Krugman, Keynes, and the MMTers

In the past Paul Krugman has expressed sympathy for me, deserted by most of my fellow right-wingers as I try to re-shape Milton Friedman’s ideas for the 21st century.  Now I get to sympathize with Krugman, tangling with the extremely frustrating MMTers.  Here’s how it goes.  The MMTers say X.  You show that X is not true.  They get outraged, claiming you misrepresented their views.  They never said X, they said Y!  Then you show that Y isn’t true.  Now they are even more outraged, “we never said Y, we said Z.”  And so on.   I feel a little less stupid about not understanding their views, as even a Nobel-Prize winner is apparently too dense to understand.  And yet hundreds of followers, many of whom seem to have little education in economics, have no trouble at all understanding what the MMTers are all about.  It makes you wonder.

In any case, here is Paul Krugman:

But what happens next?

We’re assuming that there are lending opportunities out there, so the banks won’t leave their newly acquired reserves sitting idle; they’ll convert them into currency, which they lend to individuals. So the government indeed ends up financing itself by printing money, getting the private sector to accept pieces of green paper in return for goods and services. And I think the MMTers agree that this would lead to inflation; I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue.

For it is. And in my hypothetical example, it would be quite likely that the money-financed deficit would lead to hyperinflation.

In the comment section, Scott Fullwiler:

Fourth, no, a deficit financed by “money” is NOT more inflationary than a deficit financed by bonds. There’s a very simple reason for this–it is operationally impossible to finance a bond issue with “money” unless you have a zero interest rate target, in which case in your own paradigm you are in a liquidity trap.

Here’s how I’d respond to Mr. Fullwiler:  Argentina, Turkey, Brazil, Bolivia, Israel, Chile  . . . . case after case of countries experiencing extremely high inflation and extremely high nominal interest rates, all because they were monetizing their debts.  Not only is it possible, it happens almost every time a country tries to rely on money creation to pay its bills, at least for any extended period of time.  Very easy money usually makes interest rates rise.

Here’s Keynes:

“If you are held back [i.e. reluctant to buy bonds], I cannot but suspect that this may be partly due to the thought of so many people in New York being influenced, as it seems to me, by sheer intellectual error.  The opinion seems to prevail that inflation is in its essential nature injurious to fixed income securities.  If this means an extreme inflation such as is not at all likely is more advantageous to equities than to fixed charges, that is of course true.  But people seem to me to overlook the fundamental point that attempts to bring about recovery through monetary or quasi-monetary methods operate solely or almost solely through the rate of interest and they do the trick, if they do it at all, by bringing the rate of interest down.” (J.M. Keynes, Vol. 21, pp. 319-20, March 1, 1934.)

Keynes didn’t believe in a Fisher effect, unless inflation reached hyperinflationary levels.  Joan Robinson (an MMTer before her time) was even more extreme.  They were both wrong.  But modern Keynesians like Krugman have lived through decades in very high trend rates of inflation in lots of fiat money countries.   They’ve seen the Fisher Effect in action.  They’ve read Cagan’s research on money demand during hyperinflation.   That’s why they (and I) are impervious to the MMTers siren song that we can print money to pay the government bills.  Perhaps they will have more success attracting a younger economists to their, er . . . group, as the younger generation has experienced little hyperinflation, and several examples of large increases in the monetary base leading to no inflation at all (at near-zero nominal rates.)


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220 Responses to “Krugman, Keynes, and the MMTers”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. August 2011 at 20:05

    To me MMT is to the left what the Vulgar Austrians are to the right: a faith that denies falsifiability of hypothesis.

    I’m so glad I’m near the empirical middle.

    P.S. I like to think I’m just to the left of you Scott, but that we’re so close to agreement that we’re both within a hairsbreadth of the actual truth.

  2. Gravatar of Paul Paul
    15. August 2011 at 20:05

    I’m not an economist by training, but I follow a number of economist’s blogs with interest. I would be very interested in a dialog between you and Steve Keen (debtdeflation.com) and, in particular, your critique of his position regarding debt deflation.

  3. Gravatar of Morgan Warstler Morgan Warstler
    15. August 2011 at 20:17

    Jesus Christ, again?

    Scott, the shit-brain MMT answer is: those governments didn’t TAX ENOUGH, if they had raised taxes then there wouldn’t be inflation.

    Look, stop pretending that what they are doing is economics. What they are doing is asserting the one thing that is not true.

    Dirty hippies don’t count. Monetary policy AND government are actually TOOLS controlled by the holders of hard assets.

    Both of those things are run FOR THE HOLDER OF HARD ASSETS. If you don’t own anything, you do not count.

    Democracy is not some “fact” of life – it is a tolerated methodology within some boundaries.

    Example: we set up and income tax WHEN we set up a PRIVATELY OWNED Federal Reserve. Or as we say in copywriting…

    “The big print giveth, and the small print taketh away!”

    Dirty hippies DESPERATELY WANT to only read the big print, they are like some idiot showing up on the doorstep of Publishers Clearinghouse and demanding their million dollars – trust me it happens every year.

    This country is set up constitutionally to make Democracy as liberals want to practice it almost impossible.

    Little states have outsized power over big states.

    The Fed is run by and for those who own stuff.

    Corporations can spend unlimited money saying whatever they want.

    The Tea Party owns like 200M GUNS.

    These are facts. And along comes a bunch of dirty hippies who think “Man! we cont too! This is a Democracy! Give us our $1MILLION PRIZE!”

    And call it MMT.

  4. Gravatar of Morgan Warstler Morgan Warstler
    15. August 2011 at 20:25

    Sadowski,

    The hysterical thing is that Scott’s far closer to me than he is to you…. and I am far more bothered by him. I think when you read his political policy ideas you mentally block it out. Benji at least takes it all in.

    Scott is libertarian who’s just so sure that he’s got a new mousetrap, he’s so desperate to deploy it, he’s not concerned about the larger eco-system… he’s resentful of it.

  5. Gravatar of Rien Huizer Rien Huizer
    15. August 2011 at 20:28

    Scott,

    Last week a friend who had been back in Zimbabwe two years ago showed me a 10mil note -totally worthless of course , but a great souvenir as the quality of the paper was better than the ones they issued later.

    In earnest, cases like Zimbabwe where people have discovered how to use other currencies in the private sector, and early 1920s Germany are not quite the same. And 1980s Brazil with its indexing was different again. I do not think the local currency became irrelevant in either country, unlike the bizarre games played in Argentina.

    Maybe people should realize that a state that cannot extract enough to pay roughly 60% of fairly modest gvt spending (if you allow for exorbitant defence and medicare) will have difficulty to maintain reserve currency and superpower status. But the picture does look a little less bleak if one realizes that the states and municipalities do a fair bit too and usually with hard budget constraints.

