Too literal-minded? A theory of the strange world of the MMTers

I recently did a post trying to figure out whether there are any non-quantity theoretic models of the price level.  It led to one of the most intense debates I’ve ever seen in my comment section, and even other bloggers chimed in with posts.  But no one came forth with a non-quantity theoretic model of the price level.  It is very important that any monetary theory be able to explain why prices aren’t 100 times higher, or 100 times lower.  Thus I’m more inclined than ever to think the QTM is the best starting point for monetary theory (although obviously it’s not literally true that M and NGDP grow at the same percentage rates.)

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.”  This is the idea that the central bank controls the total quantity of money, but each individual controls their own personal “money supply.”  So if the Fed injects more money into the economy, something has to give to equate money supply and demand.  Initially there is too much money in circulation, and people pass the excess balances to one another like a hot potato.  This process drives up NGDP, until the public is willing to hold the new quantity of money.

Importantly, it’s very hard for individual people to see how this process works, as the Fed injection of cash doesn’t make anyone richer.  They swap cash for bonds, at fair market value.  But if no one is richer, why should AD go up?

The easiest way to see the process work is to imagine an economy without banks, where the new money goes right into circulation as currency.  Most people can instinctively grasp that more currency, without any increase in real goods being produced, will lead to inflation.  But when you add a banking system it’s much harder to see the hot potato effect, because now the new money can show up as either cash or bank reserves.  It looks like individuals who didn’t want to hold excess cash, could simply put it in the bank.  But of course the bank usually doesn’t want to hold a lot of excess cash (reserves) either, and so you can still have the hot potato effect.

Now let’s look at an example, first from my perspective, then theirs:

The Fed wants to raise the price level by 10%.  So they decide to suddenly increase the monetary base by 10%, and then continue on with the same money supply growth rate as before.  This should cause a 10% one-time rise in P, and in NGDP, compared to the no-action alternative.  But if they actually did this in a modern economy, it would create a big mess.  NGDP doesn’t change immediately, so it’s be hard to generate demand for that extra cash.  Even so, the Fed can literally force base money into the economy, by selling [I meant buying] bonds.  I believe the MMTers, argue that trying to do this would drive rates to zero.  That may or may not be true; they tend to overlook that the interest rate isn’t just the price of money, it’s also the price of credit.  So a highly expansionary policy can increase interest rates under certain conditions, for certain maturities.  But let’s assume rates did go to zero.  Then AD would rise, and eventually NGDP would increase 10%.  At that point the public is willing to hold the larger cash balances, and the nominal interest rate returns to its original level.

Because this process would be messy, real world central banks would use a much more subtle process, involving signaling.  They will signal the desire for 10% higher NGDP though various mechanisms–a higher inflation target, a lower exchange rate, or most commonly, a lower fed funds target rate.  If credible, this signal will boost AD.  To some that seems like handwaving (the inflation target more so than the interest rate.)  It’s actually an implied commitment to provide 10% more base money at that future date when NGDP is 10% higher.  But in that case the cause of the higher NGDP (more cash in the long run) seems to occur after the effect (higher NGDP growth.)  To many people, that is deeply disturbing.  An observant reader will have noticed that cause doesn’t actually follow effect in this case, the true cause of everything is a sudden expectation that future levels of currency will rise by 10%.  So cause actually does precede effect.

My hunch is that the MMTers are fooled by this process.  They probably have a better understanding of modern central banking than most non-MMTers, certainly better than mine.  They see the central bank targeting rates, and when the target changes, there is often almost no immediate change in the monetary base.  Instead, things like loans may pick up.  To prevent the interest rate from deviating from the target, the central bank is virtually forced to respond to those bank actions by adding more reserves.  This makes the monetary base seem endogenous, and in the extremely short run it is, at least under modern central bank practices.  In the future, the advent of IOR may make central banking resemble the MMTers model even more closely.

Nevertheless, even though money seems endogenous, it actually isn’t.  A permanent peg of the interest rate would leave prices unanchored, or indeterminate.  Thus the central bank moves rates around in a fashion that will eventually move the monetary base around in a fashion that will tend to keep P and NGDP on the target growth path.  So the base is actually doing all the heavy lifting, even though the specific procedure used by central banks makes it seem like the tail of the dog.

That’s why it’s so important to do thought experiments with monetary regimes lacking a banking system.  This allows us to first work out the basic principles of what determines the price level, i.e. what determines the value of money.  Once we’ve done that we can ask whether adding banking actually changes anything fundamental.  I say it doesn’t, but obviously the MMTers disagree.

Still it seems to me that anyone attacking my position first needs to develop a model of the price level (not inflation, but the level of prices.)  I’m convinced that only the QTM can do this, and still explain why Australia and Canada have similar price levels but Canada has more than 5 times as large government liabilities.  My answer is that both countries have similar currency stocks (per capita.)  And it’s the currency stock that matters; not total government liabilities.

The best way to understand modern sophisticated central banking is to study the most primitive monetary system possible–a medieval king debasing his money in a country lacking banks.  The causal chain between debasement and inflation is no different from the causal chain between OMPs of T-securities and inflation, at least in the long run when nominal rates rise above zero.


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323 Responses to “Too literal-minded? A theory of the strange world of the MMTers”

  1. Gravatar of Left Outside Left Outside
    22. July 2011 at 10:21

    Relatively off topic… most people don’t have a clue what the central bank is doing, many fewer have a clue what the central bank will do in the future.

    I completely concede that expectations play a large role in monetary policy, but whose expectations precisely? Is there an elite cognoscenti whose expectations overwhelm the inaction of most citizens in an economy? Always wondered.

  2. Gravatar of Left Outside Left Outside
    22. July 2011 at 10:22

    I completely concede that expectations play a large role in monetary policy

    Should say, I completely concede that empirically you can see expectations playing a role, a prioiri I have some problems, but beautiful truths/ugly facts etc.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. July 2011 at 10:25

    I’ll get grief for this but like DeLong, I regard Modern Monetary Theory as none of the above. It’s more Ancient Fiscal Tautology.

    1) Ancient
    Chartalism, which is the intellectual foundation of MMT, was developed by G.F. Knapp in the 1920s, with contributions by Alfred Mitchell-Innes and Abba P. Lerner over 60 years ago. Not much of substance has happened since.

    2) Fiscal
    Exchanging money for goods or services is called “spending”. Issuing bonds in exchange for goods or services is called “borrowing.” Funding the difference via taxation is called “taxing.” Spending, borrowing, and taxing together make up fiscal policy, not monetary policy.

    3) Tautology
    Unless the proponents of a point of view, like MMT or Austrian Praxeology, admit that it is a set of assumptions that is falsifiable, then they don’t have a theory, they have a tautology.

  4. Gravatar of Kamil Kovar Kamil Kovar
    22. July 2011 at 11:22

    Simple question – what if lending does not go up and banks hold large excess reserves, as they do now? What can Fed do, to hit its target NGDP?

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. July 2011 at 11:46

    ‘…the interest rate isn’t just the price of money, it’s also the price of credit. ‘

    I don’t like that at all. The interest rate isn’t even the ‘price’ of money. Not the price of buying money, that is. Interest is the price of renting money. The prices of buying money and renting money often move in opposite directions.

  6. Gravatar of K K
    22. July 2011 at 11:52

    Scott: “Even so, the Fed can literally force base money into the economy, by selling bonds.”

    You mean buying bonds, no? But I would agree with the MMTers (if that’s their position) that the Fed cannot simultaneously control the amount of reserves *and* set the FF rate. You can’t credibly claim to control two targets when you only interfere in one market (OMO repos).

    Scott: “A permanent peg of the interest rate would leave prices unanchored, or indeterminate.”

    P and M would run away to one of two fixed points: zero or infinity.  I wouldn’t call it indeterminate though.

  7. Gravatar of K K
    22. July 2011 at 11:57

    Sorry, I get it.  The Fed, in a normal monetary environment could do both repos *and* QE, if they so chose.  Good point, and yes they could control both the level of reserves *and* the FF rate that way.

  8. Gravatar of flow5 flow5
    22. July 2011 at 12:01

    “it’s not literally true that M and NGDP grow at the same percentage rates”

    Rates-of-change in monetary flows (our means-of-payment money X’s its transactions rate-of-turnover) is exactly equal to the roc in either real gDp or the roc in inflation. There is absolutely no deviation.

  9. Gravatar of E. Barandiaran E. Barandiaran
    22. July 2011 at 12:10

    It’s not clear how far you want to go. I’m ready to argue that in most countries today we have systems in which:

    1. Money = currency and the flow supply of currency is to finance the government deficit. The stock of currency is whatever it has been accumulated in the past.

    2. Government deficits may also be financed by issuing debt. This debt is not money because it is not used as means of payment (the fact that under some conditions some types of this debt may become a close substitute of currency as a store of value is totally irrelevant to currency as a means of payments). Whenever governments cannot issue debt (high marginal cost of borrowing), they rely entirely on issuing currency.

    3. In addition to a monetary system of payments based on fiat currency, there exists an accounting system of payments based on debit/credit entries that is run by commercial banks and other authorized institutions (for example, credit unions). Thanks to new technology, accounting systems of payments have expanded considerably in the past 40 years and the possibility of eliminating fiat currency cannot be ignored. The operation of the accounting system of payments is just a minor activity for all commercial banks. Because of economies of scale and the need of special security measures to protect payments (the settlement of transactions), accounting systems of payments would be better run by organizations that are not financial intermediaries.

    4. Leaving aside their role as issuers of the currency to finance government deficits and as accounting agency of currency issued, central banks are financial intermediaries that borrow from commercial banks and sometimes from other intermediaries to fund portfolios of bonds and loans as well as foreign currencies and gold. Commercial banks may be forced to lend to central banks (forget about the justification that the banks need to hold reserves) but they may also lend to central banks voluntarily.

    5. Central banks cannot control the price level and therefore inflation because they do not control the flow supply of currency. Their financial intermediation may affect inflation and the price level in the short run, but it is the stock of currency that determines the price level in the long run. The best evidence of this point is what happens to the price level in hyperinflation blow-ups. (BTW, in the past 30 years most government deficits of advanced economies have been financed by debt and therefore inflation has been under control –it has nothing to do with Taylor rules or other ideas of great economists. Anyone interested in this problem must study the experiences of Chile and Argentina since 1975).

    6. Depending on the scale of their operations in relation to the size of the economy and on the particular assets in which the borrowed funds are invested, central banks may affect significantly the prices of those assets and perhaps the level and structure of asset prices (and by extension of interest rates).

    7. In sum, modern systems of payments are in the hands of politicians that run governments as the fraudulent clowns they are (the case of fiat currency) and in the hands of financial intermediaries (the accounting systems of commercial banks) that take the risks of their many financial operations which in turn justifies the additional intervention of governments to prevent excessive risk taking. None of these institutional details are taken into account in monetary economics and in QTM.

  10. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 12:19

    Left Outside, The various financial markets (stocks/commodities/bonds/forex) are by far the most important. Average people take their lead from those markets.

    Mark, Well he was looking at a different question. And of course his take is much more clever than mine (as usual.)

    kamil, You can reduce the demand for reserves in several ways. The easiest is to lower the interest on reserves, make it negative if necessary. Or raise the nominal return on alternative assets by increasing the inflation/NGDP target.

    BTW, the goal isn’t to boost lending, but rather to boost spending.

    Patrick, You are right, I should have said rental cost of money. I meant it’s the price that equilibrates money supply and demand, before the price level has had a chance to adjust.

    K, That’s right, I’ll fix that.

    flow5, No idea what you are talking about, maybe someone else can address your claim.

  11. Gravatar of John John
    22. July 2011 at 12:27

    “they tend to overlook that the interest rate isn’t just the price of money, it’s also the price of credit.”

    I remember you chiding me for saying that interest rates are a price of money, arguing that they were solely a price for credit. So which one is it? As a fan of Mises, I thought interest rates reflected time preference, risk premium and price premium (inflation/deflation). As such it is really the discount on future vs present goods rather than a price.

  12. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 12:27

    E. Barandarian, I was mostly with you until point 5. Central banks can control the price level, by controlling the currency stock. The role of central banks in deficit finance is trivial in most countries, including the US.

    Central banks can influence all nominal variables in the economy—all prices and all nominal interest rates. Every single one of them.

  13. Gravatar of onliberty onliberty
    22. July 2011 at 12:31

    “it’s not literally true that M and NGDP grow at the same percentage rates”

    I took this to mean that you were harkening back to the derivative of QTM %∆M+V=P+Y as a simple approximation. No?

  14. Gravatar of Ryan Markov Ryan Markov
    22. July 2011 at 12:41

    Guys, I was like you until I discovered reality.
    Modern Monetary Theory will soon become mainstream because it is right. Everything else is smoke and mirrors.

  15. Gravatar of Y Y
    22. July 2011 at 12:50

    Two things that confuse me about MMT/chartalism:

    1) The price level issue.
    2) The role of interest rates – it has to affect investment, incomes and economic growth, but I don’t think it’s treated as if it does.

    They’re on to something, but clear answers are needed.

  16. Gravatar of John John
    22. July 2011 at 12:56

    Scott,

    When you talk about reducing demand for reserves, what specific tools does the Fed have besides eliminating or charging a penalty interest on reserves. I’m probably mistaken but it seems like NGDP targeting is a goal rather than a tool just like inflation targeting. It seems The Fed need to use policy tools like lowering reserve requirements (pointless when banks are holding excess reserves), open market ops (done to death at this point), or changing rates on reserves in order to boost inflation or NGDP now that it’s up against the “zero bound”.

  17. Gravatar of E. Barandiaran E. Barandiaran
    22. July 2011 at 12:57

    Scott, seignorage (the government revenue from issuing currency) has always been low and in the past 30 years declining in most countries. The last time that seignorage increased sharply in your country –and therefore took the particular form of an inflation tax– was in the 15 years previous to October 1979. In response to that experience, the deficits have been financed by issuing debt and seignorage has been quite low (relative decline of the monetary system of payments everywhere).

    How has been the deficit financed in the past decade? Largely by debt but now that investors start to suspect that the government’s marginal cost of borrowing may increase sharply (look to Eurozone), either the deficit is reduced or it will have to be financed by issuing currency. Sorry, you should study carefully what happened in Argentina and Chile since 1975. You will learn why the power to issue currency is not trivial for governments running deficits.

    Also, you have to remember that accounting of seignorage as deficit financing or government revenue is irrelevant.

    When you say that central banks can influence all nominal variables in the economy, you are right but that does not mean that it can control the nominal variables. Stupid people can hurt a lot even if they do not intend to do it. I will never say that if the central bank today prints $1 trillion of currency, the economy’s nominal variables will increase 100% (remember that the stock of currency is around $1 trillion) in the next x months (although I could say something like that in Argentina at the end of July 1982).

  18. Gravatar of onliberty onliberty
    22. July 2011 at 13:27

    I’m still trying to crack the vault that is MMT, but based on this ongoing discussion, these are my thoughts. Bear with me.

    Some people say that economists like Alfred Marshal deliberately tried to push neo-classical economics away from the labor theory of value because that was a Marxian idea. Supposedly these people hated Marx so much that it was anathema to think that Ricardo could have anything in common with Marx.

    Therefore, labor theory of value fell out of favor and neo-classical economics emerged. Marx was wrong about many things and clearly didn’t understand the idea of incentives, but I see no reason why the labor theory of value should have fallen out of favor.

    There is no reason to abandon something that is true simply because the person that articulated it is wrong about other things.

    What is my point? While there is certainly more to MMT than just this, I think MMTers feel they must reject the idea that expectations can play any role at all because this idea stemmed from Keynes (not to mention that Keynesian economics revolves around deficits).

    Even though Keynesian economics is full of holes (although not entirely – he did advocate for tax cuts afterall), his observations about expectations is right on.

    So I think MMTers are so overly enthusiastic about rejecting Keynesian type economics that they reject everything associated with him, whether it’s appropriate or not. No?

  19. Gravatar of Benjamin Cole Benjamin Cole
    22. July 2011 at 13:28

    Okay, okay, great post.

    But Ray Dalio (the founder-manager of the world’s largest hedge fund and an economics thinker) says the US economy will founder for 10 years as it deleverages, unless we start printing money. Inflation will help us deleverage (while more money will spur growth).

    We can founder for a few years and then print money (which he suggests we will) or we can just print money now.

    I suggest to NGDP bloggers than you draw a new battle front, using Dalio.

    The argument goes like this: “Is your ascetic, fawning idolization of ultra-low inflation worth the price of 10 years of no sex (that is, economic growth).”

    Or, “Is low inflation worth 10 years of economic rot?”

    If the argument is framed thus, it becomes clear–no, low inflation is not worth 10 years of economic rot.

  20. Gravatar of Good Habit Good Habit
    22. July 2011 at 13:28

    “That’s why it’s so important to do thought experiments with monetary regimes lacking a banking system. This allows us to first work out the basic principles of what determines the price level, i.e. what determines the value of money. Once we’ve done that we can ask whether adding banking actually changes anything fundamental. ”

    No – it isn’t – it’s a totally useless game. There is no modern econcomy witout a banking system, and there can’t be any. If you do away with banks, you end any meaningful market ecomomy. Without banks, money (gold coins) can be spent – or horded. The price level will fluctuate wildly, depending on supply shocks (caused by desasters), or recovery.
    But only if you have banks, and hence credit, can demand rise above the actual stock of money. In a non banking system, savings need to preeced investment, with banks, they don’t (investmenst create savings).
    The only effect monetary policy has is negative (in the sense that it might be contractionary). If the CB sets interest rates very high, banks might stop lendig, and thus contraction will occur. Reducing interest rates will only bring lending back on track IF high interest rates had been the main cause for the contraction – otherwise, only export driven growth, or in case of a large economy, deficit spending will achive anything.

  21. Gravatar of John John
    22. July 2011 at 13:36

    One of MMT’s more intriguing theories is that hyperinflation has nothing to do with money, it is due to an inability to collect taxes. But as Jim Glass (I believe) pointed out, you can pay taxes in different currencies so that sort of nullifies their theory that specific currencies get their value because you have to pay taxes with them. Hence when you don’t have to pay taxes, the money doesn’t hold value.

  22. Gravatar of John John
    22. July 2011 at 13:42

    @ Good Habit

    “In a non banking system, savings need to preeced investment, with banks, they don’t (investmenst create savings).”

    Savings need to proceed investment with a banking system as well. Without deferred consumption, resources (capital goods and labor) don’t become available to undertake investment projects. Printing money doesn’t increase the capital stock, every capital good available corresponds to saving. Creating money and credit without savings puts the economy on an unsustainable path where there aren’t enough resources to see investment projects to completion.

  23. Gravatar of flow5 flow5
    22. July 2011 at 14:03

    If my claim was clear it would have already been published. My approach is akin to how the Sioux hunted rabbits.

    Let me try again: “The Fed wants to raise the price level by 10%. So they decide to suddenly increase the MONETARY BASE by 10%”

    Wrong. The MB is not, and has never been, a base for the expansion of new money & credit. And if you subtract excess-reserves from the “monetary base” you get a “money multiplier” (another error), whose value has virtually never changed. I.e., IOeRs are a credit control device.

    If you further refine the MB figure by eliminating the volume of currency held by the non-bank public (which is also contractionary), the residual is required (or fractional) reserves.

    But we are not done. Economists widely agree: that legal (fractional), reserves are no longer binding (because increasing levels of vault cash (larger ATM networks), retail deposit sweep programs, fewer applicable deposit classifications, & lower reserve ratios, have combined to remove most reserve, & reserve ratio, restrictions).

    Thus the loan-deposit limitation is largely dependent upon prudential reserves (contractual clearing balances & daylight credit), in conjunction with Basel Accord requirements.

    The foregoing scenario just puts the FED in the same position as the MMT’ers (out-of-control).

  24. Gravatar of trotsky trotsky
    22. July 2011 at 14:11

    What happens if banks were allowed to lend as much as they wanted with no reserve requirements, and the FED simply kept borrowing rates at a steady (too) low level?

    IMHO large banks were in this position over the last couple of years, as they could create all the AAA securities they needed for reserves via complex finance engineering and by gaming credit agencies, so in essence were there any reserve constraints on them?

    So has the “hot potato” already come through the system, and the inflation we are looking for already passed?

    Ireland and other European banks had the same experience, as the banks had a lot more control over their own reserve requirements, and are now hurting or simply part of the government?

    Maybe in the long run you are correct, but for now the banks are basically not lending:

    http://3.bp.blogspot.com/-gtxttYDYmNc/TihkCcrepSI/AAAAAAAAPe4/s6Gfg_6yDZ4/s1600/credit.jpg

    It is so bad in terms of lending that google is now creating credit solely for their ad system because their customers (small biz) are being cut off from bank credit or are being charged extremely high interest rates so they dont spend.

    I am not sure how you force money into the economy to increase inflation without govt spending, as banks will not lend. Maybe if the FED charged a high penalty on excess reserves it might help?

    Maybe we should let everybody borrow from the FED directly and not deal with banks at all, as per your example….

  25. Gravatar of John John
    22. July 2011 at 14:15

    @ Ben Cole

    I answered the question you asked me in Scott’s post about the Fed “raising” rates during the depression.

  26. Gravatar of Greg Marquez Greg Marquez
    22. July 2011 at 15:02

    Scott where does the Federal Reserve get the money to buy the bonds?

    If you tell me they just make an electronic deposit into their own account and then buy bonds then I’ll agree that they are able to inject money into the economy. But if they’re just moving money from checking accounts to savings accounts as MMTers explain it then no new money is being injected into the system.

    That’s the explanation I’m seeking.

    Thanks

    Thanks

  27. Gravatar of Lee Kelly Lee Kelly
    22. July 2011 at 15:12

    I don’t understand Modern Monetary Theory (what a presumptuous name!) Whenever I read something by an MMTer, I get the impression they are trying to fool reality with clever accounting tricks. There seems to be a kernel of truth wrapped up in a bunch of hocus pocus, but I’m not particularly interested in finding out what that is.

    I also think the monetary disequilibrium theorists are producing the real insights at the moment.

  28. Gravatar of Warren Mosler Warren Mosler
    22. July 2011 at 15:27

    The currency itself, the US dollar, is a simple public monopoly. And any monopolist is necessarily price setter.

    So the price level is ultimately a function prices paid by govt when it spends/and or collateral demanded when it lends.

    it’s all in the core MMT (published) literature;

    http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/

    the 7 deadly innocent frauds of economic policy:
    http://www.moslereconomics.com/?p=8662/

    and other ‘mandatory readings’ at http://www.moslereconomics.com

    There is no mystery in the price level.

    Warren Mosler
    MMT First Generation

  29. Gravatar of anon anon
    22. July 2011 at 16:01

    I was under the impression that MMTers relied on a combination of QTM and purchasing-power parity for the longer-run price level. Or rather, this seems to be a straightforward implication of the balance of payments constraint, which MMTers do acknowledge. (They seem to implicitly assume fixed exchange rates.)

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. July 2011 at 16:07

    Warren Mosler,
    (Ah, the guru himself responds.)

    A monopolist sets the price by setting quantity of output. Thus what you are saying implies that the government (i.e. the Fed) sets the value of the dollar by regulating the quantity of money, no?

    If so then we are back to good old QTM, not MMT.

    How can the government dictate prices paid or for collateral demanded? Isn’t this all subject to simple supply and demand?

  31. Gravatar of RK RK
    22. July 2011 at 16:09

    Building the MMT model from a barter economy, through “medieval king” simplicity, to a world with banks, then a central bank, etc:

    L. Randall Wray. Understanding Modern Money. Chapter 7.

    Hope that helps.

  32. Gravatar of onliberty onliberty
    22. July 2011 at 16:12

    So help me – I’m brand new to MMT.

    Are MMTers basically saying that monetary policy and the Fed are completely meaningless? That what sets the price level is basically supply and demand of fiscal policy, and that supply is government spending and demand is government taxing?

    If government spends more than it taxes it shifts the supply curve left, which increases the price level because dollars are basically less valuable because people aren’t being taxed as much?

    Then to bring the price level down the government demands more taxes which basically makes dollars more valuable which shifts the demand curve right?

    Is this at all in the right ballpark? Too simplistic?

  33. Gravatar of onliberty onliberty
    22. July 2011 at 16:17

    That can’t be it because the last paragraph I typed doesn’t make any sense.

  34. Gravatar of MarkS MarkS
    22. July 2011 at 16:17

    “I’m not particularly interested in finding out what that is.”

    You probably see have a VCR, dial up internet and a walkman. God forbid you venture out into the brave new world and challenge yourself into trying learning something new!!!!!!!!!

    Of course, what you don’t know can’t hurt you so if you QM’s just keep pounding the pavement on your defunct theory you can at least huddle together and stay warm. Until us MMTers start picking you off one by one as you realize that our fireplace is a lot warmer (read, RIGHT)…..But hey, Scott doesn’t like reality. He likes to create worlds where there is no banking system where you can focus on things that are’t “concrete” & “visible” (as he says)….

  35. Gravatar of Benjamin Cole Benjamin Cole
    22. July 2011 at 16:25

    john-

    Okay, let’s consider not suitcases, but the recent commentary of Ra Dalio.

    Ray Dalio (the founder-manager of the world’s largest hedge fund and an economics thinker) says the US economy will founder for 10 years as it slowly, slowly, slowly, deleverages.

    Or, we can print money, and deleverage more quickly through inflation and real growth.

    The argument goes like this: “Is your ascetic, fawning idolization of ultra-low inflation worth the price of 10 years of no sex (that is, no economic growth).”

    Or, “Are low inflation rates worth 10 years of economic rot?”

    What is so wondrous about low inflation rates? I would rather have some robust economic growth.

  36. Gravatar of John John
    22. July 2011 at 16:31

    “Money is a creature of the state”????!! What a friggin joke. Mosler is smart enough to know about the infinite regression problem. If you go back far enough you get to a point where people bartered. Why did they transition to money? The MMTers, believing that money comes from the state, probably think some wise king invented it. I’m sure that king had fun saying to people “We’ll all be better off if we all agree to trade the things we make for these worthless, shiny stones. I know you don’t want them, but if we all agree to want them we’ll be better off, I promise.” That scenario is ridiculous.

  37. Gravatar of Sphagnum Moss Sphagnum Moss
    22. July 2011 at 16:39

    @Trotsky: “they could create all the AAA securities they needed for reserves via complex finance engineering and by gaming credit agencies, so in essence were there any reserve constraints on them?”
    I think you should be referring to capital requirements of banks and not reserve requirements. Big difference: When banks lend they risk their capital. If capital becomes inadequate they become insolvent. FDIC storms the bank. Reserves are created when the government spends or banks make loans. Reserves are destroyed when government levies taxes or loans are repaid. Reserve requirements are a monetary policy tool NOT a bank regulatory tool. Banks don’t need reserves to make a loan, the loan creates the reserves. The loan will create a deposit and a portion of the deposit must be kept in reserve at the fed.

    @Trotsky: “What happens if banks were allowed to lend as much as they wanted with no reserve requirements, and the FED simply kept borrowing rates at a steady (too) low level? ”

    When a borrower gets a loan from the bank, the bank credits the borrower’s account (creates reserves) and debits the borrower’s loan account — no funding was required from another holder of reserves to lend money. The reserves are created out of thin air. If borrower defaults on loan, the bank credits loan account and debits the Bank capital account. If the Fed sets the Federal Funds rate low they will have to exchange reserves for treasuries to defend their rate. This has the effect of increasing reserves (demand notes) and decreasing longer termed notes (bonds, bills, notes). Nothing new is created, just the term structure of the notes change. In the long run this decreases net interest income to the banks and private holders of interest bearing treasury debt. We are no longer on the gold standard so paying interest for a term structure on government notes primary purpose is NOT to prevent depletion of gold in vaults. The hope is that by taking the interest income from the private investor, the private investor will either invest the money in another private investment to lower the price of credit or spend it on a real good or service to increase aggregate demand in the economy.

  38. Gravatar of John John
    22. July 2011 at 16:40

    @ Ben Cole

    I read that article in the New Yorker the other day. Of course debt is too high and that’s having a drag on the economy, I don’t think that’s any secret. But what is the point of inflation and low interest rates? To boost consumption spending and encourage lending. Inflation punishes savings by taking away money’s ability to act as a store of value. It also introduces a great deal of uncertainty into entrepreneurs, and future retirees, trying to plan for the future. Low interest rates (especially negative real rates) encourage debt. These hardly seem like the solutions to a crisis caused by too much debt.

    I agree that you could get a short to medium term kick from higher inflation. The mid-2000s were a great example were the Fed used monetary policy to kick the can down the road. The problem is that one day chickens come home to roost. Inflation is self-reversing, interest rates rise, asset values boom then fall, and at the end of the whole process everyone’s left with a lot of debt.

    To solve problems of debt, you need to pay off and/or restructure the debt to move forward on sound footing. Higher interest rates and low inflation would actually help quicken that process, paradoxical as it may seem.

  39. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 16:46

    John, The interest rate is best thought of as the price of credit. It’s also the rental cost of money. The price of money is 1/P

    onliberty, No my comment had nothing to do with the equation of exchange.

    Ryan, Good for you. Let me know when a prominent economist figures it out.

    Y, You said;

    “They’re on to something,”

    I don’t see it.

    John, NGDP targeting is a tool, just like any other. There are three basic tools of money policy. Change the current demand for base money, change the current supply of base money, or change the expected future policy. Believe me, no (fiat) central bank has ever had trouble debasing their currency. It’s never been a problem and never will be.

    E. Barandiaran, I agree with most of that–don’t see how it relates to our earlier discussion.

    onliberty, I believe expectations are very important, and are rational. Keynes believed they were very important and were irrational.

    Benjamin, Any Ray Dalio links?

    Good habit, I don’t see why banks are essential.

    John, Obviously budget deficits are the root cause of the money creation that leads to many hyperinflations. Some hyperinflations are due to lower money demand, BTW, as when a government is about to fall.

    flow5, I define money as the base, so more base means more money.

    trotsky, I did not recommend that the Fed lend money. The best way to understand money is to abstract from banks.

    Greg, They take some small pieces of white paper, which is specially made by just one company. Then they get some green and black ink and start printing $100 bills. It costs about 5 cents to print each bill. Then they take these hundreds and buy T-securities. Most of our base was $100 bills, until 2008.

    Lee, I feel the same way.

    Warren, Yes, I’ve looked at those papers before, and they never made much sense to me. I certainly didn’t see any plausible theory of the price level. One MMTer denied that the price level exists, said it’s just an arbitrary index number.

    If MMT is going to succeed they need someone who can explain the ideas clearly to the rest of the profession. A Keynes, or a Milton Friedman. All of the stuff that people send me, including those papers you linked to, have no appeal to mainstream economists. The use of terminology is so odd as to be almost impossible to understand. And I’ve spent my whole life studying monetary economics, including virtually all schools of thought. You need a big name–without one the MMT movements will be ignored in the elite institutions.

    The other problem is the strange refusal of some MMTers to consider thought experiments. When I ask about OMPs, I’m told their impossible, the Fed can’t inject money into the economy through an OMP. When I ask why, I’m told it would change the interest rate. And I should care because . . . ?

    You said;

    “The currency itself, the US dollar, is a simple public monopoly. And any monopolist is necessarily price setter.

    So the price level is ultimately a function prices paid by govt when it spends/and or collateral demanded when it lends.”

    This is a complete non sequitor. It’s like saying Microsoft is a monopolist, and so the price of Windows is determined by how much Microsoft spends on new facilities. No it’s determined by the number of Windows they sell, interacting with the demand curve for Windows.

    The government controls the supply of currency, and a different and unrelated part of the government determines spending. That’s why some countries have high inflation and budget surpluses, and other have huge deficits and deflation (Japan for instance.)

  40. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 16:49

    anon, They certainly didn’t seem happy with my claim that the QTM determines the price level, so I doubt that.

  41. Gravatar of Dustin Dustin
    22. July 2011 at 16:49

    @John, 16:31

    I’m guessing by “creature of the state” they’re talking about the State Theory of Money?

    http://socserv.mcmaster.ca/~econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf

    chartalism?

    could be wrong, but that’s my guess..

  42. Gravatar of RobertM RobertM
    22. July 2011 at 16:53

    “Too literal-minded?”

    Reality does have a tendency to be literal, doesn’t it?

  43. Gravatar of MarkS MarkS
    22. July 2011 at 16:57

    Scott Sumner,

    Ever heard of a guy named James Galbraith?

  44. Gravatar of MarkS MarkS
    22. July 2011 at 16:58

    Regardless of “big names” – this shouldn’t be a popularity contest to you. It’s about getting the economics right. If you can’t understand MMT then you need to take more time to try. It’s that simple. Otherwise, all of these discussions are pointless.

  45. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. July 2011 at 17:07

    Like vulgar Austrianism, MMT is a faith. Either you have the faith or you don’t. Otherwise there’s simply no understanding it.

    P.S. I’m Catholic, so I don’t need another religion.

  46. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 17:19

    Robert, Yes, my vocabulary is limited. Someone tell me the term I was looking for–and couldn’t find.

    MarkS. I sat next to him at the last AEA meetings, as we both presented papers. Don’t tell me he’s a MMTer!!

    I have a very simple request. Someone tell me how MMTers think the price level gets determined. That’s all I want to know.

    Mark, I’m not sure I know enough to comment, but I can see why people would draw that conclusion. I just had an Austrian tell me the Great Depression was caused by easy money in the 1920s–a decade of deflation!

  47. Gravatar of Ryan Markov Ryan Markov
    22. July 2011 at 17:27

    Scott Sumner: “Ryan, Good for you. Let me know when a prominent economist figures it out.”

    Prominent?

    Warren Mosler, Prof. Bill Mitchell, Prof. L. Randall Wray, Prof. James Galbraith

    Mark my words: these names will become very popular

  48. Gravatar of Benjamin Cole Benjamin Cole
    22. July 2011 at 17:33

    Scott-

    This link is from New Yorker, by the able John Cassidy. There is a lot of blah, blah, and Dalio comes off poorly, as a man who detests hubris, and believes he has purged hubris from his own self and systems–a form of hubris, of course.

    That said, towards the end Dalio, who evidently has called many macro shots right, muses that the USA will take 10 years to deleverage and get going again, but the USA has the inflation option if it would use it. (Greece, tied to Euro, does not).

    So, do we rot for 10 years just to keep inflation ultra-low, or do we go to moderate inflation and a growth economy?

    I say, “Print money dudes.”

    Here is cite: http://www.newyorker.com/reporting/2011/07/25/110725fa_fact_cassidy

  49. Gravatar of Sphagnum Moss Sphagnum Moss
    22. July 2011 at 17:33

    The MMT related concept of Employer of Last Resort defines the value of a dollar by the quality of labor that can be hired at a given price.

  50. Gravatar of Benjamin Cole Benjamin Cole
    22. July 2011 at 17:35

    As an aside, when you have a few billion in the bank, I guess one can muse about 10 yearsof economic rot in front of us,

    For those seeking work, running small businesses, trying to put money in bank for retirement—10 years is a long, long time.

  51. Gravatar of Lee Kelly Lee Kelly
    22. July 2011 at 17:50

    My intuition: MMTers assume that because something is a close substitute for money from the perspective of a individual savers, then whether people hold one or the other has the similar macroeconomic consequences. This is false. An excess demand for even the nearest of near monies does not reduce nominal expenditures, and, likewise, a surplus does not increase nominal expenditures.

  52. Gravatar of E. Barandiaran E. Barandiaran
    22. July 2011 at 18:09

    Scott, my second comment was to provide clarification on the meaning and relevance of the 7 points made in the first comment. If you agreed with my 7 initial points, then you might agree with these policy implications:

    1. In the current institutional framework the flow supply of currency is either a very small source of government revenue (technically the supply is determined by the flow demand for currency) or a residual variable in the context of defining fiscal policy, that is, of defining a total expenditure and its financing (and one can expect the supply to exceed the demand). In other words, even if one is willing to accept the QTM (with M = fiat currency), there is no monetary policy. The discussion of rules and discretion to achieve target rates of inflation in the short run is a waste of time.

    2. In the current institution framework the soundness and expansion of accounting systems of payments are threatened by their integration into financial systems corrupted by perverse incentives for managers and politicians (the latter directly or indirectly through the supporting role of bureaucracies in the form of state banks and/or regulatory agencies) to divert funds to bad investments and/or take excessive risks. Surprisingly, this threat to the payment system has been ignored in the post-crisis reform agenda.

    3. Not surprisingly the financial crises of the past 30 years have often implied bailouts of debtors, creditors and financial intermediaries in position to exert high political leverage. Despite the time and resources used to reform the financial system in order to eliminate those perverse incentives, in some countries the incentives remain and one can expect significant diversion of funds to bad investments and excessive risk-taking. In other countries it is claimed that the reforms have succeeded in eliminating those incentives, but it is not recognized that the benefit has been achieved at the cost of reducing economic growth. In the latter countries risk taking is penalized but one can expect that sooner or later competition will lead to excessive risks (or to the emergence of a parallel system if enforcement of constraints to risk taking are effective).

