchange rate fluctuations.
Said differently, there are exchange rate consequences if the deficit spending does not lower the debt/GDP ratio (or produce a GDP multiplier of greater than one). Even if the debt/GDP ratio increases, the government can never run out of money but the utility of each additional dollar issued diminishes as the currency depreciates.
When the reserve currency is debased the now higher oil price finds it way back to New York – enriching some – the dollars are recycled baby.
Its why both Londons and New Yorks hinterland is a industrial wasteland.
The industrial base has been destroyed by asset inflation creating a strange neo-feudal system.
http://www.youtube.com/watch?v=5U-sNn28dJk
the advantage of a Gold based monetory system particullary involving international trade is not one country can have a monopoly on reserve units. The Dork of Cork
If gold is such a wonderful money form then it surely needs no help from government. Nor should it be hindered as it is by the capital gains tax which should be totally abolished and not just for gold.
F,Beard
We would not experience such hugely destabilising trade surpluses & defecits ,Pension funds , sovergin wealth funds etc under a Gold system – even a partial one such as Bretton Woods.
When France & Switzerland called Americas bluff after Vietnam the money was chickenshit compared to now.
One definition of ‘money’ from a Tibetan monk that I know of, is (paraphrasing liberally): ‘the concretisation of vitality or human energy, guided mainly by desire, with a little bit of thought thrown in’.
I think this human aspect sub standing money is just as important as any systemic discussion. The thing about money is that it has grown over the millennia from something meant to minister to personal and family needs, to something in the hands of the great capitalistic systems – the future we desire for it is to minister to group and world need.
This will be impossible unless greed, selfishness and short-sightedness are overcome.
Money currently flows into all of the myriad homes; the great capitalistic systems and monopolies, religious, philanthropic, educational and medical institutions of the world – yet such a teeny proportion of it is spent in reality on betterment of human living; or for the inculcation of values that will lead to Peace and better human relations.
These are the true ‘imbalances’ of the world.
So much money is deflected into non-essential material aspects of living that are little better than entertainment or indulgence; or money is held back because of separative differences in opinion, or prejudice – such that the true assistance of humanity (one species on one planet earth – the only one for light years around) is overlooked.
Not one government has a Department of Peace, or a Department of Ending the Suffering and Starvation with a budget to match the essentialness of its mission. Yet people have always clamored for peace, justice and a sense of security.
In all of this, the right use of money and a realisation on the part of our so-called ‘world leaders’ as to their actual responsibilities would help. This sense of financial responsibility is to be found nowhere other than in a few. While we wait much of humanity starves, remains uneducated, or is brought up on false values.
All because of the wrong use of money.
Besides ministering to personal need, money is useless without meaning and purpose. I wish that were ‘the focus of reality’.
Cheers …
jrbarch
Thanx Scott….
Your clarifying comments were helpful. I have a lot to learn about MMT.
Here’s a website I’ve been reviewing lately, and for some reason I thought it was an MMT website. I guess not.
http://ingrimayne.com/econ/Banking/CheckingClearing.html
Do you have a book or website you could recommend that emphasizes the basics of MMT? I try to follow this website, but frankly it is hard to keep up with all the commentary, and I’m such a neophyte in MMT, although it is probably one of the most interesting and informative websites of those I do read.
It depends on what you are interested in.
There’s Cullen’s primer on MMT under “tools and resources” above, that also has many links.
Randy’s doing an MMT primer at the KC blog.
Warren’s book at his website and also “mandatory readings.”
Let me or Cullen know if none of these get at specifically what you’re after.
hey Cullen,
I’ve been reading your articles for some time now and have used the info contained therein to buttress my arguments a number of times on a Finance blog here in New Zealand. I feel as though I waste my time, because it never seems to sink in. Most people approach their economic arguments from a totally defunct 19th Century angle that wasn’t appropriate to the 20th let alone the 21st.
I initially approached economics from a monetary reform (or crank) angle, but have since been forced to recognize the political nature of the “science” and have become a committed anarchist.
“And therein lies one of the great problems with modern economics. It is based too much on pie in the sky thinking and not based on what is happening on the ground, in the trenches.”
The above is a regular complaint amongst economic apostates (non neoclassical economists).