    And that is the heart of the matter: fiscal policy (of whatever kind) should never equate to the soft budget syndrome. Ask the Soviet Union.

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. August 2011 at 20:37

    Morgan,
    Scott can correct me if I’m wrong.

    I believe he’s genuininely interested in good public policy. For example, he has supported the Denmark model on this blog, which despite the fact it has a large government sector, rates highly in terms of laws that favor free market activity. Furthermore, I think we are very close to each other on tax policy. I favor a progressive consumption tax, much like him, an moreover I favor it based on my own research related to growth.

    Frankly Morgan, you’re a media whore. You have about as much substance as a carton of cigarettes.

  7. Gravatar of david david
    15. August 2011 at 21:07

    The MMTers seem in fact right about how banks and money operations work in practice, but they seem wholly wrong about the resulting macroscopic effects.

    Someone smarter than me will probably elucidate why at some point.

  8. Gravatar of Morgan Warstler Morgan Warstler
    15. August 2011 at 21:42

    Sadowski, Sumner won’t correct you because it violates his goofball premise of method of teaching / swaying – apparently there is a post coming to say such.

    Anyhoo, he wants a far smaller public sector than we have now. The fact that you don’t push to find that out speaks volumes. You prefer him like Obama, a blank slate you can project on.

    —-

    NOW then let’s get to the good stuff: Rick Perry just said that printing money again before 2012 would be akin to treason, and an outright effort by Ben to help Obama in the election.

    Is he awesome, or what???

    No screwing around, no wasted words – concern for the dollars in our pockets, NOT the future dollars in people’s pockets who don’t yet have any dollars.

    Ben just got made explicitly political.

    THESE ARE THE GUYS Scott has to win and the only way to do it is shoveling red meat about the US adopting Texas style small government with every shovel in the shed.

    Because once the small government crowd is running the show, it isn’t printing money anymore, it’s rewarding the government for knowing its place.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. August 2011 at 22:02

    Morgan,
    Scott’s other preferred model is Singapore. True, it’s smaller as a percent of GDP and we disagree on that and I’ve let him know why. (A good percent of Singapore GDP is attributable to foreign labor.) But I agree with him on NGDP and monetary policy. It’s not a blank slate issue.

    Rick Perry is a flaming idiot and the electorate is about to learn that in so many ways. He thinks everything is unconstitutional, including Social Security, Medicare, any Federal regulation of the financial sector etc.

    The last thing this country needs is Texas style government. Why would we wand below par performance in GSP growth and unemployment since 2007?

    The only states that have all performed better than the median over the past three years have been states that had Democratic control of the governorship and both houses of the legislature. (Check it out.)

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. August 2011 at 23:00

    “Oh, a storm is threat’ning
    My very life today
    If I don’t get some shelter
    Oh yeah, I’m gonna fade away

    War, children, it’s just a shot away
    It’s just a shot away
    War, children, it’s just a shot away
    It’s just a shot away

    tell you love, sister, it’s just a kiss away
    It’s just a kiss away”

    http://www.youtube.com/watch?v=GJtq6OmD-_Y&feature=player_embedded#at=0

  11. Gravatar of Martin Martin
    15. August 2011 at 23:12

    Scott, I believe the MMT’ers believe financing through monetizing the debt is no more inflationary than financing with bonds as they assume taxes to be different in both scenario’s. In the first case taxes will be high to drive consumption down and in the second case this is not necessary as people voluntarily have abstained from consumption.

    Why we would want to do the first, when the second option is available, I don’t know. Their position to me therefore is that when the first fails you can always fall back on command and control.

  12. Gravatar of Lorenzo from Oz Lorenzo from Oz
    15. August 2011 at 23:24

    Mark S: Ezra Klein does not think Perry is an idiot.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. August 2011 at 23:36

    Lorenzo,
    I’ve read most of what EK wrote about RP.

    Compared to what? Bachmann, Obama, or lump of Play-Doh?

  14. Gravatar of Rien Huizer Rien Huizer
    16. August 2011 at 01:42

    Mark,

    you said:

    “A good percent of Singapore GDP is attributable to foreign labor”

    .
    Indirectly, yes (complementary to local labor on both sides of the compensation distribution; it is not a sweatshop country)

    What makes Singapore rather unique (only other country that is a bit similar in this respect is Singapore) is its ability to attract very high margin (pharma for instance, certain media) foreign owned businesses that drop a high share of group txable profits. It is more than just a tax haven (lots of other incentives and local advantages), but not the miracle that it seems. But it is difficult to copy. The employment share of GDP by income has been very low forever and the share of corporations (including the state-owned ones) is very high, because the share of proprietorships and self employed (only 70000) is also quite low. Delaware may have a similar feature.

    Of course Scott is right when he lauds Singapore’s excellent public sector management. There too, there may be a bit of a distortion due to the fact that Singapore is asset rich and that many gvt services are provided via a user pays model coupled with a business management-like approach (cost of capital etc) that keeps the bureaucrats on their toes. Oh, and of course a government controlled monopolist labor union that makes sure that labor is paid fairly and behaves. No real hardship but also nothing to scare foreign investors away. It is essentially the business model of a shopping mall cum industrial park operator applied on a national scale, with captive labor (enhanced by added foreigners as required). But, to the chagrin of the few western political scientists who follow it, it worked so far. But the model is beginning to get a bit stale. The dominant party model is under pressure and the LKY’s successors seem not to inspire the same mixture of respect and fear.

    I have always wondered what, according to Scott, it is that Singapore can teach, say, the US. Maybe how to run the public sector efficiently. They send all their top talents (of the party/government/SOE sector) to the Kennedy School of Government. If that is where they learn how to govern, maybe the US should send some top talents there as well…

  15. Gravatar of Morgan Warstler Morgan Warstler
    16. August 2011 at 02:02

    Sadowski, don’t be an idiot.

    A friend of mine is a fellow named Jon Taplin. He’s a long time limousine liberal yuppie I know from way back in the LA start up world. He now runs the USC Annenberg Innovation Lab.

    Here’s his blog: http://jontaplin.com/

    He’s how Papola and I got to know each other.

    He’s you in 20 years. He’s got far more on the ball mentally than Ezra Klein. He’s a HARD CORE PROGRESSIVE, who’s far more bleeding heart than Matty. But he’s an Internet start up guy, so he’s far more technology aware than a bunch of bloggers.

    He doesn’t LIKE that he has become a states’ rights advocate, as a 60’s radical it still caries far more memory of the racism than any of these new kids ever experienced.

    He’s a convert.

    And you know why? Because he actually TRUSTS his leftist dogma. he BELIEVES in it so much, he’s prepared to let Californians keep their tax dollars and build the state utopia he’s always wanted.

    And to get it, he’s prepared to let Texas build the one it wants.