  53. Gravatar of Lee Kelly Lee Kelly
    22. July 2011 at 18:20

    In other news, I wrote this in December of last year. It was my attempt to explain how quantitative easing could, in principle, boost nominal expenditures. MMTers seem to deny this is possible. Anyway, here it is (with a few edits):

    Ben Bernanke talks a lot about reducing unemployment with quantitative easing, and he means to do that by increasing total nominal income. That is how open market operations today can reduce unemployment tomorrow.

    Bernanke is likely to be frustrated by structural problems that have temporarily raised the natural rate of unemployment, but the greater part of the unemployment since the beginning of the recession has been a monetary problem under Bernanke’s control.

    When the Fed purchases, perhaps indirectly via its “primary dealers,” long term government bonds from banks, firms, and households, banks receive additional reserves, and firms and households receive additional cash balances.

    Since the demand for credit is low and creditworthy borrowers few, banks are unlikely to immediately use these additional reserves to finance many new loans. With the balance sheets of most banks already fragile, holding excess reserves is more appealing than holding risky or low interest bearing alternatives.

    But what will the households and firms do with their additional cash balances? If they simply hold the money in place of bonds, then Bernanke’s quantitative easing will have utterly failed, but that is precisely why he is purchasing longer term bonds.

    Short term bonds with near zero interest rates are extremely close substitutes for money, and so purchasing short term bonds may increase the money supply, but is also likely to increase money demand in proportion, and total nominal expenditures will remain unchanged. Purchasing longer term bonds with higher interests rates, however, exchanges quite different assets. Households and firms that sell long term bonds are unlikely to hold all their new money. Instead, they will begin spending it on various consumer and capital goods, because they now have more money than they want.

    The increase in spending by households and firms will increase total nominal incomes, reduce the real burden of debt, and, therefore, increase the demand for credit. Banks will then discover more creditworthy and willing borrowers and start lending more again. As the balance sheets of banks strengthen, holding excess reserve will be less appealing than safer and higher interest bearing alternatives.

    Commentators who just talk about increasing the quantity of bank reserves and credit misunderstand the situation. Higher levels of nominal expenditures will not be caused by more bank lending, but rather more bank lending will be the effect of higher levels of spending. When this occurs, the Fed will need to begin contracting or sterilising the monetary base so to prevent nominal expenditures (and inflation) from rising too quickly.

    The assets that banks hold on their balances sheets will become safer; household balance sheets will be repaired as crippling debt burdens are relieved. Confidence will be restored, money demand will fall, interest rates will rise, and the Fed will eventually reverse its unprecedented increase in the monetary base. Furthermore, incessant calls for the federal government to “do something” will fall by the wayside.
    ________________________________________________________

    This is how I have always understood quantitative easing. Maybe I am wrong, but the explanation seems sound. Like Sumner, I also think that expectations are very important. I didn’t mention this in my explanation, but I think it is one of the reasons why QEII was not particularly successful.

  54. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 18:41

    Thanks Benjamin, That was interesting.

    Sphagnum, But nominal wages are what we are trying to explain–that’s part of the price level. It’s the price of inputs.

    Lee, I agree.

    E. Barandiaran, I agree with you on the moral hazard problem, but don’t see what you mean by “there is no monetary policy.”

  55. Gravatar of Lee Kelly Lee Kelly
    22. July 2011 at 18:47

    I wish you’d disagree with me sometimes.

  56. Gravatar of RK RK
    22. July 2011 at 19:11

    @John

    “Money as creature of the state” does not go like this:

    “I’m sure that king had fun saying to people “We’ll all be better off if we all agree to trade the things we make for these worthless, shiny stones. I know you don’t want them, but if we all agree to want them we’ll be better off, I promise.””

    That is indeed ridiculous.

    Money as a creature of the state goes, instead, like this:

    1. King says to people: you now have a tax liability, payable in shiny stones with my face stamped on them. If you don’t hand some of those shiny stones to me by April 14th of next year, I chop off your head.

    2. Now the people have an instant motivation to get their hands on the stones. But where can they get them?

    3. Enter King again, the only figure with the authority to stamp the shiny stones, this time offering to exchange said shiny stones (with his face stamped on them) for goods and services.

    4. Not everybody works for or exchanges with the king, but everybody wants to keep his/her head, therefore those that don’t work for or exchange with the king have a motivation to trade real goods and services for shiny stones (which they get from those who do work for or exchange with the king).

    Upshot: shiny stones (stamped with king’s profile) circulate in exchange for real goods and services, and the king has appropriated goods and services for the state, in a manner easier than banging on everyone’s door with his scepter and a goon squad and straight up stealing.

    I know it’s hard to suspend judgment long enough to see whether a framework that builds on this story ends up explaining more than its rivals, but I don’t understand why it’s so hard to understand the story itself, and to disagree with it without resorting to straw man characterizations of it.

  57. Gravatar of TC TC
    22. July 2011 at 19:15

    Mark S:

    “3) Tautology
    Unless the proponents of a point of view, like MMT or Austrian Praxeology, admit that it is a set of assumptions that is falsifiable, then they don’t have a theory, they have a tautology.”

    Accounting is tautology by design. It’s the entire point of accounting, and in particular, balance sheet accounting. MMT isn’t falsifiable because accounting isn’t falsifiable. Accounting is definitional. You can’t say “Balance sheet accounting is wrong” – this is a nonsense statement.

    You can say “Balance sheet accounting is the wrong tool to think about money”. This is a possible statement. I’d say it’s delusional, but you can say it and think it.

    MMT describes the world by following the rules of accounting.

    You can make up any kind of accounting you’d like, just like you can make up any algebra you like. But the accounting, like the algebra, needs to be internally consistent. Also, it needs to be useful. Balance sheet accounting fits these criteria.

    So yes, MMT is a tautology, but it is not like most of the tautologies you see out there. It’s simply playing by the rules someone else set up, and seeing what happens when it is applied to money.

  58. Gravatar of morgan warstler morgan warstler
    22. July 2011 at 19:19

    You people don’t know how to argue.

    Go right at the false assumtpion.

    Mosler – money is not a monopoly run by democratic government. You and people like you; the people who don’t have large amounts of personal capital DO NOT COUNT you do not get a vote on what money is.

    At the end the day, the masses will not riot when they are fat and have 500 channels and since there is no danger of agitation making the meek powerful you bring no FORCE to the table.

    And force is EXACTLY what you think makes money credible – the MODERN monetary theory would have to be that people like you matter far less than you used too. Money now more than ever is a tool for and by the top 30-40 percent who vote own everything and own all the guns.

    And were forcing a very modern approach on YOU; aren’t we?

  59. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. July 2011 at 19:36

    RK,
    And they all lived happly ever after, the end. 🙂

    http://www.youtube.com/watch?v=FGRTdWIuR-U&feature=player_embedded

    P.S. I hated it when they changed the Mulberry Bush into a Prickly Pear. (e.g. in T.S. Eliot’s The Hollow Men.)

  60. Gravatar of morgan warstler morgan warstler
    22. July 2011 at 19:46

    Benji love you but you aren’t being intellectually honest since YOU want us to choose inflation based on time of suffering…. then you should figure out how to give all the printed money to the guys with savings tell them you realize the moral error of inflating away their capital that you feel awful about it so they get all the new free money but theyhave to spend it… then you get what you say you want – inflation.

  61. Gravatar of Citizen AllenM Citizen AllenM
    22. July 2011 at 20:18

    I find this all to be a big waste of time, because of the need to look backwards to the right set of circumstances.

    As I pointed out last week at Calculated Risk, even James Buchanan has the right answers for this depression:

    http://www.econlib.org/library/Buchanan/buchCv2c9.html

    To wit:

    Governments are not, however, always rational or efficient purchasers. Experience, especially that taken from the depression period of the 1930’s, provides ample evidence that governments will refrain from creating money during depressions, and that they will, instead, create interest-bearing debt. And, even now, there is perhaps only a rather naïve hope that governments in the future would be any wiser and would improve substantially on this record.
    2.9.10

    If governments do choose deliberately to be inefficient purchasers, that is, if they sell interest-bearing securities instead of issuing noninterest-bearing money, no longer can the unemployed resources be put to work at a zero cost. The zero real cost is a minimum which can only be reached by rational policy. If interest-bearing debt is issued, some unnecessary real cost is introduced into the borrowing side of the fiscal operation, and even though the resources will otherwise be idle, the transference of these resources to the government must involve some future sacrifice of individual utilities.*88
    2.9.11

    If, in its sale of securities, the government withdraws funds from either consumption or investment spending, the subsequent utilization of these funds does nothing toward increasing the level of total employment. Debt creation under such circumstances is in all respects similar to the classical model already discussed. When debt creation during depression is discussed separately as a distinct fiscal operation, presumably the funds are drawn from idle balances and, therefore, when these are expended, idle resources are put to work. But if the securities sold are interest bearing, regardless of the amount or degree of unemployment existing in the economy, some real-debt burden is created. This debt burden is the real cost of putting the idle resources to work. And this real cost will be shifted forward to future taxpayers. If the government borrows to finance the building of a post office in a deep depression, the real cost of the post office is represented by the goods and services which taxpayers in the future could purchase if they were not obligated to finance the interest payments.
    2.9.12

    The interest-bearing, government securities are purchased by individuals and financial institutions from idle funds, and the real cost or primary debt burden is entirely unnecessary and could, and should, be avoided by direct money issue. At this point we may raise the question: Why is it necessary that the government pay interest on bonds sold to individuals or institutions who purchase these bonds from idle funds? What do these individuals or institutions give up in exchange for the claims to future incomes represented by the bonds? This question is answered when it is recognized that money as an asset yields some utility income to its holder in an uncertain world. Some sacrifice of current liquidity is involved in the exchange of idle cash for a government bond. The claim on future income may be considered a payment for this sacrifice of liquidity. But this payment is unnecessary, because the government does not add to its own liquidity in the process. It secures no additional liquidity from private people in the exchange. The government is always infinitely liquid so long as it possesses money-creating powers.

    In other words, the freshwater side is struggling to reinvent the wheel. Again.

    Buchanan wrote that in the late 1950s.

    I would also note the BDL is a brilliant butthead.
    I was kicked off there five years ago, and was glad to be gone.

  62. Gravatar of John John
    22. July 2011 at 20:23

    @RK

    You’re still saying a king invented the idea for money and that’s ridiculous. In fact in ancient times, most taxes were collected in kind. For an expostion of how money arose read this quick article
    http://mises.org/daily/4746/The-Meaning-of-Gold-in-the-News

    Basically money emerges slowly on its own due to differences in the marketability of commodites. For instance, a man who makes a telescope would have to wait a long time to find someone wanting to a buy a telescope who also had food he needed to eat, but if he could trade the telescope for a more liquid commodity, one which he did not intend to use directly, he could more easily profit from his labor. This process of indirect exchange eventually led people to commodities which were particularly well suited for direct exchange: gold and silver. They hold value, have a high value to weight ratio, don’t spoil, can be divided, etc. The creation of money was a product of human action and not human design. There is no way that a government could have single handedly come up with the idea of money and began collecting taxes in it. Rather money naturally evolves out of the human need to exchange in the same way that language evolves out of the human need to communicate.

  63. Gravatar of John John
    22. July 2011 at 20:26

    Scott,

    I completely understand and support the QTM and the the idea that supply and demand sets the objective exchange value of money. I was trying to point out why the MMT hyperinflation argument was silly, I wasn’t endorsing it, merely saying that it was intriguing in a crazy sort of way.

  64. Gravatar of John John
    22. July 2011 at 20:35

    Scott,

    Price deflation and deflation are different things. Inflation refers to inflating the money supply just like you inflate a balloon or the universe inflated following the Big Bang. In the 1920s, loose policy by the Fed did cause prices to rise higher than they would have otherwise, but massive productivity gains cancelled out the effect of inflationary monetary policies. This also happened in China at the turn of the 20th century, despite the yuan peg and accompanying currency production, productivity rose so fast that prices fell. Just like you say that interest rates don’t accurately convey the tightness of money, the CPI doesn’t always convey inflation. High periods of productivity will counteract increases in the supply of money not counteracted by increases in the demand for money and decreases in demand not counteracted by increases in money supply (this is the complete correct definition of inflation).

  65. Gravatar of Lorenzo from Oz Lorenzo from Oz
    22. July 2011 at 20:42

    Patrick: I am glad you said that, I wanted to shout NO! when I read that. Scott’s reply makes me feel better. (Though it would be good for new readers, Scott, if you explicitly amended the post.)

  66. Gravatar of onliberty onliberty
    22. July 2011 at 21:29

    Okay, I’ve been reading for days about MMT. While certainly I don’t understand all its nuance (if there is any) I think I have the basics down.

    It sounds more to me like mythology than economics. In other words, MMTers see the world around them and try to construct a story that seems to superficially explain what is happening.

    MMT seems to be deductive in that it starts with the big picture and tries to work backwards to figure out what might be causing the big picture.

    Mainstream macro, on the other hand, has developed slowly over the years through induction. Economists observe specific ways the economy behaves and gradually build a theory that explains what we see around us.

    Honestly, MMT to me seems slightly sophomoric. And I don’t say that to insult anybody. Of course I’m nobody to talk, I’m barely literate in this stuff. But I did keep in mind Scott’s question of what determines the price level while I was reading, and MMT is absolutely silent on this issue.

  67. Gravatar of Lorenzo from Oz Lorenzo from Oz
    22. July 2011 at 22:38

    onliberty: the labour theory of value is false and based on poor reasoning. Worse, once you operationalise it a la Leninism as the basis of the active creation of a “classless society” it provides a list of people who are “surplus to requirements”. (All notions of intrinsic value end up being ways to discount inconvenient humans.)

  68. Gravatar of Morgan Warstler Morgan Warstler
    22. July 2011 at 22:49

    I keep saying this, but everyone wants to geek on on the econ, even after you see Mosler and RK make the clearest statements of how they see things.

    The government prints money and buys shit / hires people until the economy is on target and they tax people to take money back out if it overheats.

    Ultimately, they are laser focused on the FORCE of the government.

    And I think you econ geeks are all thinking that’s a possible model.

    And the reality is not that the model is UNACCEPTABLE, the reality is that it is not POSSIBLE.

    Government is not some thing where we all get to have a voice.

    Jim Glass touched this in a far nicer way than I will say it – there is a HUGE swath of the competent folks who actually “matter” – who have a totally different view of inflation than those of you trying to get another 5% of the workers a job.

    —–

    Let me put it in political metaphor:

    MMTers are acting like we make political decision based on polls of what “Americans” think, and we all KNOW this is not true – we make them based on what “Likely Voters,” think.

    And in economic terms, the will of government is ACTUALLY the will of “the capital holders”

    Which is WHY we have the government BORROWING money from the capital holders and OWING the capital holders money, because the capital holders are who matter, and that’s what the capital holders want.

    The force of government is BEING USED EXACTLY the way the king wants it to be used.

    MMT is just a bunch of non-kings wishing they were kings.

    It is neat to see Scott riddle them with econ, but you can just hippie punch them – because in reality hippies get punched, and economics is reality.

  69. Gravatar of Lorenzo from Oz Lorenzo from Oz
    22. July 2011 at 22:51

    John: coins are the creation of kings. The Austrian story gets you to a dominant medium of exchange. But it does not get you to a medium of account. Kings, as tax collectors and biggest spenders, had the most interest in taking that extra step and the capacity to do so. What made coins really work, however, was that the coins then had much wider use.

  70. Gravatar of Good Habit Good Habit
    23. July 2011 at 00:27

    john:”Savings need to proceed investment with a banking system as well. Without deferred consumption, resources (capital goods and labor) don’t become available to undertake investment projects.”

    Ever heared about unused capacity? 🙁
    And your fist sentence follows the wide used fallacy that reserves enable loans. As MarkS tried several times to teach people on this blog, (and as MMT teaches) – banks don’t lend out reserves. They lend to (hopefully) creditworty costumers, and thus loans create deposits.

    scott:”I don’t see why banks are essential.”
    That’s like saying: “I don’t see why we should pretend that the world is not a disk – for all practical purposes it’s flat with a few bumps…” As in my sentence above – loans create deposits – and that’s what allows the economy to grow beyound the actual stock of money in the first place (allows for leverage / increased velocity). Without banks, people might still hoard money in vaults – and no – money is rarely (absent hyperinflation) a hot potato…
    And yes, without banks, your back to some form of barther ecomony (with money just a “normal” commodity) – might fit a pre-industrial society, but not the 21th century.

  71. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 03:16

    My own snapshot/caricature of MMT:

    It’s a logically coherent position, AFAICT.

    It’s roughly similar to British Keynesianism in the 1960’s.

    Keynesian Cross theory of income determination, with elasticity pessimism, so the IS curve is roughly vertical.

    Radcliffe Report view on monetary policy. The LM is horizontal (and since the IS is vertical, shifting the LM up or down doesn’t do much anyway.

    They *define* “Fiscal Policy” as money financed. So deficits are assumed to be money-financed, if the central bank “does nothing”. In other words, if the government runs a deficit, it is money-financed, unless the central bank chooses to use “monetary policy” to sell bonds. (This is more of a terminological difference, but it does confuse arguments.)

    Abba Lerner’s functional finance.

    The AS curve is reverse L-shaped.

    They pay lip-service to Chartalist ideas, but (to their credit) I don’t think many have read Knapp’s State Theory of Money (it’s an awful book). Their Chartalism is really closer to the Fiscal Theory of the Price Level, except that FTPL theorists usually have a vertical AS curve.

    The role of money as medium of exchange has little place in the theory.

    MMT attracts some adherents who have difficulty distinguishing equilibrium conditions from accounting identities. So they think that I-S + G-T +X-M =0 is a theory of income determination. (This is not true of the main MMTers themselves, but only of some followers.) If you haven’t seen this accounting identity before, you can easily get over-excited by seeing it.

    Similarly for the idea that banks can create loans and deposits at the stroke of a pen.

    In terms of policy, in current circumstances, there is actually less difference between (say) Scott and MMTers than meets the eye.

    Both agree the current problem is a deficiency of AD. Neither is worried about “How can we afford to finance that increase in AD?”

    Yes, MMTers are more for fiscal policy than monetary policy. But remember, MMTers “Fiscal policy” is *money-financed* fiscal policy. They want helicopter money, in our language (even though they hate that language).

  72. Gravatar of mb mb
    23. July 2011 at 03:29

    Scott,

    The interest rate is the relative price of consumption at two points in time (Ct+1/Ct).

    The price of money is the inverse of the aggregate price level, as has been understood since the days of Hume and Thornton.

    These two concepts are not, and never have been, equivalent. Understanding the difference, however, helps explain why periods of fast money growth typically coincide with HIGH nominal interest rates and periods of slow money growth coincide with coincide with low nominal interest rates. If one chooses to view the interest rate as the “price of money” [sic], the opposite pattern should be observed in the data. Much mischief in central banking history — most notably the 1970s — derived from this mistake about how to define “the price of money.”

  73. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 03:38

    Re-reading your post, Scott, I think it’s making an important point. But one that would apply more broadly than to MMTers in particular. However small and temporary the hot potato effect of new money is for any individual, the aggregate effect in general equilibrium of a permanent increase is still the same.

  74. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 03:39

    It’s so easy to get lost in the trees.

  75. Gravatar of flow5 flow5
    23. July 2011 at 03:47

    The base is ill-defined. It is very clear that it has no mathematical basis. And that’s why you target money flows as a proxy for all transactions. Otherwise targeting nominal gDp is about as good as using the “Taylor Rule”.

  76. Gravatar of flow5 flow5
    23. July 2011 at 03:53

    There’s nothing new about MMT. It’s how the plutocrats originally controlled spending and it’s practice never survived – for obvious reasons.

  77. Gravatar of K K
    23. July 2011 at 04:14

    Nick:”However small and temporary the hot potato effect of new money is for any individual, the aggregate effect in general equilibrium of a permanent increase is still the same.”

    Modulo wealth effects. You don’t end up in the same general equilibrium no matter who first gets the new money.

  78. Gravatar of E. Barandiaran E. Barandiaran
    23. July 2011 at 04:41

    Scott,
    In your last reply you make two points.

    First, you say you don’t understand what I mean by “there is no monetary policy”. I hope we agree that policy means a well-defined objective and well-defined instruments. I said that in the current institutional framework there were only two possibilities about the flow-supply of currency: one that it is determined by its demand (call it passive currency), and the other that is just the residual variable of fiscal policy.

    Indeed I know that most economists will argue that a government can influence the demand for currency, so passive currency is activated. We know that the demand for currency depends on the price level, (very) short-term interest rates, the volume and the pattern of transactions, and the cost of alternative means of payments (including accounting means of payments as well as other monetary means of payments –like foreign currencies in Latin America). We know that a government can force people and enterprises, in particular financial intermediaries, to use and hold more currency than needed.

    The relevant question, however, is whether the government can “control” the demand for currency to achieve some objective. For example, it can run a Fund to “control” show-term interest rates by handling Treasury bonds to the Fund. This Fund then trades these bonds in the market as needed to increase or decrease short-term interest rates. If the Fund is large enough, it may have some effects on these rates, but we know from experience with many goods and assets that even if the initial effects are large, they will fade out. Indeed, if the government had let this Fund to issue currency on its behalf and buy the bonds to the Treasury we can call the Fund a modern central bank. I hope this explanation is enough to make clear what I mean for “no monetary policy”. In my passive currency case, government can influence the demand but it cannot control it –as much as I cannot say that I control an elephant because I hold its tail (or as Bill Gates acknowledges in today WSJ about his spending of several billion dollars to influence education).

    In a few words, as long as M = currency, there is no monetary policy (and this is the reason why so many economists prefer to define M broad enough to include a lot of financial assets and to argue that central banks have to be involved in financial markets). Note: if necessary, I can give you many historical examples of government intervention in particular markets to manipulate prices that one can argue that affect the demand for currency.

    Second, you agree with me about moral hazard. Let make clear, however, that my argument about financial systems goes well beyond any moral hazard. My main concern is the marriage (or should I call it “mutual capture”?) between governments and all sorts of financial intermediaries –from China’s state banks, to Spain’s Cajas, to Chile’s state intermediaries and regulatory agencies, to Argentina’s looting of funds, to U.S.’s revolving doors between government and intermediaries, just to name the countries with which I’m quite familiar.

  79. Gravatar of Greg Greg
    23. July 2011 at 05:21

    Two interesting things

    1) Scott criticizes MMT for being too focused on reality

    2)Scott claims that MMT says nothing about price level and HIS theory does.

    Well Scotts theory may SAY something about price level but what it says has been demonstrably wrong, which is why these monetarists need to appeal to religious statements like “confidence”, “faith”, “expectations” and the like. The quantity theory is so utterly incapable of explaining reality in the modern world its a joke.

    Since 2008 the ‘base’ money has gone from 900 bil to over 3 trill, almost 4x increase. During that time the ‘value’ of a dollar has INCREASED!

    MMT actually has an explanation for that and it doesnt rely on ghosts, goblins and angels.

  80. Gravatar of Ron T Ron T
    23. July 2011 at 05:39

    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.”

    If you understood basics about how the institutions of the monetary system work you would know that there is no basis for the “hot potato phenomenon” to arise. Reality has an MMT bias.

  81. Gravatar of Lee Kelly Lee Kelly
    23. July 2011 at 05:45

    I want to understand why my story about how quantitative easing can work, in principle, is false. No MMTer has yet addressed that, or at least not directly, and not in language that I understand.

  82. Gravatar of RK RK
    23. July 2011 at 06:00

    @ John

    I know there are different theories of the origin of money, and I know both that you hold one and what it is. I also know that it’s very hard to respond to my post correctly, not only by saying, “Sorry. I was ridiculing a straw man. I’ll represent your view correctly in the future” but also by ceasing to use “ridiculous” as a synonym for “false.”

    In any case, it goes without saying that when we get down to the (postulated) historical circumstances under which “state money” developed, it is going to end up being more nuanced than my four step process, and is not going to involve a King sitting on his throne, and a cartoonish light bulb going off over his head. In fact, believe it or not, there are people working on how state money might evolve out of prior institutions in an organic way. It shouldn’t be hard to find their work if you are interested, but you might have to get out of your intellectual neighborhood (never a bad idea).

    @ Greg

    Exactly. That’s what got me interested in MMT in the first place. My intellectual training is primarily in philosophy, and to an outsider it was distressing to see so much economic theorizing done via hand-waving, and model building based on implausible assumptions. It was very satisfying to see MMT replace “confidence” with institutional reality – the fact that the other views have empirical problems just made MMT more attractive. It’s been a little distressing for me to see that economists have as much difficulty looking at the world through more than one lens as philosophers do, and are equally beguiled by ideologically satisfying abstraction, mathematically “grounded.”

    Ah, the human animal, in this particular historical moment…

    I think that’ll do it for me on this board. Thanks for the post, Scott. I hope you check out Chapter 7 of Wray’s Understanding Modern Money. I think it will help you with your good faith effort to understand MMT.

    Take care.

  83. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 06:10

    Nick, it is only coherent if you fiat away reality. It is exactly like saying we do politics based on what Americans think.

    We don’t, because the people have to be likely to vote to count.

    We don’t do “monetary policy” for Americans, we do it for people who have money.

    Flow5 re-iterates this pointing out we basically had MMT when plutocrats ran around.

    MMT requires political FORCE. And we currently have political force.

    Ya know, you folks talk a lot about expectations, but when I keep repeating what we all actually expect, things like, “Republicans will allow more NGDP via QE, only when they are in charge.”

    Everyone from Benji to Inflation Hawk to Scott will ADMIT this is true, it is what they EXPECT is true.

    BUT, then they will not form policy based on expectations….

    The logic says clearly, IF you want more QE, IF you think QE is the only real strategy, you will vote Republican.

  84. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 06:13

    MMT is just a complaint about the political force we ACTUALLY have.

    If you are smart enough to admit / point the BOJ CHOSE to stay in their liquidity trap, yo are smart enough to point out / admit WHY MMT fails.

    They don’t have the political force.

  85. Gravatar of Lee Kelly Lee Kelly
    23. July 2011 at 06:20

    Morgan, I hardly understand a thing you write. You use all English words, but they rarely come together to form a coherent series of thoughts. I am just saying because I suspect I am not the only one, and I expect you really want to be understood.

  86. Gravatar of Scott Sumner Scott Sumner
    23. July 2011 at 06:25

    Lee, You said;

    “I wish you’d disagree with me sometimes.”

    I disagree, you should be happy we always agree. 🙂

    Citizen, Thanks for those good quotations from Buchanan

    John, Thanks for clarifying that.

    John (a different one?) No, inflation isn’t the increase in the money supply, it’s the increase in the price level. In 2009 the money supply (base) doubled, but the CPI fell. So we had deflation.

    But even if inflation were the increase in the money supply, the 1920s would probably be the least inflationary decade in the entire 20th century. The base hardly changed. So you’d still be wrong about inflation causing the Great Depression.

    Lorenzo, Maybe I’ll do an update.

    onliberty, Yes, the problem they have is they don’t have proponents who present their ideas in a way that is appealing to the reader–especially if the reader is an economist. The arguments are extremely hard to follow, and seem to jump from one point to another without making the necessary connections.

    Good habit. No, loans don’t create deposits. If I borrow $1000 from my local bank and ask for the loan in cash, no deposit is created. The correct statement would be “Banks create loans and deposits separately, for separate reasons. They try to create the profit maximizing quantity of each. The amount of loans doesn’t equal the amount of deposits.”

    Nick, Thanks, that was very helpful. I wish they could explain their ideas so clearly. A few reactions:

    1. So they are similar to the very worst type of Keynesianism? That’s not good.

    2. The whole point of the exercise was to find out their model of price level determination. Is that too much to ask of them? I still don’t have an answer. How do you think they determine the price level?

    3. I am very worried about how can we afford the increase in AD, if we choose to go the fiscal stimulus route, which you suggest is their approach (although they call it monetary policy.

    Do they have a model of monetary economics that applies to countries without banks, i.e. all the countries in the world up until about 1400 AD?

    mb, I completely agree.

    Nick, Do you think it would be possible to construct a list of those macro theories that explain the price level, and those that don’t even try? And then another list of those that can account for the Australia/Canada pattern I discussed, and then those that cannot explain the fact that both countries have similar price levels, despite wildly different levels of government liabilities.

    I can’t do this, as I don’t know enough macro, but perhaps you could. 🙂

    flow5, The base is bank reserves plus currency held by the public.

    K, You said;

    “You don’t end up in the same general equilibrium no matter who first gets the new money.”

    Replace “don’t” with “do.”

    E. Barandiaran, I still don’t understand why the Fed can’t control currency, or the base. Just do open market operations. Yes, the flow supply is a residual from fiscal policy. But the Fed determines that residual, and the Congress must accommodate that fact.

    Greg, You do know that the Fed started paying interest in 2008. And that I was one of the first economists to point out that as a result we wouldn’t have inflation?

    I have a very simple question: What is the MMT theory of the price level? The MMTers that come over here tell me nonsensical things, like the price level is arbitrary, or Japan doesn’t really have a price level 100 times higher than us, as they use a different currency! Or the wage rate determines the price level. How can one even have a discussion if faced with those arguments?

    To understand what makes a theory tick, I need to understand how they model the thought experiment where the government doubles the money supply during a period where interest rates are positive. I still don’t see an answer to that simple question.

  87. Gravatar of Ralph Musgrave Ralph Musgrave
    23. July 2011 at 06:28

    Scott, You haven’t grasped on of the most basic points of MMT. MMTers do NOT, as you suggest, advocate increasing the money supply by the conventional method (central bank buying bonds). They advocate a straightforward “print and spend” policy (as advocated by Abba Lerner). The total number or value of bonds can remain constant.

    As an MMTer my reaction to your claim that having the central bank buy bonds “doesn’t make anyone richer” is to let out a big yawn. I tumbled to that one years ago.

  88. Gravatar of Scott Sumner Scott Sumner
    23. July 2011 at 06:28

    Ron T, Fine, so what’s the MMT theory of the price level. Where’s their nominal anchor?

  89. Gravatar of Scott Sumner Scott Sumner
    23. July 2011 at 06:38

    Ralph, I don’t recall suggesting the MMTers advocate increasing the money supply using the conventional method. Indeed I could care less how they favor increasing the money supply. I am interested in their theory, not their policy recommendations. I am only interested in how they think an OMP would affect the price level. That is all. And I’d also like to know their theory of how the price level is determined, which seems to be some sort of state secret, as none of them are willing to tell me, although they do tell me all sort sorts of comical things, like Japan’s price level is not 100 times higher than ours, because they use a different currency.

  90. Gravatar of Brian Brian
    23. July 2011 at 06:42

    MMT contends that bank lending is not constrained by reserves, but rather by bank capital. So adding reserves cannot be expected to increase bank lending or AD. Bill Mitchell goes into this in great depth on his site. Sounds to me like many of those who don’t understand the conclusions reached by MMT are overlooking this aspect of the MMT literature.

  91. Gravatar of Ryan Markov Ryan Markov
    23. July 2011 at 06:47

    Scott Sumner: “… so what’s the MMT theory of the price level. Where’s their nominal anchor?”

    You should read this: http://heteconomist.com/?p=756

  92. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 07:24

    Lee, please read more carefully.

    I view economics through the lens of Realpolitik. There is a greater narrative than simply figuring out macro.

    In a debate this is called subsuming the argument.

    As in EVEN IF targeting NGDP works, we should only target under certain political conditions…. when it benefits the right.

    Specifically because our current economic situation is a political situation brought to bear by a specific political strategy started @1980.

    To me, you are all standing in the middle of a 40-50 year strategy to hack Democracy in favor of capitalism, and you are arguing about plot device WITHOUT regard for the bigger greater picture.

    Who cares in the economy runs smoother, if it leads to a greater social safety net and less “dog eat dog” as Benji likes to say?

    Dog eat dog is the dominant economic long term strategy for maximizing technology gains – and technology gains are the only thing that benefits humanity.

    Hope this helps!

  93. Gravatar of Mike Sandifer Mike Sandifer
    23. July 2011 at 07:39

    Morgan,

    I mean no offense at all when I take Lee Kelly’s last comment to you a step further. There are possible indications of dopamine dysregulation in patterns of your comments and you may want to see a psychiatrist about. There are doubtless many other possible explanations, but I just throw that out there, given the seriousness as a medical issue and the fact that it’s normally the result of serious degenerative conditions.

    It may not even be likely that I’m correct, but worth considering if it hasn’t been addressed previously. I say this, with all due respect, and recognizing that you sometimes have what may be usefully unique perspective to share.

  94. Gravatar of Payam Sharifi Payam Sharifi
    23. July 2011 at 07:45

    Morgan Warstler,

    Every time I read one of your statements I let out a big sigh, because you really have no idea what you’re talking about. The reason we are in a recession today and went to a near depression over the last few years is due to neoclassical economists like Sumner and Nick Rowe(even if Sumner appropriately calls for more AD like Post-Keynesians do).

    Post keynesians and MMTers are closer to Keynes than the new keynesian varieties like Sumner or Krugman, so whoever said we reject Keynes quite honestly doesn’t get it. Furthermore, someone asked why we haven’t responded to why QE wouldn’t work in his thought experiment. I would urge you to remember why Keynes wrote the General Theory to begin with, and if you don’t know why he wrote it then I suggest you first read his Treatise on Money(where he essentially called for QE) and then stepped away from that in the General Theory, which you should read next. If you don’t want to read it then go read some Post Keynesian literature on the matter.

  95. Gravatar of Mike Sandifer Mike Sandifer
    23. July 2011 at 07:45

    I neglected to add that most of these problems are addressed quite successfully with medication, with degenerative effects attenuated.

    Again, I’m not even saying it’s probable that this applies to you, but the patterns make me feel the need to comment.

  96. Gravatar of Good Habit Good Habit
    23. July 2011 at 07:53

    scott:”No, loans don’t create deposits. If I borrow $1000 from my local bank and ask for the loan in cash, no deposit is created.”
    You’r beeing pedantic, here. Of course I can always withdraw cash from my deposit, and if I don’t have an account, the bank might occasionally skip the process of crediting it on my account first. But only if I withdraw cash or transfer the funds to another bank, will the bank actually need reserves. And as the bank usually receives cash paiments from other clients, or transfers from other banks, it still doesn’t need additional reserves. So, the main point is – banks are rarely ever constraint in making loans by a lack of reserves.

    “Japan doesn’t really have a price level 100 times higher than us, as they use a different currency! Or the wage rate determines the price level.”
    This might be directed at me.. Obviously, the term “price level” has not the same meaning for us. I, for my part, never (ever) saw a the term price level used in (absolute/nominal terms)as you do, and I can’t see why this would make sense at all – comparing price levels of different countries always has to be relative. (Or has been the only way I have ever seen the term used).
    Just a simple example: If, say – a bottle of beer cost CHF 4.– in Switzerland, but CLP 1000.– in Chile, and the market exchange rate for CHF to CLP is 1:500 – I – and (almoust) everyone I saw use the term price level until now – would say – the price level in Chile is half of that in Switzerland (1000/500 = 2), while you would say – the price level in Chile is 250 times as high as in Switzerland.

    and as you didn’t respond on the other thread, I just paste in my example again…

    Different currencies had a different starting point – they are just unit’s of account, arbitrary defined by governments. When, eg., the Swiss Franc was defined, it had a value of just 1/24 of a Pound Sterling. Should we therefore say that – in 1850 – the price level in Switzerland was about 24 times higher then in the UK? and that in the meantime, the difference has much narrowed? (as of yesterday, the exchange rate was 1/1.33). And that with the introducion of Euro, the price level in Italy fell about 1800 times?
    None of this statements would make any sense at all, IMO.

  97. Gravatar of Ralph Musgrave Ralph Musgrave
    23. July 2011 at 08:03

    Scott,

    Re MMTers advocating an increase in the money supply by the conventional method, I certainly take your 2nd and 3rd paragraphs in the above article to be saying that. Anyway, moving on….

    Much of your thinking chimes with MMT, far as I can see. As an MMTer I fully agree with the “hot potato” effect.

    I certainly agree with QTM (which I assume is the quantity theory of money.) That’s on the assumption that a change in the quantity of money involves a change in the total of “private sector net financial assets” – a common MMT phrase. In other words a SWAP of bonds for monetary base is near irrelevant: it’s an increase in the monetary base with the total value of bonds remaining constant that has the real effect.

    Re the Fed wanting to raise the price level by 10%, I don’t think MMTers claim the main effect comes via interest rates. They claim the effect comes mainly from the hot potato effect.

    Re central banks being forced to respond to demands for extra reserves by the banking system, MMTers do make that claim, but they are not alone. Steve Keen, who is not specifically an MMTer, also makes this claim – backed with plenty of research.

    I quite agree that it is important to do “thought experiments with monetary regimes lacking a banking system.” Warren Mosler who is a leading MMTer does just this with an ultra simple economy consisting of just one family: parents and children. See:

    http://www.gate.net/~mosler/frame001.htm

    Re how the price level relates to the total quantity of money in an economy, this is not something MMTers devote much time to. Though what they WOULD say can be inferred from their other ideas, no doubt.