Joan Robinson, argued that neoclassical economics,”sets up a ‘model’ on arbitrarily constructed assumptions, and then applies ‘results’ from it to current affairs, without even trying to pretend that the assumptions conform to reality.” [Collected Economic Papers, vol. 4, p. 25]
“Economics has increasing become an intellectual games played for its own sake and not for its practical consequences. Economists have gradually converted the subject into a sort of social mathematics in which analytical rigor as understood in math departments is everything and empirical relevance (as understood in physics departments) is nothing . . .:”
Mark Blaug
It would be a severe mistake to believe or to argue that it is nothing more than an error or an oversight that economics does not dwell on real issues or isn’t based on reality, for it is no accident. Doesn’t it seem just a little convenient that the way that economics instruction has become structured just happens to serve the wealthy?
“Economic instruction in the United States is about a hundred years old. In its first half century economists were subject to censorship by outsiders. Businessmen and their political and ideological acolytes kept watch on departments of economics and reacted promptly to heresy, the latter being anything that seemed to threaten the sanctity of property, profits, a proper tariff policy and a balanced budget, or that suggested sympathy for unions, public ownership, public regulation or, in any organised way, for the poor.” [The Essential Galbraith, p. 135]”
Back in the 1890s when the power of the wealthy wasn’t vulnerable to challenge Alfred Marshall commented with an admirable degree of candour, “From Metaphysics I went to Ethics, and found that the justification of the existing conditions of society was not easy. A friend, who had read a great deal of what are called the Moral Sciences, constantly said: ‘Ah! if you understood Political Economy you would not say that’” [quoted by Joan Robinson, Collected Economic Papers, vol. 4, p. 129]
Joan Robinson added that “[n]owadays, of course, no one would put it so crudely. Nowadays, the hidden persuaders are concealed behind scientific objectivity, carefully avoiding value judgements; they are persuading all the better so.” [Op. Cit., p. 129]”
http://infoshop.org/page/AnarchistFAQSectionC1
“This is why we reject so much of the economics that is taught in textbooks predicated on defunct gold standard beliefs and the thoughts of men and women who have never actually been involved in monetary operations or the mechanics of what makes an economy and/business work in the real world.”
Well, the problem becomes far worse when you recognize how few people that operate businesses or work in money market operations understand or particularly care how sustainable businesses actually function in the real world.
Bill Waddell, one of the preeminent consultants on the Toyota Production System, wrote an article that dovetails whats become a familiar refrain about neoclassical economics and he argues that it applies to much of the American business community as to macroeconomics.
“He irritated the economics community with a paper he presented in 1971 called “Theoretical Assumptions and Nonobserved Facts” in which he took them to task for creating ever more complicated mathematical models based on bad data. Economic theories are then explained in papers that explain the complicated math at great length, but “By the time it come to interpretation of the substantive conclusions, the assumptions upon which the model is based are easily forgotten.” He bemoaned the fact that conjuring up a more elegant model to manipulate data was deemed a greater achievement than finding new and better data to feed into basic models.
Economists are not alone in their guilt. They are just easy targets because their theories are so detached from reality, and their efforts to defend their theories in the face of overwhelming evidence of absurdity they make easy targets. In fact, manufacturers are just as guilty. Consider a couple of examples:”
Read more: http://www.evolvingexcellence.com/blog/2011/07/theoretical-assumptions-and-nonobserved-facts.html#ixzz1T5X7OxlB
at Evolving Excellence
Read more: http://www.evolvingexcellence.com/blog/2011/07/theoretical-assumptions-and-nonobserved-facts.html#ixzz1T5VwlKJO
at Evolving Excellence
There is a continuing discussion over Sumner’s blog. Warren chimes in every now and then, but I’d love to see Cullen or Scott participate too. For example, here is Scott Sumner:
(http://www.themoneyillusion.com/?p=10178&cpage=5#comment-70613)
So, I think he is saying we should see inflation of 100% with a 100% increase in non-interest bearing reserves when demand is not depressed/interest rates are positive. MMT, I think, does not agree, but I am not sure how to present the argument in the best manner.
Do any of you bother to look at how our monetary system was introduced? It was introduced at all. It was a breach of contract under disguise of law. It was a violation of private property and promise to pay. It’s the very cause of our sideways movement over the last decade. When will you figure out the aggregations of Income, Savings, and Sectoral Balances don’t have any meaning? Only invidual transactions matter. Prices aggregated etc. are futile attempts to make sense of a fictional actor i.e “Society”.
As a matter of pragmatism we’d all be better off allowing people to transact with their property as they see fit. That is: get rid of legal tender laws. Let’s see how how the freely floating exchange rate takes to sink like a stone.