    Ezra is an idiot. I will show you in his post where he makes the core mistakes:

    “It’s a superficially appealing vision. But it misses a few things: economies of scale, interrelated economies, and coordination problems.”

    All of these disappear with the Internet. I make that super CLEAR with my Guaranteed Income plan (which Sumner of course loves). Simple old Internet tech like Ebay and Paypal, makes it easy to do Friedman’s negative Income tax, and auction off all the excess capacity for $ per hour auctions… to reduce the cots of the program. BTW, it ends unemployment.

    The Internet scales any GOV2.0 program OVERNIGHT, the moment one state shows some new program works, it will become part of the online dashboard of other states CHOOSE to offer.

    “In other cases, the problem with state-by-state regulations aren’t as apparent until disaster strikes. Take a hedge fund that is Too Big to Fail.”

    At this point, Ezra shows why he’s a poseur. The entire premise or Rick Perry is that NOTHING is TBTF, not even state governments.

    And if Ezra was being intellectually honest he’d catch himself by thinking, “wait, Rick Perry doesn’t believe in TBTF,” note Ezra just ASSUMES that in the future some hedge fund will be bailed out, let alone a shitty state.

    Just look at Greece. Just look at Italy.

    There is something DEEPLY wrong with Ezra acting like a wonk. That’s a 120 IQ mistake right there.

    You adopt Rick Perry / Morgan / Taplin style states’ rights because you want to see the states themselves FINALLY face the music. So we can figure out who is right. It’s time to go all in and turn the cards and get on to the next chapter in our history.

    Because one of us is RIGHT. And one of us is WRONG. And over the long term, just like the Euro (each state already has a balanced budget amendment), we will see and learn what kind of workfare / welfare, what kind of public employee system, what kind of state education system, what kind of tax system, social rights, etc is best.

    BTW, Sumner is surely a states’ rights guy.

  16. Gravatar of Master of None Master of None
    16. August 2011 at 03:53

    Scott,

    Regarding the ability of the US govt to finance itself via bond issues, does it concern you at all that the weighted average duration of maturities on US debt has gotten shorter over time (is this even true?)?

    I have heard this cited as a “major issue” that explains the lower long term rates we’ve seen (due to declining supply) and that increases the risk of a sharp rise in interest rates whenever the duration starts to increase. (I know, I know, never reason from a price change).

    If this is the case, what’s the right “playbook” for Treasury over the next 3-5 years? I would think they should start issuing more 10-30 yr bonds at 2.27-3.73%; increase the duration now while rates are low (if you believe the Fed will eventually be successful).

  17. Gravatar of marcus nunes marcus nunes
    16. August 2011 at 04:00

    Bruce Bartlett is “almost there”!
    http://economix.blogs.nytimes.com/2011/08/16/its-the-aggregate-demand-stupid/

  18. Gravatar of John Thacker John Thacker
    16. August 2011 at 04:41

    The only states that have all performed better than the median over the past three years have been states that had Democratic control of the governorship and both houses of the legislature. (Check it out.)

    I’m pretty certain this is false, simply because I checked North Dakota.

    “Why would we wand below par performance in GSP growth and unemployment since 2007?”

    Surely you know that any argument insulting a state because too many people (including a lot of poor people) are moving there is stupid, right?

    Treating internal and external migration as some sort of exogenous variable is ridiculous. So is pretending that chasing away poor people by making it too expensive for them to live there is a good thing.

    Texas’s land regulation policies (i.e., the lack of them) have done more for the working class and middle class than most all anti-poverty programs in blue states.

  19. Gravatar of John Thacker John Thacker
    16. August 2011 at 04:42

    NB: Of course I’m willing to concede that North Dakota has some important natural resource reasons behind its economic boom, but from what I can tell of the figures, they’ve certainly beaten the median on both GSP and unemployment over the last three years.

  20. Gravatar of q q
    16. August 2011 at 04:57

    the main difference here is that the MMTers have zero political power whereas the hard money types have considerable power in conservative circles.

    in fact you could say that’s one of the main differences between the dems and repubs. dems are more than willing to throw their radical fringe under the bus at the drop of a hat – repubs won’t do it no matter what the cost.

    i have an unrelated question, while we are on the subject of tortured logic. i am always puzzled by people saying that low interest rates can cause a commodity price spike (usually people mention food, gold, oil after this). i don’t understand how this could happen (i mean x causing y) unless there were extreme short term inflation expectations – which we know there aren’t. do you understand what people are thinking here?

  21. Gravatar of TC TC
    16. August 2011 at 05:08

    One of the strangest things about being an MMTer is that you get “refuted” by people, and the points they bring as counter to MMT end up supporting the MMT interpretation.

    Scott, you don’t understand MMT. You are very, very far away from understanding MMT. Nick Rowe is a bit closer, but still very far away. Paul Krugman is very far away from understanding.

    When you can explain MMT in such a way that a MMTer would agree with your description, we can have a discussion. Until then, you might want to think about why Scott Fullwiler wrote what he wrote, because he knows about Israel, Turkey, Argentina, Brazil, Bolivia, Zimbabwe, Poland, Yugoslavia, ect.

    He is not ignorant of these cases, nor does MMT ignore them. In fact, I look at these cases as being great examples of why MMT helps to understand the world better.

    If you cannot make sense of how an MMTer would makes sense of these situations and consider them to be great examples for MMT and not against MMT, then…

    Your comments about Canada and Australia as running counter to MMT were better comments. MMT says the government sets prices for lots of things, even when it doesn’t do it directly. Much like setting short term interest rates impacts the long end of the curve, prices paid by the government for labor and goods impacts related markets.

  22. Gravatar of Morgan Warstler Morgan Warstler
    16. August 2011 at 05:20

    TC,

    True or false: MMT says Zimbabwe failed to tax the printed money back out of the system and that’s what caused hyperinflation.

    See. I make perfect sense of MMT.

    q,

    You are closer to right. BUT you made the same dumb mistake, you pretend Dems and Repubs are somehow on opposite sides of the field. They aren’t. Dems get their money from the same place as Repubs. So it is wrong for you to PRETEND the Dems have a natural affinity for MMT.

    Most Dems are not DeKrugman, because most Dem donors are not DeKrugman.

  23. Gravatar of Morgan Warstler Morgan Warstler
    16. August 2011 at 05:30

    marcus nunes,

    Why doesn’t Bruce Bartlett or you for that matter simply advocate paying public employees $400B less each year and use the money to pay 16M unemployed $25K a year a piece to rub my back?

    Public employees would still be earning what they made in 2000 plus inflation.

    Why is there a AD problem? We just are paying public employees too much money.

  24. Gravatar of TC TC
    16. August 2011 at 05:33

    Morgan,

    50% on the test. Not as bad as some.

  25. Gravatar of TC TC
    16. August 2011 at 05:43

    Morgan,

    Actually now thinking ’bout it, more like 25%. Still better than some, but also still an F.