  98. Gravatar of John John
    23. July 2011 at 08:31

    Scott, you mischaracterized my definition of inflation horribly. I said an INCREASE in Money supply WITHOUT a corresponding INCREASE in money demand or a DECREASE in money demand WITHOUT a corresponding DECREASE in money SUPPLY. It works just like any other supply and demand chart determing the price of a commodity. In 2000-11, the Fed increased the money supply but the increased demand for money prevented serious inflation. I was absolutely NOT arguing that inflation simply comes from money supply increases. Sorry for the caps but I wanted to make that very clear.

  99. Gravatar of rogue rogue
    23. July 2011 at 08:35

    The price level is determined by aggregate demand. If there already is enough existing demand for all supply, then the more demand, the higher the price level.

    Demand is determined by income, and access to credit. The greater the income, the greater the demand (unless one is uncle Scrooge).

    Access to credit (assuming banks are prudent lenders avoiding NINJA loans) is determined by level of income.

    So the next question is where does income come from? It comes from other people’s spending. Other people’s spending is determined by their income and access to credit.

    So the real question to ask is how does income keep on generating itself? Confidence in the stability of markets, in the currency, in the belief that income will continue. What makes this confidence possible? The paradigm that answers this best is the true economic paradigm. You be the judge.

  100. Gravatar of onliberty onliberty
    23. July 2011 at 08:50

    Lorezno,

    “the labour theory of value is false…”

    I read your post. Thanks for that. I completely agree that the *implications* Marx drew from the labor theory of value are false and dangerous. But he took an otherwise true idea, and twisted it so that it justified some radical idea. Those radical ideas are false, not the initial concept on which they are based.

    We still use the labor theory of value all the time, even if we don’t realize (and some of us would never want to use that term simply because of its negative connotations – but that doesn’t mean we are arguing over the truth of the idea, we are just arguing over what to call it).

    Wages are determined by production. Wages are lower in China because their production is lower. They produce less with their labor so they get less in return.

  101. Gravatar of Greg Marquez Greg Marquez
    23. July 2011 at 09:08

    Scott:
    Uhh… that was a somewhat snarky reply.

    Here’s the thing. MMTers say that the Federal Reserve cannot put money into the economy, they are a bank, they can’t actually print money, and it appears at least according to the Federal Reserve
    ( http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html )
    that this is true.

    This isn’t a technical point about how the banking system works but goes to the very basic assumptions of your model. If the Federal Reserve can’t actually put money into the economy then it’s impossible for the Federal Reserve to target NGDP as you prescribe. Your snarky response suggests to me that you really don’t know if the Federal Reserve can print money, you’re just assuming it can.

    That’s the point I’m trying to understand. Your theory about NGDP targeting may still be true, it probably is, it’s just impossible for the Federal Reserve to do the targeting it must be done by the Treasury Department.

    Thanks

  102. Gravatar of Winslow R. Winslow R.
    23. July 2011 at 09:27

    @ Ryan Markov

    Great link, hope Scott takes the time to read and understand.

  103. Gravatar of flow5 flow5
    23. July 2011 at 10:03

    “The base is bank reserves plus currency held by the public”

    Currency has no expansion coefficient. That’s from Dr. Leland James Pritchard, Ph.D. Chicago, economics 1933.

  104. Gravatar of morgan warstler morgan warstler
    23. July 2011 at 10:54

    Payam if you want to convince me start with my assumptions and work the problem. I promise I am most certainly your huckleberry.

    I start with only technology and invention improve human lives because they alone create productivity gains. Moving money around doesn’t do anything. If you disagree you can argue it but more compelling would be if you could stipulate to my assumptions.

    Next I view the state as inherently unstable simply because historically it is and I think you can judge the likelyhood of state longevity based on how closely it abides my assumption on tech and innovation.

    You can see this as a baconian argument in support of raising up engineers and scientists to the hugest eshalon in society or be more crass ans simply say that those who argue for state power tend to be those who are dog likely to be eaten.

    You are welcome to contradict this fact… mmt folk in real life tend to be those without much of a pot to piss in. To me that is as deep as one needs to go to get you folks.

    I’m not trying to be personal here I’m trying to cut to the chase. MMT likes the state. LIKES it.

    I’m actually fascinated with the idea of natural money intellectually because it doesn’t like the state but forces all folks with savings to be personally betting taking equity in private ventures 100% of the time.

    Calling things a depression doesn’t make it so. I view the 1970s as a far more painful.

    If you think you have real chops bring it… but doubt you will can. Ive read the work so make your arguments.

  105. Gravatar of wh10 wh10
    23. July 2011 at 11:06

    Dear Dr. Sumner,

    Thank you for your good-faith effort as well as your honesty in admitting you don’t understand central banking operations to the degree MMTers do (and not to mention plenty of non-MMTers in the relevant operations literature). This to me says a lot about your integrity. It’s admirable and arguably uncommon to find amongst people of your stature.

    The reason we focused so much on “interest rates, RR, etc” in this debate with you is because 1) you brought them up first at NEP with your examples, and we saw some serious errors (maybe we became unproductively fixated on this), and 2) if you don’t understand the operations and accounting and institutional capabilities, then it is *possible* that “what you think is happening” in the real-world is not actually “what is happening” in your thought experiment. By not first understanding the accounting and operations, you risk 1) misinterpreting fiscal and monetary policy tools and 2) thus potentially drawing the wrong conclusion about the causations.

    Dr. Fullwiler has tried to explain to you what the MMT model of price level determination is. In fact, I wager to guess, that if we can sort this out, you and MMT will be in general agreement. “Interestingly, MMT is also a quantity-theoretic model of changes in the price level. The differences are (1) net financial assets of the non-government sector, rather than traditional monetary aggregates, are the MMT’ers preferred measure of “money,” and (2) desired leveraging of the non-government sector is akin to the inverse of what one might call “velocity.” In MMT, the two of those together (net financial assets of the non-government sector relative to leveraging of existing income) set aggregate demand and ultimately changes in the price level, at least the changes that are demand-driven.”

    Let me try to further explain the difference between how you are seeing things and how operations experts see things (and I hope you are willing to continue your good faith effort). I will try to use “neutral language” rather than the “MMT language” you find odd.

    Dr. Sumner’s Problem: Dr. Sumner believes that “new currency/deposits in the economy” necessarily leads to higher prices *no matter how the currency/deposits get there* (i.e. the “Iceland dump” without a bank or the OMP with a bank).

    MMT’s View: *It does matter how the currency/deposits get there,* and MMT can use chronology and an accurate view of operations and accounting to show this (with theory of spending decisions as a reinforcing supplement if necessary).

    The Disconnect: Whereas Dr. Sumner sees the impact of a fiscal policy injection of dollars the same as a monetary policy injection of dollars, MMT says “no, because in the latter, the spending potential was already there due to prior fiscal policy.”

    I assert that Dr. Sumner is not making the connection with this viewpoint because he is not yet aware of 1) the accounting, 2) the fiscal injection that happened prior to the monetary injection, and 3) the institutional capabilities and market dynamics that allow for spender’s portfolio of financial assets to change should the spender want more currency/deposits *without* the Fed providing them in exchange for treasuries. Please refer to Dr. Fullwiler’s explanations in (http://bit.ly/n6Klit) for why treasuries do not constrain spending; it’s point 7 in that article. (I realize this article may seem like “heresy” to you, but for now, please just focus on point 7, because that is all that is relevant here :).)

    Approach for Consensus: Explain to Dr. Sumner that prior to the Fed swap of dollars for treasuries, the price impact he is expecting was *already baked into the system.* This is why MMT prefers “net financial assets” to monetary aggregates, otherwise “you get fooled by the process.”

    One reason MMT prefers NFA is because spending decisions are made relative to one’s income, and it’s easy to confuse “deposits” with “income” and easy to falsely believe that “deposits” either constrain or enable spending. The belief that deposits by definition cause spending lead many to believe that QE–a simple portfolio shift from a longer-duration financial asset (a Treasury bond) to an overnight duration one–in and of itself causes spending, when the owner of the longer duration financial asset has 20 Primary Dealers making a market at all times if he wanted to spend without QE, amongst other things. Again, please refer to the link above for why treasuries do not constrain spending.

    I tried to explain at NEP the inconsistencies in your thought experiment being applied to an OMP, but either you ignored me or didn’t understand the language I was using. But let me try again. In the “Iceland dump” example, the injection of money into the economy is a net add to the financial wealth of the economy, what MMT calls net financial assets (financial assets- financial liabilities). The economy receives all of those financial assets without any offset, so assets increase by that amount and thus so does “net financial assets” (or “wealth” or “equity”). MMT and you are in COMPLETE AGREEMENT that the quantity of “money things” there can potentially translate in and of itself into price changes. The exogenous injection of net financial wealth is *a fiscal policy tool,* and that’s where the QTM lies (in addition to wealth leveraging of the non-govt sector, as Dr. Fullwiler says above, from the MMT perspective). You are seeing the banking system swap of dollars for treasuries the same as the fiscal injection of net new wealth. But they are not. Net financial assets aren’t changing, and the wealth that makes the 10% higher spending that you are looking *for was already in existence.*

    Respectfully yours,

    Wh10

  106. Gravatar of wh10 wh10
    23. July 2011 at 11:16

    Also, as I suspect you realize, you and MMT agree interest rate changes can lead to price changes, but MMT views this as fundamentally divorced from changes in the quantity of reserves. I know you don’t want to talk about that (all the reserve stuff, interest rate stuff, etc.), but I just wanted to reconfirm, so that it doesn’t look like I am saying monetary policy is completely impotent.

  107. Gravatar of Donald Close Donald Close
    23. July 2011 at 12:23

    Speaking as a ‘bystander’ (trained in the physical sciences & engineering — IMHO, economics doesn’t have the same rigorous basis), I want to thank Dr. Sumner for addressing this topic (I enjoy all of your posts). I have been reading some of the MMT material for the last six months or so, and I have been struck by the (to me) seeming disconnect between the MMT people and ‘conventional’ economists. So I am happy to see some dialog on the subject. I still don’t see any resolution, but at least I don’t feel that I’m just missing something blindingly obvious. Thanks also to all the people who have commented.

  108. Gravatar of Greg Greg
    23. July 2011 at 12:33

    Lee

    Quantitative easing switches an interest bearing asset for a non interest bearing asset, its like taking money form a savings account and putting it in checking. IF QE “works” its only because someone feels wealthier when they own stock xyz instead of a T Bill paying 2%, but there isnt any more money in the system as a result of QE. Feeling wealthier is not being wealthier. QE increases speculative activities in some areas and leads to more volatility in markets but net private sector wealth is unchanged. If wealth could be changed simply by people liking higher stock prices, why couldnt we just raise the prices of ALL stocks?

    The criticisms that printing money doesnt make anyone wealthier applies to the notion that higher stock prices makes anyone wealthier.

  109. Gravatar of Greg Greg
    23. July 2011 at 12:43

    Scott

    Japans price level isnt 100 times ours, thats absurd. If we priced our stuff in pennies it would be 100x more but it wouldnt be any more expensive!

  110. Gravatar of Y Y
    23. July 2011 at 13:43

    Greg,

    Japans price level isnt 100 times ours, thats absurd. If we priced our stuff in pennies it would be 100x more but it wouldnt be any more expensive!

    That’s exactly the point he’s making. Japan’s M is that much bigger.

  111. Gravatar of Ron T Ron T
    23. July 2011 at 13:49

    There isn’t a less interesting question than about “price level”. Who cares? Real output matters. Would it matter if we switched to cents and the “price level” rose? There isn’t a more irrelevant issue in all of econ. If you ask about the rate of change – this is driven by energy prices and spending vs output. So if anything, fiscal policy can impact it much more than monetary policy.

    http://blogs.forbes.com/johntharvey/2011/05/30/what-actually-causes-inflation/

  112. Gravatar of Greg Greg
    23. July 2011 at 14:19

    Y

    But Japans M isnt any bigger, its simply denominated in a smaller unit. Lets price our debt in “micro cents” and then we can really get some scary big numbers.

  113. Gravatar of Greg Greg
    23. July 2011 at 14:22

    Ron T

    I agree with you about price level being an uninteresting question. You must ALWAYS ask with price……… relative to WHAT. I care not how much something costs nominally but how much of my salary do I have to spend on it.

    Prices might be really low but if most people dont have any money………

  114. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 15:04

    Scott: I think the basic MMT theory of the price level is this:

    The public has a real demand for a stock (M+B)/P. The government sets the nominal supply of (M+B). The two together determine P.

    (This is the long run theory, of course, since MMTers are sticky price/wage people in the short run. In the short run, an excess demand for (M+B) creates a fall in Y and L, which in turn reduces the demand for (M+B), until demand equals supply for (M+B)).

    This is sort of similar to FTPL, in that it lumps together M+B, except FTPL adds the condition that the demand for (M+B)/P must equal the present value of primary surpluses. (That’s because FTPLers implicitly assume that M, B, and private bonds are all perfect substitutes, to a first approximation).

    There is also a second MMT theory of the price level, but it’s more of a theory of how they would *like* the price level to be determined. If the government stands ready to buy labour at a fixed nominal wage W, in exchange for newly-printed money, then W determined P in much the same way that the price of gold determines P under the gold standard, except labour replaces gold as the nominal anchor.

    As far as I can tell, my reading of MMT here is consistent with the post to which Ryan Markov links above.

    http://heteconomist.com/?p=756

  115. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 15:13

    Basically, if you start with FTPL, and then assume that the demand for government liabilities M+B is perfectly interest-inelastic (FTPLers make the exact opposite assumption) you get MMT. This is consistent with my “vertical IS curve” interpretation of MMT.

  116. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 15:19

    Greg: “But Japans M isnt any bigger, its simply denominated in a smaller unit. Lets price our debt in “micro cents” and then we can really get some scary big numbers.”

    Yes. But that exact same insight is what is at the root of QTM. It goes all the way back to David Hume (and, no doubt, earlier). If we added a zero to all the dollar bills, so a $1 became a $10 bill, and a $10 became a $100, etc., then we would need to add a zero to all the prices to get back to equilibrium. Increase M ten-fold, and we increase equilibrium P ten-fold too.

  117. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 15:40

    Scott:

    “3. I am very worried about how can we afford the increase in AD, if we choose to go the fiscal stimulus route, which you suggest is their approach (although they call it monetary policy.”

    Think back to Abba Lerner on Functional Finance. Suppose the economy were in recession, and expected to remain there *permanently* (unless the government “does something”). Their solution is to print (non-interest paying) money and spend it. The rest of us, who worry about deficits and debt, are thinking about the possibility that the recession may not (we hope!) be permanent, and that at some time in the future we would need to have positive (real) interest rates on government liabilities to prevent above-target future inflation. AFAICT, MMTers do not worry about this, because their IS curve is vertical, so future governments can set real interest rates as low as they want.

    “Nick, Do you think it would be possible to construct a list of those macro theories that explain the price level, and those that don’t even try? And then another list of those that can account for the Australia/Canada pattern I discussed, and then those that cannot explain the fact that both countries have similar price levels, despite wildly different levels of government liabilities.

    I can’t do this, as I don’t know enough macro, but perhaps you could.”

    I can’t do it either, Scott.

  118. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 15:48

    BTW, one general problem I have with understanding what MMTers are saying is that they are often unclear on whether they are talking about real or nominal variables. I have to guess, and then see which guess makes most sense.

  119. Gravatar of W. Peden W. Peden
    23. July 2011 at 16:06

    Can’t MMT’s do what the Old Keynesians did with the price level and have it determined exogenously by the effects of the worker-management power tradeoff on wage-units? So the price level in a given country reflects this conflict within capitalism. The differences between, say, the Venezuelan price level and the US price level are a function of worker power in the two countries. The price level is therefore just an aggregate of the individual prices which compose it, which in turn are set by the dynamics of capitalist production.

    One thing this tells us is that there are no problems with inflation that cannot be solved by a good incomes policy. If we’re reviving the old notion of fiscal stimulus, why not incomes policies as a means to ensure full employment? Also, has it occured to anyone that capital and import controls are really good ideas? And why shouldn’t we have a nationalised travel agent?

  120. Gravatar of Jim Glass Jim Glass
    23. July 2011 at 16:30

    **“MMTers … probably have a better understanding of modern central banking than most non-MMTers, certainly better than mine.“**

    I wouldn’t be so gracious, both for the obvious reason (see below) and because where MMTers are concerned no such graciousness goes unpunished (see comments under prior posts).

    *”MMTers do NOT, as you suggest, advocate increasing the money supply by the conventional method (central bank buying bonds). They advocate a straightforward “print and spend” policy. “*

    Indeed, as explained right here: “What If the Government Just Prints Money?”, explaining how the govt can happily solve the debt ceiling problem simply by printing all the money it wants to spend without incurring any more debt.

    Well, nobody can deny that’s a way around the legal issue.

    As to the predicted economic consequences, and the understanding of how our financial system works that it shows, compared to *all* conventional wisdom — held by *all* finance ministers, Nobel economists, central bank heads, etc. — it represents either *far better* understanding, or *woeful*, embarassing misconception. There is nothing “so so” about it!

    Professor, it may be time to cease being so middling gracious, call a spade a spade, and pick one or the other.

    Don’t worry about the feelings of all those Nobel economists and central bankers, they’re all big boys and are paid enough to handle the truth.

  121. Gravatar of Payam Sharifi Payam Sharifi
    23. July 2011 at 17:47

    Mr. Glass, who’s to blame for the current financial crisis? Is it not obvious to you that its those like Sumner who engage in thought experiments and who implicitly and sometimes explicitly accept the rational actor model(ie modern microeconomics), who don’t really understand how government spends, and aim to totally exclude politics from their discussion of economics and make it a science instead are the reason we were lured into finance becoming so large here in the US and in other countries? Don’t come here with your self-righteous BS when its clear to everyone that mainstream economics has crippled the world economy. I’ll explain that a little more below in my response to morgan wrestler.

    Mr. Wrestler,

    Your views against government are misguided. Government is made of the people who inhabit the country. Your attack against it and your war to forever weaken it in fact makes it more corrupt. Its actually quite simple to understand, so let me both lay out your position and my position.

    Your position: government is corrupt, and we should do everything in our power to weaken it. My response: government is made of the people, so to say it is corrupt is to say that we are corrupt, which may or may not be true. Nevertheless…
    My position: what government does or doesn’t do is a matter of democracy to decide, not for seemingly impartial actors like “economists”. Economists have actually hijacked democracy. Instead of deciding what social services we want in place, we instead are ruled by an orthodoxy that says we should base things off of monetary costs and benefits. So rather than letting interest groups have a voice who desire some sort of social benefit that can’t really be measured by monetary means, we instead let “impartial” actors like economists make these judgments based off of direct monetary costs and benefits. What is the general consensus of these economists? Let the market decide. What does this do? It excludes distributional issues and weakens whatever ones are in place…this is essentially an attack on democracy. This means that the rich get richer, and the middle and lower classes are left to rot. Don’t believe me? Look at our income inequality, its the worse its been since the great depression and its not getting better but getting worse. Look at unemployment…where before it was a mandate of the federal reserve to ensure full employment, its been left on the backburner and nobody gives a shit, not even you(no, you really f’ng don’t). So when politicians are in office they are left with this orthodoxy to deal with and left with MORE POWERFUL INTEREST GROUPS(the rich variety) to decide on policy. Look at governor Christie of new jersey. Who was he palling around with recently? Hedge fund managers. There is no other constituency left in this country that has a real voice, they get silenced out by the orthodoxy those like Sumner have created. Now we have those like Sumner continuing with their thought experiments as if nothing happened, and people like you coming here and attacking MMTers? Are you f’ng kidding me? Get a clue. Your arguments only serve to advance the shit that currently rules the United States and other developed countries, and that continues to seek to give bad advice to developing countries.

  122. Gravatar of Payam Sharifi Payam Sharifi
    23. July 2011 at 18:00

    Last word for those of you STUPID enough to be calling MMT “faith”…neoclassical economics is faith based economics, and while its true that austrians are worse in this respect its foolish to talk about MMT or post keynesian economics as faith based when even sumner said “My theory is that they focus too much on the visible, the concrete, the accounting, the institutions”

    Nothing could be less faith based.

  123. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 18:38

    “Your arguments only serve to advance the shit that currently rules the United States and other developed countries, and that continues to seek to give bad advice to developing countries.”

    QED.

    Payan, you totally prove my point. YOUR EXISTENCE justifies my argument.

    MMT is perfect example WHY we short circuit Democracy!

    There is no way in hell people like you get to count as much as people who OWN AND RUN STUFF.

    Oh yes, there you are without hard assets you have earned, and you have no job, let’s give YOU an equal voice in PRINTING MONEY And TAXING others – as if money is a social tool.

    The answer is no. We voted. Here’s a hint: The people who you are claiming to support – don’t vote. Good luck with that!

    We shall not be adopting MMT for the same reason we keep cutting taxes on the rich and allowing corporations to make huge political donations – to keep your ideas down, to repress you.

    YOUR REAL “rubber meets the road” PROBLEM I pointed out this week; when poor people have 500 channels, A/C, and enough food to be fat, it is very, very, very, very hard to roust them up into a revolution to install Mosler and Payam at the head of US Monetary Policy.

    —-

    When you get serious about finding a real workable plan to topple the Fed, you’ll have to figure out how to WIN the asset holders, win the job holders… how to serve them.

    and oh my god you’ll be an Austrian!

  124. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 18:40

    or, if he does it right… you might be Scott Sumner.

  125. Gravatar of Payam Sharifi Payam Sharifi
    23. July 2011 at 18:51

    I will never be a faith based Austrian, so don’t go there.

    Note I never acted like I was being repressed, I was just pointing to the idiocy of your argument, in that you make government more corrupt the more you try to make it smaller. BTW I’m not sure if you don’t realize this, and not sure if you’re an austrian or something, but austrians reject democracy whether they say they do or not. The only thing I try and argue here is that if you believe in democracy or its equivalent(republics) then its idiotic to argue for policies that effectively increase inequality and/or do exactly what you don’t want them to do. I only post when I’m annoyed.

    FYI taxation in MMT is viewed as a mechanism to regulate aggregate demand, its not looked at through the same prism as many liberals who see it as “paying their fair share”. FYI I agree with you in that I don’t have any optimism that ideas can change things on a grand scale. Only religion can do that.

  126. Gravatar of Lee Kelly Lee Kelly
    23. July 2011 at 18:55

    Okay, maybe this a response to the MMTers:

    In a sense, open market operations just exchange one type of government debt for another, and the recipients of additional money balances are no wealthier. Debits equal credits. For the economy as a whole (not including the Fed), the total monetary value of its assets is unchanged. To increase nominal wealth, the Fed would have to add to the combined supply of money and Treasury bonds in the economy, but it can’t. If monetary stimulus is supposed to work by increasing nominal wealth in the economy, then it can’t work at all. Only the Treasury has the power to do that by creating new money (like minting a $2 trillion platinum coin) and giving it to government bond holders.

    This is all true, I think, and entirely irrelevant to whether open market operations can increase nominal spending, because it does not depend on people having more nominal wealth or feeling richer. The whole point is to satiate an excess demand for the medium of exchange (base money + chequing accounts + some other things), that is, mostly the kind of stuff you can go and exchange for goods at Wal-Mart.

    To the extent that recipients of additional money balances do hold the money in place of bonds, open market operations will be ineffective at stimulating nominal expenditures, but that is precisely why good monetary policy always involves purchasing assets that are not perfect substitutes for money. The trick is to buy assets from people who don’t want money, but know they can use money to get something else they do want. Perhaps they want other financial assets, or maybe they will directly purchase consumer or capital goods — this is what stimulates nominal expenditures.

  127. Gravatar of Scott Sumner Scott Sumner
    23. July 2011 at 19:03

    Brian, You said;

    “MMT contends that bank lending is not constrained by reserves, but rather by bank capital. So adding reserves cannot be expected to increase bank lending or AD.”

    This is what drives me nuts about MMT. The second sentence does not follow from the first. I agree with the first, but not the second.

    Ryan, Thanks, but not only does that not answer the question, what it does say (about bonds and base being equivalent) is wrong (as I showed in my “price level” post.)

    Payam, Yup, I’m the reason we are in recession now. For pointing out in late 2008 the insanity of IOR. For pointing out that the Obama fiscal stimulus plan wouldn’t work. For pointing out that QE would not create high inflation, and unemployment was the real problem. For pointing out two years ago that we should emulate Sweden. Yes, it’s all my fault.

    Good Habit, You said;

    “But only if I withdraw cash or transfer the funds to another bank, will the bank actually need reserves.”

    That’s actually not that uncommon, People borrow money for a reason, not to have it sit in a deposit account earning a lower rate than they pay on the loan.

    It’s annoying that MMTers think they are working with a bunch of tautologies.

    You said;

    “So, the main point is – banks are rarely ever constraint in making loans by a lack of reserves.”

    Even though as MarkS says I know nothing about banking, even I knew that. Make the loan and borrow reserves in the fed funds market, if you need the reserves. Is that another great insight? As far as the banking system as a whole, it can get extra reserves from cash in circulation, or it may or may not be able to push the Fed into injecting new base money into the system.

    You said;

    “When, eg., the Swiss Franc was defined, it had a value of just 1/24 of a Pound Sterling. Should we therefore say that – in 1850 – the price level in Switzerland was about 24 times higher then in the UK? and that in the meantime, the difference has much narrowed? (as of yesterday, the exchange rate was 1/1.33). And that with the introducion of Euro, the price level in Italy fell about 1800 times?”

    If it’s true, why not say it?

    Ralph, You said;

    “I certainly agree with QTM (which I assume is the quantity theory of money.) That’s on the assumption that a change in the quantity of money involves a change in the total of “private sector net financial assets” – a common MMT phrase. In other words a SWAP of bonds for monetary base is near irrelevant: it’s an increase in the monetary base with the total value of bonds remaining constant that has the real effect.”

    As I showed with my Canada/Australia comparison in my price level post, a swap of cash for bonds is extremely relevant. I think you missed the point of the post.

    John, OK, Sorry for misinterpreting you.

    Rogue, You said;

    “The price level is determined by aggregate demand.”

    Actually, it’s NGDP that’s determined by AD, but that’s close enough. But how is AD determined. Why is it 30 times higher in Japan than the US?

    Greg, You are getting very picky. The Bureau of Engraving and Printing actually prints the money. But the Fed does put money into circulation.

    Ben Bernanke said last year in an interview that the Fed does print money, I suppose he doesn’t know how the Fed operates either?

    (Yes, I know he didn’t mean that literally, but effectively they do.)

    Sorry about the snark. I get annoyed by so many MMTers with an attitude. They come here and make arguments at the level of an undergraduate textbook, and then lecture me that I know nothing about money, and only they have been exposed to the TRUTH.

    Winslow, I did read it. Not sure I understood it. Didn’t agree with it’s view of OMPs.

    flow5, I have no idea what that means, but thanks.

    wh10, You said;

    “Dr. Fullwiler has tried to explain to you what the MMT model of price level determination is.”

    No actually he didn’t. I asked him several times, and each time he refused to answer.

    In the Iceland case I wasn’t trying to show that the currency dump increased the price level. Indeed before the dump there was no Iceland economy. I simply tried to show that a fiat regime didn’t need any backing–no gold, no taxes, no government, no nothing. And also that we could estimate Iceland’s price level, just on the basis of its currency stock.

    You seem to claim that if Canada monetized it’s entire national debt, and then had no net debt like Australia, it’s price level would not rise. OK, but that means Aussies would be walking around holding a currency stock equal to 3% of GDP in their wallets, and Canadians would be walking around holding a currency stock equal to almost 30% of GDP in their wallets. I ask you, how likely does that seem?
    Or maybe your argument is that rates would go to zero, and stay at zero, and the money would sit in bank vaults. Again, how likely does that seem? (Imagine that nominal interest rates were 5% when this experiment occurred.)

    Thanks Donald.

    Y, Thanks for explaining that to Greg.

    Ron, If it’s not interesting, go find a blog that is. I figure if a monetary theory can’t explain the price level, it can’t explain anything.

    Nick, Thanks for finally clearing that up. Now I know the theory, and I reject it.

    You said;

    “That’s because FTPLers implicitly assume that M, B, and private bonds are all perfect substitutes, to a first approximation)”

    If so, it’s easy to see how they developed that erroneous theory of the price level. When I got to Walmart and they don’t accept my T-bond, I must remember to explain to them that T-bonds and cash are perfect substitutes.

    I wonder why MMTers assume the IS curve is vertical?

    Their nominal wage model of P is presumably something short of a “General Theory”.

    W. Peden, But that wouldn’t really explain why the Korean price level is 1000 times higher than ours.

    Jim Glass, You are probably right.

  128. Gravatar of Payam Sharifi Payam Sharifi
    23. July 2011 at 19:14

    Don’t take it as much of an insult Mr. Sumner, I hold you as responsible as I do almost every other economist, but that’s not to say I don’t respect what you do say…its that I don’t respect what you DON’T say. If you indeed say we needed to emulate sweden then my immediate impression of you was quite wrong, and for that I apologize.

    Nick Rowes explanation of MMT via ISLM is not a correct interpretation as has been explained on Nicks blog months ago. I’ll quote from someone named tjfxh there:

    “NIck: “It’s a different way of saying the same thing. The only difference is that *maybe* MMTers don’t believe interest rates affect desired savings or investment, so want to use fiscal policy. See my last post on reverse engineering.”

    No “maybe” about it. We seem to be are going round and round on this. MMT flatly and emphatically rejects monetary policy and favors fiscal policy. See your last post on reverse engineering. 🙂

    MMT combines Godley’s SFC macro modeling and sectoral balance approach with Lerners’s functional finance, among other things, to achieve its aim, full employment with price stability, which is the Fed’s mandate, btw. MMT is recommending substituting fiscal policy for monetary policy. No and’s, if’s, or but’s.

    With respect to this discussion, MMT’ers deny that the MMT approach can be reduced to ISLM and recast as a sort of monetarism, as we have already gone thorugh previously. MMT is fiscalism for good reason: The transmission from government expenditure to an increase in nongovernment NFA to increased NAD, and the opposite in the case of taxes, is clear. The transmission of interest rate management is not clear for a variety of reasons that MMT’ers explain. MMT’ers reject the assumption of that interest rates affect I & S in the way presumed, so that the ISLM model is not useful as a policy tool. For MMT the sectoral balance approach and functional finance are policy tools, using fiscal policy.

    You also assume that taxation (revenue) funds expenditure. MMT denies this, in that in a fiat system, a monetarily sovereign government that is the monopoly issuer of a nonconvertible floating rate currency funds itself directly with expenditure. No taxes needed for funding. Not now. Not ever.

    Expenditure and taxation are separate fiscal operations that do not depend on each other. Expenditure transfers real resources from private to public and increases nongovernment NFA in the exchange. Taxes withdraw net financial assets generated previously by the expenditure that created these assets ex nihilo. That is what “fiat” means. The connection between expenditure and taxation is that the currency that government creates ex nihilo is in effect a tax credit. That’s it. Nongovernment must obtain these credits to satisfy its obligations mandated by government in the form of taxes, fees and fines.

    The federal government in the US spends first and then taxes to reduce reserves as needed to control inflationary pressure and issues tsys to drain reserves from the interbank market. Taxation is a fiscal op. Tsy issuance is monetary op. Expenditure adds reserves, taxes subtract reserves, and tsy issuance converts reserves into another asset form without altering NFA. Monetary policy only alters NFA through the amount of interest paid, since interest payments increase nongovernment NFA. So lower rates are deflationary in this respect, and higher rates inflationary, according to MMT.

    To understand MMT. it is necessary to recognize that MMT is a “new paradigm,” in that it rejects many assumptions (norms) on which the current economic paradigm rests because, e.g., they do not reflect how the Treasury, cb, and financial sector actually interact “” as Scott F. pointed out in another thread, as I recall.

    I am happy that you are trying to understand MMT, but I think that without approaching it on its own terms, you are getting confused about what MMT is saying and more importantly at this critical juncture, what MMT is prescribing. ISLM is never going to capture what MMT is saying becuase its transmission is monetary (interest rates) and MMT is fiscal (expenditure and taxation). MMT is shouting out to dump monetary policy and switching to fiscal policy based on SFC macro models, the sectoral balance approach, and functional finance (and some other things, too). MMT sees the issue as lagging demand due to demand leakage stemming from increased saving desire and net imports, which government needs to offset fiscally with a corresponding deficit.

    BTW, retiring the debt by increasing reserves to buy up tsys simply puts the reserves drained from the interbank market back into the market. This would mean that the overnight rate would go to zero unless the cb paid interest on excess reserves equal to its target rate, or else set the target rate equal to zero (the MMT recommendation). What you are proposing by transferring tsys to the Fed’s book is the no-bonds recommendation of MMT’ers, which the Fed is now pursuing to some degree. You say that is might be better to buy back bonds now because there might be inflation in the future. The fact is that QE is depriving nongovernment of the added NFA of the interest to be paid and transferring it to the Tsy to reduce the deficit. This is just adding to the demand leakage that is crippling the economy now. If the interest were used to increase the deficit by that amount, this extraction would not lead to demand leakage. Moreover, we can deal with inflation should it arise fiscally, in a targeted fashion, instead using the blunt instrument of interest rates to contract the entire economy and increase the buffer of unemployed as we have been doing under NAIRU.”

  129. Gravatar of Brian Brian
    23. July 2011 at 19:16

    Scott S

    You are right I missed a step.

    Bank lending is not constrained by reserves, but rather by bank capital. Adding reserves does not add capital because it is an asset swap. Reserves are added while bonds are removed. This means that added reserves cannot be expected to increase bank lending or AD.

  130. Gravatar of K K
    23. July 2011 at 19:22

    Scott:”Replace “don’t” with “do.””

    That’s true only in a representative agent world. If you have agents with different preferences, then changing the initial endowment will not generally result in the same general equilibrium. Why do you say this? If someone wins the lottery they will not consume all their new wealth instantly and then go back to their old lifestyle. Instead they will split their new permanent income between consumption and savings. If you endow a whole class of actors with new wealth, their behaviour will change, as they find themselves at a flatter portion of their utility function. This will not leave you in the same equilibrium.

    Consider giving a trillion dollars of helicopter money either to the largest 100 corporations, or the poorest 150M Americans. It’s your contention that we will find ourselves in the same equilibrium? Under any individual preference assumptions?

    Like I said, this even has a name: http://en.m.wikipedia.org/wiki/Wealth_effect

  131. Gravatar of Lee Kelly Lee Kelly
    23. July 2011 at 19:39

    Question to MMTers:

    Why must “private sector net financial assets” increase for monetary policy to stimulate nominal expenditures?

    This, in my opinion, is false and utterly misconstrues the position of opponents.

  132. Gravatar of Eric Dennis Eric Dennis
    23. July 2011 at 19:44

    I think Lee Kelly, in his 18:20 comment above, provides a nice, explicit account of the mechanism by which the Fed can increase nominal spending, and so I am also waiting for “MMT” advocates to respond to it. Greg’s reply above to the effect that nominal spending (hence the demand for credit) is affected only by the money value (and not the riskiness or liquidity) of assets in the economy is inadequate. By that logic we can replace everyone’s liquid assets with houses and expect no change in business income/credit.

    Regarding the claims here that MMT is concerned with the idea that modern banks are capital-constrained rather than reserve-constrained, http://en.wikipedia.org/wiki/Chartalism says the following:

    “MMT rejects the mainstream notion of the money multiplier, where a bank is completely constrained in lending through the deposits it holds, and its capital requirement…. [W]hat MMT does argue (in opposition to the mainstream) is that there is no real constraint to a bank in creating any loan it likes.”

    So which is it: MMT sees capital requirements as binding — or MMT sees no requirement as binding?

  133. Gravatar of Lee Kelly Lee Kelly
    23. July 2011 at 19:49

    It’s like the MMTers forgot to include money in their monetary economy. I know they mention “money” a lot, but they treat it like just another financial asset — it’s special only because it is low risk and earns less interest than everything else. There is no acknowledged role for money as a medium of exchange. In MMTers world, people only accept money in exchange because they want to hold money itself; they never accept money because they know it can be readily traded for the real object of their demands.

    This seems absurd, because it would contradict the fundamentals of monetary economics, but I just can’t understand MMTers peculiar claims any other way.

  134. Gravatar of rogue rogue
    23. July 2011 at 19:55

    Scot:”But how is AD determined. Why is it 30 times higher in Japan than the US?”

    It’s 30 times higher there now? Wow. Must have something to do with the US consumer deleveraging (over there only businesses had to deleverage). Consumer demand has greater multiplier effect than business demand (since business demand depends on consumer demand), and losing the consumer meant greater demand loss.

  135. Gravatar of Y Y
    23. July 2011 at 20:25

    I wonder why MMTers assume the IS curve is vertical?

    That’s a great, great question.

  136. Gravatar of dilletaunted dilletaunted
    23. July 2011 at 21:29

    “As to the predicted economic consequences, and the understanding of how our financial system works that it shows, compared to *all* conventional wisdom “” held by *all* finance ministers, Nobel economists, central bank heads, etc. “” it represents either *far better* understanding, or *woeful*, embarassing misconception. There is nothing “so so” about it!”

    i assure you that the only folks scoffing in such a charming way at those disagreeing with mainstream economics are those who are already mainstream economists. please though, do close those ranks as tightly as possible

  137. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 21:51

    payam, I think you are DUMB.

    this is what i have been saying:

    I 100% get WHY you like MMT.

    I KNOW you don’t argue “pay their fair share”

    I KNOW you call it “regulating aggregate demand”

    my point is DEMAND isn’t meant to be regulated – instead only people with $avings count, and unregulated demand is simply a free market aggregate of what those with $avings want to spend.

    I’m calling you dumb because in post after post I have said I DESPISE Democracy, I have said I view the state as illegitimate and unstable, and I view capitalism as a FACT like mathematics – that will destroy democracy.

    ——

    I’m making a REAL argument. I’m saying YOU ARE THE REASON not to make sure MMT is stillborn, and never takes a breathe in the real world.

    I’m like the great hacker of liberal thinking, RAWLS. I do not care about inequality at all. Disparity to me is meaningless.

    —-

    You are invited now to have a public argument with someone who kicks in every basic belief you have and calls you weak for thinking it.

    I argue YOU PAYAM ARE THE REASON the powers that be are justified in keeping you down.

    You want o steal what you haven’t earned, and therefore ANY political machination that destroys your dreams is justified.

  138. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. July 2011 at 23:31

    on liberty: if wages are determined by production, then the value of labour is the value of what it produces, not the other way around. You cannot “fix” the labour theory of value.

    I can tell you, as a (very minor) employer, trying to get labour to produce maximum value is central to the game. That you have labour does not mean you have value!

  139. Gravatar of Jim Glass Jim Glass
    24. July 2011 at 00:57

    Payam Sharifi wrote:

    Mr. Glass, who’s to blame for the current financial crisis? Is it not obvious to you that its those like Sumner who engage in thought experiments and who implicitly and sometimes explicitly accept the rational actor model(ie modern microeconomics), who don’t really understand how government spends …

    “Don’t really understand how the government spends?” … comes from *you*?   🙂

    The MMTers’ single core fundamental belief — and I am sure you will agree — is that: All the world’s central bankers, Nobel economists and finance minisisters are *stupid* compared to MMTers. This implicit insult becomes explicit soon enough.

    E.g., when merely pointed to an MMT article on how govt can spend limitless money via printing it with no adverse effect, instead of endorsing it with, “Yes, that is correct. Do you have any questions about it?”, your response is a shot at “those like Sumner” and Don’t come here with your self-righteous BS .

    You’ve not much confidence in MMT writing on such subjects, to change the subject like that, eh? Well, I don’t blame you, I haven’t much either!

    In just the last four days I’ve received my nth lecture from an MMTer on all of these subjects — and note always the reliance on others’ stupidity…

    1) The govt can print as much money as it wants to spend, happily, link above. MMTer’s comment: “Anyone could understand this, but you would have to understand 3 balance sheets to get that, and economists don’t understand basic accounting.”

    All the world’s economists are *too stupid* to read three balance sheets. So we MMTers have figured out what all the economists in the world can’t believe!

    2) “All the economics textbooks are wrong because they are written for a world on the gold standard. Economists don’t realize we don’t use a gold standard any more”.

    Economists are *too stupid* to know the world is not on the gold standard!!

    3) “It is impossible for a govt to default on debt issued in its own fiat money, because it can always just issue more money to pay the debt.”

    Russia defaulted on ruble denominated bonds in 1998, with many nasty consequences, as one may recall.

    “That doesn’t count, Russia chose to do that”.

    But WHY would Russia *choose* such a thing? Could it be that the MMT belief really is: a govt can never default on a debt issued in its own fiat money if it will always choose an alternative that is WORSE. Because in the real world that reduces to: a govt *can* be forced to default on its own fiat money debt if it chooses its least-bad options.

    But no — Russia was *too stupid* to know it could avoid default by printing money. So “that can’t be used as a conterexample”.

    4) Zimbabwe’s money printing was the consquence of its hyperinflation, not the cause of it. But what caused the hyperinflation? “An increase in nominal demand bumping into a supply constraint”. And we know that because “Printing money cannot increase demand”.

    OK, this is yet another thing that all the world’s economists and central bankers are *too stupid* to understand, eh? While you few MMTers have smartly figured it out all by yourselves to trump them.

    But still I ask only to get *no answer*: Since printing money cannot increase nominal demand, then what *did* increase nominal demand by 231 million percent??? That must have been a HUGE thing, *obvious* to any MMTer with only one eye. (Even if all the world’s economists, blind to it, ignorantly believe Mugabe’s printing more than $20 million currency a month was the cause of the hyperinlfation, instead of just a mere consequense.)

    Payam Sharifi, can *you* finally tell me: what was the non-monetary cause that increased nominal demand in Zimbabwe by 231 million percent??

    Now cutting short my long list of MMTers citing all the world’s economists, central bankers, finance ministers et al as being *too stupid* for whatever, I will end with the most amusing example IMHO.

    5) Warren Mosler teaches Larry Summers about the Paradox of Thrift….
    ~~ quote~~

    Senator Daschle was looking at all this in disbelief. The Harvard professor of economics Asst. Treasury Secretary Lawrence Summers didn’t understand reserve accounting? Sad but true.

    So I spend the next twenty minutes explaining the ‘paradox of thrift’ step by step, which he sort of got it right when he finally responded “Ah, so we need more investment which will show up as savings?” I responded with a friendly ‘yes’ after giving this first year economics lesson to the good Harvard professor and ended the meeting.
    ~~~~~

    So there we have Larry Summers — famous economist and US Treasury Secretary — being *too stupid* to grasp the Paradox of Thrift.

    This is the MMTers’ creed: “Everybody but us is *too stupid*…Larry Summers, and all the world’s famous top experts on both theory and operatrional practices are *too stupid*…” (To which I might counter with, Occam’s Razor.)

    But Payam Sharifi, do you really think that we all are *so* stupid as to actually believe that Larry Summers had to finally learn about the Paradox of Thrift from Mosler like that. Or is it only MMTers who fall under that very low bar?

    Now I don’t doubt for a moment that Summers may have looked incredulous during the whole encounter, but I suspect he was not incredulous about what Mosler thought he was incredulous about.

    Nick Rowe is far too kind when he tries to find a reasonable relation between MMT and mainstream economics via IS/LM and otherwise. He should listen to the MMTers who say he makes a mistake when he does that.

    Scott Sumner is far too considerate in being polite to one MMTer after another who patronizes and hurls insults back.

    Kindness and consideration are virtues only so far. They should stop making these mistakes.

  140. Gravatar of W. Peden W. Peden
    24. July 2011 at 00:58

    Prof. Sumner,

    Korean worker power, of course. Look at how low unemployment is in South Korea. This gives South Korean workers bargaining power. They must have more bargaining power, otherwise their price level wouldn’t be higher.

    (Yes, I know it doesn’t. But old fallacies die hard…)

  141. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. July 2011 at 02:02

    Jim Glass,
    This says it all:
    “This is the MMTers’ creed: “Everybody but us is *too stupid*…Larry Summers, and all the world’s famous top experts on both theory and operatrional practices are *too stupid*…” (To which I might counter with, Occam’s Razor.)”

    I get sick of debating them myself as all they ever seem to do is insult my intelligence. Too bad I wasted all those years and money actually studying economics at a university instead of reading a couple of articles and/or blog posts. I could have saved myself so much trouble.

    Sounds like you’ve had a rough week dealing with the @#$%^&* cockroaches. Take some time off. You’ll feel better in the morning.

  142. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 05:20

    The Post-Keynesian view of inflation: http://blogs.forbes.com/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/

    I don’t have much time to say much else, other than economists in general have been raised and taught under the rational actor paradigm which is quite frankly full of shit. So don’t act like I don’t have room to talk when everyone knows this.

  143. Gravatar of Mike Sandifer Mike Sandifer
    24. July 2011 at 05:43

    Personally, I can’t wait for the discussion to move on to bubbles, which the MMTers may be very disappointed to find that Scott is very skeptical of, and rightly so.

    To me it’s a rather humorous claim some of them make when they say the QE programs merely pumped up asset prices, creating new bubbles, as if demand wasn’t at least part of the story, with increased corporate earnings, and to make no mention of, or to discount the wealth effect that resulted.

    Thanks to you Scott, I realized my own conception of “bubbles” wasn’t scientific and now am also generally very skeptical of bubble claims, which are everywhere in the popular media. I try to look now at real factors, or you might say, macro “fundamentals” which I often think I find to offer a plausible story for asset price rises.

  144. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 06:18

    MMTers adopt Hyman Minsky’s concept of speculative euphoria as inherent in capitalism, we don’t need to hear nor do we care about Dr. Sumners view on bubbles, nor will we care what you think about it.

  145. Gravatar of Scott Sumner Scott Sumner
    24. July 2011 at 07:03

    Payam, There’s probably no one on the planet with a more sophisticated understanding of what makes monetary models tick than Nick Rowe. If you are correct that he doesn’t understand MMT, then there’s no point in me even trying. And I guarantee that if he doesn’t understand it, then all the followers of MMT . . . well you probably catch my drift.

    Here’s my question for MMTers. Go back to 1980. We have 13% inflation and 15% nominal interest rates. Now assume Volcker decides to get wild and crazy, and suddenly do enough OMPs to boost the base by 20%. He let’s interest rates go wherever they want to go. What do the MMTers say will happen? The ones that come over here and comment say:

    1. Nominal interest rates immediately go to zero.

    2. The price level is unaffected by this action.

    Are the MMTers interpreting their model correctly? And if you say “The Fed can’t do that,” I’ll start screaming.

    You said;

    “You also assume that taxation (revenue) funds expenditure. MMT denies this, in that in a fiat system, a monetarily sovereign government that is the monopoly issuer of a nonconvertible floating rate currency funds itself directly with expenditure. No taxes needed for funding.”

    Eliminate all taxes? I’m starting to like it better.

    BTW, I never use IS-LM, so no problem there. My big problem is the claim that OMPs are not inflationary, even if they occur during a period where interest rates are positive. For me that’s a bridge too far.

    Brian, You said;

    “Bank lending is not constrained by reserves, but rather by bank capital. Adding reserves does not add capital because it is an asset swap. Reserves are added while bonds are removed. This means that added reserves cannot be expected to increase bank lending or AD.”

    Sorry, but it is still a complete non sequitor. Now I understand why Nick was so frustrated by MMTers being unclear as to whether they are talking about real or nominal variables.

    A swap of cash for bonds does not increase real capital, but it does increase nominal capital. Hence nominal lending can go up, even as real capital and lending remain unchanged.

    Second, Just because a bank doesn’t increase it’s capital, doesn’t mean they can’t increase their lending. At the very instant a new loan is made, lending rises while capital is unchanged.

    K, OMPs don’t change the initial endowment in any important ways. If I swap $1000 in T-bills for $1000 in cash, I’m no richer or poorer. Hence there is no wealth effect that would make me want to spend more or less.

    You said;

    “Consider giving a trillion dollars of helicopter money either to the largest 100 corporations, or the poorest 150M Americans. It’s your contention that we will find ourselves in the same equilibrium? Under any individual preference assumptions?”

    Then it would matter, but precisely because the drop is fiscal policy. I was discussing monetary policy.

    Eric, Good question–do they see constraints, or not?

    Lee, Good point. It’s not a monetary theory at all, it’s a fiscal theory.

    Rogue. You said;

    “It’s 30 times higher there now? Wow. Must have something to do with the US consumer deleveraging (”

    Nice try, but it was roughly 30 times higher in 2006, when Americans were leveraging.

    W. Peden, Yes, Those Koreans work 1000 times as hard as we do.

    Payam, If the MMTers have a high opinion of Post-Keynesianism, that’s all I really need to know.

    Mike, Yes. people see bubbles everywhere. We are hard-wired to find patterns (that’s why so many are superstitious) and we find them even where they don’t exist.

  146. Gravatar of Scott Sumner Scott Sumner
    24. July 2011 at 07:12

    Everyone, Here’s what a cult looks like. They want others to join, if they’ll try to learn the dogma. Here’s Payam:

    “To understand MMT. it is necessary to recognize that MMT is a “new paradigm,” in that it rejects many assumptions (norms) on which the current economic paradigm rests because, e.g., they do not reflect how the Treasury, cb, and financial sector actually interact “” as Scott F. pointed out in another thread, as I recall.
    I am happy that you are trying to understand MMT, but I think that without approaching it on its own terms, you are getting confused about what MMT is saying and more importantly at this critical juncture, what MMT is prescribing.”

    So Payam is basically saying “Please come over and study our great ideas. Learn the truth.” And how do cultists feel about studying the ideas of others, who disagree with them? Again, I quote Payam:

    “MMTers adopt Hyman Minsky’s concept of speculative euphoria as inherent in capitalism, we don’t need to hear nor do we care about Dr. Sumners view on bubbles, nor will we care what you think about it.”

    Once the TRUTH has been revealed by the great Hyman Minsky, no need to consider other ideas. Nice little cult you have there Payam.

  147. Gravatar of Good Habit Good Habit
    24. July 2011 at 07:21

    scott responded to my question
    “with the introducion of Euro, the price level in Italy fell about 1800 times?”

    “If it’s true, why not say it?”

    and somewhere else asked:about AD

    “Why is it 30 times higher in Japan than the US?”

    IMO, your definition of both the terms “price level” as the term “AD” is devoid of any meaning.
    AD is for REAL goods and services – if Japan consumes 30 times more real goods and services than the US, good for Japan. And the price level is the difference between RGDP and NGDP. In case of countries using different currencies, adjusted for the exchange rate.
    Your fixation on purely NOMINAL values leads to a discussion emptier than the emptiest place in outer space.. Sorry to get unpolite.

  148. Gravatar of Greg Marquez Greg Marquez
    24. July 2011 at 07:34

    Scott thank you for the response and I think you’ve handled yourself quite well, you’ve put on your man pants and stood up to a flood of criticisim in a very admirable way.

    I think I’m not making my question clear. What I’m trying to discover is: Can the Fed. only put new money into the economy when the Federal Government spends. It seems to me this is the case. The federal reserve can take money out of the economy easily enough but can it put money in to the economy without getting it from the Treasury department via government spending of one kind or another.

    Maybe I’m being stupid but I think this is the essential issue between you and MMTers. The MMTers seem to be saying that the various measures of money supply aren’t really measuring anything important. When we see money supply exploding in the last half of 2008 followed by deflation in 2009, that does seem to make their point.

    This really isn’t about the Quantity Theory of Money vs. MMT but about how the quantity of money is increased. I think QTM ideas about inflation still apply but I suspect that the MMTers are right and that the Fed can’t actually increase the supply of money.

    So are you saying as a certainty that the Fed can “print” (I’m using quotes because obviously all they have to do is make an electronic entry of some kind.) new money without government spending. Can the Fed decide entirely on it’s own to deposit in their own account 2 Trillion new dollars, dollars not transfered from any other account, and then use that money to buy bonds? It seems to me the MMTers are right, that, if the Fed can’t do this then it can’t really increase the amount of money in the economy regardless of what the money supply measures are saying.

    Thanks for your time.

  149. Gravatar of wh10 wh10
    24. July 2011 at 07:47

    Dr. Sumner,

    You’re right. This radical fanaticism does not help MMT’s case. Unfortunately, it happens in the world, but I don’t think the core developers of MMT are encouraging that. They are honest finance practitioners and academics trying to explicate the way they see the world working.

    Thanks for the continued engagement. I think we can only get so far on the internet. I imagine if you could sit down in a room with James Galbraith and Fullwiler etc., both sides would be able to communicate in a much more productive manner. “Text” can only get two sides who disagree so far (any one here ever try to have a heated debate online with a loved one, for example?).

    You say that Dr. Fullwiler didn’t give you the QTM. Why isn’t the quote I provided you sufficient, in which he directly states MMT is QTM-theoretic? Because the term “net financial assets” isn’t used as frequently in mainstream econ lit as you would require?

    Most of this is coming down to NFA, Dr. Sumner. We think you are fixating way too much on cash/deposits, that it’s an overly simplistic view of markets, and that it’s “fooling” you into thinking that the existence of deposits instead of, say, a T-bond, creates new spending power for the economy.

    “In the Iceland case I wasn’t trying to show that the currency dump increased the price level. Indeed before the dump there was no Iceland economy. I simply tried to show that a fiat regime didn’t need any backing-no gold, no taxes, no government, no nothing. And also that we could estimate Iceland’s price level, just on the basis of its currency stock.”

    What do you mean you weren’t showing that; are you now taking me to literally, that it was the “dump” that caused it as opposed to the existence or expectation of the existence of new currency? Your last sentence says we could estimate the price level on the basis of the currency stock. Ie more currency —> higher prices. Fine, we agree, but we agree because that new currency translates into new NFA.

    I may be misspeaking for MMT, but I think in your example of an OMP, it would only change the price level from the demand side if it changed the value of NFA for the economy or changed expectations in some way that it changed spending habits.

    I 100% agree with you MMT needs a clearer way to explain how MMT is seeing things. And I am not looking to convert you. I am just desperately trying to get you to see things how MMT is seeing things, because only then can you really critique MMT! And that kind of discourse would be excellent.

    I’ll hopefully be back at some point with an alternative explanation. Perhaps the MMTers will write a more scholarly responses over at their home base.

  150. Gravatar of Warren Mosler Warren Mosler
    24. July 2011 at 07:53

    John
    22. July 2011 at 16:31
    “Money is a creature of the state”????!! What a friggin joke. Mosler is smart enough to know about the infinite regression problem.

    YES, WRITTEN ABOUT IN THOSE EXACT WORDS MANY TIMES. THE TEXT BOOK STORY IS AN INFINITE REGRESSION BECAUSE IT FAILS TO RECOGNIZE THE ROLE OF TAXATION.

    If you go back far enough you get to a point where people bartered. Why did they transition to money? The MMTers, believing that money comes from the state, probably think some wise king invented it. I’m sure that king had fun saying to people “We’ll all be better off if we all agree to trade the things we make for these worthless, shiny stones. I know you don’t want them, but if we all agree to want them we’ll be better off, I promise.” That scenario is ridiculous.

    READ ‘WHAT IS MONEY’ BY MITCHELL INES AT http://www.moslereconomics.com IT WAS WRITTEN ABOUT 100 YEARS AGO AND GOES OVER THE HISTORY, ARGUING THAT IT’S ALWAYS BEEN SOME KIND OF TAXATION THAT GAVE CURRENCIES VALUE, FOR ALL PRACTICAL PURPOSES

  151. Gravatar of Warren Mosler Warren Mosler
    24. July 2011 at 07:56

    morgan warstler
    22. July 2011 at 19:19
    You people don’t know how to argue.

    Go right at the false assumtpion.

    Mosler – money is not a monopoly run by democratic government. You and people like you; the people who don’t have large amounts of personal capital DO NOT COUNT you do not get a vote on what money is.

    At the end the day, the masses will not riot when they are fat and have 500 channels and since there is no danger of agitation making the meek powerful you bring no FORCE to the table.

    And force is EXACTLY what you think makes money credible – the MODERN monetary theory would have to be that people like you matter far less than you used too. Money now more than ever is a tool for and by the top 30-40 percent who vote own everything and own all the guns.

    And were forcing a very modern approach on YOU; aren’t we?

    AGREED, IT’S A MONOPOLY (THE DOLLARS TO PAY TAXES COME ONLY FROM GOVT AND/OR IT’S DESIGNATED AGENTS- THE BANKS) AND A TOOL THAT’S BEEN EXPLOITING PEOPLE TRYING TO WORK FOR A LIVING FOR AT LEAST THE LAST 40 YEARS.

  152. Gravatar of wh10 wh10
    24. July 2011 at 07:58

    Yes Greg! I think you are getting at it. “Money” is such a vague word, and the “money” Dr. Sumner cares about is “money” that MMT considers way too narrow a view of “money” in a fiat regime. MMT cares a lot about NFA, as Dr. Fullwiler tried to explain to Dr. Sumner when he offered MMT’s QTM view of things.

    I am going to try and whip up an explanation that tries to get Dr. Sumner to understand that what we all really care about when we think about demand-side price changes in a fiat regime is NFA, not just currency and deposits. I might be speaking to soon, but I think this is the key.

    Dr. Sumner thinks people’s spending ability is tied to the amount of deposits in an economy; MMT denies this. That is, the spending potential of an economy is already “baked into” the value of all NFA in that economy. If there aren’t more deposits, that’s because at that point in time the economy does not desire them and they are in an equilibrium in which they are satisfied with the portfolio of financial assets they hold at equilibrium prices. Magically converting their non-deposit assets to cash/deposits does not change their wealth and there is no reason to believe why this should change their desire to spend in and of itself, UNLESS the OMP leads to a change in interest rates or alters expectations in other ways.

  153. Gravatar of Warren Mosler Warren Mosler
    24. July 2011 at 07:59

    5) Warren Mosler teaches Larry Summers about the Paradox of Thrift….
    ~~ quote~~

    Senator Daschle was looking at all this in disbelief. The Harvard professor of economics Asst. Treasury Secretary Lawrence Summers didn’t understand reserve accounting? Sad but true.

    So I spend the next twenty minutes explaining the ‘paradox of thrift’ step by step, which he sort of got it right when he finally responded “Ah, so we need more investment which will show up as savings?” I responded with a friendly ‘yes’ after giving this first year economics lesson to the good Harvard professor and ended the meeting.
    ~~~~~

    So there we have Larry Summers “” famous economist and US Treasury Secretary “” being *too stupid* to grasp the Paradox of Thrift.

    READ IT AGAIN. I DID NOT SAY THAT ABOUT LARRY. HE UNDERSTOOD IT, BUT CHOSE NOT TO CARE. WHAT HE SAID HE DIDN’T UNDERSTAND WAS RESERVE ACCOUNTING. HIS WORDS, NOT MINE.

  154. Gravatar of Warren Mosler Warren Mosler
    24. July 2011 at 08:19

    Warren, Yes, I’ve looked at those papers before, and they never made much sense to me. I certainly didn’t see any plausible theory of the price level. One MMTer denied that the price level exists, said it’s just an arbitrary index number.

    SORRY TO HEAR THAT. READ ‘THE 7 DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY’ YET? IT’S IN THERE AS WELL IN NON TECHNICAL TERMS WITH ‘HOUSEHOLD’ MODEL AS WELL.

    YOU CAN READ IT ON LINE AT http://www.moslereconomics.com

    If MMT is going to succeed they need someone who can explain the ideas clearly to the rest of the profession. A Keynes, or a Milton Friedman. All of the stuff that people send me, including those papers you linked to, have no appeal to mainstream economists.

    SAD BUT TRUE 🙁

    The use of terminology is so odd as to be almost impossible to understand. And I’ve spent my whole life studying monetary economics, including virtually all schools of thought. You need a big name-without one the MMT movements will be ignored in the elite institutions.

    UNDERSTOOD. THE 7 DEADLY INNOCENT FRAUDS SEEMS TO ME MORE ‘UNDERSTANDABLE’

    ALSO, IT IS PERFECTLY UNDERSTANDABLE FOR THE GOLDMAN, MORGAN STANLEY, NOMURA, AND OTHER TRADING DESKS, AS WELL A QUITE A FEW PORTFOLIO MANAGERS GLOBALLY WHO CONTINUE TO PROFIT FROM THE MAINSTREAM’S LACK OF UNDERSTANDING.

    The other problem is the strange refusal of some MMTers to consider thought experiments. When I ask about OMPs, I’m told their impossible, the Fed can’t inject money into the economy through an OMP. When I ask why, I’m told it would change the interest rate. And I should care because . . . ?

    AGAIN, CHECK OUT THE 7DIF

    SORRY, DON’T KNOW WHAT OMP STANDS FOR?

    ALSO, THERE ARE LOTS OF KEYNESIANS AND AUSTRIANS WHO DON’T ALWAYS GET THINGS QUITE RIGHT AS WELL?

    You said;

    “The currency itself, the US dollar, is a simple public monopoly. And any monopolist is necessarily price setter.

    So the price level is ultimately a function prices paid by govt when it spends/and or collateral demanded when it lends.”

    This is a complete non sequitor. It’s like saying Microsoft is a monopolist, and so the price of Windows is determined by how much Microsoft spends on new facilities.

    I’D SAY IT’S LIKE SAYING MICROSOFT SETS THE PRICE AND LET’S QUANTITY FLOAT? I DON’T SEE THE CAPX CONNECTION?

    No it’s determined by the number of Windows they sell, interacting with the demand curve for Windows.

    AS THE SINGLE SUPPLIER, THEY SET PRICE AND LET QUANTITY ADJUST. YES, THEY CAN DECIDE TO RAISE OR LOWER THE PRICE, BUT THAT’S A DIFFERENT STORY. FOR EXAMPLE, THEY DON’T SAY WE ARE GOING TO SELL ONLY 100 MILLION COPIES AND LET THE MARKET DECIDE THE PRICE. I SUPPOSE THEY COULD BUT IT’S IMPRACTICAL.

    AND OTHER PUBLIC MONOPOLIES LIKE ELECTRIC, WATER, ETC. DO SAME. THEY SET PRICE AND LET Q ADJUST.

    The government controls the supply of currency,

    HOW’S THAT? THE FED SETS INTEREST RATES, WHICH IS PART OF THE PRICE SETTING FUNCTION OF ANY MONOPOLY.

    MONOPOLISTS SET TWO PRICES.
    WHAT MARSHALL CALLED THE OWN RATE WHICH IS HOW THAT GOOD OR SERVICE EXCHANGES FOR ITSELF.
    AND HOW IT EXCHANGES FOR OTHER GOODS AND SERVICES.

    and a different and unrelated part of the government determines spending.

    ULTIMATELY CONGRESS AND/OR ITS DESIGNATED AGENTS DETERMINE BOTH PRICES.

    That’s why some countries have high inflation and budget surpluses, and other have huge deficits and deflation (Japan for instance.)

    MMT EXPLAINS THAT AS ABOVE.

    Scott Sumner
    22. July 2011 at 16:49

  155. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 08:29

    Eric,

    I am still waiting for an MMTer to criticise my story of how quantitative easing, in principle, can raise nominal expenditures.

    Greg gave a short response, but he seems to have completely misunderstood the argument: nothing depends on people feeling wealthier. I tried to clarify this in a later comment and also asked few related questions, but no MMTer has so far responded to rebut my claims.

    My hunch is that MMTers disagree with this:

    “Short term bonds with near zero interest rates are extremely close substitutes for money, and so purchasing short term bonds may increase the money supply, but is also likely to increase money demand in proportion, and total nominal expenditures will remain unchanged. Purchasing longer term bonds with higher interests rates, however, exchanges quite different assets. Households and firms that sell long term bonds are unlikely to hold all their new money. Instead, they will begin spending it on various consumer and capital goods, because they now have more money than they want.”

    Because they treat money as just another financial asset, special only because it is riskless and offers a lower rate of interest than everything else, they deny the final sentence of this paragraph. In their view, nobody would exchange the bond for money in the first place if they would then “have more money than they want” — for people to accept money in exchange, it must be because they want to hold money itself.

    However, this denies the existence of money (i.e. a medium of exchange). The defining characteristic of money is that it is something people regularly accept in exchange even though they do not want to hold greater money balances, because they know it can be readily exchanged for the real objects of their desires. It is in this sense that even the nearest of “near monies” can never have the same macroeconomic importance as the medium of exchange (except insofar as changes in the supply and demand of near monies effects the demand for the medium of exchange).

  156. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 08:56

    To clarify: this last comment was meant to explain my previous claim that MMTers forgot to include money in their monetary theory. Their apparent inability to explain the price level, much less its changes, and their insistence that open market operations cannot increase nominal expenditures seem to both stem from their implicit denial of money itself. This, at least, is the only way I have been able to make sense of their claims so far.

  157. Gravatar of wh10 wh10
    24. July 2011 at 09:25

    Lee,

    I think we’re getting at the issue here.

    What happens is that people trade these financial assets, which are all denominated in the same unit of currency (whether it is a dollar bill or a stock), until everyone is happy with what they hold at the price at which they hold it. If people want to buy more goods and services, then the mix and value of financial assets changes until everyone is happy again. The market value of a t-bond for example, is in fact what you will receive if you trade it for a spendable deposit; that is, the only thing separating a t-bond and a deposit is the investor’s decision to sell the t-bond for that deposit, and at that moment, he will receive the market value of the bond as a deposit. All the unique things about “the medium of exchange” that you bring up are already priced into the value of a deposit and other financial assets. This kind of process is happening every millisecond; the market is continually trading financial assets until people are happy with the value of their holdings.

    So we must ask ourselves, what is the difference in a world with QE and without QE?

    Without QE, people are trading financial assets until they are happy with what they hold, and maybe one guy wants more deposits and less treasury bonds so he can buy more widgets, and there is an opposite side to that trade. Or maybe people are withdrawing their deposits for currency more often, and banks are coming up short on reserves, so they trade their treasuries to the Fed, which gives them more reserves, so that the banking system doesn’t collapse and so that they can maintain their FFR target.

    With QE, if the Fed is not changing interest rates by entering the market, then they are not changing anything from “the money view” which could have happened without the Fed’s intervention (note, by using the terms “money view” I am trying to set aside the issue of expectations and behavior, for now). Note, they are not “forcing” anyone on the other side of Primary Dealers to sell treasuries. By buying treasuries from Primary Dealers, all they are doing is putting downward pressure on the FFR (that is, the Fed is buying from PDs and increasing the amount of reserves/potential currency in the system). They are not alleviating any new pent-up demand to sell treasuries. That pent-up demand already would have existed and would have translated into changes in value for all financial assets in the economy before QE!

    Now, if the Fed changes the FFR by flooding the banking system with reserves, then yes, that could lead to changes changes in wealth/spending (interest rates down, value of financial assets up, all else the same). *But when we talk about *quantity,* what MMT is saying is that the Fed could have changed the FFR *anyways* without buying treasuries and increasing reserves!* So QE is a moot point; if QE changes interest rates to zero but you are attributing the change in spending to quantity of reserves, you are being too short-sighted and not understand the true mechanisms of value changes and spending in the economy! In fact, the Fed places a floor on interest rates by paying IOR on reserve, so it could have counter-acted the interest rates effects of QE. Again, it’s all about the interest rate, baby!

    Okay, now to expectations and behavior. If we accept that the way the Fed performed QE from a fundamentals perspective doesn’t change anything, we could still assert that the way markets perceive QE could change things. If by the Fed stepping in, markets think inflation will rise because there is more deposits relative to other financial assets in the economy, then interest rates will go up. We could imagine a number of things happening.

    But this is separate from what Dr. Sumner’s issue is. Dr. Sumner thinks that by automatically swapping t-bonds for physicians dollar bills or electronic numbers in a deposit account, that adds *more spending potential* to the economy that did not exist beforehand. But it entirely did exist, and the market was reaching equilibrium to satisfy that demand. In fact, if banks held too many treasury bonds and not enough reserves because people were withdrawing so much cash at a given interest rate, the Fed would have given them reserves in exchange anyways! That is to say, the quantity aspect of QE or an OMP that Dr. Sumner is fixated on could have already occurred! SWAPS OF T-BONDS FOR RESERVES ARE RESPONDING TO A DEMAND FOR DEPOSITS!! This is endogenous money! We’re kind of talking on two sides of the same coin! We just think Dr. Sumner isn’t realizing the proper directional cause and causal inputs. Again, in QE, the Fed was just increasing reserves but not changing wealth in and of itself; if QE changes interest rates- then fine, it may change spending. But the Fed could have changed interest rates anyways without changing the quantity of reserves!!!!! Again, this is the red herring!

    Sorry if that was incoherent. I think we’re starting to boil down to the issue. As I said, I expect we will agree, we just need to get on the same side of the coin, if you will.

  158. Gravatar of onliberty onliberty
    24. July 2011 at 09:41

    “Everyone, Here’s what a cult looks like. They want others to join, if they’ll try to learn the dogma.”

    lol Scott I couldn’t agree more! I thought the exact same thing when somebody commented,

    “Guys, I was like you until I discovered reality. Modern Monetary Theory will soon become mainstream because it is right. Everything else is smoke and mirrors.”

    Are they talking about a cult or an economic theory?

  159. Gravatar of wh10 wh10
    24. July 2011 at 09:42

    Sorry I guess I meant ‘swaps of t-bonds for reserves )b/w bank and Fed) will respond to changes in the demand for currency.”

  160. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 10:21

    wh10,

    I don’t understand all of your response, but thank for trying! A few comments:

    (1) You wrote: “What happens is that people trade these financial assets … until everyone is happy with what they hold at the price at which they hold it.”

    This is false when prices are not flexible. In particular, the interest rate on money is not a market price. It is fixed at zero for currency and a little more for reserve balances at the Fed. When the demand for safe and liquid assets rises, interest rates on those assets fall, but they cannot fall below the interest rate on money — why would someone exchange money for T-bills to receive a negative interest rate when he can just hold money instead? Even if the demand for safe and liquid assets continues to rise, their interest rates cannot stop falling, and no more are supplied despite increasing the demand.

    In other words, what we have here, is a price ceiling, and there is a shortage of safe and liquid assets. The frustrated demand for safe and liquid assets has to go somewhere else. If it just spilled over into increase demand for flat-screen televisions, then we might get a sub-optimal allocation of resources, but nominal expenditures would not fall. But, unhappily, this frustrated demand for safe and liquid assets is more likely to spill over into money, i.e. people just sit on higher money balances.

    However, and this is really important, aggregate money balances cannot increase unless there is a like increase in the money supply. You are implicitly contradicting one of the other fundamental propositions of monetary theory: while an individual can increase money balances by reducing expenditures relative to income, foe the economy as a whole expenditures must always equal income. That is, one person can only increase his money balances if another reduces his money balances.

    With an excess demand for money, it is impossible for the market to work “until everyone is happy with what they hold at the price at which they hold it,” at least not without a fall in the general level of prices.

    (2) You said: “So QE is a moot point; if QE changes interest rates to zero but you are attributing the change in spending to quantity of reserves”

    This is not how I explained that QE would work; read my previous comments again. I explained how an increase in bank lending would likely be the effect of higher nominal expenditures, not the consequence.

  161. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 10:48

    Oops! I made an error. The end of the second paragraph should read:

    Even if the demand for safe and liquid assets continues to rise, their interest rates cannot keep [not “stop”] falling, and no more are supplied despite increasing the demand.

  162. Gravatar of wh10 wh10
    24. July 2011 at 11:07

    Lee, please direct me to your comments that you refer too. I wasn’t actually challenging any point you would have made there (because I wasn’t aware of it), I was just speaking generally. My argument is if QE leads to higher nominal expenditures, then it’s not because new spending power has been created by swaping t-bonds for deposits.

    “But, unhappily, this frustrated demand for safe and liquid assets is more likely to spill over into money, i.e. people just sit on higher money balances.”

    They don’t literally sit on more pieces of paper. The relative value of those pieces of paper may change though.

    “However, and this is really important, aggregate money balances cannot increase unless there is a like increase in the money supply. ”

    I think you are too fixated on imagining the quantity of pieces of paper. It’s all about relative value. All of these things are denominated in the same unit of currency.

    “With an excess demand for money, it is impossible for the market to work “until everyone is happy with what they hold at the price at which they hold it,” at least not without a fall in the general level of prices.”

    That’s the point. I don’t understand what “the market working” means to you. So prices fall. And?

  163. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 11:19

    wh10,

    You said: “They don’t literally sit on more pieces of paper. The relative value of those pieces of paper may change though … I don’t understand what “the market working” means to you. So prices fall. And?”

    But that’s is just the point. The interest rate on money is fixed, so that can’t change, and money doesn’t have a single market price of its own, because it is traded on every market. The only way for the “price” of money to change is by a change in the general level of prices. Until then, there will be an excess demand for money and insufficient nominal expenditures to allocate available resources, i.e. a recession.

    Here is another way of thinking about the situation: Suppose the price of widgets is fixed by the government at $5. Beginning in equilibrium, any change in supply not matched by a like change in demand will cause a surplus or shortage of widgets. Constant shortages and surpluses of widgets at the fixed price make people unhappy; they appeal to the government to “do something.” The government says, “the free market has failed; widgets must be supplied only by the government.” So the government monopolises the supply of widgets and establishes a special quasi-independent agency called the Federal Widget Reserve. The idea is that no matter what changes happen on the demand side of the market for widgets, the FedWids clever technocrats can always figure out the exact change on the supply side needed to equilibrate the market at $5. In other words, for any change in demand, there is always some change in supply that keeps the equilibrium price constant.

    Why is this thought experiment relevant? Well, the interest rate on base money is like the price of widgets. The government monopolises the supply of base money, and it fixes the rate of interest at zero for currency and a little more for reserve balances at the Fed. This means to prevent a surplus or shortage of money, the interest rate on money must always equals whatever the government has fixed it at. If the demand for money changes and there is no offsetting change in the supply of money, then there will be a shortage or surplus of money at the prevailing price level.

  164. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 11:41

    wh10, here are some problems.

    (1) You seem to acknowledge that a shortage of money can depress nominal expenditure at the prevailing level of prices. You then advocate that we let prices fall. However, a fall in prices is just an increase in the real supply of money. So your claim is that the shortage of money can be resolved by an increase in its real supply (i.e. falling prices). If so, then why can’t the shortage of money also be resolved by an increase in its nominal supply without falling prices?