  26. Gravatar of TC TC
    16. August 2011 at 05:47

    Some people considered this to be helpful in understanding MMT.

    http://wp.me/p1b5Ih-jn

  27. Gravatar of TC TC
    16. August 2011 at 05:50

    See also Interfluidity’s posts on MMT.

  28. Gravatar of Scott Sumner Scott Sumner
    16. August 2011 at 05:51

    Mark, Yes, focusing on empirical evidence is a key.

    Paul, I don’t know him, but I’m not a fan of debt deflation theories. Deflation does cause debt problems, and often causes recessions, but for unrelated reasons.

    Rien, I’m not too worried about inflation in the US.

    Mark, Yeah, we are fairly close. I favor progressive consumption taxes. I like Denmark, but like Singapore’s fiscal model a bit better–only because I prefer forced saving to forced taxes.

    David, I don’t even think they understand banks. Several posted comments to the effect that banks never make loans in cash. Never? Suppose I borrow $8,000 and ask for the money in cash? How’s that not a loan in cash?

    Morgan, You said;

    “Anyhoo, he wants a far smaller public sector than we have now.”

    The conservative Heritage Foundation ranks Denmark as more capitalistic than America. Are they sellouts too?

    Mark, I do like the Texas model, people are moving there in droves for a reason, but don’t like Perry, who reminds me of Bush.

    BTW, Gimme Shelter is one of my favorite songs–and Texas is very good at that!

    Martin, But we know that monetizing the debt is highly inflationary, unless rates are near zero. And we know that if you are not in a very low inflation rate recession, then monetizing the debt doesn’t drive interest rates to zero.

    Rien, You asked:

    “I have always wondered what, according to Scott, it is that Singapore can teach, say, the US.”

    I’ve been very clear on this, we need to replace our high income tax/social welfare model with a low consumption tax, forced saving model. That’s what Singapore means to me. Of course I also like it’s low corruption, free trade, good environmental policies, etc, etc. But replacing taxes with saving is the key.

    Master of None, I think it’s a mistake to assume the US can out guess the bond market. If long rates are low, that’s because markets think future short rates will be low. I don’t have strong views on the optimal distribution of maturities.

    Marcus, Yes, he certainly gets the need for AD, but is too pessimistic about monetary policy.

    John Thacker, I agree about Texas.

    q, I agree, commodity prices fell sharply as interest rates fell sharply in 2009.

    TC, If Fullwiler knows about those cases, why does he continue to insist that monetizing the debt is not inflationary? That’s flat out wrong.

    I’ve read Nick Rowe’s comments on MMT, and I completely agree. I don’t see a difference between his view and mine.

  29. Gravatar of Scott Sumner Scott Sumner
    16. August 2011 at 05:53

    TC, I must have read a half dozen posts that are supposed to explain MMT, and not one was clearly written. Not one clearly distinguished between real and nominal variables. All suffered from the fallacy of composition.

  30. Gravatar of Anon1 Anon1
    16. August 2011 at 06:02

    TC:

    MMTers will always be a marginal, fringe school of thought. They don’t know acknowledge the importance of the natural rate of interest, they don’t see the difference between short-term endogenously-determined money supply vs. long-term exogenously determined money supply, and they have no good theory for the price level. Moreover, they have a self-righteous tone topped off with a persecution complex. In short, both the MMT message and the MMT messengers leave a lot to be desired.

  31. Gravatar of Floccina Floccina
    16. August 2011 at 06:05

    I have had MMTers tell me that they are talking about monetized a tiny amount of money that they will tax back once target inflation is reached.

  32. Gravatar of David Pearson David Pearson
    16. August 2011 at 06:13

    “…it happens almost every time a country tries to rely on money creation to pay its bills, at least for any extended period of time.”

    True but ironic. Even with unrealistic growth forecasts, Treasury will need out-sized financing for years. As long as the Fed tries to stimulate real growth, it will provide that financing. In these conditions, stimulus is a huge gamble. If it pays off (produces real growth), deficits will be cured. If it does not (produces mostly inflation), the Fed will be trapped into supplying financing for, “any extended period of time.” Maybe the gamble is worth it, but as in any bet, its important to understand the downside risk.

    Can you imagine what would happen to out-year deficit projections if the Fed tried to tighten with 8%+ unemployment?

  33. Gravatar of Morgan Warstler Morgan Warstler
    16. August 2011 at 06:17

    Scott, why?? I don’t care if you like Denmark, according to countless posts here your PREFERRED system here entails far less government than Denmark.

    I like Singapore too – and if our public employees learn to work as efficiently as possible here, I’ll like them too.

    But my PREFERRED system here entails far less government in part because I think public employees here are unable to operate like they do in Singapore.

    Or Denmark for that matter – to me the obvious issue is that we are a nation of immigrants, we’re not all descendant form the same tribe. People stop sharing easily when the other guy is a foreigner. It’s a negative on the ledger, but there are positives as well.

  34. Gravatar of Floccina Floccina
    16. August 2011 at 06:19

    Morgan Warstler, as long as we have a central bank shouldn’t we push it to act like free banks would in a free banking economy? That is to spend/create money in the face of deflation.

  35. Gravatar of TC TC
    16. August 2011 at 06:26

    Scott,

    You just had a post where you said that inflation is a made up number. If inflation is a meaningless concept made up, then why are you worried about real vs. nominal for MMT?

    The core idea for MMT is that insolvency is impossible, debasement is possible. Fiat countries can always create money, but the money might be worthless.

    It is important to know that a country cannot go broke because it removes the idea of insolvency from bond market yields. There is no insolvency risk for a true fiat currency without a debt ceiling.

    As a result, the bond market shows us inflation expectations, and that’s it. There isn’t default risk in treasuries, because default is impossible.

    This is one reason why MMT is powerful and useful. It eliminates a variable.

  36. Gravatar of John Thacker John Thacker
    16. August 2011 at 06:44

    “in fact you could say that’s one of the main differences between the dems and repubs. dems are more than willing to throw their radical fringe under the bus at the drop of a hat – repubs won’t do it no matter what the cost.”

    While I do think that the Republicans are more wedded to hard money than the Democrats to MMTers, I must have missed where the unified Republican government from 2002-2006 tried to outlaw abortion, cut spending, etc.

    The GOP radical fringe feels just as heavily that they are the ones constantly sold out by the “DC business as usual” crowd as the Dems’. Of course, you can simply redefine what the “real” radical fringe or goals of each party is, but the same sort of paranoia (with some basis for truth?) is present in both parties.

  37. Gravatar of Diatom Diatom
    16. August 2011 at 07:11

    Scott S:
    Just wrote a comment for the last 37 mins, but the stupid laptop trackpad clicked and I lost it all arrrrghhh!! Key points:

    1) I am the proud owner of a bachelors degree in econ. Proud because it required hard work and I was the top student in my classes by a long shot. The professors would have me in their offices and homes and run their ideas by me. Don’t forget how our education gave us new perspectives. MMT exists to tell us some of those perspectives need re-evaluating at the bottom level. That’s why professional economists struggle making sense of MMT maybe more than people starting from the beginning. Mind you, you should learn from the PhD’s+Mosler, not their students if you want guaranteed accurate and complete information.

    2) You believe there is a direct link between price level and base money. You need to provide data and a transmission mechanism to support this. Just saying Brazil, Israel etc isn’t helpful. MMTers say the transmission mechanism is the action of spending. As much as your neighborhood convenience store would love to raise their prices in response to a greater monetary base, they’ll find that if they raise their prices they’ll end up with unsold spoiled milk. MMTers say tsy secs and cash are highly fungible. You never hear someone say, I wish the government would pay off the debt so I could make a purchase. You can sell a tsy sec very easily and buy something should you wish to.

    3) Reserve requirements: In the real world banks are legally required to hold reserves using a backwards looking complex formula. The Federal Reserve is the only institution capable of creating reserves. The way open market operations work is by draining or injecting reserves into the banking system. When the government sells a treasury security, it can only be paid for with reserves. The bank exchanges with the government one asset (reserves) with another (tsy sec). Now the banking system has fewer reserves. Profit seeking banks with excess reserves have a choice between lending in the Fed Funds Market to banks who need to meet their reserve requirements or buying tbills. The reverse happens if the Fed wants to inject reserves. They are perfect substitutes, you’ll notice how the FFR and short term govt debt earn the same rates.

    It should be recognized that the fed supplies/drains whatever quantity of reserves is necessary to hit their target. Failure to do so would cause an unstable FFR since banks wouldn’t be able to attract cash deposits as needed.

    Bankers and MMTers will tell you that that their loans are capital constrained, not reserve constrained as we learn in school. Reserves are used for meeting reserve requirements and settling payments. That’s it.

    Lastly, since you are on this topic, you might want to take a look at Scott F’s last response to Krugman. You can get everything from the horse’s mouth rather via his students. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799068

  38. Gravatar of johnleemk johnleemk
    16. August 2011 at 07:21

    Economic policy-wise, other than his harebrained remarks on monetary policy, I can live with Rick Perry. (Then again, I’d say the same for Ron Paul.) But temperamentally, the guy’s just George W. Bush all over again, and I don’t know how well that bodes for US foreign policy if he gets elected. That’s why if I had a vote, I might cast a protest vote for Ron Paul, but never for Rick Perry.

    Perry’s not stupid, and neither is Dubya (it’s difficult to win state- and/or national-level elections if you’re stupid). Perry’s even more intellectual than Dubya. Bachmann isn’t stupid either, but much less intellectual than Perry. Perry may be smart and intelligent, but his political persona will just never appeal to guys like me (and I think Scott seems to also be of a similar persuasion on this).

    Ezra Klein’s critique of Perry’s federalist vision doesn’t seem that well-founded to me. I am fine with federal power — one issue I strongly disagree with Ron Paul and likely Rick Perry on is the Civil Rights Act, which I think clearly needed to intervene in commerce for the protection of human life and liberty. But Scott has persuaded me on the point that most countries are too centralised these days (one big point in Denmark’s favour — it is small and relatively decentralised). I don’t agree with either Perry or Klein, but on federalism I’m closer to Perry. He’s still too damn loose on the trigger for me to think about supporting nonetheless.

  39. Gravatar of beowulf beowulf
    16. August 2011 at 07:36

    “I feel a little less stupid about not understanding their views, as even a Nobel-Prize winner is apparently too dense to understand. And yet hundreds of followers, many of whom seem to have little education in economics, have no trouble at all understanding what the MMTers are all about. It makes you wonder.”

    Now that part is easy to figure out. Look at this way, it was lucky for Paul Douglas (who quit UChicago to enlist) the Marines don’t teach economics at boot camp.
    Many of the best marksmen in the Marines had never fired a rifle before joining the Marines. They had the advantage of not developing a particular style. If you shoot enough to develop your own method you will have to unlearn this in the Corps.
    http://www.wikilawnet.org/forum/Military/What-is-the-most-common-sniper-rifle-used-in-the-marines-73493.html

    while investigating some random fire… Douglas was shot at as he uncovered a two-foot-wide cave. He then killed the Japanese soldier inside at which point he wondered whether his enemy might be an economics professor from the University of Tokyo.
    http://en.wikipedia.org/wiki/Paul_Douglas

    That’s unlikely or the dying soldier’s last words would have been “Cobb-Douglas lacks microfoundations”. But the point is, its easier for an economists to learn marksmanship from scratch than it is to learn a new style of economics. Likewise, Newcomers to macroeconomics without old habits to un-learn can pick up the new thread faster.

  40. Gravatar of Morgan Warstler Morgan Warstler
    16. August 2011 at 07:39

    Obama is on schedule to have oversee more US soldiers killed than Bush in his first term. AND john, you KNOW Obama is only there because he doesn’t want to look weak, not for something he believes.

    Whether folks like it or not, invading Iraq made sense strategically – it was more than debatable. Oil is a strategic asset worth fighting for. After 911, it was obvious that we needed to make sure we had a backup gas station in case the House of Saudi couldn’t control their crazies any longer. Keeping the straits of Hormuz from becoming a Iranian chock point mattered then and still matter now.

    WTF we are doing in Afghanistan I have no frigging clue. A young man from my home town was killed there last weekend, and I have no idea what strategic interest we have there.

    So john, while I’m totally comfy with Ron Paul too, I don’t know HOW you can pretend Obama isn’t a far uglier commander in chief than Bush or Perry will be.

  41. Gravatar of Benjamin Cole Benjamin Cole
    16. August 2011 at 07:41

    It is getting ugly out there. Happily Perry is a closet queen, and will have to step out of the race soon. At least I hope so.

    Perry Says Fed Spending Before Election Almost ‘Treasonous’
    August 16, 2011, 10:49 AM EDT
    MORE FROM BUSINESSWEEK

    By John McCormick

    Aug. 16 (Bloomberg) — Texas Governor Rick Perry, finishing his first full day of campaigning for the U.S. Republican presidential nomination in Iowa, said it would be “almost treacherous — or treasonous” for Federal Reserve Chairman Ben S. Bernanke to increase stimulus spending before the 2012 election.

    “If this guy prints more money between now and the election, I don’t know what you would do with him,” Perry said at a backyard appearance in Cedar Rapids, Iowa. “We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous in my opinion.”

  42. Gravatar of Morgan Warstler Morgan Warstler
    16. August 2011 at 07:49

    Floccina,

    “Morgan Warstler, as long as we have a central bank shouldn’t we push it to act like free banks would in a free banking economy? That is to spend/create money in the face of deflation.”