    (2) You seem to acknowledge that a shortage of money can depress nominal expenditures, but then you deny that an increase in its supply can raise nominal expenditures. Once more, this practically amounts to a denial that money exists, because it means that investors only sell assets to the Fed to hold money itself, i.e. they never sell to the Fed to get money so they can then use the money to get something else. Otherwise your argument falls apart.

  165. Gravatar of Warren Mosler Warren Mosler
    24. July 2011 at 11:49

    regarding qe

    first, there is no evidence in either Japan or the US that qe does anything more that scare portfolio managers in or out of the currency. If anything, both nations have experienced lower than anticipated growth in output and employment from qe.

    qe works through two channels (and it’s functionally identical to the tsy never issuing/selling those securities in the first place)

    It works to reduces the term structure of rates via reduced supply.

    As ‘for every $borrowed there is a dollar saved’ as a matter of accounting, qe shift interest income, to the extent resulting rates are lower, from savers to borrowers. So any alteration in demand would have to come from differing propensities to consume.

    However, with the govt a net payer of interest, and the ‘rest of world’ a net receiver, the lower rates remove interest income from the economy. So the propensities have to overcome that hurdle as well for lower rates to have a positive effect, and, in fact, the evidence seems to indicate the effect may be negative.

    Note that with the Fed’s portfolio approaching $3t, it turned over $79 billion in profits to the tsy not long ago. That was interest income the private sector would have earned without qe, also a negative for the economy.

    Also, with the term structure of rates a function largely of expectations of future fed rate moves, those who believe qe is inflationary also believe the fed will soon be hiking from that inflation. Therefore the term structure of rates can go up with qe.

    One fact remains, there is no channel from reserves to loans.

    See recent Fed paper by Seth Carpenter, and Bernanke’s 2004 paper with Sacks and Reinhart.

    And it’s all at http://www.moslereconomics.com as well

    Bottom line- in my humble opinion qe has functioned as a tax and made things worse.

  166. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 12:16

    Dr. Sumner,

    MMTers ARE Post Keynesians, its just that all post keynesians are not MMTers. Anyhow, I’ll quote you below and respond:

    “Everyone, Here’s what a cult looks like. They want others to join, if they’ll try to learn the dogma. Here’s Payam:

    “To understand MMT. it is necessary to recognize that MMT is a “new paradigm,” in that it rejects many assumptions (norms) on which the current economic paradigm rests because, e.g., they do not reflect how the Treasury, cb, and financial sector actually interact “” as Scott F. pointed out in another thread, as I recall.
    I am happy that you are trying to understand MMT, but I think that without approaching it on its own terms, you are getting confused about what MMT is saying and more importantly at this critical juncture, what MMT is prescribing.”

    So Payam is basically saying “Please come over and study our great ideas. Learn the truth.” And how do cultists feel about studying the ideas of others, who disagree with them?”

    No, if you had read more carefully you’d see that I was quoting what someone else said in a reply to Nick Rowe over at his blog. I did not say this. This person was actually being quite courteous to Dr. Rowe.

    “Again, I quote Payam:

    “MMTers adopt Hyman Minsky’s concept of speculative euphoria as inherent in capitalism, we don’t need to hear nor do we care about Dr. Sumners view on bubbles, nor will we care what you think about it.”

    Once the TRUTH has been revealed by the great Hyman Minsky, no need to consider other ideas. Nice little cult you have there Payam.”

    hehe, my arrogant response was to an arrogant self-aggrandizing comment and was purposely meant to annoy that person in question. Seriously though, I have never seen a real rebuttal to any of Minsky’s work anyway, so unless you can tell me where he was wrong, Post Keynesians and especially MMTers go by his financial instability hypothesis. And again in all seriousness, I’d like you to frame any such argument you make in the future to at least rebut Minsky’s arguments…I would like to read it very much. MMTers come from a heterodox(read–unorthodox) school of thought, so we don’t exclude anything from consideration. We do, however, generally intensely dislike mainstream models that don’t attempt to insert reality into the picture.

  167. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 12:36

    Morgan Warstler,

    I couldn’t care less about any of your views, or that you think i’m a pussy. See, unlike you I don’t carry assumptions about ECONOMICS and make it a religion. If anything, after reading plenty of economics, philosophy, and political material my one and only religion is democracy. Thank you for admitting, unlike plenty of clueless austrians, that you are anti-democratic. There is nothing more to discuss with you, but I would urge you to go get a tan and actually learn to speak like a normal human being, you prototypical austrian.

  168. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 14:07

    Payam, when you get tired of blaming everyone for your failings in the modern economy, mine is the path to enlightenment.

    MOSLER,

    You did not respond to my point, don’t be afraid! C’mon old man lets get out of your comfort zone:

    You say money is a mononpoly run by government.

    I say you think too small….

    I say MONEY and GOVERNMENT are both programs run for and by the 30-40% of society who matter: the people who OWN HARD ASSETS, have savings and spend part of their life in high earning categories, are likely to vote and own guns.

    Today, we call them the Tea Party. Government is a servant to them.

    Government officials don’t count. Non voters don’t count. People who vote to get free stuff, don’t count. You Mosler and most MMT types don’t count.

    Think of what I’m saying here… GET IT THROUGH YOUR HEAD: The fact that you think government can, could, should print, buy and tax doesn’t let you into the club to have a viable opinion.

    Its like listening to a turtle have an opinion on what the dogs should do.

    ——

    C’mon Mosler

    I know you won’t really respond, and I think it is cute watching you and the econ geeks bat around macro theory..

    But mine is totally different argument – I say your economics is just an attempt at political power.

    You think “government” includes the dirty hippies in MMT crowd, and by insisting that money is a government monopoly, and acting like that is backed up by force, the hippies might someday be in charge.

    I say the “force” truly resides with the people who have the guns, own the stuff, and are likely vote – and AS SUCH:

    US Monetary policy is meant to be a monopoly run BY AND FOR the Tea Party crowd.

    —–

    See we don’t disagree! I just know that we already have the kind of control and EXERCISE it the way we want it exercised.

    C’mon old man, let me hear your response!

  169. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 14:12

    Now back to originally scheduled programming.

    Scott, I don’t get your point on explaining differences in price levels. To me, it’s just that matter people have to able to WRITE DOWN the price on a price tag.

    .00000000000000000000000000000000000000000000000000025 is a pain in the ass to write.

    Thats why Turkey basically deflated a couple years ago right?

  170. Gravatar of Brian Brian
    24. July 2011 at 14:57

    Scott S

    “A swap of cash for bonds does not increase real capital, but it does increase nominal capital. Hence nominal lending can go up, even as real capital and lending remain unchanged.”

    Please explain further. I do not understand how a swap of cash for bonds increases nominal capital. For every dollar of cash that is received by the bank, a dollar of bonds are removed from the banks balance sheet. Any variation in the price of the bonds will be captured in the banks pnl, used to evaluate its capital. Is this right or is it wrong?

    PS If Warren and Scott F are quacks I would really like to know so that I can quit stumping for them, but so far I don’t see how they are wrong.

  171. Gravatar of onliberty onliberty
    24. July 2011 at 15:57

    “I do not understand how a swap of cash for bonds increases nominal capital.”

    You can spend cash but you can’t spend bonds.

  172. Gravatar of Warren Mosler Warren Mosler
    24. July 2011 at 16:19

    you all concerned about the debt ceiling not being extended?

    I don’t see Congress getting any bill to the President’s desk?

    tsy bonds probably go lower in yield, stocks and credit sensitive financial assets as well as real assets head towards 0?

    Worse than 2008 because the auto stabilizers are disabled?

    5 billion a day in spending cuts means sales fall, unemployment goes up, no $ for unemployment comp unless something else gets cut, and falling tax revenues mean spending is cut further.

    Looks like a downward deflationary spiral that doesn’t stop much before 0?

  173. Gravatar of W. Peden W. Peden
    24. July 2011 at 16:25

    Warren Mosler,

    Even assuming that a deal comes off, there has been a lot of unnecessary uncertainty as a result of failures from both sides, particularly the Republicans.

  174. Gravatar of Warren Mosler Warren Mosler
    24. July 2011 at 16:33

    Different point.

    As markets figure out the magnitude of the risk it starts to get discounted.

    stocks heading down in Singapore and dollar up

  175. Gravatar of onliberty onliberty
    24. July 2011 at 17:05

    “Looks like a downward deflationary spiral that doesn’t stop much before 0.”

    It’s a good thing we have expansionary monetary policy to fight against deflation, isn’t it?

  176. Gravatar of Scott Sumner Scott Sumner
    24. July 2011 at 17:48

    Memo to myself–no more MMT posts and no more Austrian posts.

    Good habit, Hmmm, why would a monetary economist be interested in nominal variables? You probably think the most important thing to know about Germany 1920-23 is what happened to its real GDP, who cares about NGDP?

    Nick complained that the MMT stuff he reads doesn’t distinguish between real and nominal variables–no wonder outsiders have so much trouble understanding it.

    If the AD curve shifts to the right, I consider that an increase in AD. I guess you don’t, which is fine with me. I define AD as a given level of nominal spending.

    Greg, I define money as the monetary base. As far as I know all economists agree that the Fed can increase the base. They do it all the time, almost every day. They simply swap cash for bonds, it’s no big mystery.

    wh10, You said;

    “We think you are fixating way too much on cash/deposits,”

    First let me thank you for being so polite. But one problem I have is that people simply assume I have some sort of set of beliefs. There’s a reason this blog is so popular–I happen to have been right about a lot of things that have happened to the US macroeconomy since 2008. That’s not true of many of my fellow mainstream economists, who have very different views.

    That quote above is an example of how I am misinterpreted. I pay no attention at all to deposits; my interest is currency, and to a lesser extent reserves. I also think it useful to start with the pre-crisis situation, to get a better understanding of monetary economics during normal times. That’s because things get much more confusing when rates hit zero. So here’s why I think currency is important:

    1. It’s the medium of account. (most important)
    2. The government has a monopoly.
    3. It’s produced at near zero cost
    4. It doesn’t have close substitutes (except when rates are near zero.)

    If apples were the medium of account, I’d spend my whole life studying weather conditions and fruit infestations, etc. The medium of account is really important, because the supply and demand for the medium of account affects all nominal variables.

    So monetary theory to me is the theory of the medium of account. What determines its value, etc. Bonds are not a medium of account, because the price of a bond can change. Apples are not the unit of accoutn, because the price of apples can change. If something weird happens to the market for currency, so that the equilibrium real value needs to rise 10%, THAT CAN ONLY HAPPEN VIA THE ENTIRE PRICE LEVEL FALLING 10%. That’s why currency is really, really, important.

    It may seem less important at zero rates, when other assets become really good substitutes, but that’s misleading, because markets expect that rates will rise in the future, and thus expectations of future Fed policy continues to be important, even at the zero bound. That’s why markets reacted strongly to QE2. The MMTers are right that QE2 didn’t do anything in an of itself–it affected markets because they saw it as a signal of future monetary policy intentions.

    You said;

    “Fine, we agree, but we agree because that new currency translates into new NFA.”

    OK, I accept that, and Nick Rowe (the only person I trust to decipher this) agrees with you. But then I’d refer you to my post on the QTM, and especially the Canada/Australia example. The purpose of that example was to show that an OMP has a huge impact on the price level, despite having no impact on NFA.

    more to come . . .

  177. Gravatar of Scott Sumner Scott Sumner
    24. July 2011 at 18:43

    Warren, I don’t see why taxes are essential to money having value. It seems to me that money has value for the same reason wallets have value–it makes shopping easier. Now it’s also true that once money has value, people find other uses. Most of the demand for US currency today is probably hoarding demand, not transaction demand. In New Zealand (where currency demand is strikingly low) most of the demand may be transaction demand.

    Even I’ve been surprised by bitcoins, which I didn’t expect to succeed. My skepticism was because of network effects, the dollar was already established. But I think bitcoins would be an even bigger problem for MMTers, because there’s no tax angle. By the way, I’m not expert on bitcoins, and it’s entirely possible I’ve completely misunderstood what they are all about.

    In an earlier post I used new settlers on an island, who started out with some Monopoly money but no government. The idea was that the Monopoly money was a sort of focal point–everyone accepted it because everyone else thought everyone would accept it. If you said starting tomorrow US currency could no longer be used to pay US taxes, you had to use credit cards or checks or Canadian currency, I predict US currency would still have value.

    wh10 You said;

    “Dr. Sumner thinks people’s spending ability”

    I don’t like the term “spending ability,” as it suggests something like wealth. We need to distinguish between real and nominal valuables. The Zimbabwe people were desperately poor, and hence didn’t have much purchasing power in the ordinary sense, but there were going around spending zillions of Z dollars, purely as a result of monetary inflation. They may have had zilch stocks and bonds, but they had lots of cash in a nominal sense. We need a completely different model to explain countries with high real purchasing power, like Switzerland, and countries with high nominal purchasing power, like Zimbabwe.

    Warren, Sorry, OMP means open market purchase.

    You said;

    “I’D SAY IT’S LIKE SAYING MICROSOFT SETS THE PRICE AND LET’S QUANTITY FLOAT? I DON’T SEE THE CAPX CONNECTION?”

    But Microsoft sees itself facing a downward sloping demand curve. So in a sense it’s a joint decision, how much to charge, and how much to produce. Some monopolists set Q (Opec) and some set P (Microsoft.) I’d never deny that the government doesn’t set M in the way the monetarists used to propose–indeed I think that would be silly. But they take actions knowing it will affect M, and I think changes in M are what drive nominal variables in the long run.

    You asked:

    “HOW’S THAT? THE FED SETS INTEREST RATES, WHICH IS PART OF THE PRICE SETTING FUNCTION OF ANY MONOPOLY.”

    But they control the supply of currency, and use that control to target interest rates. The base is the tool, interest rates are the target. BTW, it’s a really foolish target, as once rates hit zero the steering wheel is locked.

    It’s true that at any given i-rate, the base is endogenous, but they can change their target rate whenever they want. They can also adjust their inflation target, which changes the demand for base money at any given fed funds target. So actually currency isn’t entirely endogenous at a given fed funds target.

    And of course the big problem here (and with all of Post Keynesian economics, BTW) is that the interest rate is not the price of money. If we are using micro analogies (as you are) the correct analogy is that 1/P is the price of money. It’s the relative price of money in terms of other goods–the same formula we use in microeconomics for the relative price of any good.

    Warren, If you look at the data for Japan, it’s clear they never tried QE. The base in Japan is endogenous, and rose because at zero rates there was more demand for base money. How do I know? Very simple, the base fell 20% in 2006. No country doing QE with the intention of creating positive inflation would ever reduce the base 20% at a time when there was no inflation. On the other hand my theory (that the BOJ is ultraconservative), perfectly explains the interest rate increase of 2000, the huge drop in the monetary base of 2006, and the interest rate increase of 2006. I had a debate with Krugman on this issue, and The Economist found his reply to me basically proved my point.

    When QE was announced in America, I said it had already raised inflation expectations modestly, but that this was about all it would do–and that it was way too small to produce a robust recovery. More importantly, QE really isn’t the sort of tool the Fed should be using, they should peg the price of NGDP futures contracts at the desired growth rate for NGDP. QE2 was better than nothing. It may have prevented deflation–the core had slipped to 0.6% when announced, and produced a bit lower, unemployment, but that’s about all it did.

    You said;

    “One fact remains, there is no channel from reserves to loans.”

    This confuses nominal and real variables. There’s no direct channel from reserves to electric toasters, but more reserves increases the nominal size of the electric toaster industry. (Here I’m assuming non-interest-bearing base money and positive market interest rates.)

    Payam, I claimed you said something thoughtful and something moronic. And now you disavow the thoughtful comment. I’ll accept that, my mistake.

    Morgan, Because if you can’t explain the price level, you don’t have a valid theory of money.

    Brian, I never said they are quacks.

    If money is neutral, then a doubling of the money supply will double all nominal variables, including nominal bank capital. Now money may not be neutral in the long run. It’s possible that I and 90% of other economists are wrong. But until I see persuasive evidence that it’s not neutral, that will be my working assumption.

    Warren, I’m no expert on fiscal policy (or perhaps it’s what you call monetary policy?) 🙂

    But they always seem to get deals done at the last minute, at least in the past they have. My hunch is that there will be a deal.

    Everyone: Please, not so many comments (not addressed at Warren, as I’m told he is the expert.) I’m running out of time to answer them all.

  178. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 19:13

    Woohoo! I get to disagree with Scott Sumner: you’re wrong about the unit of account; the medium of exchange is more important.

    Suppose the unit of account is an ounce of gold and it has a stable value; the medium of exchange remains fiat dollars.

    Now suppose there is an excess demand for money (i.e. the medium of exchange). In the present system, the excess demand for money must be cleared by either a general fall in prices or an increase in the money supply, but now the medium of exchange has a price of its own. The shortage of dollars can be resolved by an increase in its price in terms of ounces of gold. This might not happen immediately and smoothly, but it’ll happen a damn sight faster and smoother than a general fall in the price level.

    Unfusing the medium of exchange from the unit of account would enable the marker system to deal with monetary disequilibrium relatively painlessly.

    Now suppose the unit of account increase in value, causing a general fall in the price level? Will this cause a recession? No, because the price of the medium of exchange will change to prevent a shortage of demand. It may disrupt the economic plans of savers and borrowers (by changing the risks and returns on lending), but it will not prevent spending from allocating all available resources.

    Please, explain how I am wrong.

  179. Gravatar of Jim Glass Jim Glass
    24. July 2011 at 19:13

    So there we have Larry Summers “” famous economist and US Treasury Secretary “” being *too stupid* to grasp the Paradox of Thrift.

    Warren Mosler responds:

    “READ IT AGAIN. I DID NOT SAY THAT ABOUT LARRY. HE UNDERSTOOD IT, BUT CHOSE NOT TO CARE.”

    I’ll do better than read it again, I’ll cut-and-paste it again:

    ~~ quote~~

    Senator Daschle was looking at all this in disbelief. The Harvard professor of economics Asst. Treasury Secretary Lawrence Summers didn’t understand reserve accounting? Sad but true.

    So I spend the next twenty minutes explaining the ‘paradox of thrift’ step by step, which he sort of got it right when he finally responded “Ah, so we need more investment which will show up as savings?” I responded with a friendly ‘yes’ after giving this first year economics lesson to the good Harvard professor and ended the meeting.
    ~~~~~

    So if he understood it, why did you waste 20 minutes of everybody’s time explaining it, step-by-step, to him?

    Until he ‘sort of got it right’?

  180. Gravatar of Jim Glass Jim Glass
    24. July 2011 at 19:20

    Mark A. Sadowski wrote…

    Jim Glass … Sounds like you’ve had a rough week dealing with the @#$%^&* cockroaches. Take some time off. You’ll feel better in the morning.

    Oh, not at all, you misunderstand. I enjoy ’em, really.

    I’ve known the MMTers since before they were MMTers, way back on usenet. Did you ever hear of the “Usenet Crank Index”? (If not, see my next comment). By it the proto-MMTers were small time. Wait until some Georgists show up here!

    Seriously, it was not only fun but educational dealing with such. One is forced to check one’s own knowledge of ABCs and ability to express them clearly in plain English to average people who are totally uninformed. In my job where I often have to explain technical issues to layperson clients this is a skill worth money.

    I had a real-and-truly educational exchange with a raving lunatic named “Fathersmanifesto” who was obsessed with the Japanese taking over the world. He came out with one totally bizarre claim after another — yet on the surface they sounded plausible enough to be taken seriously by the uninformed masses, like maybe in a politcal campaign. So they were not innocuous, maybe even a bit venomous.

    I’d think, “That *can’t possibly* be true … but why?” His arguments were from so far out of left field that no normal rational person (meaning: non-useneteer!) would ever have the refuting data on hand. So I’d go looking, find it, and post it. He’d ignore that, come out with something more bizarre (whack-a-mole!), repeat, repeat, repeat.

    Of course I knew I’d never convince him of anything, but I learned more about the Japanese economy, trade with them and related issues than I would have from reading three textbooks. And it was a rewarding, being able to meet the challenge of answering the craziness.

    So it wasn’t wasted time. Well, not entirely — I did lose too many billable hours to this recreation. But it can be fun.

    Ask Patrick Sullivan, *he* knows. Paul Zrimsek too.

  181. Gravatar of Jim Glass Jim Glass
    24. July 2011 at 19:34

    MMT and its adherents (no less than all other schools of thought) must face two tests to determine their credibility. One they fail, though on the other they make very top scores.

    1. The test of Falsifiablilty:

    If MMT can’t be falsified it is meaningless and useless. Serious advances in theoretical thinking always are falsifiable. For instance…

    * Einstein’s Relativity theory was falsifiable by its prediction of a measureable bending of light as it passed the sun. Because of its radical claims it was not generally accepted until it famously passed that critical test.

    * Old Keynesianism was falsifiable via the Phillips Curve. When the stagflation of the 1970s contradicted its predictions in that regard, old Keynesiansism died (with its better parts being picked up by later Neo-Keynesians).

    * Old Monetarism relied upon stable velocity of money. When velocity was found to be unpredictably unstable in the 1980s it died (with its better parts picked up bycentral bank operational policies, and the post/quasi-monetarists).

    Is MMT falsifiable? Note that its proponents should *want it to be falsifiable* both to advance the truth and gain personal prestige as it passes every test (see Einstein, relativity) — *IF* they really believe it is true and as important as they say, and they are honest in their professed motives.

    What are the tests of falsification for MMT?

    Well, one blatantly obvious one is hyperinflation. Mainstream economics says it is caused by printing money. MMTers deny this and say such mass money-printing is merely a consequince of “increasing nomiminal demand bumping into a supply constraint” — the increase in nominal demand *not* being caused by the money printing, because, quote, “Printing money cannot increase demand”.

    So what caused the 231 million percent increase in nominal demand in Zimbabwe, even as real demand fell 55%? When I asked this simple question of an MMT-ateer last week, the answer returned was: “You’ve imprisoned yourself with Say’s law …” Well, *that* was helpful!

    I right here plant my flag and declare MMT falsified! until the explanation of that 231 million percent increase in nominal demand (as real demand fell by half) caused by non-monetary factors, is explained!

    But do MMTers *care* if MMT is falsifiable? It seems not, for *they presume it is impossible*.

    Mosler answered DeLong on this point, whether MMT is real falsifiable theory, saying MMT is, quote:

    “Theory, much like the theory of addition, which states that a+b = b+a”

    A statement which is totally self-discrediting — though he doesn’t care. A+B = B+A is *not* a theory, and it can’t be falsified. So Mosler doesn’t know/care what a theory is … while also claiming MMT *can’t* be falsified any more than can the rules of addition.

    Yet note how well that statement expresses the fundamental bedrock principle of MMT: “You are all too stupid to understand a+b = b+a, but we understand it, so we are smarter than you and all the experts in the world! And we cannot be refuted, because you can’t refute a+b = b+a, even though with all your PhDs you are *too stupid* to understand it.”

    Which gets us to…

    1) The Usenet Crank Index

    I spent a lot of time in sci.econ and related groups on usenet back in the 1990s. And usenet attracted cranks the way shi.., er, sugar draws flies. It provided the first electronic means for cranks-of-a-feather to meet together, form mutual support groups, and organize, without leaving the comfort of their own basements. Crank movements and cranks abounded.

    As a result the larger usenet community quickly developed a Crank Index to apply to new arrivals. From it, some of the “universal characteristics of cranks”:
    ~~~~

    Cranks…

    * Overestimate their own knowledge and ability, and underestimate that of acknowledged experts.
    * Insist that their alleged discoveries are urgently important.
    * Misunderstand the mainstream opinion to which they believe that they are objecting.
    * Misunderstand or fail to use standard notation and terminology.
    * Rarely, if ever, acknowledge any error, no matter how trivial.
    * Love to talk about their own beliefs, but tend to be bad listeners, uninterested in anyone else’s experience or opinions.
    * Claim that their ideas are being suppressed one way or another (often a logical necessity, else how could amateurs figure out such important things that all the world’s top experts and professionals don’t know and deny?)
    * Often exhibit a lack of academic achievement, in which case they typically claim academic training in their field is not only unnecessary for discovering “the truth”, but *actively harmful* because it “poisons” minds by teaching falsehoods.
    * (more)
    ~~~~

    Note how the last item in particular is “the great equalizer and *more*”, for cranks dealing with those more educated than them about what is under discussion. Their own lack of education is an *advantage* because the whole field is taught wrong! Brainwashed by the establishment! (Corrupt and supressing the truth, even!)

    If I had a dollar for every time an MMTer has told me, “Your textbooks are all wrong, the textbook writers don’t understand that we are no longer on the gold standard!”, I could start a bout of inflation all my myself!

    How high do MMTers score on Crank Index? You can decide for yourself.

    But I declare that MMT remains falsified until Payam Sharifi or some other MMTer can look at that 231 million percent increase in nominal demand in Zimbabwe and tell me both: (1) exactly where it came from, and (2) how it forced Mugabe to print 22+ million Zimbabwe dollars per month in currency *as a consequence*.

  182. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 19:42

    Rofl Jim Glass, you’re a riot. The “test of falsifiability”? Trust me when I tell you that MMT, coming from an institutional economics school, is much more rigorous than is mainstream economics. Anyhow, since you apparently didn’t read the first link I gave you, here’s a more direct response for a hyperventilator like you:

    http://bilbo.economicoutlook.net/blog/?p=3773

  183. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 19:50

    Jim, that is EXACTLY WHY I hang out here!

    You people are nuts. And you Jim Glass know it. You at least admit it, but you get the power dynamic wrong.

    People here forget who runs this country. The savers, the 85-90% who have a job, the people who are not underwater on their house, the folks who own hard assets, the folks who vote constantly, the folks who own guns, the folks who own small businesses that employ people. The big fish in small towns. The Tea Party.

    And I try over and over to explain to you eggheads how you need to think about macro and its place and your place in the world, and it is incredibly slow going, but it is also incredibly rewarding.

    It is kind of like teaching high school Dudgeon and Dragons players how to get laid.

    Not only is it God’s work, it is an intellectual challenge.

  184. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 19:50

    And for Dr. Sumner, a primer on the taxes drive money viewpoint:

    http://neweconomicperspectives.blogspot.com/2011/07/mmp-blog-8-taxes-drive-money.html

  185. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 19:55

    and something else you might be interested in, the MMT view of liquidity traps:

    http://bilbo.economicoutlook.net/blog/?p=15168

  186. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 20:10

    Jim Glass,

    “Falsifiable” is a loaded term with many misleading connotations. I prefer to say that some theories can be criticised by pointing to empirical evidence and others can’t. If your theory is one of those that can’t, then you haven’t got a theory that predicts anything. MMTers certainly seem to have a difficult time explaining what kind of evidence they would accept as a refutation of MMT.

  187. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 20:15

    I KNEW IT!

    I read Jim’s demand of an answer and I thought, MMTer’s don’t think there is a problem in Zimbabwe as long as the government is able to collect all the money in taxes.

    And sure enough:

    “So what went on? The Zimbabwean Government is sovereign in the Zw dollar, although recent decisions to allow US dollars to freely trade within the economy is likely to undermine that sovereignty if tax collections in Zw become difficult to achieve.”

    My god, why will you eggheads not listen? This stuff is not complicated.

    Notice, Mosler denies nothing I say – I outright statement that he and his kind do not matter. He even specifically quote me and then AGREES, but watch I GUARANTEE that now that I have been even more specific he will not respond.

    It drives Payam crazy, he OUTRIGHT admits that ONCE I DENY the validity of a Democracy wherein Payam matters…

    I have stolen the MMT argument and used the logic to maintain the status quo.

    Quite simply the current government and its currency are run as monopolies FOR THE PEOPLE WHO MATTER.

    It CHOOSES to borrow, because those with money want it to borrow. It fails to tax, because those with money want it to not tax. It doesn’t print money

    ——

    Get your heads out of he clouds boys – there is a reason that Matty and DeKrugman have less vitriol for MMT than for Austrians…

    Because it is simply the full and total expression for putting the power into the hands of the state.

    Scott, I SWEAR I don’t think you get this. When you say, “Warren, I don’t see why taxes are essential to money having value.”

    You miss the entire basis of the dirty hippie’s thnking in MMT.

    Suddenly they get the guns and the print press, they get to hand $ to whoever they want and take it from whoever they want.

    In the status quo, the government is a bitch to the A Power (and B power) – and it KILLS MMTer’s inside.

    There is nothing more here, they want to print some money and give it to the freeloaders, and when the economy overheats NO WORRIES, they’ll just seize cash from the guys who have some left.

  188. Gravatar of Jim Glass Jim Glass
    24. July 2011 at 20:19

    Warren, I don’t see why taxes are essential to money having value. It seems to me that money has value for the same reason wallets have value-it makes shopping easier.

    Of course taxes are in now way essential to money having value.

    Was wampum money because Indian chiefs insisted taxes be collected in it?

    Were the Great Stones of Yap, up to 12-feet in diameter and some sitting at the bottom of the ocean, money because the government insisted on collecting taxes in them?

    A good 15-years ago in sci.econ when the proto-MMTers were making the claim that the dollar became the US currency and has value only because the US govt historically used its monopoly power to mandate that taxes be paid in it, I pointed out that in the reality of historical fact…

    * The “dollar” evolved from popular Spanish coinage that the US govt adopted because the people were already using it — so what choice did govt have if it wanted to make purchases from them?

    * During the early days of the USA, when the dollar was “locked in place”, the major source of govt revenue was tariffs — and the govt happily accepted tax payments in any currency that was available in to port to facilitate tax collection most easily.

    * The Internal Revenue Code allows payment of tax in foreign currency and always has. (Today if the currency is traded in the market the IRS requires payment in dollars so it doesn’t have to pay the exchange rate fee. But if you earn taxable income abroad in a country with currency controls — think Malaysia not long ago — so it can’t be exchanged for dollars, do you think IRS will declare your income tax free? No, it will happily accept payment in ringgits or whatever — in fact *insist*.)

    Of course none of this ever registered against what *must* have been true as deduced from the first principles of Chartalism.

    Neither did the fact that — despite goverment monopoly power imposing mandated use the official currency via tax payment and legal tender laws — countries listing literally from A to Z (Argentina to Zimbabwe) have seen their populations quickly, spontaneouslly abandon the use of said currencies when they lost value due to the goverment’s mismanagement of them. (Why does the bulk of American currency by value circulate in foreign countries?)

    Such is the weakness of mere facts when they “bump up against” the power of pure reason (a+b = b+a!!).

  189. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 20:35

    As I said before morgan, only religion can change something, and mainstream economics is a religion. I hold no fantasies to the contrary.

    Anyhow, MMT only seeks to explain how the system operates, it does not specifically prescribe outcomes, so the fact that you believe you “hijacked” it from us is of course silly. Here is one of the founders of MMT, Randy Wray:

    “Later””-much later–we will show how the “functional finance” approach of Abba Lerner follows directly from MMT. This leads to a discussion of monetary and fiscal policy””not only what policy can do, but also what policy should do. Again, the discussion will be general because the most important goal of this Primer is to set out theory that can serve as the basis of policy formation. This Primer’s purpose is not to push any particular policy agenda. [b]It can be used by advocates of “big government” as well as by those who favour “small government”. My own biases are well-known, but MMT itself is neutral. “[/b]

  190. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 20:41

    Jim, they aren’t REALLY saying that taxes matter, they are talking about the force of confiscation.

    It IS about cutting off heads to reduce private capital to cool down fromt hem printing.

    It is this easy in their mind:

    100 units owned by competent private players.

    Dirty Hippies print 50 units and spend them as they see fit, giving them value because the will cut off heads if people don’t pay with them.

    Dirty Hippies take 40,50,60 from private players and cut off their heads if they try and fight.

    What matters is the Dirty Hippie gets to print WITHOUT CONCERN for bad effects – since they can always cut off heads.

  191. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 20:45

    Morgan you’re not mistaken at all that MMTers see that the power of the state could be used better, but you’re really going wayyy too far with this. The only thing MMTers call for that is really different than standard Post Keynesian economics is a full employment program. That’s it. Nothing more. All this dribble about cutting off heads is quite silly.

  192. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 20:47

    Payam, yawn.

    Dirty Hippies don’t count, they don’t have any stuff.

    Monetary policy CAN ONLY EXIST for people who have stuff.

    Because there is a reason they got that stuff, and that reason is why they are in charge of the government, and that is the reason they ok’d the government they run to have a Central Bank, and they aren’t going to stand for people who don’t have stuff getting to make decisions about monetary policy.

    What part of this do you not understand?

    Ask yourself this Payam… if I’m wrong, why is the Fed owned by banks? Why isn’t the Treasury in charge?

    It is to keep Payam down.

  193. Gravatar of KRG KRG
    24. July 2011 at 20:48

    “The easiest way to see the process work is to imagine an economy without banks, where the new money goes right into circulation as currency. Most people can instinctively grasp that more currency, without any increase in real goods being produced, will lead to inflation.”

    The second clause of that last sentence seems to be a very shaky proposition, especially when we’re in a situation that includes huge debt overhands and high unemployment and underutilized capacity. I think it’s a bad assumption all around that production won’t by and large, tend to expand with money first in a modern economy, unless you can point to a clear resource or element of infrastructure that is limiting growth. And that’s only going to become more true as time goes on (Think for a moment, how many e-books, musical albums, streamed movies, or games would need to be purchased from Amazon, iTunes, NetFlix, Steam, etc… to force a structural price increase from too much demand. As we develop more sinks like that, the accuracy of any model that’s based on assuming total production limits is going to break down- not necessarily because they’re wrong, but because productivity will put those boundaries out of practical reach.

    Right now oil, and in bad weather, food, tend to be the only truly limiting elements- which really suggests that we should actively devote a large portion of available resources to solving those limiting factors.

    MMT doesn’t say that money supply _never_ affects prices, more that money supply only affects them if it causes expected AD to rise faster than the ability to expand available production capacity to meet it. It also notes that taxes serve to moderate AD.

    (Specifically- income taxes, being profit taxes, don’t actually affect production costs, and can’t be applied to them without moving the price level away from the ideal point of price/product * people willing to buy at that price. By reducing the amount of cash people have on hand, (particularly if only higher income brackets are targeted with a graded system) it actually serves to shift prices lower by reducing the prices that people at the upper end of the spectrum are willing to pay. Currency injection, as long as it’s down at the low end of the spectrum, doesn’t serve as a direct inverse because it first has to pick up the slack of realizing demand that went unfunded up to that point, so helps add directly to the number of people able to pay anything at much faster that it does to the people with enough budgetary slack that they’re willing to bid up prices instead of increasing their total consumption.)

  194. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 20:54

    Payam, I think I have you finally!

    “MMTers see that the power of the state could be used better”

    NO IT CAN’T.

    The state is used NOW exactly the way the people who own and run it want it run.

    For it to run another way assumes facts not in existence.

    Right now is exactly what happens when MMT’s assumptions is put into effect. It has taken from 1913 until now, and while we are in third act, but this entire “crisis” is just part of beat down of dirty hippies who tried to take over with FDR.

    Once the right figured out how to spend all the money, create massive deficits by cutting taxes, and make sure the government cannot come confiscate their stuff, your dreams were dashed, you just haven’t woken up yet.

  195. Gravatar of Payam Sharifi Payam Sharifi
    24. July 2011 at 20:57

    Your attempts to troll me are a complete failure, especially when I was only clarifying the position of MMTers and not making any other statement.

    Anyway categorizing a former hedge fund manager like Mosler a dirty hippy who has nothing just shows that you don’t know who you’re talking about.

  196. Gravatar of KRG KRG
    24. July 2011 at 21:39

    “MMTers deny this and say such mass money-printing is merely a consequince of “increasing nomiminal demand bumping into a supply constraint” “” the increase in nominal demand *not* being caused by the money printing, because, quote, “Printing money cannot increase demand”.”

    _Printing_ money can’t. If the BEP printed 10Trillion dollar bills, then dumped them in a hole in the ground and buried them, how much did demand increased? If, as is the actual context of the statement that I’d guess that you’re misrepresenting here, that “hole” is bank reserves when few people want or can afford to take out loans, how much is demand increased? (And, in fact, when it’s done in a way that reduces the availability of savings opportunities, which are in demand, it will raise the price on those significantly. IF you want an easily falsifiable prediction from MMT, which has borne itself out very well, you can start there- it predicted that QE wouldn’t help the economy grow much, that there was no danger of inflation from it, but that it would actively keep bond rates low because it would limit the market for an already high demand item.)

    But even beyond that, demand exists mostly independently of having the money to express it; there’s only a relatively narrow luxury range where having money actually increases demand. Anything below that and you want a loaf of bread whether or not you can afford to buy it, above than and you can ask Marvin Brewster about the difficulties that come with intentionally trying to spend money to get rid of it; the only demand created by huge hordes of money is the economically counter productive demand for even more money without risking the expense of actually producing anything of value on the way to that goal.

    “So what caused the 231 million percent increase in nominal demand in Zimbabwe, even as real demand fell 55%? When I asked this simple question of an MMT-ateer last week, the answer returned was: “You’ve imprisoned yourself with Say’s law …” Well, *that* was helpful!”