    No. If we have a central bank we should push it to corrupt the worst parts of Democracy: so VOTES matter less than OWNERSHIP OF THE HARD ASSETS.

    Please respond so I know you understand this first point.

    You say “we” and I don’t know who you are talking about. If you mean “we” the dirty hippies who don’t own anything meaningful, realize I don’t think they count at all. All they get to do is vote.

    You can’t ASSUME we are a Democracy where voting is the only method of power.

  43. Gravatar of Morgan Warstler Morgan Warstler
    16. August 2011 at 07:57

    Benji, if only he were gay…. I campaign even harder for him!

    One of my best business partners is a Gay Republican from Texas with a dog named Reagan. He went to A&M with Perry and knew him a bit afterward. He doesn’t think he’s gay. I spent years in gay circuit party scene, and while I don’t have perfectly tuned gaydar, having met Perry I sure didn’t sense any queen in him.

    But if he is, I hope it comes out after he is President. It’d do wonders for the GOP’s id.

  44. Gravatar of Ivona Poyntz Ivona Poyntz
    16. August 2011 at 08:05

    I do not think that quantative or credit easing necessarily equates to government monetizing its debt. Yea, money is ‘printed’ to stimulate the economy rather than to pay government bills. And no, its not the same thing.

  45. Gravatar of Benjamin Cole Benjamin Cole
    16. August 2011 at 08:12

    Morgan-

    Look, I live on the edge of West Hollywood, so you know I don’t give a crap about anyone’s sex life.

    That said, Perry strikes me as a closet queen, and that’s the word on the street. I find it amusing that the GOP is swooning before his feet. Well, he does have great hair. He strikes as a John Edwards type–courting disaster while pettifogging about morals.

    I don’t see Perry trumping Obama in any debate. I expect he will not debate Obama, and simply go straight to Fox, braying that the media is biased.

    Well, we have a great show in front of us. The GOP is shaping up as The Gong Show on steroids.

    If Bachmann is on top, will Perry stick it out and go into her No. 2 slot? Hah-ha.

  46. Gravatar of Adam2 Adam2
    16. August 2011 at 08:22

    Hi John Thacker, Texas also has high land taxes. And I have read a more regulated mortgage market.

    California on the other hand has prop 13 and regulators looked the other way when Mozillo turned his bank into a Ponzi scheme.

  47. Gravatar of Tschäff Reisberg Tschäff Reisberg
    16. August 2011 at 08:32

    Dr. S:

    I’m sorry to hear you think MMT intros suffer from the fallacy of composition. I’ve never noticed this, can you please enlighten us?

    I’m witnessing your frustrations because MMT ideas come into conflict with your existing ideas and prevent you from seeing the logic in MMT. I think this paper here might be the cure: http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf I picked that one because it explains whats wrong with orthodox thinking and replaces it systematically with something better.

    I appreciate you’re engagement with your critics, and your willingness to consider MMT. Genuine curiosity puts you miles ahead of the pack.

  48. Gravatar of Floccina Floccina
    16. August 2011 at 08:37

    Morgan Warstler,
    No. If we have a central bank we should push it to corrupt the worst parts of Democracy: so VOTES matter less than OWNERSHIP OF THE HARD ASSETS.

    Are you saying that the fed should do a bad job so owners of hard assets can wrest some power away from democratic Government?

  49. Gravatar of TC TC
    16. August 2011 at 09:26

    Tschaff,

    I agree – Scott is at least engaging. Note that his NGDP target idea isn’t really all that far removed from what a MMT might propose.

    I also wonder if the Kocherlakota paper where he argues we can relax the constraint that the CB will allow the Treasury to default might be useful. The thought that the CB could force a Treasury to default is so ingrained into monetary thinking. Sometimes people forget it’s a self-imposed constraint, and was consciously done to prevent the fiscal side from impacting price levels.

    Basically, the threat of the CB refusing to buy those bonds imposes the will of the CB on the Treasury, regardless of the market impact. We can see this in Europe right now, where the threat of default is very, very high, but the inflation rate is quite low.

    So far, the ECB has saved the day over and over again. Of course they can do this in any quantity they want, they could force Greek yields down to any level. The SMP is like QE, and inflates the ECB balance sheet.

    Who could/would force a bankruptcy on the ECB? Through what channel can anyone do this?

    That threat of default forces fiscal consolidation on the european countries by forcing the yield to “unsustainable” levels.

  50. Gravatar of Martin Martin
    16. August 2011 at 10:23

    “Martin, But we know that monetizing the debt is highly inflationary, unless rates are near zero. And we know that if you are not in a very low inflation rate recession, then monetizing the debt doesn’t drive interest rates to zero.”

    Scott, imagine a closed economy and 100% tax rate, where is the inflation going to come from now? The government can’t consume more than what the economy produces and there is no one else to consume.

    Their position – as I understand it – is that you can pick any position between 0% taxes and 100% taxes and printing money won’t be inflationary as long as you pick the appropriate tax rate.

    It reminds me a bit of price controls and rationing during the war, that was instituted I believe, to prevent (price) inflation?

  51. Gravatar of Peter D Peter D
    16. August 2011 at 10:44

    Guys, the problem seems to be that you think that issuing bonds will NOT be inflationary. This ignores:
    a) the interest rate , which is disinflationary
    b) the fact that the savers mostly decide to save in advance and only choose the vehicle of savings later. So, if no govt bonds are available they move into the next available alternative. Bringing consumption forward almost never happens.
    c) now, it is true that the private sector on the whole may not be able to meet its savings desires. But this is hard to know in advance. The preference to holding cash may change. The inflation may spill into some asset classes and not the others (for example, speculative rise in the price of oil may impact some prices in the economy but actually depress others, as demand for those gets “crowded out”)
    d) maybe most importantly, all your examples of high inflation would not have been solved by bond issuance either. You might be able to delay inflation, exacerbating it in the process by paying higher and higher interest rates on the bonds. That is, the problems with the above economies were not money printing per se, but more fundamental ones. At some point in time each had to pick its poison – print money now or delay printing even money later. This was the point of Krugman’s France example, even though I am not sure he realized that (although he acknowledged that the money printing “poison” turned out exactly “what the doctor ordered”.)
    e) MMTers don’t deny that there can be differences or the economy if you print or issue bonds. But sometimes the they might go exactly in the opposite direction of the conventional wisdom. Instead of hitting a moving target with an unsteady aim of monetary policy (I think Jamie Galbraith used the metaphor) MMT advocates fiscal adjustments. And don’t bring examples of broken taxation regimes. If your taxation is impaired, it’s game over, whether you use monetary or fiscal policy.

  52. Gravatar of johnleemk johnleemk
    16. August 2011 at 11:53

    Morgan,

    So you think Obama is a *far* worse president on Iraq and Afghanistan than Bush was or Perry would be? Re Perry, it’s hard to say either way, but for the moment he and Bush seem pretty comparable. Re Bush, he got the US into this quagmire to begin with. I’ve seen the stats on Obama versus Bush in terms of casualties. Obama’s record is not far worse than Bush’s; in terms of statistical significance there’s a good argument their track records are comparable.

    What is scary about Perry is his willingness to play to illiberal social issues (walking back his comments on states’ rights re marriage laws for instance) and his aggressive persona which likely has translatable consequences for foreign policy; on both counts, he is Bush II. On the economy, he’s far from Bush, but that is both good and bad; his comments on monetary policy are absolutely inexcusable.

    The difference between Obama and Bush/Perry is that Obama’s personality is that of the academic lawyer; when he takes risks on war he at least brings a cerebral attitude to the table. Bush and Perry have always given off the impression that they go with their aggressive gut, which is the last thing US foreign policy needs right now.

    None of this is to say I’m an Obama fan; I’m plainly not. My ideal candidate would be a hybrid of Obama and Paul, which at the moment looks to be Gary Johnson or Romney/Huntsman.

  53. Gravatar of John John
    16. August 2011 at 12:36

    There’s a much more fundamental problem with MMT: printing money to finance the government puts more resources in the hands of governments that will use them for political purposes (wastefully from an economic perspective). Besides, is anyone really comfortable with the idea of an omnipotent government after all the horrors we have seen in the 20th century? Why do people want the government to be able to willy nilly confiscate resources from the people. Only explanation: they are Fing idiots.

  54. Gravatar of Peter D Peter D
    16. August 2011 at 13:01

    John, govt spending does not necessarily confiscate anything. Transfer payments, for example, are, well, transfer payments – they move resources within the private sector.
    If you think that MMT advocates “want the government to be able to willy nilly confiscate resources from the people” you have really no idea what you’re talking about. You should spend some time analyzing MMT policy proposals before spewing something as silly as that.
    And it is a political argument anyway.

  55. Gravatar of Luis Enrique Luis Enrique
    16. August 2011 at 13:52

    I had been teaching undergrad macro, as a TA, for about 2 or 3 years before I’d even heard of MMT, and I’d happily have told my students that a government that can print its own money can’t go bust, in the sense of not having the $ to pay its $ debts. I’d haven quite happily said that banks don’t actually need reserves before they can lend, and that policies that increase reserves need not increase lending, although banks may have a desired reserve ratio and take some actions to achieve it. I’d have agreed that by running a fiscal surplus and paying off bonds held by the central bank, high powered money is removed from the system, and that money is ultimately created by governments running deficits financed by printing money. I can never understand why some MMTers regard these as great insights hithertofore denied by the mainstream. I still don’t know what claims MMT makes that are both true and not merely restatements of then already well known.

    In those comments, Scott F tells us that if you are running a deficit but don’t want to finance it by printing money because inflation is proving a problem, you can cut spending or raise taxes. Well, who knew?

    Best as I can figure it, they say in a situation like the current one we can finance the deficit by printing money, and then when inflation kicks off down then road we can control it by taxing the hell out of the economy, and presumably paying down debt held by the CB. Why that is preferable to just having CB buy lots of bonds, QE, and then sell them again to contol inflation down then road, I’m not clear.

    ,

  56. Gravatar of Peter D Peter D
    16. August 2011 at 14:19

    Luis, first, hats off for your understanding. Now, no offense, but, please, step out of your ivory tower for a second and make a survey of people on the street: how many realize that “running a fiscal surplus and paying off bonds held by the central bank, high powered money is removed from the system” or, more easily, that govt surplus translates into non-govt deficit? While you’re at it, ask how many realize that “a government that can print its own money can’t go bust”. You’ll discover that the hoi polloi almost uniformly have been deprived of the deep understanding so obvious to you. Turns out, you need some loud-mouthed MMTers to actually start educating people about these supposedly mundane, unremarkable truths.
    I also suspect that you’d find quite a few colleagues of yours that still think that banks lend reserves. Paul Krugman, for example, for some reason seems to thinks that banks need “newly acquired reserves […] which they lend to individuals” when “there are lending opportunities out there”.
    Thanks to the loud-mouthed MMTers there is at least some modicum of discourse going on in the blogoshepre (with some leakages into the mainstream) about the almost universally accepted truth that govt deficits are a very bad, scary thing.
    MMT does combine many previously explored ideas, such as sectoral balances, functional finance and Minskyan financial instability and augments those with its own policy proposals, such as direct targeting of employment and effective demand via a Job Guarantee program.
    You ask “Why that is preferable to just having CB buy lots of bonds, QE, and then sell them again to contol inflation down then road, I’m not clear.” I think because the controlling inflation part is not necessarily a given. Again, this is based on understanding that bonds don’t prevent anybody from spending and in fact carry the additional inflationary component in interest payments.

  57. Gravatar of TC TC
    16. August 2011 at 14:39

    Luis,

    The thing is that everyone is going around telling people that we can go bust.

    Until he was forced to admit we cannot go bust, Bill Gross – the worlds largest bond manager – was saying that we were going broke and there was nothing we can do about it.

    Laurence Kolitkoff of Boston University writes column after column about how the U.S. is broke and will need to default.

    Rogoff and Reinhardt wrote a book “This time it’s different.”

    All of these people are warning about having too much debt, because then we have to default. These famous, influential people are all warning we can go broke.

    You just said you’d be glad to say we can’t go broke. I am glad to hear that.

    Now, people are saying that “Well, we can’t go broke, but we do have to worry about hyperinflation.” Then they pull out the Inter-Temporal Government Budget Constraint and say this is the reason we need to worry about hyperinflation.

    The ITGBC has a no-Ponzi assumption, but it always seems to me that what these people are saying is “We’re violating the no-Ponzi assumption and risking a hyper-inflationary spiral”.

    But it’s an assumption. Assumptions hold by assumption. They hold because we’re assuming it holds. We’re assuming that from this point forward, it holds. You can’t go saying “well, we’re violating the no-Ponzi” after assuming the no-Ponzi.

    It appears that’s what’s happening to me.

    These people have a point – we might be violating it. The thing is we can’t tell if the No Ponzi assumption is being held or not – and we’re never going to be able to tell. We’re never going to be able to tell with todays knowledge that the no-Ponzi holds.

    Then, the fiscal theory of the price level – very similar to MMT in some ways – is denied by Kocherlakota (he calls it religious belief) and Buiter, while Woodford thinks it has some validity. Buiter uses the ITGBC as the reason the FTOTPL doesn’t work.

    That’s why Fullwiler went after the ITGBC in his paper. And to keep the Fiscal theory of the price level “false”, Kocherlakota wants to be able to relax the “CB must let the Treasury default” constraint.