    The government’s active undermining of the country’s production capacity by stripping land from experienced farmers and putting it in the hands of cronies that had no idea how to actually be productive. And it was using the money being printed money, not to employ its people or to build infrastructures in any way, but to pay off debt that was denominated in foreign currency, so it was chasing a moving target. MMT very explicitly regards public debt held in and external currency to be a disaster waiting to happen, whether it happens like in Greece or Zimbabwe.

    So, in the overall analysis, Zimbabwe was a combination of pathological governmental dysfunction combined with non-sovereign debt. Had it insisted that all of its debts be exchanged for and denominated in its own currency up front, it could have significantly lessened the shock (not to mention forcing the debt holders to need to care about the health of Zimbabwe’s economy as a factor of the value of what they were being paid) and the overall crash and demand reduction would have happened regardless of printing because of the havoc it wreaked by destroying it agricultural base (70% of its productive land, and the largest source of employment in the country rendered effectively inert as just the tip of the iceberg), regardless of money supply issues.

  197. Gravatar of The Paradox of Fiat Money « Uneasy Money The Paradox of Fiat Money « Uneasy Money
    24. July 2011 at 23:27

    […] Scott Sumner has been engaged in some pretty acrimonious debates about whether the Fed or central banks in general have the power to control the price level with […]

  198. Gravatar of Jim Glass Jim Glass
    24. July 2011 at 23:41

    Payam Sharifi wrote:

    Rofl Jim Glass, you’re a riot. The “test of falsifiability”?

    MMTer does not take well to concept of “falsifiability”. Big Surprise! In other news: water found to run downhill…

    But still … Einstein himself said “If light doesn’t bend around the sun by the amount I’ve specified, oops, I pulled a whopper!” The first Keynesians said, “If the Phillips curve doesn’t work out the way we’ve said, we’re wrong” and then “Ooops, we *were* wrong. Bye now.”… and the first Monetarists said, “If velocity isn’t stable then what we’ve suggested isn’t going to work”, and then, “Ooops, it’s not stable. Bye now, while we re-think this”.

    *They* didn’t have any problem with falsifiability. Or with accepting the consequences.

    Payam Sharifi, here is a very simple yes/no question for you:

    Is the theory of Modern Monetary Theory falsifiable in any way? Yes or no.

    No ducking or weaseling, please. If “yes”, explain the test(s) you prefer, and point to the MMT web page source explaining it in detail. No need to go into all that yourself.

    Do you believe that like Relativity, Keynesianism, and Monetarism, MMT is subject to falsification?

    Or do you believe along with Mosler that MMT is theory
    as a+b = b+a is theory, irrefutable (if incomprehensible to all the professional economists and government finance professionals who are too dim to understand it).

    As you have sufficient expertise to damn Prof Sumner and the entire professions of modern economics, public finance and central banking for multiple sins…

    (“economists in general have been raised and taught under the rational actor paradigm which is quite frankly full of shit” as one of so many examples)

    …SURELY you can answer this one, simple, most basic Yes/No question about your own creed! Right???

  199. Gravatar of Jim Glass Jim Glass
    25. July 2011 at 00:04

    Jim Glass wrote:

    I declare that MMT remains falsified until Payam Sharifi or some other MMTer can look at that 231 million percent increase in nominal demand in Zimbabwe and tell me both: (1) exactly where it came from, and (2) how it forced Mugabe to print 22+ million Zimbabwe dollars per month in currency *as a consequence*.

    and

    Payam Sharifi, can *you* finally tell me: what was the non-monetary cause that increased nominal demand in Zimbabwe by 231 million percent??

    Payam Sharifi wrote:

    Rofl Jim Glass, you’re a riot … here’s a more direct response for a hyperventilator like you:

    http://bilbo.economicoutlook.net/blog/?p=3773

    Oh, I’m disappointed. I asked “*you*” what caused the 231 million percent increase in nominal demand in Zimbabwe. To explain in *your own* terms. After all, to increase nominal demand 231 million percent the cause had to be HUGE — bigger than a pack of African elephants! And just as obvious!

    But YOU can’t say what it was? Even though you have the expertise to damn all modern economics, public finance, and central banking, you *don’t* have the expertise to name what that HUGE thing was?

    How disappoining. If not surprising.

    As to what Mitchell said … it’s odd what he didn’t say. Although he runs over Zimbabwe’s problems all the way back to the 1980s, to show it was a *victim* of so many, he somehow overlooked making any mention of Mugabe running the presses to print more than 20 million of Z-dollar currency a month to pay his army to fight a war of aggression to capture Congolese diamond mines. He didn’t have the money to pay the army, so he *printed it*, as much as it took. (Not so “victim-like”, that!)
    ~~~
    http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe#Causes

    “Mugabe’s government was printing money to finance troops in the Democratic Republic of the Congo .. the Congolese war cost millions of dollars a month … This required the printing of currency. Zimbabwe was grossly under-reporting its spending involvement in this war to the IMF. Some reports cite a discrepancy of $22 million a month. Zimbabwe was involved in this conflict not because the Democratic Republic of the Congo was a bordering nation and posed a threat, but instead because rebel territory contained diamond mines. These mines were the motivating factor for involvement in the conflict”
    ~~~~

    Perhaps Mitchell doesn’t mention that tiny little fact because he knows “Printing money can’t create demand”, so it is irrelevant to the story. 🙂

    What he does tell us is ye olde “nominal demand bumping up against a supply constraint” tale. He even gives us a nice graph that illustrates it.

    To wit: There was an economy going along happily, and then around 1996 it became a victim of bad things that happened to its productive capacity. As that dropped by about 50% (real GDP declined near 50%)demand for things continued as before, there was an increase in demand *relative* to available supply, so prices were bid upward. Inflation!

    Sounds plausible, but for two tiny little problems:

    (1) Supply interruptions cause recessions, as factories close, farms stop producing, etc. Recessions cause people to spend *less* (closed factories and unemployed workers must spend less, those who fear they may soon be in that positions spend less out of caution). This is definitionally a *reduction of demand*, and it is *deflationary*. See USA 2008.

    By what magic is a reduction in demand that is deflationary simultaneously a non-reduction in demand that is highly inflationary? He doesn’t tell us! Can you?

    Aw, forget that, skip that one. An MMTer would probably object that I assume recessions are deflationary from reading a textbook using gold standard analysis. Let’s keep things in Mitchell’s own terms…

    (2) I’ll accept that as productive capacity and real GDP fall 50%, demand continues unabated, unchanged on its former course by inertia (cough, ahem). Thus there is now more demand relative to available supply, resulting in bidding up of prices, inflation.

    Problem is, with productive capacity falling 50% and demand unchanged, demand-to-supply and the consequent price level increase to 2-1, 2-fold, compared to the “before” level.

    While what we saw in reality was an increase to 2.31 million-to-1, 2.31 million fold. Given the 2-fold increase, *from where* did the additional increase by and another 2,309,998 fold come? Prof Mitchell for some reason doesn’t tell us!

    (Maybe because of that graph he supplied. Try redrawing it to scale so that after the supply constraint occurs the demand level is 2.31 million times higher relative to supply than before! That’s practically too hard to imagine, much less draw on a web page.)

    So frankly, rounding to the nearest 10,000-fold, the 2.31 million-fold increase in prices remains totally unexplained.

    So I repeat:

    Payam Sharifi, can *you* finally tell me: what was the non-monetary cause that increased nominal demand in Zimbabwe by 231 million percent??

    PS: Hey, another possible falsifiation test for MMT, courtesy of Prof Mitchell…

    Does empirical data say that severe recessions caused by supply interruptions are inflationary or deflationary?

  200. Gravatar of Greg Greg
    25. July 2011 at 02:01

    NIck and Mr Sumner

    Mr Sumner said to me;

    “Greg, You do know that the Fed started paying interest in 2008. And that I was one of the first economists to point out that as a result we wouldn’t have inflation?

    I have a very simple question: What is the MMT theory of the price level? The MMTers that come over here tell me nonsensical things, like the price level is arbitrary, or Japan doesn’t really have a price level 100 times higher than us, as they use a different currency!”

    So its your contention Mr Sumner that if we hadnt paid interest on reserves we would have had inflation because the banks would have lent them out? This is absurd. They would lend them out now, even though we do pay interest on reserves, they just cant find enough credit worthy borrowers. Banks cant stuff loans down peoples throats, they respond to requests from credit worthy customers. And NO, Japans price level IS NOT 100x ours its denominated in units 1/100th the size of ours.

    And Mr Rowe

    When I made the above point earlier you made the mistake of saying this is exactly consistent with the QTM. Here is your quote;

    “But that exact same insight is what is at the root of QTM. It goes all the way back to David Hume (and, no doubt, earlier). If we added a zero to all the dollar bills, so a $1 became a $10 bill, and a $10 became a $100, etc., then we would need to add a zero to all the prices to get back to equilibrium. Increase M ten-fold, and we increase equilibrium P ten-fold too.”

    This flat out wrong. Redenominating existing currency is NOT the same as adding NEW currency. If I walk around telling people Im a billionaire because Ive just redenominated my dollars to micro dollars and I make a billion microdollars a week, that is far different than the currency creating entity cutting me a check for a thousand dollars. In one you are just readjusting the numeraire the other is addition of “new” money.

    Id think a Phd would not make such an elementary error.

  201. Gravatar of Brian Brian
    25. July 2011 at 03:49

    onliberty,

    “You can spend cash but you can’t spend bonds.”

    Now I understand why Scott F is so particular about terms and understanding the operational details. Cash CAN be spent, but not necessarily WILL be spent, as he explained to me the other day on his blog:

    “If my retirement portfolio were suddenly converted to cash, do I all of a sudden spend it? In fact, since now my interest income is lower, now I’ll need to save more to enjoy the same retirement I would have enjoyed with my retirement portfolio in bonds. As such, there’s a good case to be made that I would actually spend less.”

    But more importantly, we are actually talking about reserves here, not cash. And unlike cash, reserves cannot be spent. I think it boils down to confusion between capital and reserves. It seems like the Scott S and Co think that they are the same thing. That is the only way I can explain the statement that “Swapping cash (reserves) for bonds increases nominal capital.”

  202. Gravatar of Ron T Ron T
    25. July 2011 at 04:46

    Greg Marquez, you wrote: “Your theory about NGDP targeting may still be true, it probably is, it’s just impossible for the Federal Reserve to do the targeting it must be done by the Treasury Department.”

    Of course you are right, it is one of the most trivial conclusions of MMT.

    Today Bill Mitchell debunks most of what has ever been written on this blog: http://bilbo.economicoutlook.net/blog/?p=15383
    unfortunately, his analysis is reality based, so I guess it is useless.

  203. Gravatar of W. Peden W. Peden
    25. July 2011 at 04:59

    “This sort of criticism is in the realm of “you cannot know anything unless you do it” which if true would mean almost all of the knowledge base shared by humanity would be deemed meaningless jabber.”

    Tell that to MarkS.

  204. Gravatar of W. Peden W. Peden
    25. July 2011 at 05:08

    Greg,

    “So its your contention Mr Sumner that if we hadnt paid interest on reserves we would have had inflation because the banks would have lent them out? This is absurd. They would lend them out now, even though we do pay interest on reserves, they just cant find enough credit worthy borrowers. Banks cant stuff loans down peoples throats, they respond to requests from credit worthy customers.”

    The problem with this analysis is that it misses out most of the monetary system e.g. balance effects, asset prices, and so on. Reading a MMT’er try to understand the monetary system is like reading an essay on “Hamlet” that doesn’t feature the Prince of Denmark. Or reading someone talking about monetary economics in terms of the money-multiplier, for that matter.

  205. Gravatar of KRG KRG
    25. July 2011 at 06:49

    “Supply interruptions cause recessions, as factories close, farms stop producing, etc. Recessions cause people to spend *less* (closed factories and unemployed workers must spend less, those who fear they may soon be in that positions spend less out of caution). This is definitionally a *reduction of demand*, and it is *deflationary*. See USA 2008”

    Recessions reduce the demand optional products when over-supplies now exist. The demand for basic sustenance, on the other hand, remains constant no matter what the overall economic conditions are, and food is not a durable product- if if production grinds to a halt, there is very little lingering overstock that needs to be moved to provide deflationary pressure. When you stop producing food, the supply disappears quickly, so instead of deseration on the part of sellers to move stock lowering prices, you get a bidding war over what little is left, while demand for everything else goes away.

    Zimbabwe’s inflation was largely the result of a self-induced famine; it was the bidding war from that famine that both caused the aggregate demand drop (as demand for everything except food disappeared) and the hyperinflation. Printing extra money, without targeting it’s use directly at increasing food production, simply served to remove a cap on how far that inflation could go.

  206. Gravatar of wh10 wh10
    25. July 2011 at 07:19

    W. Peden, Warren gives a more thorough analysis above.

  207. Gravatar of W. Peden W. Peden
    25. July 2011 at 11:24

    wh10,

    Presumably. But I trust MarkS to give a fair account of MMT and he has used the phrase “just an asset swap” on multiple occasions, suggesting that the role of assets in MMT is trivial. They’re STILL better than British monetary theory pre-1980s, though…

  208. Gravatar of Ron T Ron T
    25. July 2011 at 11:52

    W. Peden,
    “Reading a MMT’er try to understand the monetary system is like reading an essay on “Hamlet” that doesn’t feature the Prince of Denmark.”

    So I guess you can point out a single point where they are wrong? I thought not.

  209. Gravatar of Peter D Peter D
    25. July 2011 at 12:26

    Do monetarists believe that people delay consumption when bonds yields are high enough? I am still to meet anybody who’d say: “Gee, bonds are yielding X% – I’d better wait on that new widget purchase!”
    People put money in bonds because they decided to save beforehand, not because the govt “bribed” them not to consume with that money so as to prevent inflation.
    Similarly with inflation expectations – people will not start consuming like crazy just because they expect the currency to sink. They will buy foreign currency, real estate or some other form of durable investment.

  210. Gravatar of Peter D Peter D
    25. July 2011 at 12:45

    By saying “they focus too much on the visible, the concrete, the accounting, the institutions”, you seem to imply that these have little bearing on the economic behavior. This seems wrong. A particular setup of the system could have very significant effect on behavior of the agents in the macroeconomy.
    For example, you know that bonds can be pledged at very little haircut as collateral at the CME (as TC, who also comments here can confirm). The agents would actually prefer bonds to cash, as the bonds will continue to earn interest. There swapping bonds for cash will do nothing to enable commodity speculation. By ignoring operational details like this, monetarists are liable to reach false conclusions.

  211. Gravatar of W. Peden W. Peden
    25. July 2011 at 13:10

    Ron T,

    Yes, I can. What is interesting is the root causes of their errors e.g. the failure to understand the transmission mechanism of asset prices to the real economy.

  212. Gravatar of W. Peden W. Peden
    25. July 2011 at 13:14

    Peter D,

    Let’s say someone buys real estate as a way of preserving their wealth against currency depreciation. Don’t they have to buy that real estate from someone? And doesn’t that person now have more non-interest bearing cash than they want to hold? Not to mention all the people with greater nominal wealth from higher real estate.

    Like I said, no appreciation of the importance of assets and balance-effects. The “Rosencrantz and Guildenstern are Dead” of monetary economics.

  213. Gravatar of W. Peden W. Peden
    25. July 2011 at 13:15

    (As for buying foreign currency, this has a direct effect on exchange rates and it is therefore a blindingly obvious transmission mechanism between inflation expectations and the economy.)

  214. Gravatar of Scott Sumner Scott Sumner
    25. July 2011 at 13:19

    Lee, I’m confused. Gold is a medium of account, not a unit of account. And if the dollar price of gold changes, it’s not the medium of account, cash is.

    Payam, Your primer of taxes simply asserts money exists to pay taxes. Yes money can be used for that purpose, but so what. The entire article seems pointless to me. You can have money without any government. What about bitcoins?

    Your second link started out:

    “There are several different strands of mainstream economic thinking and these differences manifest in the way they think about monetary and fiscal policy. The extreme mainstream position is that fiscal policy is ineffective because it 100 per cent crowds out private spending.”

    I stopped right there. That’s written at a high school level. At elite levels of macro it’s conventional wisdom that fiscal policy is ineffective, as central banks target inflation. That may be right or wrong, but it’s not an extreme view, and it has nothing to do with crowding out. Both the pieces you sent me are fine for undergraduates, but do you have any material on MMT that would be persuasive to someone who actually knows something about macro?

    KRG, You said;

    “The second clause of that last sentence seems to be a very shaky proposition, especially when we’re in a situation that includes huge debt overhands and high unemployment and underutilized capacity. I think it’s a bad assumption all around that production won’t by and large, tend to expand with money first in a modern economy,”

    I agree. I was referring to the long run effect at full employment. In the short run output will rise, although you’ll generally get a bit of inflation too, especially in commodities.

    But be careful, the slack is very limited and you get inflation much sooner than you might think, as we saw in the 1970s. One MMTer said 30% slack, which is insane.

    Greg, You said;

    “So its your contention Mr Sumner that if we hadnt paid interest on reserves we would have had inflation because the banks would have lent them out?”

    No, that’s not my contention. Banks have nothing to do with the process. The rate of inflation depends on many things, including future expected monetary policy. Even w/o IOR, you may have no inflation if the currency injection is temporary, as we saw in Japan. Indeed Bernanke indicated ours was temporary as well, hence I wouldn’t expect much inflation even without IOR.

    Greg, You said;

    “Banks cant stuff loans down peoples throats, they respond to requests from credit worthy customers.”

    You might want to calm don’t until you learn a bit about my blog. Your assertions have no relationship to my views, yet you seem to think I believe these things.

    KGB, You said;

    “Zimbabwe’s inflation was largely the result of a self-induced famine; it was the bidding war from that famine that both caused the aggregate demand drop”

    Actually AD soared faster in Zimbabwe than any other country in the world. If AD had dropped, they would have had deflation.

    Peter, You said;

    Do monetarists believe that people delay consumption when bonds yields are high enough?

    Google some of my posts on “never reason from a price change.” You can never tell the effect of a different price, interest rate, or exchange rate unless you know why the price changed.

    Regarding bonds and cash, I am referring to a situation where one pays positive interest and the other doesn’t. In that case the effect is very significant, as we’ve seen.

  215. Gravatar of Scott Sumner Scott Sumner
    25. July 2011 at 13:32

    Payam, OK, I read the entire piece on the liquidity trap. And I still don’t know the MMTer view of liquidity traps. How does it differ from the Woodford/Eggertsson?Krugman (rational expectations) view? How does it differ from my view?

    (I don’t need someone explaining to me what a bond yield is–are there any pieces that are written for grownups?)

    He talks about DeLong’s views, but those are different from mine, so that’s no help.

  216. Gravatar of Jim Glass Jim Glass
    25. July 2011 at 15:30

    “Famine causes hyperinflation” — another falsification test for MMT.

    KRG wrote:

    Zimbabwe’s inflation was largely the result of a self-induced famine; it was the bidding war from that famine that both caused the aggregate demand drop (as demand for everything except food disappeared)…

    A huge *drop* in aggregate demand being a prerequisite for hyperinflation, of course. 🙂

    Recessions reduce the demand [for] optional products … The demand for basic sustenance, on the other hand, remains constant … When you stop producing food, the supply disappears quickly … you get a bidding war over what little is left, while demand for everything else goes away.

    OK. Time 1: Zimbabweans have average 100$Z income spent 30% on food and 70% on other. Time 2, of famine: they shift to spending 90% on food, 10% on everything else.

    At most, even assuming the “Mitchell Miracle” of no reduction in total real demand in a recession, so average Zimbabwean income reamains 100$Z, the Zimbabwean CPI remains *unchanged* because the 200% increase in price of food is offset by the 86% drop in price of everything else. Where is the inflation?

    Of course those of us in the reality-connected world see that Zimbabwean inflation actually rose 231 billion percent. So Zimbabweans instead of spending 90% of $100$Z, or 90$Z, on food, were spending 208 billion $Zon food! (“Today a child can carry five hundred thousand dollars’s worth of groceries.”[1])

    Where did they get the money to bid up that price 2.3 billion fold?? You can’t bid up price by bidding money you *don’t have*! And that was one whole lot of new money to get!

    … Printing extra money, without targeting it’s use directly at increasing food production, simply served to remove a cap on how far that inflation could go.

    Ah, well, yes! But printing extra money *always* “simply removes the cap” on how far bidding can go on *everything* — even if there is no famine, no decline in AD, no “supply constraint” at all, even a booming ecomomy to start with.

    Which is why the whole world, minus MMTers, will tell you that printing enough money will always create inflation. And printing *more* money beyond that point will create *more* inflation.

    So you are correct — and even more correct than you thought! If you realize it, you now qualify to join the rest of the world.

    BTW, Somalia is having a self-induced famine right now, with no sign of hyperinflation as a result. And no massive money-printing as Mugabe engaged in either. So off of these two examples for starters, do you think a reality-based person would conclude hyperinflation more probably results from (a) famine, or (b) massive money printing?

    ~~
    [1] A Dynamic Enquiry into the Causes of Hyperinflation in Zimbabwe, pdf.

  217. Gravatar of Jim Glass Jim Glass
    25. July 2011 at 15:42

    Ron T wrote:

    Bill Mitchell debunks most of what has ever been written on this blog:
    http://bilbo.economicoutlook.net/blog/?p=15383
    unfortunately, his analysis is reality based, so I guess it is useless.

    Is this is the same Bill Mitchell in whose analysis of the Zimbabwe inflation (which I just read) Mugabe’s aggressive war to seize Congolese diamond fields, and the financing of that war by *massive* currency printing, doesn’t exist?

    Hey, how “reality based” is that?

    Dude, here’s a tip: If you actually *are* reality based, you don’t have to go around proclaiming it to people. They know it.

    If you *do* have to go around proclaiming you are reality based, and that *only* you and your few buddies are — you say all the world’s experts and top professionals aren’t, “we should abandon the textbooks” because they are wrong, etc. — well, Occam’s Razor says you aren’t, you are only trying to fool people, starting with yourself.

    And people know that too.

    “Methinks these MMTers protest their reality-basedness too much”, to paraphrase the bard.

  218. Gravatar of wh10 wh10
    25. July 2011 at 15:58

    “Which is why the whole world, minus MMTers, will tell you that printing enough money will always create inflation. And printing *more* money beyond that point will create *more* inflation.”

    Really, now? So all the economists right now advocating for fiscal policy expect inflation as a result? How about Q going up instead, given the massive output gap we have, until we reach full capacity?

  219. Gravatar of Winslow R. Winslow R.
    25. July 2011 at 18:31

    “Which is why the whole world, minus MMTers, will tell you that printing enough money will always create inflation. And printing *more* money beyond that point will create *more* inflation.”

    Wow, MMT faces a much bigger battle than I ever imagined.

    I find it hard to believe anyone believes just the act of ‘printing’ money can create inflation, especially independent of whether that money is ever lent, spent or is desired as new savings? Does Scott S. or anyone agree with Jim?

  220. Gravatar of Winslow R. Winslow R.
    25. July 2011 at 18:40

    Often definitions are the basis of misunderstandings. I agree that inflation of money happens with ‘printing’, but I tend to follow a more conventional view of inflation as a general increase in prices over a given period of time.

  221. Gravatar of dilletaunted dilletaunted
    25. July 2011 at 19:24

    @wh10

    “Which is why the whole world, minus MMTers, will tell you that printing enough money will always create inflation. And printing *more* money beyond that point will create *more* inflation.”

    “Is this is the same Bill Mitchell in whose analysis of the Zimbabwe inflation (which I just read) Mugabe’s aggressive war to seize Congolese diamond fields, and the financing of that war by *massive* currency printing, doesn’t exist?”

    are you and jim glass mixing and matching ‘printing money’ as a cb swapping bonds for reserves and ‘printing money’ as gov’t deficit spending?

    “Where did they get the money to bid up that price 2.3 billion fold?? You can’t bid up price by bidding money you *don’t have*! And that was one whole lot of new money to get!”

    once again, cause and effect.

    “If you *do* have to go around proclaiming you are reality based, and that *only* you and your few buddies are “” you say all the world’s experts and top professionals aren’t, “we should abandon the textbooks” because they are wrong, etc. “” well, Occam’s Razor says you aren’t, you are only trying to fool people, starting with yourself.

    And people know that too.”

    it is my belief that your belief that the ‘people’ hold a deep reverence for the economics profession is mistaken. though i’m sure you help with that indefatigable smugness.

  222. Gravatar of Greg Greg
    25. July 2011 at 19:35

    Peden

    You said

    “Let’s say someone buys real estate as a way of preserving their wealth against currency depreciation. Don’t they have to buy that real estate from someone? ”

    Yes, so what?

    “And doesn’t that person now have more non-interest bearing cash than they want to hold?”

    Does NOT logically follow from your first assertion. If they traded the house for the cash they OBVIOUSLY wanted the cash instead of the house.

    ” Not to mention all the people with greater nominal wealth from higher real estate.”

    This certainly doesnt follow. Everyone could be selling their houses and prices be FALLING. Hmmmm when was a time that might have happened?

  223. Gravatar of Mike Sandifer Mike Sandifer
    25. July 2011 at 21:05

    Wow, some of these MMT fans are saying printing money doesn’t cause inflation? I hope they don’t cancel gravity next.

  224. Gravatar of Payam Sharifi Payam Sharifi
    25. July 2011 at 21:20

    No, its just that you don’t have a working definition of what “printing money” means functionally, especially for a country like the United States. I bet you don’t even know that the federal reserve doesn’t actually have a printing press. I repeat what dilletaunted said above: “are you and jim glass mixing and matching ‘printing money’ as a cb swapping bonds for reserves and ‘printing money’ as gov’t deficit spending?

    Point of fact, if you don’t understand how the federal reserve functions institutionally with regards to member banks then you have no room to ever talk about inflation other than it is a general rise in the level of prices. I again refer everyone to this:

    http://blogs.forbes.com/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/

  225. Gravatar of Jim Glass Jim Glass
    25. July 2011 at 21:32

    “Which is why the whole world, minus MMTers, will tell you that printing enough money will always create inflation. And printing *more* money beyond that point will create *more* inflation.”

    to which wh10 replied:

    Really, now? So all the economists right now advocating for fiscal policy expect inflation as a result?

    Well, when deflation hit in the 2008 recession, they sure specifically and explicitly tried and expected to create inflation and reverse the deflation via stimulus — and succeeded, right? Maybe you didn’t notice? Perhaps because you think that was impossible? 🙂

    Today most economists oppose more monetary stimulus — exactly because they fear it would create too much inflation.

    Of the minority that *do* support it, yes, *of course* they expect it to create more inflation. Krumgan e.g. has said many times he favors a higher level of inflation targeted by the Fed through money policy and more money stimulus.

    Have you been missing all this? Perhaps you should be paying closer attention to real world events.

    How about Q going up instead, given the massive output gap we have, until we reach full capacity?

    Well the minority of economists supporting more stimulus will tell you the large output gap creates an aggregate supply curve is sloped so the result of stimulus will be a little more inflation and a lot more output. The majority who oppose it will tell you they think the recession was due to structural problems, so it is operating close to capacity now, so the aggregate supply curve is shaped so that stimulus will produce a lot or inflation and only a little increase in output.

    In other words, it is not question of “Q going up instead” but of the relative rates by which Q and prices go up — the slope of the AS curve in their minds.

    Really, pay more attention to what the people you are talking about are actually saying. When you don’t know that, and damn policies you can’t fairly explain yourself on an even 101 level, points are earned very quickly on the Usenet Crank Index.
    ~~~~

    and Winslow R. replied:

    Wow, MMT faces a much bigger battle than I ever imagined.

    One 100% accurate statement from an MMTer! Especially on *this* subject.

    I find it hard to believe anyone believes just the act of ‘printing’ money can create inflation

    Though the whole world believes that’s just what happened in Zimbabwe. The mass-edited Wikipedia says so many times over, the CIA World Factbook says so (“Until early 2009, the Reserve Bank of Zimbabwe routinely printed money to fund the budget deficit, causing hyperinflation”), academic studies say so (A Dynamic Enquiry into the Causes of Hyperinflation in Zimbabwe(pdf) … even Zimbabweans in the Zimbabwe popular press say so:

    “ZIMBABWE’S chart topping inflation reportedly at 24,000% qualifies the nation as experiencing hyper inflation. Compare that to the next highest inflation of 40% in Burma. The main cause of hyperinflation is a massive and rapid increase in the amount of money (estimated at 17,000%)…”

    Now, it’s one thing to say *you* don’t believe printing money creates inflation. But to say you “find it hard to beleive that anyone believes it” … in the plain face of what everyone (but MMTers) believe … well. That seems a bit ego-centered.

    especially independent of whether that money is ever lent, spent or is desired as new savings?

    Oh, did you have the impression that Zimbabweans didn’t spend any of that mass-printed currency?

    (Really, can you think of any reason why they wouldn’t have?)

    Does Scott S. or anyone agree with Jim?

    See above.

  226. Gravatar of Rien Huizer Rien Huizer
    25. July 2011 at 21:38

    Jim Glass,

    I was temped to comment on your Zimbabwean case (I used to have a golfing buddy who still longs for the tobacco farm he left behind) and did not do it, especially with Scott’s blog being inundated by often unintendedly silly remarks. However, have you considered that something may be wrong with what is being observed in your case? I would guess that the local shekel has simply lost all of its value (except for the predatory issuer who is simply defaulting on payments by using this stuff wherever he has the leverage to do so). Because a highly informal economy like Zimbabwe has plenty of ways to use other sores of value and media of exchange, the local currency has become irrelevant and so are prices expressed in it. That reminds me of another example in a dictatorship: The old USSR printed real currency and paid it to people who used it to pay for whatever the stores offered, which was not very much usually. For quite a while, that was it, until informal quasi money began to circulate between “firms” (atste-owned ones) to ease bottlenecks with the tacit approval of the gvt. Late stage developments in the USSR were black markets in consumer products, where barter was used in conjunction with foreign currency. Meanwhile the price for soap in the state shops may have been at the 1953 level, or higher or lower) What was the price level in the USSR, what was it in Zimbabwe and how did both cases relate to the issue and management of money by the relevant authorities? Incidentally, I am still looking for a monetary theory that can
    (a) function within current institutional arrangements (ie no insensive remodeling required (except some consolidation of agencies like issuing only one kind of currency: spot and forward Tbills, putting the two billion regulatory agencies into one single story building, etc) and (b) do better than what we have right now.

    Upon request I will let you know what “better” means.

  227. Gravatar of Payam Sharifi Payam Sharifi
    25. July 2011 at 21:46

    Jim, the majority of economists are idiots, they still follow the rational actor paradigm and operate in fantasyland, and when I say this I’m including the likes of Krugman…even though MMTers with the positions he takes. For you to not realize that the economics profession is in crisis is quite sad. Those in the profession that haven’t learned even after the financial crisis are pathetic. Cue you, who loves to give the majority/minority argument. You can sit there pretending that MMTers and others studying heterodox economics are the elitists, but you and the economics profession you like to protect are the real elitists, and again just look at the way you phrase your arguments “MOST OF US BLAH BLAH BLAH WHILE YOU SMALL PEOPLE BLAH BLAH BLAH”.

    The important point for you to try and get across, Jim, is what does printing money mean for an advanced country like the United States? How would the USA print money? This is where you should get scared, because I’ll be ready to pounce on you after you give me a wrong answer. This is where MMT’s strengths lie, and where you will show yourself to be a complete fool. You might want to actually read Dr. Harvey’s blog post that I linked to just above on inflation to give yourself an honest clue.

  228. Gravatar of Payam Sharifi Payam Sharifi
    25. July 2011 at 21:48

    err, meant to say MMTers generally side with the positions Krugman takes, even if he is wrong about the economics sometimes.

  229. Gravatar of Winslow R. Winslow R.
    25. July 2011 at 22:12

    “Oh, did you have the impression that Zimbabweans didn’t spend any of that mass-printed currency?”

    no, that was my point, they ‘printed’ and then spent it and to take it another step, they failed to tax. The printing operation, by itself, does not cause inflation.

    “(Really, can you think of any reason why they wouldn’t have?)”

    sure, instead of ‘printing’ then spending, they could have lent it, or even created incentives for people to save it, like selling treasury bonds that pay interest. But you, knew this, right? So why ask the question?

  230. Gravatar of Jim Glass Jim Glass
    25. July 2011 at 23:05

    Rien Huizer writes an increasingly rare perfectly reasonable comment in this thread…

    Jim Glass, I was temped to comment on your Zimbabwean case (I used to have a golfing buddy who still longs for the tobacco farm he left behind) and did not do it, especially with Scott’s blog being inundated by often unintendedly silly remarks. However, have you considered that something may be wrong with what is being observed in your case? I would guess that the local shekel has simply lost all of its value…[for plausible reasons]

    A currency can certainly lose value for supply-demand reasons. That is, 1$z in one’s pocket may buy less next year than this, and less the year after that, etc. But it remains just 1$z.

    The question is: how does that 1$z become literally 2.31 billion $z in your pocket in just one year (the annual inflation rate reached in 2008), still with the purchasing power of the former 1$z?

  231. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2011 at 23:23

    Payam, you are not an elitist. You are a man with an empty basket. No one is calling you an elite.

    No worries though, DeKrugman is not an economist.

    Of course MMT agrees in general with DeKrugman, you both want to use government to take from the competent and give to the incompetent… and CALL IT “economics.”

    Economics is not concerned with social justice or affecting outcomes – its purpose to to understand the science behind WHAT COMPETENT VALUE CREATORS DO to trade with one another.

    The best economics can do is describe what we can expect to happen if x,y,z….

    Which is why my analysis carries: we can expect government and monetary policy to be run for and by the people who have stuff.

    This is what we can EXPECT to happen. This is what does happen.

    We can expect Obama to lose. We can expect public employees to lose the power of their unions. We can expect the safety net to be rolled back to something sustainable. We can expect only technology to improve people’s lives.

    WHY ON EARTH, with all this going for us, would we try and craft an alt.theory that fails to get more power and control to the people who own stuff?

    The logical thing to do is to ask the people who have a VETO, what they want done and give it to them post haste.

    We ask, do you want us to print money? The monopoly power says NO!

    We ask, do you want us to raise taxes? The monopoly power says NO!

    Here we have the government running monetary as a monopoly, printing and spending exactly the way the monopoly power wants…

    And MMT hates it.

  232. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2011 at 23:29

    “no, that was my point, they ‘printed’ and then spent it and to take it another step, they failed to tax.”

    Yep, I called it. Didn’t even need to read Mosler’s blog.

    http://www.themoneyillusion.com/?p=10178&cpage=5#comment-70362

  233. Gravatar of Jim Glass Jim Glass
    25. July 2011 at 23:51

    Winslow R. wrote:

    no, that was my point, they ‘printed’ and then spent it and to take it another step, they failed to tax. The printing operation, by itself, does not cause inflation.

    What you mean is: the printing operation by itself *does* cause inflation. To offset that you have to tax it back. If you don’t, you get the inflation that printing by itself causes.

    Right! Correct! The whole worlds agrees with you.

    Now, why didn’t Mugabe tax it back?

    Because he wanted to fight an aggressive war to seize Congolese diamond fields. But he didn’t have the money to pay the army to do it. *Because he couldn’t raise the taxes*.

    So he printed deca-millions of dollars a month in currency instead to pay the army, so it would do what he wanted.

    OK, so now who is he going to tax to get that money back? The army?? Don’t think so!

    Well, who else was there? Nobody. He couldn’t tax it from anybody … **that’s why he had to print the currecy in the first place!**

    Of course, when he paid the soldiers with the new currency *they spent it*. That stoked inflation, obviously, which reduced the money’s value to the army, which did not want to see its pay reduced, so he had to print ever more. Which caused yet higher inflation so he had to print more yet to pay not only the army but now also his own govt officials and party members who didn’t want to see *their* real pay reduced either … repeat, repeat, repeat.

    But “reality based” MMTers say that all he had to do was tax it back. Gee. OK … what’s the reality-based answer for HOW he was going to do that???

    Once the war inflation was on, if he had told his army and government/party minions, “Hey, guys, you know all that money I’ve been paying you? Sorry, I have to take it back, here’s your *new giant tax bills*” he’d have been *shot*. The only question is who’d have shot him first, the army or his own party.

    OK, so going back further he could have said at the beginning, “No war to seize a neighbor’s diamond fields for me. I am peace-loving, care for my common citizens, and fiscally responsible.”

    Then there’d have been no hyperinflation — but he wouldn’t be Mugabe, and we’d all be living in a different world.

    Bottom line: Goverments function using and consuming *real resources*. If a govt wants to do something, X (say fight a war) it can use real resources directed to the purpose via taxes (or borrowing serviced by taxes).

    But if it CAN’T tax, so it makes a *choice* to redirect and consume those resources by printing money, inflation follows by the rules of arithmetic. Then by the rules of politics the inflation must accelerate (else an army having its pay cut gets unhappy) etc., until something (usually nasty) happens to force the politicians in power to “bite the bullet” and break the cycle.

    Thus was Zimbabwe, and thus was Weimar (and Hungary, Yugoslavia, etc.) Sure, they could have avoided the inflation by taxing to offset their money-printing. But that is not a “reality based” observation, it is an utterly naive meager truism.

    They all printed money in mass amounts *without* taxing, consciously and intentionally, *for a reason!*

  234. Gravatar of Jim Glass Jim Glass
    25. July 2011 at 23:56

    dilletaunted wrote:

    are you [the] jim glass mixing and matching ‘printing money’ as a cb swapping bonds for reserves and ‘printing money’ as gov’t deficit spending?

    Nope.

    Is this your defense of Mitchell giving an analysis of the Zimbabwean hyperinflation in which *massive* money printing (by scale of the economy, equal to deca-trillions of dollars in the US) somehow *isn’t mentioned*?

    If so, very lame. Try again.

    “Where did they get the money to bid up that price 2.3 billion fold?? You can’t bid up price by bidding money you *don’t have*! And that was one whole lot of new money to get!”

    once again, cause and effect

    Is an answer to “Where did something come from?”

    Now MMTers are developing their own new language and syntax too?

    it is my belief that your belief that the ‘people’ hold a deep reverence for the economics profession is mistaken.

    I never said anything at all about anybody holding a deep reverence for the economics profession.

    I commented on what people think of those who have to constantly proclaim to everyone else how “reality based” they are, and how *only they* are “reality based”, and how *all* the top experts and professionals and textbooks don’t understand reality.

    Really, economics has nothing to do with it.

    though i’m sure you help with that indefatigable smugness.

    Hmmm, I just took at quick scan through the big number of all the overt insults thrown at Prof Sumner and many others here recently by MarkS, Pamyan “economists are idiots” Sharafi, and so many other MMTers. I don’t see you complaining about any of that.

    Perhaps you are annoyed at my being *merely* smug, the half-assedness of it? I should be a complete condescending jackass, in their fine MMT mold?

    I’ll try to do better in that regard in the future. 🙂

  235. Gravatar of W. Peden W. Peden
    26. July 2011 at 00:03

    Greg,

    “Yes, so what?”

    Good grief!

    “Does NOT logically follow from your first assertion. If they traded the house for the cash they OBVIOUSLY wanted the cash instead of the house.”

    They want cash rather than the house, but that doesn’t mean they want to hold onto the cash. Why would they hold onto that cash? If they want to save, there are better things that non-interest bearing money. If they want to spend, then they have to hand that cash to someone else, who now has more non-interest bearing money than they want…

    “This certainly doesnt follow. Everyone could be selling their houses and prices be FALLING. Hmmmm when was a time that might have happened?”

    Ceteris paribus, it always follows that more demand makes the price higher than it would be if there was less demand. Since the case I was addressing was one where someone decides to start buying real estate to avoid a currency depreciation, it certainly follows that demand has increased for real estate and ceteris paribus the price of real estate has increased, pushing up the nominal wealth of real estate owners.

  236. Gravatar of W. Peden W. Peden
    26. July 2011 at 00:34

    When Thomas Sowell is bad, he’s bad. When he’s good, he’s brilliant. Here he makes the argument against the debt ceiling-

    http://jewishworldreview.com/cols/sowell072611.php3

  237. Gravatar of Jim Glass Jim Glass
    26. July 2011 at 00:57

    Payam Sharifi wrote:

    Point of fact, if you don’t understand how the federal reserve functions institutionally with regards to member banks then you have no room to ever talk about inflation…

    Payam, trusting in your oft-professed superior knowledge of how, well, *everything* works, I asked you two very simple questions:

    (1)”can *you* finally tell me: what was the non-monetary cause that increased nominal demand in Zimbabwe by 231 million percent??”

    (2)”a very simple yes/no question for you: Is the theory of Modern Monetary Theory falsifiable in any way? [As Relativity, Keynesianism, Monetarism all were.] Yes or no. ”

    Yet I see no answer to either. All I see is you rushing on to change the subject to one thing after another to which you also claim far superior understanding.

    Now you patronize me with…

    I bet you don’t even know that the federal reserve doesn’t actually have a printing press.

    Ahem…
    ~~~~~
    START THE PRESSES

    One chore high on Ben Bernanke’s to-do list was ordering the rebuilding of Uncle Sam’s money presses a week ago…

    As part of the ambitious [stimulus] moves, the government’s two huge printing facilities – in Washington, DC, and Fort Worth, Tex. – will have to expand their already strained, 24-hour output.

    To upgrade and rebuild its money presses, the government said with little notice on Nov. 14 that it began negotiating an exclusive contract with Swiss printing giant KBA-Giori, SA to provide labor, parts, repairs, upgrades, improvements, service, software and equipment in a long-term contract.

    “This new $800 billion initiative (by the Fed) will cause an increase in currency requirements, and there is, of course, the realization that printing too much will cause inflation,” said Mark Gertler, a professor of economics at New York University…
    ~~~~~

    Payam, when you look at a green $1 bill that you take out of your wallet, see that it has “Federal Reserve Note” inscribed across it, and has the seal of the regional Federal Reserve Bank that issued it upon its face … who do you imagine printed it?

    “… if you don’t understand how the federal reserve functions…”

    That’s right, Payam, now give three more lectures about how those who don’t understand the very basics of how the Fed functions shouldn’t talk.

    How would the USA print money?

    You mean, without owning a printing press?

    This is where you should get scared, because I’ll be ready to pounce on you after you give me a wrong answer.

    Pounce! Pounce!

    Really, is there ANY point where you so proudly “reality based” people become embarassed enough to *look up a fact* before making a patronizing grand proclamation about it — and being 100% wrong yet again?

    Or do you have some gene that leaves you immune from feeling embarrassment?

    I mean, I know it’s much more fun for y’all to keep telling yourselves how right you are, than it is to check simple facts with the outside world, but for cryin’ out loud.

    Jim, the majority of economists are idiots … but you and the economics profession you like to protect are the real elitists, and again just look at the way you phrase your arguments “MOST OF US BLAH BLAH BLAH WHILE YOU SMALL PEOPLE BLAH BLAH BLAH”.

    And that’s REALLY what all this is about for you, and for most of you MMTers, right? “The textbooks should all be thrown out…”, not because they are based on the gold standard, but because it is ‘undemocratic’ that textbook writers know more about the subject than you, you think they “look down” on you.

    Ah, memories of usenet! This complaint was made explictly all the time in every sci.* group. “Economics is undemocratic … Physics is undemocratic … Medicine is undemocratic …”.

    Well, you know what? That’s right, they are.

    Knowledge is *not* democratic. And if you want to move up instead of down in the feudal order of expertise, you’ll do well to:

    1) Show you can answer plain, straight questions asked of you — by doing it!

    2) Check facts *before* citing them to show off your *superior* knowledge of how the real world functions with proclamations like…

    “I bet you don’t even know that the federal reserve doesn’t actually have a printing press.”

    I said before that exchanges like this can be fun, up to a point — but the point arrives where dealing with patronizing fact-immune posing idiocy like this becomes just a pure waste of time.

    So I will be moving on to other discussions now.

  238. Gravatar of Jim Glass Jim Glass
    26. July 2011 at 01:23

    Morgan Warstler wrote:

    Yep, I called it. Didn’t even need to read Mosler’s blog.

    http://www.themoneyillusion.com/?p=10178&cpage=5#comment-70362

    Yup, Morgan, you did.

    Zimbawbe would never have had that hyperinflation *if only* it had taxed back all that money it printed! And neither would have Weimar, Hungary, Yugoslavia…

    And this is supposed to be some keen new insight that refutes common wisdom, instead of the most naive banal truism.

    Of course Zimbabwe, Weimar, Hungary, Yugoslavia… all knew that full well. If they had been *capable* of collecting the taxes to fund their spending, wtf would they have funded it by mass printing of currency instead? A question MMTers do not ask.

    Now on to other things.

  239. Gravatar of wh10 wh10
    26. July 2011 at 04:29

    Jim,

    Are you an Austrian? Also, mind sending me a paper rather than some ad hominem attacks projecting this relative rate of P and Q increase? In other words, you don’t believe we can return to the world we had just a couple years before with normal inflation and 4% unemployment (minus the massive debt bubble)?

  240. Gravatar of Greg Greg
    26. July 2011 at 04:35

    Peden

    “They want cash rather than the house, but that doesn’t mean they want to hold onto the cash. Why would they hold onto that cash?”

    This is ALL conjecture. Some people DO want to hold onto cash. I’m holding onto lots right now.

    “If they want to save, there are better things that non-interest bearing money.”

    Sometimes there are sometimes there arent. I never have to find a “buyer” for my cash.

    ” If they want to spend, then they have to hand that cash to someone else, who now has more non-interest bearing money than they want…”

    What an insight! Purchases require the transfer of money between parties. The thing you miss is that in sum, the private sector can never raise its own nominal wealth. One person is 100$ richer (and 100$ worth of widgets poorer) and the other is 100$ poorer and 100$ worth of widgets richer…. netting to zero. Now, party 2 can raise the price of the widget 5x and declare “Im five times richer today” but unless someone buys it they arent any richer.

    “Since the case I was addressing was one where someone decides to start buying real estate to avoid a currency depreciation, it certainly follows that demand has increased for real estate and ceteris paribus the price of real estate has increased, pushing up the nominal wealth of real estate owners.”

    See, here’s the flaw in your model. When prices rise that IS currency depreciation. You cant have it both ways. When your dollar buys you less of something (less shares of stock, less sqft of housing, less pounds of beef) the buying power of your dollar is FALLING! When gold prices rise that is (supposedly) a sign of “currency depreciation”. The same is (should be) true of rising of housing prices, beef prices…..

    And BTW… why do YOU care about the “nominal” wealth of real estate owners? Arent you guys supposed to be focused on “real” wealth? You sound like a Chartalist.

  241. Gravatar of Morgan Warstler Morgan Warstler
    26. July 2011 at 04:49

    Jim, eventually you and I agree.

    I like to start off by announcing I’m undemocratic right from the get go, since Democracy fails as a poorly constructed meme.

    wh10,

    it is easy to have low inflation AND low unemployment, for YEARS.

    We just need to write policy to TRY and make wages un-sticky. Prices will follow.

    We automate government, driving as many public employees out of jobs as possible.

    We end the minimum wage.

    We end Unemployment Insurance.

    And we institute a Guaranteed Income plan… here let me give you some papers:

    http://biggovernment.com/mwarstler/2011/01/04/guaranteed-income-the-christian-solution-to-our-economy/

    http://biggovernment.com/mwarstler/2011/01/31/guaranteed-income-part-ii-a-real-end-to-illegal-immigration/

  242. Gravatar of KRG KRG
    26. July 2011 at 04:54

    “I agree. I was referring to the long run effect at full employment. In the short run output will rise, although you’ll generally get a bit of inflation too, especially in commodities.”

    What happens to that analysis when our productivity reaches the point that a person can produce more than they can possibly consume in a lifetime? (Not just wants to consume, but actually is capable of reasonably consuming. Again look at the sinks provided by digital distribution of arts and entertainment; a person with sufficient income could easily put as much as they wanted into purchases in that medium and never finish consuming it all, without actually affecting the price level because the cost to expand capacity is low compared to the revenue from that level of consumption) Up till now we’ve managed to find ways to drive consumption to meet our productive capacity, but at some point we hit real physical limits and time constraints on consumption even as we continue to amplify productivity.

  243. Gravatar of W. Peden W. Peden
    26. July 2011 at 05:44

    Greg,

    “This is ALL conjecture. Some people DO want to hold onto cash. I’m holding onto lots right now.”

    I never said that no-one wants to hold onto cash. But our demand to hold cash is much smaller than our demand to hold wealth. This is true in the personal sector and particularly true in the financial and corporate sectors. (In fact, corporations have a demand to hold cash that is somewhere near zero.)

    That the demand to hold money does not adjust in line with increases in the supply of money is not conjecture; it is a matter of empirical fact. I may hold onto a $5 note if I find it on the street; I wouldn’t hold on to $5,000,000 if someone buys my shirt for that price.

    “Sometimes there are sometimes there arent. I never have to find a “buyer” for my cash.”

    In what sense?

    “What an insight! Purchases require the transfer of money between parties. The thing you miss is that in sum, the private sector can never raise its own nominal wealth. One person is 100$ richer (and 100$ worth of widgets poorer) and the other is 100$ poorer and 100$ worth of widgets richer…. netting to zero. Now, party 2 can raise the price of the widget 5x and declare “Im five times richer today” but unless someone buys it they arent any richer.”

    In the example of someone buying the real estate, the price of real estate has gone up. But the money that was used to purchase that real estate has not ceased to exist. So, instead of there being real estate priced at X and Y quantity of money, after the purchase real estate is X’ and the quantity of money is still Y.

    “See, here’s the flaw in your model. When prices rise that IS currency depreciation. You cant have it both ways. When your dollar buys you less of something (less shares of stock, less sqft of housing, less pounds of beef) the buying power of your dollar is FALLING! When gold prices rise that is (supposedly) a sign of “currency depreciation”. The same is (should be) true of rising of housing prices, beef prices…..”

    (More reasoning from price changes.)

    Haven’t you just said that expectations of currency depreciation can cause currency depreciation?

    “And BTW… why do YOU care about the “nominal” wealth of real estate owners? Arent you guys supposed to be focused on “real” wealth? You sound like a Chartalist.”

    I don’t care about the nominal wealth of the real estate owners under discussion. What matters for understanding the effects of monetary policy on the real economy is that THEY care.

  244. Gravatar of wh10 wh10
    26. July 2011 at 05:52

    BTW Jim- what you say is totally legit. I used the word “inflation” too loosely as well. I meant inflation way above normal or trend.

    I don’t know about your majority/minority mix though. Most economists advising Obama wanted more fiscal stimulus.

    I don’t know how you claim we’re operating near full capacity right now. I’ve seen tons of reports saying we’re way below potential real GDP.

    But again actually analysis would be great, instead of your cantankerous assertions. Inflation projects is exactly what I have been looking for but can never find. Most everyone’s just talking about the size of the govt budget.

  245. Gravatar of Winslow R. Winslow R.
    26. July 2011 at 05:54

    “Zimbawbe would never have had that hyperinflation *if only* it had taxed back all that money it printed! And neither would have Weimar, Hungary, Yugoslavia…

    And this is supposed to be some keen new insight that refutes common wisdom, instead of the most naive banal truism.”

    Another convert! You do realize ‘common wisdom’ has the silly belief inflation is regulated by the Fed raising and lowering interest rates?

  246. Gravatar of W. Peden W. Peden
    26. July 2011 at 06:18

    Winslow R.,

    Monetarists have been criticising such views for decades…

  247. Gravatar of Greg Greg
    26. July 2011 at 06:28

    Peden

    “I never said that no-one wants to hold onto cash. But our demand to hold cash is much smaller than our demand to hold wealth.”

    Cash IS wealth. If you were walking around with $5 mil in a briefcase you would describe yourself as $5 mil wealthier. If you bought something with it and sold it next year for $3mil you would describe yourself as $2 mil LESS wealthy.

    “This is true in the personal sector and particularly true in the financial and corporate sectors. (In fact, corporations have a demand to hold cash that is somewhere near zero.)”

    What planet are you living on? Corporations are sitting on MOUNTAINS of cash right now.

    “In what sense? ”

    In what sense do I not have to find a “buyer” for my cash? In any sense.

    “In the example of someone buying the real estate, the price of real estate has gone up. But the money that was used to purchase that real estate has not ceased to exist. So, instead of there being real estate priced at X and Y quantity of money, after the purchase real estate is X’ and the quantity of money is still Y”

    Yes, So? We’ve transferred money from buyer to seller and seller MIGHT be better off. Maybe he sold the house for less than he bought it, maybe he sold it for more. Either way selling existing real estate to each other will never make us collectively wealthier. Just like selling exisitng stocks to each other can never do it. Only new real estate being built adds to wealth, otherwise known as investment.

    “(More reasoning from price changes.)”

    And the point of this critique?

    “Haven’t you just said that expectations of currency depreciation can cause currency depreciation?”

    I dont use the term currency depreciation, its meaningless. You must always denote depreciation relative to something.

    “I don’t care about the nominal wealth of the real estate owners under discussion. What matters for understanding the effects of monetary policy on the real economy is that THEY care.”

    Yes they do but thinking that satisfying their desires should be a goal of monetary policy is absurd. Why dont we simply declare that house prices are twice as high form this day forward? Would we all be better off? Screwing with the price of money via interest rate manipulation cannot be of any real help. As a monopoly issuer you can control price or quantity. We should be working with quantity. People care less about the value of their money then they do about how much they have.

  248. Gravatar of Winslow R. Winslow R.
    26. July 2011 at 06:31

    Okay, not sure we agree. MMT and monetarists agree inflation is not controlled by raising and lowering interest rates.

    But…

    It seems (some) Monetarists believe the act of ‘printing’ is sufficient to cause inflation.

    It seems MMT believes the the government must ‘print’, spend and fail to tax to cause inflation.

    Is that right?

  249. Gravatar of wh10 wh10
    26. July 2011 at 06:54

    Without throwing economic capacity into the mix, you have no idea where you are. MMT tends to say fiscal policy induced demand-pull inflation can only occur once the economy is at full capacity. Once the economy is at full capacity, then fiscal spending needs to be matched by taxes to avoid demand-pull inflation.

  250. Gravatar of Greg Greg
    26. July 2011 at 07:05

    Thought experiment

    A) The government puts all the unemployed to work and builds 600,000 new houses and fixes up the rest. All homeless people are “given” a house.
    Housing prices fall 25% Stock Market goes down 3000 pts

    B) Monetary policy ends up being effective (remember this IS a fictional story) at increasing the number of existing houses and stocks being sold and prices rise 25%.

    In which scenario are we better off in “real” terms?

    I say A because we have MORE houses and less people without houses even though the prices of those things has fallen.Those are real outcomes

  251. Gravatar of Scott Sumner Scott Sumner
    26. July 2011 at 07:09

    Winslow, You asked;

    “I find it hard to believe anyone believes just the act of ‘printing’ money can create inflation, especially independent of whether that money is ever lent, spent or is desired as new savings? Does Scott S. or anyone agree with Jim?”

    A few points. The Fed can always create inflation by printing money, but printing money doesn’t always create inflation. There is a distinction. It depends on whether the money injection is expected to be permanent. It depends on slack in the economy. It depends on shifts in money demand. BTW, as an aside, reserves earning interest aren’t printing money, as some commenters have implied.

    W. Peden, Yes, Sowell is right about the debt ceiling.

    KRG, You said;

    “What happens to that analysis when our productivity reaches the point that a person can produce more than they can possibly consume in a lifetime? (Not just wants to consume, but actually is capable of reasonably consuming.”

    I hear this often, and find it very odd. I know very few people would would not be happy if someone gave them a million dollars. Indeed I think even most millionaires would be happy. If we all get as rich as Bill Gates, then we should work less and shift to Euro-style vacations–but I don’t see that in the near future.

    Winslow; You said;

    “It seems (some) Monetarists believe the act of ‘printing’ is sufficient to cause inflation.

    It seems MMT believes the the government must ‘print’, spend and fail to tax to cause inflation.

    Is that right?”

    Yes, and no one seems to address my main argument in the post a few days back on non-QTM models of the price level. The Canadian/Australian case seems to me to refute MMT, and I could find dozens of similar comparisons. But the point is that there is normally a fairly well defined real demand for cash, or demand for cash as a share of GDP. In most countries people just want to hold 2% to 6% in NGDP as cash. Put more out there and the ratio won’t rise, the denominator (NGDP) will rise. This assumes positive interest rates, BTW, which almost always occur when demand is not deeply depressed. So imagine you have 5% interest rates, and demand is not deeply depressed. What happens if you double the base though an OMP? I say prices double. What do MMTers say?

  252. Gravatar of Winslow R. Winslow R.
    26. July 2011 at 07:37

    “So imagine you have 5% interest rates, and demand is not deeply depressed. What happens if you double the base though an OMP? I say prices double. What do MMTers say?”

    MMT would say it depends on what is purchased?

    My interpretations:

    If tsy bonds are purchased, then interest rates fall and there are temporary impacts as horizontal money might expand as the change in interest rate adjusts the yield curve but is partially offset by less vertical money, in the form of interest income, going to the private sector.

    If real resources are purchased then depending if the economy is at full employment and whether savings desires are satiated, we could see some inflation of the price level, not necessarily 2x.

  253. Gravatar of Peter D Peter D
    26. July 2011 at 07:44

    Scott
    So imagine you have 5% interest rates, and demand is not deeply depressed. What happens if you double the base though an OMP? I say prices double. What do MMTers say?

    But if the reserves swapped for Tsys are non-interest bearing, then the interest rate won’t stay 5%. It will fall, potentially to zero.

  254. Gravatar of W. Peden W. Peden
    26. July 2011 at 08:06

    “Cash IS wealth. If you were walking around with $5 mil in a briefcase you would describe yourself as $5 mil wealthier. If you bought something with it and sold it next year for $3mil you would describe yourself as $2 mil LESS wealthy.”

    I know that cash is wealth. But not all wealth is cash.

    “What planet are you living on? Corporations are sitting on MOUNTAINS of cash right now.”

    Mountains of money, but not mountains of notes & coin. Companies, like financial institutions and the wealthy, hold negligible amounts of cash. Hence narrow money measures like M0 are less than 10% of broad money indicators like M4.

    “In what sense do I not have to find a “buyer” for my cash? In any sense. ”

    In the sense that, if your cash holdings are in Austro-Hungarian kronen (or some other worthless currency) you can’t get anything for them? Hence the concern with currency depreciation.

    “Yes, So? We’ve transferred money from buyer to seller and seller MIGHT be better off. Maybe he sold the house for less than he bought it, maybe he sold it for more. Either way selling existing real estate to each other will never make us collectively wealthier. Just like selling exisitng stocks to each other can never do it. Only new real estate being built adds to wealth, otherwise known as investment.”

    So you acknowledge that increasing people’s cash holdings makes them buy assets and this pushes up the nominal price of those assets. Excellent; this is a very important premise in understanding money in a modern economy.

    When asset prices increase, people’s nominal wealth increases. This has very important effects in the transmission mechanism: it makes people and companies more willing to spend and invest; it increases agent’s nominal assets and thereby creates the illusion of creditworthiness, thereby encouraging bank lending and subsequently the growth of broad money aggregates; in short, it increases aggregate demand. In an economy with spare capacity, this initially primarily affects real output.

    A dramatic and blatant example of this causal chain was the Barber Boom in the UK during the early 1970s. Initially, the affect was on real output, which reached peacetime 20th century records in 1973.

    “And the point of this critique?”

    Basic price theory: just looking at a price doesn’t tell you about the underlying realities behind that price. Gold prices might be high because of a combination of a large number of reasons.

    “Yes they do but thinking that satisfying their desires should be a goal of monetary policy is absurd. Why dont we simply declare that house prices are twice as high form this day forward? Would we all be better off? Screwing with the price of money via interest rate manipulation cannot be of any real help. As a monopoly issuer you can control price or quantity. We should be working with quantity. People care less about the value of their money then they do about how much they have.”

    No-one is arguing that satisfying the desires of asset holders should be the goal of monetary policy. However, the mark of a good domestic monetary policy regime is that it keeps the monetary transmission mechanism from disrupting the economy. This is accomplished by keeping the supply of money in line with the demand to hold money, indicated by a steady growth of NGDP (which is money multiplied by the inverse of the demand to hold money).

    I agree that controlling the price of money (which is the price level) is a bad idea. I also agree that the quantity of money is very important. My preference would be a wide broad money monitoring range within which the central bank targeted NGDP growth rates.

  255. Gravatar of W. Peden W. Peden
    26. July 2011 at 08:24

    Winslow R.,

    “It seems (some) Monetarists believe the act of ‘printing’ is sufficient to cause inflation.

    It seems MMT believes the the government must ‘print’, spend and fail to tax to cause inflation.

    Is that right?”

    Not quite, but close. Monetarists believe that the velocity of broad money is basically a function of four variables (inflation, the money supply, real GDP and real interest rates, roughly in that order).

    So printing money when real output is depressed is primarily expansionary with regard to real output, not prices, because the money supply affects NGDP rather than the price level as such.

    Monetarism and MMT both allow that the government underfunding its borrowing (“printing money”) is expansionary. Monetarism allows that the central bank can expand analogously; MMT, as I understand it, requires that the central bank is redefined as an arm of the Treasury whenever it buys non-financial assets or it doesn’t work.

    Up until now, the differences are basically semantics. There is no argument in MMT (as opposed to wider Post-Keynesian arguments about the endogeneity of broad money e.g. Kaldor’s endogeneity theory) that mean that the central bank isn’t in control of NGDP, as far as I know.

    Where MMT differs from Monetarism is in its account of the transmission mechanism between printing money and the economy. This is not so surprising, since monetarists disagree about the transmission mechanism as well e.g. some embrace the dreaded Money Multiplier, others don’t. I like Tim Congdon’s account which focuses on assets.

    But all monetarists focus to some extent on money balances and expectations, whereas the MMT focus seems to be on the point of expenditure e.g. a central bank buying property or a government building a bridge. In the monetarist transmission mechanism, these expenditures are basically insignificant in themselves because they are one-off transactions; insofar as they are important, they are important because of their effects on the money balances of agents in the economy.

    I probably have MMT wrong at multiple points here, but at least I hope I’ve conveyed the gist of the monetarist approach to the transmission mechanism between expanding the money supply and the real economy. A good detailed account of the effects of the money supply in a modern economy can be found in Tim Congdon’s “Keynes, the Keynesians and Monetarism” Chapter 14 and all of “Money and Asset Prices in Boom & Bust”.

    The reason that Monetarism and MMT look deceptively similar at times is that (good) monetarists* like Friedman, Congdon and Sumner reject the “lending determines spending” and money multiplier approach of “creditist” monetary theory, and so does MMT as I understand it.

  256. Gravatar of Greg Greg
    26. July 2011 at 08:51

    Peden

    “Mountains of money, but not mountains of notes & coin. Companies, like financial institutions and the wealthy, hold negligible amounts of cash. Hence narrow money measures like M0 are less than 10% of broad money indicators like M4.”

    Who the f%$K cares about coins or notes?? What is your obsession with physical money? They are sitting on cash in MM accounts.

    “In the sense that, if your cash holdings are in Austro-Hungarian kronen (or some other worthless currency) you can’t get anything for them? Hence the concern with currency depreciation.”

    We are talking about the US dollar here not some defunct currency that ever had close to a trillion dollars in output let alone over 15trillion. This is an absurd concern. We are debating the need to “cut entitlements” in this country, and slow down govt sepnding and debt accumulation to avoid currency collapse. This is acting as if continuing to pay granny 2000/month instead of 1700/month is going to be the difference between staying the worlds reserve currency and going the way of the Austro-Hungarian krona.
    INSANE

    ‘So you acknowledge that increasing people’s cash holdings makes them buy assets and this pushes up the nominal price of those assets.’

    NO Im not acknowledging that at all. It might but it does NOT logically follow.

    “When asset prices increase, people’s nominal wealth increases. This has very important effects in the transmission mechanism: it makes people and companies more willing to spend and invest; it increases agent’s nominal assets and thereby creates the illusion of creditworthiness, thereby encouraging bank lending and subsequently the growth of broad money aggregates; in short, it increases aggregate demand. In an economy with spare capacity, this initially primarily affects real output.”

    What a load of crap. So let me get this straight. Making all the prices higher makes everyone happier and they will spend, even if they dont have any more money, but the govt sending everyone a check (actually putting more money in to the system) only causes inflation and no one is better off.

    “just looking at a price doesn’t tell you about the underlying realities behind that price. Gold prices might be high because of a combination of a large number of reasons.”

    I couldnt agree more with this.

  257. Gravatar of W. Peden W. Peden
    26. July 2011 at 12:58

    Greg,

    “Who the f%$K cares about coins or notes?? What is your obsession with physical money? They are sitting on cash in MM accounts.”

    The important thing about notes & coin is that they don’t accumulate interest. They are depreciating assets. That’s why the demand to hold cash is so low: outside of deflation, the value of your cash is ever-decreasing. So, when a person or a bank or a business has an increase in their holding of cash beyond a certain point (the equilibrium of their demand for cash and their cash holdings) they exchange the cash for something else. So a bank with increased non-interest bearing money will swap this money for an appreciating asset.

    By ‘cash’ I mean ‘notes & coin’. If I mean money, I would say ‘money’. A CD is money but not cash.

    “We are talking about the US dollar here not some defunct currency that ever had close to a trillion dollars in output let alone over 15trillion. This is an absurd concern. We are debating the need to “cut entitlements” in this country, and slow down govt sepnding and debt accumulation to avoid currency collapse. This is acting as if continuing to pay granny 2000/month instead of 1700/month is going to be the difference between staying the worlds reserve currency and going the way of the Austro-Hungarian krona.
    INSANE”

    The same mechanisms are at work in both cases. Currency depreciation DOES make it harder to find a “buyer” for one’s cash.

    “NO Im not acknowledging that at all. It might but it does NOT logically follow.”

    It does logically follow. Only by introducing exogenous shocks that increase the demand to hold cash does an increase in cash not result in people seeking assets to preserve the value of their wealth.

    “What a load of crap. So let me get this straight. Making all the prices higher makes everyone happier and they will spend, even if they dont have any more money, but the govt sending everyone a check (actually putting more money in to the system) only causes inflation and no one is better off.”

    No. The mechanism is the same in both cases. Fiscal policy generally works in exactly the same way that monetary policy does: it increases the quantity of money. In both cases, if output is depressed, the effects of increasing the quantity of money can be to increase the rate of real output.

    (Incidentally, the “hot potato” effect of money does boost the total quantity of money significantly, because it makes people more creditworthy or sometimes just appear more creditworthy, which makes banks willing to lend to them. This link between the monetary base and broad money creates the illusion of a “money multiplier effect” where banks lend out their reserves, but actually the initial line of causation is through the real economy to banks. So, in both the debt-monetization case and the monetary policy case, the quantity of broad money is boosted.)

  258. Gravatar of wh10 wh10
    26. July 2011 at 14:02

    I don’t know the monetarist language and school well-enough to fairly critique, but your claim that fiscal and monetary policy work exactly the same is unequivocally wrong. Fiscal policy boosts net financial assets and monetary policy does not. I am not saying that makes monetary policy completely ineffective, but I am curious to hear your thoughts on this.

  259. Gravatar of W. Peden W. Peden
    26. July 2011 at 14:21

    wh10,

    I suppose I should have picked my words more carefully: fiscal policy generally only stimulates if it increases the quantity of money and in THIS sense the mechanism is the same. There are differences in the details, of course.

    Significantly, this means that any fiscal policy can be offset by monetary policy working in the opposite direction. In the UK, there have been four clear cases of this: 1974-1975 (loose fiscal policy vs. tight monetary policy), 1981 (tight fiscal policy vs. loose monetary policy), 1987-1989 (tight fiscal policy vs. very loose monetary policy) and 1993-1999 (tight fiscal policy vs. stable monetary policy).

    As a result, monetarists agree with the consensus view that nominal expenditure is under the ultimate control of the central bank, not the government.

    In the monetarist model, fiscal policy generally works by changing the quantity of money and thereby the PRICE of financial assets, not the quantity of financial assets per se. But it is perfectly possible for the government to run huge deficits and for the effects of this on the money supply to be offset by monetary policy tools like IOR, which have made much of what I’ve said about M0 somewhat redundant since banks can now gain interest on a component of M0.

  260. Gravatar of wh10 wh10
    26. July 2011 at 14:22

    That is to say, fiscal policy directly delevers and adds to nominal wealth, whereas monetary policy “swaps” directly leaves the economy’s equity position unchanged and increased lending leads to higher leverage (obviously not always a bad thing, but just talking about direct impacts on the economy’s balance sheet).

  261. Gravatar of wh10 wh10
    26. July 2011 at 14:29

    Thanks for the reply. How will IOR offset fiscal policy? By reducing loan creation?

  262. Gravatar of W. Peden W. Peden
    26. July 2011 at 14:50

    I don’t think that the increase in nominal wealth is the primary transmission mechanism from fiscal policy to the real economy, because it only involves a single one-off transaction i.e. a boost in the quantity of nominal wealth.

    The primary route is more complex: fiscal policy > M0 > asset markets > nominal wealth > creditworthiness > broad money > M*V = P*T, with an increase in M. Another possible roadmap would be fiscal policy > M0 > creditworthiness > broad money > M*V etc., which would be how fiscal policy would stimulate if, say, it involved packets of money delivered to the poorest members of society.

    IOR offsets fiscal policy by increasing the demand to hold M0. If commercial banks can earn interest on M0 by holding it at the central bank, then they have less of an incentive to buy assets and thereby (indirectly) boost broad money. So IOR reduces loan creation, though in a more complex way than the false money-multiplier story would suggest.

    If broad money does not increase (and since fiscal policy doesn’t have a significant impact on the velocity of money) then NGDP is not increased. If NGDP doesn’t increase, then an increase in goverment deficits simply crowds-out the rest of the economy. A real-world example of this was 1974-1975 in the UK, where the offsetting of fiscal stimulus by tight monetary policy created a horrendous liquidity squeeze that drove the British economy into a deep recession. More recently, domestic credit expansion to the private sector in the US has been weak, presumably because fiscal stimulus has been offset by tight monetary policy and therefore manifests itself as a private-sector credit crunch.

    Ideally, monetary policy and fiscal policy should march in step: if fiscal policy is tight, then monetary policy should be loosened to keep money in equilibrium; if fiscal policy is loose (say because of a war) then monetary policy should be tightened, again so that money stays in equilibrium.

    Stock, price, demand, supply, equilibrium and disequilibrium. They’re the key to understanding money and just about everything else in economics, I’ve found.

  263. Gravatar of wh10 wh10
    26. July 2011 at 15:34

    Thanks for the reply.

    In the absence of IOR, fiscal policy does not increase M0 if the Fed is targeting a positive FFR (additional reserves must be drained) or laws exist to require the Govt to sell bonds 1 for 1 with deficit spending (the case in the US). People receive more deposits and reserves stays the same. Thus broad money increases directly. Moreover, if credit creation is what you think has the greatest impact on growth, then by directly improving people’s equity position (assets – liabilities) by the simple act of deficit spending should become more credit worthy.

  264. Gravatar of W. Peden W. Peden
    26. July 2011 at 15:54

    wh10,

    I hadn’t considered that transmission mechanism, but it seems ok to me. I’m not fully familiar with details of the US system, which (like most of the US apparatus) is rather chimerical.

    Obviously, with an increase in broad money, one gets to the straightforward M*V = P*T situation much quicker.

    As I see it, for monetarism to work, broad money has to be at the centre. While M1 may be the actual medium of exchange (cash + cheques) in a modern monetary system people can make up for disequilibriums in M1 by moving money in from broader aggregates from M2 upwards, whereas they cannot do the reverse because M1 is a component of the broader aggregates.

    The key point is that, under the current regime, the Fed can offset the effects of fiscal stimulus. The net effects of the 2008-2011 fiscal stimulus has been to increase the US debt, cause a totally unnecessary debt crisis, increase government spending as a percentage of GDP, and little else.

  265. Gravatar of wh10 wh10
    26. July 2011 at 16:05

    Peden, I am not sure where you are from, but any central banking system has to work like how I described under positive rate targeting regimes (maybe I am overlooking something though).

    I’d disagree with you on the net effect. I think fiscal stimulus provided a vital support for the economy to prevent it from tumbling into depression. Of course, it wasn’t large enough, and most advocating for it made that call before it even began.

    The increase in the US debt is moot, and it’s meaningless beyond continued stimulus via interest payments into the economy (good now, inflationary at full capacity). Of course that is going to happen when you deficit spend. That it led to political bickering, fine, true. Better we did it than not though. Increase govt spending in a time like now is not a bad thing. Demand is not coming from the private sector or abroad.

  266. Gravatar of wh10 wh10
    26. July 2011 at 16:11

    Also, FYI, central banks do not perform discretionary OMPs if they are targeting a positive interest rate without IOR (only recently introduced, in the US at least). This was the big problem Dr. Fullwiler had with Dr. Sumner’s insistence at NEP. Not sure if the OMP during IOR debate has been resolved though.

  267. Gravatar of W. Peden W. Peden
    26. July 2011 at 16:13

    wh10,

    I was thinking more in terms of the bonds-to-debt correspondence. In the UK, it is possible for the Treasury to overfund or underfund its borrowing.

    The fiscal stimulus was not irrelevant as such, but it could have been substituted by monetary stimulus.

    Increasing the debt is undesirable precisely because of the crowding-out problem. Of course, there is no crowding-out if the money supply is increased, but one might as well just increase the money supply. The interest paid on debt is also an unnecessary distortion of the market.

  268. Gravatar of wh10 wh10
    26. July 2011 at 16:22

    In the UK, what proportion of govt spending is overdrafts vs bond sales? If we had that here, we’d have no debt scare!

    The debt does not crowd anything out. That’s a misunderstanding of the accounting. The govt spends and bonds absorb private sector net savings should non-banks buy them. The interest paid on the debt is no different from the original act of fiscal spending; it’s distortionary to the extent it induces inflation via added net financial assets.

  269. Gravatar of wh10 wh10
    26. July 2011 at 16:23

    Also, what monetary stimulus should we have done that we didn’t? More QE? The evidence shows that did not achieve much except fears of inflation and commodity bubbles, contributing to cost-push inflation.

  270. Gravatar of wh10 wh10
    26. July 2011 at 16:24

    sorry specifically referring to QE2. QE1 was needed.

  271. Gravatar of wh10 wh10
    26. July 2011 at 16:35

    Even if banks buy the bonds it absorbs voluntary savings. It’s all voluntary. If people didn’t want to buy the debt, then they wouldn’t and banks would buy all of it with reserves or more technically reserve overdrafts (then subsequently replenished with the deficit spending for the system as a whole, or for a bank not receiving enough reserves in return, the Fed then does an OMO to buy the bank’s treasury and replace with reserves). But they do because they have a desire to net save. Govt debt is just an accounting offset. That should be clear to you given you live in a place where overdrafts are permitted.

  272. Gravatar of wh10 wh10
    26. July 2011 at 16:38

    Well not “just” – there’s also the inflationary potential from interest NFA injections, potential value added for well-functioning financial markets and options for people to save (debatable), and also all the needless political ramifications.

  273. Gravatar of W. Peden W. Peden
    26. July 2011 at 16:39

    “In the UK, what proportion of govt spending is overdrafts vs bond sales? If we had that here, we’d have no debt scare!”

    I’m not sure, but we don’t have a debt ceiling either. On the flipside, the £ isn’t a reserve currency.

    “The debt does not crowd anything out. That’s a misunderstanding of the accounting. The govt spends and bonds absorb private sector net savings should non-banks buy them. The interest paid on the debt is no different from the original act of fiscal spending; it’s distortionary to the extent it induces inflation via added net financial assets.”

    The crowding-out is in an aggregate demand sense.

    The inflationary distortion is real, but more importantly the new financial assets act as substitutes for private sector assets.

    “Also, what monetary stimulus should we have done that we didn’t? More QE? The evidence shows that did not achieve much except fears of inflation and commodity bubbles, contributing to cost-push inflation.”

    In the clearest-cut case, which was QE2, all the evidence is that QE2 added to RGDP. Monetary policy cannot cause cost-pull inflation, because for every commodity there is an owner. Any inflation caused by QE (as opposed to supply shocks) was demand-pull.

    My preference would be for the Fed to stop paying IOR and target NGDP. QE is a quantitative target, whereas NGDP is an equilibrium target, so strictly speaking I don’t want more QE.

  274. Gravatar of wh10 wh10
    26. July 2011 at 16:58

    “The inflationary distortion is real, but more importantly the new financial assets act as substitutes for private sector assets.”

    They do not act as substitutes from any private sector assets that could have already existed before the event of fiscal spending. They absorb net new govt spending on a voluntary basis. You don’t understand the accounting yet. Here’s the t-account walk through (http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html). Again, if people didn’t want them, they wouldn’t have to buy them. Now if you think there exists a psychological phenomenon wherein the future opportunity to buy govt debt with new money leads to a prior misallocation of financial resources, fine, that’s an argument. I’d like to hear yours.

    Regarding QE2 rGDP, any good papers?

    Regarding inflation, explain further please? You’re saying costs are offset by demand? I actually don’t believe QE2 caused broad inflation, but you definitely see some in commodities, and you can make that argument that’s potentially due to *some* speculation. So when you look at that basket of goods, the prices rose and that hits the average family. Not broad inflation though. So maybe I agree with you?

  275. Gravatar of Brian Brian
    26. July 2011 at 17:04

    My understanding of MMT on Zimbabwae,

    Inflation can be caused by loss of supply (decrease in sellers at a given price point) or by an increase in aggregate demand (increase in buyers at a given price point). In this case it was both. Land reorganization led to famine which destroyed supply. The war spending increased demand. Sure he should have collected taxes, but he didn’t have the power to do so. A modern monetary system requires having the ability to collect taxes! Once you lose that, its game over, end of currency. Read Bill Mitchell’s piece on the us civil war. A big part of their problem was a philosophical objection to paying taxes.

    http://bilbo.economicoutlook.net/blog/?p=13834

    The point is that when you destroy things it is bad for people’s wealth. Sure the government will print money but it cannot replace the productive capacity that was lost. The cause was the initial destruction. MMT does not say that wealth comes for free. It says that when real wealth increases so should financial wealth (via deficits/net financial asset creation). When real wealth decreases as in Mugabe’s case, that government should be removing financial wealth (by taxing heavily and possibly raising interest rates to encourage saving until after the hard times).

    Brian

  276. Gravatar of W. Peden W. Peden
    26. July 2011 at 17:11

    I never suggested that people are forced to buy government bonds. But to buy a government bond is not to buy some other savings instrument. That is an accounting identity.

    “Regarding QE2 rGDP, any good papers?”

    Here’s the most detailed analysis I’ve seen yet-

    http://www.project-syndicate.org/commentary/feldstein33/English

    – which goes beyond the obvious correlation.

    “You’re saying costs are offset by demand?”

    No. If QE increases the demand for commodities, then the negative effect of increased costs for the buyer of these commodities is offset by the increased revenues for the sellers. Cost-push inflation is caused by factors in the supply-side like the labour market and supply chain, not by demand.

    I think that any increase in broad inflation since the beginning of QE2 has been almost entirely due to supply-side factors like the oil supply. I remember thinking back in November 2010 that the worst thing that would happen from a monetarist perspective would be a series of supply side shocks in 2011. Thus far, we’ve had a huge earthquake and nuclear crisis in one of the world’s biggest economies; a mini-oil crisis; several revolutions; multiple default-risks in countries with no monetary sovereignty; and a debt crisis in the world’s largest debtor nation. All these things considered, I think that the US economy is doing remarkably well.

  277. Gravatar of wh10 wh10
    26. July 2011 at 17:31

    Actually I misspoke myself on the govt debt. Explain to me how your substitution can possibly happen (I gave you too much leeway). You can imagine starting with Dr. Sumner’s Iceland, where the govt spends $100, creating $100 deposits and $100 in bonds in the banking system. Then the govt decides to deficit spend $100 again, so now the economy has $200 deposits + $200 in govt bonds. Where is the substitution?

    On this inflation issue- I am admittedly a novice in understanding type of event, and certainly the monetarist view of things. But if the buyer of steel pays a higher price for it because of investment speculators, and hikes his price for the end product, then someone pays that higher price, and if it wasn’t the someone who sold the steel (average family unemployed), they could get screwed. Maybe this is way too simplified? But I could still think this doesn’t have a broad inflationary impact since the price of something else could go down.

    Agree with your last paragraph.

  278. Gravatar of wh10 wh10
    26. July 2011 at 17:41

    Sorry I may have screwed the accounting up there. It’s getting late. Resume later. Best!

  279. Gravatar of wh10 wh10
    26. July 2011 at 17:45

    Wait! No I didn’t, except what also could have happened is that you wind up with $100 in bonds and $100 deposits for nonbanks and $100B and $100 reserves for banks. You are saying you’d rather have it end up being $200 in deposits for consumers and $200B for banks. But then I ask, why did it happen the way you are fearing and why is that necessarily bad?

  280. Gravatar of Payam Sharifi Payam Sharifi
    26. July 2011 at 17:57

    Hmmm…interesting that this conversation led to points of agreement. Certainly none of my own comments contributed to this, but I’m happy nonetheless. I’m starting to appreciate the monetarism of you fellows here much more(but only because it correlates to MMT 🙂 )A couple of points:
    W. Peden: You said, in response to wh10, in an “aggregate demand sense” Wh10 meant it that way too.

    I’ll repeat that MMT’ers are Post-Keynesians. They believe in endogenous money(btw I’ve never heard anyone critique the endogenous money approach of Post Keynesians, I’d like to hear it from you guys). In fact, the reason MMTers ARE MMTers is that push the endogenous money approach and combine it with Abba Lerners Functional Finance to show that its Fiscal Policy that needs attention. In reality MMT should be called Functional Finance(and that is what we call it here at UMKC when speaking of it academically) but the name has stuck for whatever reason(when again in reality there is nothing modern about it).

    Note where the subject ultimately led to: to the crowding out theory, which is bunk. It seems that if you monetarists put aside your ideology with respect to government and discovered this as well as central bank operations(read this excellent article posted today, as well as the comments): http://ftalphaville.ft.com/blog/2011/07/26/634841/the-feds-1-6-trillion-somethings/

    that you would be MMTers, no doubt. Mr. Peden, where can I find some good chapters or books on *good* monetarism? I appreciate your insights.

    I think I had more to say but I’ll leave it at that.

  281. Gravatar of Payam Sharifi Payam Sharifi
    26. July 2011 at 18:02

    Jim Glass,

    Just to be a smartass, wrong!

    http://en.wikipedia.org/wiki/Bureau_of_Engraving_and_Printing

    A bureau of the treasury, not the Fed 🙂

  282. Gravatar of Rien Huizer Rien Huizer
    26. July 2011 at 18:14

    W. Peden,

    My compliments for your helping out Scott (who in the Northern academic vacation season should be devoting himself to better things).

    You said:

    “As a result, monetarists agree with the consensus view that nominal expenditure is under the ultimate control of the central bank, not the government.”

    Yes, depending on institutional arrangements of course. What puzzles me is that this debate between orthodox and heterodox economists no one has picked up the political economy rationale for the current institutional arrangements (and differences in those), i.e. that we have fiscal policies (and doctrines) under political control and monetary ones under independencies created and usually at the pleasure of a broad political consensus.

    The combination of public sector finance (with effects on both aggregate income and on all kinds of outcome variances for groups (classes, regions, causes) controlled by politicians (lords) who have to buy votes, and monetary policy conducted by selfless, meritocratic central bankers (mandarins). Is one that allows politicians to promise risky policies (bets) in the confidence that the market will reward them or else, that they will be able to blame the Central Bank. This protects democracies from economic catastrophes, until the public gets tired or bored (as is happening in the proportional representation systems) and needs to be fed increasingly excentric rubbish to
    maintain a minimum of relevance,

    However economists talk and write as if there is a power that will make the (political) economy perform in ways that conforms to their (necessarily) reductionist theories. Theories about economic phenomena have inherent metodological problems, which allows for a pleasant variety that may provide inspiration to politicians in their primary activity, getting and maintaining support.

    I wonder what should be taught to the trainee-mandarins.

  283. Gravatar of Payam Sharifi Payam Sharifi
    26. July 2011 at 18:24

    Rien….its worked rather well for neoclassical economists, hasn’t it? 😉

  284. Gravatar of Rien Huizer Rien Huizer
    26. July 2011 at 22:40

    Payam Sharifi,

    What did work well for neoclassical (macro?) economists? Making a living from academic work with legitimizing/criticizing competing politicians as the main market for their ideas? And absent opportunities in that lucrative field, teaching new generations of economists? Or figuring out, in a central bank, how to defeat the attempts of the politicians to ruin the economy for the gain of a few votes? Iam not sure what you mean by doing well and neoclassical could fit just a bout anyone with an economics degree..

  285. Gravatar of W. Peden W. Peden
    27. July 2011 at 02:19

    Payam Sharifi,

    The challenge for endogenous money theories is to provide a theory of the transmission mechanism from the economy to the money supply that covers all cases of variation in the money supply. The best effort has to be that of Nicholas Kaldor, who was brilliant at following Old Keynesian principles to their logical conclusions.

    Kaldor’s transmission mechanism is that changes in the money supply is driven by changes in bank lending, which is in turn driven by the terms of trade of businesses because businesses borrow when they are short of money.

    This theory has several advantages: it provides an institutional account of the money creation process; it provides an explanation of the volatility of the money supply; and it leads to testable conclusions. It has only one basic disadvantage: it is wrong.

    If the money supply adjusted to the terms of trade, then net bank borrowings of businesses (loans less repayments) would adjust inversely to their money holdings. So one should be able to inversely correlate business sector borrowings and money holdings, only no such correlation exists in any economy (as far as I know).

    Even more problematically, in reality most money is held in the personal sector and a large proportion of that is held by people who are retired. It would be very surprising if they adjusted their money holdings to the terms of trade and in practice they don’t, because the personal sector’s demand for money is by far the most stable of all sectors.

    Finally, the Kaldorian endogeneity thesis depends on a false image of banking, where banks adjust passively to the demand for credit e.g. a liquidity-strained firm goes into a bank and has no problems getting a loan. In practice, when companies are balance-sheet constrained, banks are very reluctant to lend to it.

    (There’s also the creditist account, which is also falsifiable and clear, but I don’t think anyone on here is a creditist.)

    Monetarists have an account of how the money supply can be controlled (imprecisely) by the authorities and how it leads the economy. We can look at the economy and see if it follows the monetarist transmission mechanism during monetary shocks. Non-monetarists have not provided a sound alternative, yet, as far as I know. Kaldor deserves a huge amount of credit for actually trying to work out such a mechanism, rather than just asserting the endogeneity of money as dogma.

    (Obviously endogeneity can hold contingently because of policies e.g. in a Gold Standard.)

  286. Gravatar of W. Peden W. Peden
    27. July 2011 at 02:32

    “Explain to me how your substitution can possibly happen (I gave you too much leeway). You can imagine starting with Dr. Sumner’s Iceland, where the govt spends $100, creating $100 deposits and $100 in bonds in the banking system. Then the govt decides to deficit spend $100 again, so now the economy has $200 deposits + $200 in govt bonds. Where is the substitution?”

    My substitution claim was premised on an offsetting of the deficit using monetary policy. As I said-

    “Increasing the debt is undesirable precisely because of the crowding-out problem. Of course, there is no crowding-out if the money supply is increased, but one might as well just increase the money supply.”

    So, if there is an offsetting of the increase in deposits, there is a crowding-out of credit for the private sector because those government bonds will substitute for, say, corporate bonds. If there is no offsetting of fiscal policy by monetary policy, then there is no crowding out.

    “On this inflation issue- I am admittedly a novice in understanding type of event, and certainly the monetarist view of things. But if the buyer of steel pays a higher price for it because of investment speculators, and hikes his price for the end product, then someone pays that higher price, and if it wasn’t the someone who sold the steel (average family unemployed), they could get screwed. Maybe this is way too simplified? But I could still think this doesn’t have a broad inflationary impact since the price of something else could go down.”

    Sure, but two things-

    (1) The higher price will stimulate supply in the long-run.

    (2) Even in the short-run, there is a seller of the steel as well as a buyer. If the price of steel is driven up by increased demand, then the producer of the seller is better-off. There is no net loss of output.

    With genuine cost-push inflation (say a war in the Middle East cuts oil supplies) there is a shortage of supply of a product, so output has declined. Put precisely, cost-push inflation REFLECTS a loss of output, rather than causes it.

    “No I didn’t, except what also could have happened is that you wind up with $100 in bonds and $100 deposits for nonbanks and $100B and $100 reserves for banks. You are saying you’d rather have it end up being $200 in deposits for consumers and $200B for banks. But then I ask, why did it happen the way you are fearing and why is that necessarily bad?”

    I’m not sure I follow.

  287. Gravatar of W. Peden W. Peden
    27. July 2011 at 02:39

    Payam Sharifi,

    “Note where the subject ultimately led to: to the crowding out theory, which is bunk. It seems that if you monetarists put aside your ideology with respect to government and discovered this as well as central bank operations(read this excellent article posted today, as well as the comments): http://ftalphaville.ft.com/blog/2011/07/26/634841/the-feds-1-6-trillion-somethings/

    that you would be MMTers, no doubt. Mr. Peden, where can I find some good chapters or books on *good* monetarism? I appreciate your insights.”

    I think monetarists get the balance on crowding-out correct: crowding-out occurs if and only if deficit spending is offset by monetary tightening. Fiscal policy, if accomodated by monetary policy, can boost output with no crowding-out if there is spare capacity.

    As I said, Tim Congdon is very good on the transmission mechanism. Friedman was one of the better American monetarists because he understood the importance of broad money. Good work on monetary disequilibrium (not exclusively a monetarist idea, by any means, but it forms a central part of monetarist theory) can be found in the work of Clark Warburton and Leland Yeager. The monetarist literature from the Bundesbank and Germany is a good example of monetarist theory applied over a long period of time under European conditions.

  288. Gravatar of W. Peden W. Peden
    27. July 2011 at 02:42

    Rien Huizer,

    “I wonder what should be taught to the trainee-mandarins.”

    That’s easy: the Treasury should learn the Treasury View; the central bankers should learn about monetary disequilibrium.

  289. Gravatar of Winslow R. Winslow R.
    27. July 2011 at 06:27

    “But all monetarists focus to some extent on money balances and expectations, whereas the MMT focus seems to be on the point of expenditure e.g. a central bank buying property or a government building a bridge. In the monetarist transmission mechanism, these expenditures are basically insignificant in themselves because they are one-off transactions; insofar as they are important, they are important because of their effects on the money balances of agents in the economy.”

    It would help to focus on this difference?

    MMT sees the size of these expenditures(spending exceeding taxes) to be a currently significant $1.58 trillion in 2010.

    How can this deficit spending be considered insignificant considering it is over 10% of the 2010 GDP of $14.7 trillion?

  290. Gravatar of W. Peden W. Peden
    27. July 2011 at 06:44


    MMT sees the size of these expenditures(spending exceeding taxes) to be a currently significant $1.58 trillion in 2010.

    How can this deficit spending be considered insignificant considering it is over 10% of the 2010 GDP of $14.7 trillion?”

    It’s an insignificant proportion of total transactions (circular flow + financial transactions). I don’t know what the approximate number of transactions per year is in the US, but I know from studying the UK economy in 1981 that the UK’s total transactions were £4000 billion in that year. The US has more than five times the population of the UK, the £ is weaker than the $ and the US economy in 2011 is considerably bigger at a per capita level than the UK economy in 1981.

    $1.58 trillion worth of transactions is of trivial importance in terms of net transacitons.

    This is what I mean by annual government expenditures being insignificant: as transactions, they are one-time transactions and a small proportion of the total number of transactions in an economy.

    Government expenditures, as transactions in themselves, are insigificant. It’s the effects of government spending on the money supply, individual cash balances, profits, expectations and so on that is important. Hence a monetarist analysis looks at the effects of government expenditure on balances and expectations, rather than at government expenditures per se.

    (Monetarists also don’t think of an economy in an income-expenditure way, which vastly helps correct analysis of a modern economy.)

  291. Gravatar of Scott Sumner Scott Sumner
    27. July 2011 at 07:56

    Winslow and Peter, I’ll address the monetary policy with 5% rates in a new post.

    I won’t get into the debates between commenters, due to lack of time.

  292. Gravatar of Greg Greg
    28. July 2011 at 02:11

    Here is the MMT model on prices.

    http://neweconomicperspectives.blogspot.com/2011/07/two-theories-of-prices.html

  293. Gravatar of ssumner ssumner
    28. July 2011 at 06:16

    Greg, So they think wages explain prices. But wages are a price, so the reasoning seems circular.

  294. Gravatar of Jason Jason
    28. July 2011 at 15:20

    Way too late this game, but this statement by Scott:

    “Still it seems to me that anyone attacking my position first needs to develop a model of the price level (not inflation, but the level of prices.)”

    is not valid from a mathematical standpoint: models exist where the dynamics of a system are completely determined except for the absolute scale which must be determined empirically.

    http://en.wikipedia.org/wiki/Scale_invariance

    One example is quantum electrodynamics. We do not theoretically determine the value of the “electric charge”; we determine the (beta)function that describes its value over a range of energies and then measure it at one energy.

    This is not to nitpick with some random physics example. The beta function could be an analogy for inflation and the electric charge the price level, the former telling how the latter changes in an over-heated or under-employed economy. However, we aren’t able to tell from the theory itself what the price level is. We have to measure an interest rate or a price.

  295. Gravatar of Eric Tymoigne Eric Tymoigne
    29. July 2011 at 07:03

    Hi Scott. Inflation and price level relates to goods and services, not the wage rate or the interest rate. Otherwise you can throw away hundreds of years of work by economists. From Irving Fisher (his theory of interest rates would be circular if one follows your approach) to Friedman and all other major economists.

  296. Gravatar of ssumner ssumner
    29. July 2011 at 10:37

    Jason, I don’t know enough about physics to comment. But if I have a model that can explain the price level in 2010, and in 2020, then I can also explain the inflation rate. If I can explain the inflaion rate, but not the price level, I will have much less confidence in that model. I prefer a model that can explain the price level, to one that can’t.

    Eric, Are you really saying that Fisher would deny that inflation relates to interest rates?

    There are many price levels. The price level for output, for inputs, etc. So I don’t understand that point. But if I could drag Fisher and Friedman out of their graves, I’m sure they’d agree with me. I’ve read a lot of each of their writings, and many of my ideas come from them.

  297. Gravatar of Eric Tymoigne Eric Tymoigne
    29. July 2011 at 17:03

    Scott, I was concerned with output-price inflation strictly. Modern Money also has a theory of asset-price inflation in which the money supply plays a much more direct role. There are two theories of prices, one for flows (newly produced assets) on for stocks (outstanding assets). In the former, the cost of production matters to determine the price level (unit cost of labor is part of the cost of production).
    Yes fisher has i = r + p but if one follows your logic that is not good enough because i is a price determined by another price (p stands for inflation) so this theory must be circular.

  298. Gravatar of ssumner ssumner
    30. July 2011 at 11:04

    Eric, I assure you there is nothing “cicular” about the Fisher equation. So far as I know all economists accept it. Interest rates are measured over a period of time, whereas prices are measured at a point in time. Thus interest rates aren’t “prices” in the normal sense of the word, they are more like the rental cost of credit. And i is a nominal rental cost. It is composed of a real rental cost (determined by real factors) plus inflation, determined by monetary policy.

  299. Gravatar of Eric Tymoigne Eric Tymoigne
    30. July 2011 at 16:49

    Yes on i, the same is true for the wage rate: It is the rental cost of labor if you prefer to put it that way. Both w and i affect the cost of production of output and the output-price theory can be developed to include the unit cost of labor (w/APl) and the cost of credit (i). In this case, given everything else, a higher interest rate raises the output-price by raising the cost of production.

  300. Gravatar of Britmouse Britmouse
    31. July 2011 at 13:30

    “In the UK, what proportion of govt spending is overdrafts vs bond sales”

    It is all bond sales, and that started in the 90’s I believe; I believe this was called the “full funding” policy. The overdraft with the BoE is called the “Ways and Means Advance”, and has been fixed at £400m for a while. W Peden seems to know more history here… is there a good book on UK monetary policy history?

    I know little macro history and enjoyed reading this, from 1993: http://www.official-documents.gov.uk/document/hc9293/hc05/0547/0547.pdf

    NGDP growth rates are front and centre, page 11:

    “This [inflation] target implies a path for the growth of money GDP […] averaging about 6 per cent a year over the next three years, and falling gradually thereafter. It is the role of macroeconomic policy to deliver this. The purpose of microeconomic policy is to improve the efficiency of markets and strengthen the supply performance of the economy, so as to raise the growth rate of output compatible with a given inflation path.”

  301. Gravatar of ssumner ssumner
    31. July 2011 at 14:06

    Eric, Nominal intersest rates and nominal wages are scaled differently. If the price level rises 100 fold, nominal wages will tend to rise 100 fold, but nominal interest rates won’t rise at all. Indeed right now the nominal interest is the same as in the 1930s, even though wages are 30 times higher.

    Interest rates are linked to the rate of inflation, wages are linked to the price level. Those are very different concepts.

  302. Gravatar of Potpourri Potpourri
    1. August 2011 at 13:20

    […] wonder what would happen if crazy inflationist Scott Sumner took on the crazy inflationist MMTers? Here ya go, courtesy of the above […]

  303. Gravatar of Philip Pilkington Philip Pilkington
    20. August 2011 at 11:58

    Across the blogosphere quite a few folks sympathetic to MMT have been led down a wayward path by Sumner’s imprecise use of language (or maybe it was the MMTers in the comments section, I don’t know).

    To put the criticised statement accurately: ‘Bank lending is not reserve-constrained’. Therefore they can loan out reserves if they want “” although, I imagine this will be something of a rare occasion, who takes out cash loans apart from dope dealers? “” but they will not take their reserve position into account in making this loan. They’ll make the loan if the prevailing interest-rate and other variables favour it. Then they’ll borrow on the interbank lending market to make up their reserve position at the end of the accounting period.

    So the big question is: ‘Is giving a cash loan out straight from the vault loaning reserves?’. Yes and no. Physically, yes. But operationally, no; as the amount of reserves has no bearing on the loan.

    Maybe Sumner was confused by the didactic statement ‘Banks don’t lend reserves’, but as an economist he should have seen what this meant. He should have realised that people were speaking from an economic or operational perspective and not ‘physically’.

    That is why I suspect he was engaging in shallow rhetoric (as usual). Which, given his statement about MMTers being ‘arrogant’, is remarkably ironic. And given that he accuses them of being ‘too literal minded’, is doubly so.

  304. Gravatar of ssumner ssumner
    20. August 2011 at 16:08

    Philip, No I wasn’t trying to be disingenuous. I actually have trouble following the argument of the MMTers, like 99.9% of other non-MMT economists. It would greatly help if they would actually say what they mean. Time and again I catch them making inaccurate statments, and then they say “well, that’s not really what I meant.” Well then what is the point of MMT? We all agree that a bank can make a loan and then scramble for funds in the ff market. That’s not controversial. But that fact, by itself, has zero implications for things like the money multiplier, which is a theory about equilibrium ratios of various aggregates. And we all agree that if the central bank is targeting interest rates then even in the aggregate the banking system can make more loans, and in aggregate scramble for more funds from the Fed. But again, that fact has no implications for the money multiplier. You’d need a model explaining when and why the central bank adjusts its interest rate target to work out the implication of the Fed’s targeting regime.

    It’s also not true that mainstream economists assume the money multiplier is constant, indeed the number one textbook (Mishkin) spends a lot of time modelling changes in the money multiplier. I happen to think the money multiplier is not a useful concept, but when I read MMT criticism of the multiplier, it almost makes me want to defend it.

  305. Gravatar of Philip Pilkington Philip Pilkington
    20. August 2011 at 19:08

    Look, there is no money multiplier. Banks do not lend in relation to their reserves. You can check this out yourself — look at their balance sheets. They DO NOT check their reserves before lending.

    Their lending decisions are based on their ability to turn a profit. So, if the the banks are able to lend to desirable customers at rates that they think profitable — they will lend. Their rates are predominantly based on the interest rate set by the central bank.

    This has NOTHING to do with reserves. They make loans based on the interest rate and that’s (almost) it.

    And if this is the case then this nonsense of the ‘money multiplier’ is just crap. It always has been. We see it in QE. We see it everywhere. For the love of God, we have to get over this. It’s pathetic!

  306. Gravatar of W. Peden W. Peden
    20. August 2011 at 19:25

    Philip Pilkington,

    Except that you can get monetarism without banks “checking their reserves”. Which is why MMT is so worthless.

    Also, talking about the relationship between the monetary base and broad money in a post-IOER economy as if the US still had a non-interest bearing monetary base is hopelessly outdated. Why had “Modern” Monetary Theory not kept up with developments since October 2008? Indeed, why should it be called “Modern” Monetary Theory if it’s (a) basically Chartalism, (b) supported by outdated criticisms, (c) its adherents are engaged in half-century old amour with ancient accounting identities, and (d) MMT’ers, when they think about the subject at all, use a pseudo-Marxian theory of the price level that hasn’t been defensible at the microeconomic level for well over 100 years?

  307. Gravatar of Philip Pilkington Philip Pilkington
    20. August 2011 at 19:42

    “Except that you can get monetarism without banks “checking their reserves”. Which is why MMT is so worthless.”

    Fascinating… explain. How does monetarism operate without reserve constraints? Please do tell… You need to control the money supply… how on earth do we do this…

    P.S. This is where my bullshit detector goes off… but hey…

  308. Gravatar of W. Peden W. Peden
    20. August 2011 at 20:13

    “Fascinating… explain. How does monetarism operate without reserve constraints? Please do tell… You need to control the money supply… how on earth do we do this…

    P.S. This is where my bullshit detector goes off… but hey…”

    Quite straightforwardly. To quote… Myself-

    “M0 > asset markets > nominal wealth > creditworthiness > broad money > M*V = P*T”

    The problem with most monetary theory (including MMT) and macroeconomics generally is the lack of emphasis on assets. There’s a long tradition of focusing on INCOME rather than WEALTH, when wealth is obviously more important.

  309. Gravatar of W. Peden W. Peden
    20. August 2011 at 20:23

    (There are other channels of course. That’s just an example of a channel that isn’t dependent on the central bank’s lending. The exchange rate is another obvious channel.)

  310. Gravatar of ssumner ssumner
    21. August 2011 at 08:53

    Philip, You said;

    “Look, there is no money multiplier.”

    This is the sort of statement that drive me nuts. The money multiplier is M2/MB, or M1/MB. It is simply a ratio. It is nonsensical to say it doesn’t exist. It would be like saying the money supply doesn’t exist, or a better analogy would be velocity doesn’t exist.

    What people usually mean when they criticize the MV=PY equation is that V isn’t constant. And when they say there is no money multplier, they mean it’s not constant. But everyone accepts that. MMTers tend to deny the neutrality of money. Since a stable money multiplier (in response to an increase in the montary base) is a correlary of the neutrality of money, it’s no big surprise that they deny the multiplier would remain fixed if the base were increased.
    The fact of the matter is that some increases in the base do increase M2, and some don’t. I don’t consider the money multiplier to be a useful concept, but not because it doesn’t exist–rather I don’t beleive changes in M2 are all that interesting.

    You said;

    “Banks do not lend in relation to their reserves. You can check this out yourself “” look at their balance sheets. They DO NOT check their reserves before lending.”

    This is a perfect example of the fallacy of composition. Sure, individual banks can make new loans without reference to their reserve balances, but that has no bearing on the question of whether reserve balances constrain the entire banking system. It would take hours to discuss all the factors that affect that impinge on that relationship.

    You said;

    “This has NOTHING to do with reserves. They make loans based on the interest rate and that’s (almost) it.”

    Again, true for the individual bank, but not true in aggregate. The level of reserves affects the interest rate in very complex ways.

    Suppose you double the base, and money is neutral in the long run. Then loans will also double in the long run, and interest rates will remain unchanged in the long run. MMTers would say if the interest rate doesn’t change, then the amount of loans shouldn’t change, but that confuses real ands nominal values. If the base and the price level and the amount of loans all doubles, then real values of those variables would not change.

    You said;

    “And if this is the case then this nonsense of the ‘money multiplier’ is just crap. It always has been. We see it in QE.”

    This is what drives mainstream economists crazy. The textbook model does not predict that QE should have raised M2. If you think it does then you don’t understand mainstream economics. The textbook model deals with high powered money. The Fed did not inject high powered money during QE. But even if the Fed had, the mainstream model does not predict that more base will increase M2 when interest rates are near zero. Take a look at Mishkin’s text, which is the number one money text.

  311. Gravatar of Warren Mosler Warren Mosler
    21. August 2011 at 12:22

    mmt says loans ‘create’ deposits and with current institutional arrangements lending is not, at the macro level, reserve constrained.

    In the very short term lending is capital constrained but capital is endogenous and always available at sufficient return on equity reasonably quickly.

    Therefore, lending is constrained by the availability of credit worthy borrowers desiring to borrow, and not any concept of ‘available funds’

    see ‘soft currency economics’ at http://www.moslereconomics.com and ‘full employment AND price stability’ as well

    i have never said, nor meant to imply, that if the interest rate doesn’t change loan volume won’t change

    Warren Mosler

  312. Gravatar of ssumner ssumner
    22. August 2011 at 05:35

    The term “constrained” is ambiguous. It could mean that more reserves are a necessary condition for more loans (generally not true at the margin) or it could mean that more reserves will cause more loans in nominal terms (often true, but not always.)

    I think in terms of equilibria. In equilibrium, is a certain policy action like to cause changes in other variables? Injection of more reserves (or to be precise more base money) does often have a causal effect on lending (especially when interest rates are not zero.)

    As an analogy, higher gas taxes tend to reduce gas demand. This is despite the fact that most people aren’t “constrained” they have enough money to keep buying the previous gas amount if they wish.

  313. Gravatar of warren mosler warren mosler
    23. August 2011 at 07:03

    reserves balances are best thought of as a residual
    of lending.

    Loans ‘create’ deposits (bank liabilities) and if that creates any reserve requirement, in the first instance that reserve requirement is an ‘overdraft’ at the fed, and an overdraft at the fed *is* a loan from the fed, and booked as such on settlement day if it still stands.

    So, as above, the causation is that loans create both deposits and reserves.

  314. Gravatar of W. Peden W. Peden
    23. August 2011 at 07:13

    Warren Mosler,

    That’s much too simplistic. For instance, if a company’s deposit balance is good, will it be easier or harder for them to get a loan?

  315. Gravatar of Scott Sumner Scott Sumner
    23. August 2011 at 07:36

    Warren, You said;

    “reserves balances are best thought of as a residual
    of lending.”

    In my view reserve balances are best not thought of at all. (Unfortunately with IOR that’s not possible.) But the monetary base is quite important, and has a strong influence on the amount of loans and deposits. When there is no IOR, then countries that increase their monetary base by 50% per year will tend to also increase loans and deposits quite rapidly (except obviously at zero rates–but zero rates are unlikely to persist long if the base keeps rising by 50% per year.) Slow the growth of base money and you will usually slow deposits and loans.

    I wouldn’t say loans create deposits, rather banks make a joint decision as to the profit maximizing level of loans and deposits. Of course none of this has anything to do with monetary policy. Drug dealers probably have a bigger impact on the demand for base money than banks, and no one models the demand for base money from drug dealers. Banks are just firms that use base money, like Walmart and other firms. The price level is detemined by changes in the nominal supply and real demand for base money. No reason to even discuss banks.

    The question of whether loans create reserves is very complicated, and depends on the Fed’s policy for adjusting interest rates. If they target the base, loans may create some reserves by attracking cash held by the public into the banking system.

    If they target interest rates, then you need to look at the Fed’s policy for adjusting rates. If they follow a Taylor Rule, then if an increase in loan demand threatens to raise inflation, this will cause the Fed to riase rates, which will prevent the base from rising as much as if the Fed didn’t raise rates. One can’t make any simple generalizations based on accounting identities, it depends on the equilibrium outcome of many decisions made by many parties.

  316. Gravatar of warren mosler warren mosler
    23. August 2011 at 10:15

    I’d say you have your causation reversed.

    Loan growth is the cause with floating fx policy.
    Without reserves constraining lending, the CB is left to set the term structure of ‘risk free’ rates. And rates are not a function of loan demand or loan volume. It’s the fed’s reaction function that causes them to change rates, not market forces per se.

    Loans are reserve constrained only with fixed fx policy with reserves rationed by the resulting interest rate.

    Lots of good Fed and other CB literature on all this on the Fed’s websites.

    And not that it matters, but I’ve been an ‘insider’ in monetary operations for almost 40 years now, and everyone I’ve met in Fed’s monetary affairs from Don Kohn to Vince Reinhart and all the staffers knows all this as ‘goes without saying’, if that matters. Charles Goodhart has been writing about this for 50 years or more, as have numerous Central Bankers familiar with debits and credits of actual monetary operations.

    And looking around the world today the fixed fx regimes like HK all have interest rates that vary with market forces, while all the floating fx regimes like the US, UK, Japan, ECB vote on their interest rates.

  317. Gravatar of ssumner ssumner
    10. September 2011 at 08:01

    Warren, I don’t see how loan growth is a useful way of thinking about monetary policy. Imagine monetary policy in a country without loans or banking. Now ask what the transmission mechanism is for policy in that case (I say the hot potato effect.) In that case I’d argue that this transmission mechanism still applies if you add banking to the model. Yes, banks use money, but so does Walmart and drug dealers. No one thinks it’s essential to model Walmart and drug dealers in a monetary model.

    The CB can’t set the term structure of market interest rates indefinitely, because that would leave the price level indeterminate. When the Fed cuts short term rates, it is not unusual to see long rates rise. I don’t think that is intential on the Fed’s part, it is the market reaction to how the cut in short rates will affect future NGDP growth, and then an anticipation of how the Fed will react to that future NGDP growth (via Taylor Rule, etc.)

  318. Gravatar of Some People See the World As It Is, Some As It Ought to Be. Then There Are Economists | Mike the Mad Biologist Some People See the World As It Is, Some As It Ought to Be. Then There Are Economists | Mike the Mad Biologist
    15. September 2011 at 18:09

    […] 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”) […]

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  322. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 01:59

    Speaking of Romney I was just over at Politico to see his latest flip flop. Last week he was agreeing with the WH that the mandate is a penalty not a tax.

    Now the GOP has gotten to him and he’s calling it a tax. Look I really don’t care if you want to call it a penatly or a tax-I just call it the law of the land. But Romney as usual is so transparent.

    Does he really have no sense of irony in running on repeal and replace-with the real emphasis on repeal? How about the GOP base? They now are saying the only hope to defeat Obamacare is to elect Romney. So the guy who invented Obamacare-Obamacare=Rpmneycare-is now the only guy who can stop Romneycare-I mean Obamacare. It gets confusing.

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    20. June 2013 at 12:18

    TheMoneyIllusion » Too literal-minded? A theory of the strange world of the MMTers lckdoo

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