    There is a ton here with MMT. We’re literally barely scratching the surface.

  58. Gravatar of marcus nunes marcus nunes
    16. August 2011 at 14:47

    Four months ago MMTers gave me a “hard time”. I´m surprised by the large number of comments. Maybe, like the Seinfeld show (“A show about nothing”), the “Theory about nothing” also has many viewers!

  59. Gravatar of Tom Hickey Tom Hickey
    16. August 2011 at 14:52

    Hi Scott,

    You wrote, “Here’s how I’d respond to Mr. Fullwiler:  Argentina, Turkey, Brazil, Bolivia, Israel, Chile  . . . . case after case of countries experiencing extremely high inflation and extremely high nominal interest rates, all because they were monetizing their debts.”

    Did any of the governments of these countries understand MMT principles and were they basing their policy options on them? No.

    Were any of them even aware of the work of Wynne Godley on sectoral balances. No.

    Were any of them even aware of the work of Abba Lerner on functional finance? No.

    You may as well have said Weimar and Zimbabwe, which is the constant refrain of those who have not read the professional literature before criticizing MMT.

    So far, I have seen none of the critics of MMT do so professionally by citing reference to publications or even informal output of professionals on their blogs.

    MMT economists welcome debates,and they would like it to be conducted in a professional manner. They have even reached out and said that they are happy to discuss issues personally, too. I am not aware of anyone that has done so.

    Best regards,
    tom

  60. Gravatar of John John
    16. August 2011 at 14:53

    Peter D,

    Government spending always removes resources from a private sector where projects are funded by voluntary contributions into the public sector where projects are chosen by political expediency instead of profit and loss. Without the profit and loss test, the result is chaos. There is no economic feedback mechanism telling the government where and how many roads to build, how many tanks to build, etc.

    Paper money creation or counterfeiting, transfers resources to those who created the money and those who sell to those who created the money. People further removed from this process lose purchasing power. It’s really not that complicated.

  61. Gravatar of Ron T Ron T
    16. August 2011 at 15:28

    ” The MMTers say X. You show that X is not true. They get outraged, claiming you misrepresented their views. They never said X, they said Y! Then you show that Y isn’t true.”

    Haha, what is a single statement by MMTers that you managed to refute? I mean without pleading that banks are assumed out of existence.

  62. Gravatar of W. Peden W. Peden
    16. August 2011 at 16:24

    I seem to remember debating MMT’ers on the transmission mechanism between central bank actions, the broad money supply and NGDP on here for quite some time. They did not come out victorious…

  63. Gravatar of JKH JKH
    16. August 2011 at 16:29

    “The financial crisis has made these features of the real world even more obvious and it should make clear that nearly all of
    mainstream monetary theory as applied to central banking is nearly worthless, as is for instance the infamous money multiplier fable and the presumed causal relationship running from bank reserves at the central bank to price inflation.”

    Marc Lavoie

  64. Gravatar of W. Peden W. Peden
    16. August 2011 at 16:32

    The above quote is mistaken.

  65. Gravatar of Ron T Ron T
    16. August 2011 at 16:55

    Scott S,

    “And yet hundreds of followers, many of whom seem to have little education in economics, have no trouble at all understanding what the MMTers are all about. It makes you wonder.”

    This is actually very easy to understand. Since the mainstream econ is like a Ptolemaic system with hundreds of epicycles and still every new observation violates their prediction which requires introduction of new epicycles etc at infinitum. MMT on the other hand is a Copernican system – very simple yet robust. I am also one of those non economists and I easily see how unrealistic your theories and explanations are. They are refuted based on insitutional structure of the monetary authorities, they violate accounting, and they are not supported by evidence.

    I see clearly why the Fed cannot control NGDP unless it changes the rates, that there is no basis for crowding out and that issuing bonds or not has no impact on either inflation or ability, present or future, of the govt to fund itself.

    These are easy concepts, unless you have to throw out the epicycles from your head. And admit you had been wrong the whole time.

    You nevercould even come close to proving MMTers wrong, you have no choice but to shrug them off as a cult.

  66. Gravatar of Scott Sumner Scott Sumner
    16. August 2011 at 17:54

    Anon1, Touche. In one short paragraph you did much better than all my posts on MMT.

    Floccina, Well, They say many different things.

    David Pearson. You said;

    “As long as the Fed tries to stimulate real growth, it will provide that financing.”

    So far the Fed hasn’t monetized much debt. Instead they trade interest-bearing reserves for debt with lower yields–not a good deal for the Treasury–but a good deal for the banks.

    You said;

    “Can you imagine what would happen to out-year deficit projections if the Fed tried to tighten with 8%+ unemployment?”

    The major European central banks have done this numerous times over the past 30 years. If the extended UI makes 8% the new natural rate of unemployment, then I have no doubt the Fed will often be forced to do this.

    Morgan, You said;

    “Or Denmark for that matter – to me the obvious issue is that we are a nation of immigrants, we’re not all descendant form the same tribe. People stop sharing easily when the other guy is a foreigner. It’s a negative on the ledger, but there are positives as well.”

    For the first time today we agree. The Singapore model really would work much better here than the Danish model. We should try to make our culture more like the Danish culture, but that’s a long term project.

    TC, You said;

    “You just had a post where you said that inflation is a made up number. If inflation is a meaningless concept made up, then why are you worried about real vs. nominal for MMT?”

    I prefer to think in terms of NGDP growth and hours worked (as my real and nominal variables.) But since most people use the language of inflation, I often use it when addressing their concerns. Krugman and Keynes were using that language, I stuck to it.

    All schools of macro assume no default risk for gov. bonds in a fiat money regime–there’s nothing unique about MMT.

    Diatom, You said;

    “When the government sells a treasury security, it can only be paid for with reserves.”

    Wrong, it can be sold for cash. Most of the money injected into the economy through OMPs was cash, not reserves, until 2008.

    It’s also true that silver can be easily converted into cash, but no one calls silver money. The supply of silver doesn’t have much influence on the price level. The point is that neither silver not T-bonds can easily be use din transactions. That’s why cash is different. That’s why silver and T-bonds are close substitutes for cash. That’s why changes in the supply of cash change the price level.

    You said;

    “It should be recognized that the fed supplies/drains whatever quantity of reserves is necessary to hit their target. Failure to do so would cause an unstable FFR since banks wouldn’t be able to attract cash deposits as needed.” they do that during periods when they target the ffr, but not during periods when they don’t target the ffr. In any case, you are mixing up short run endogeniety of money with long run exogeniety, just as commenter anon1 mentioned above.

    johnleemk, Of all the commenters, your views on Perry are closest to mine.

    more to come . . .

  67. Gravatar of Scott Sumner Scott Sumner
    16. August 2011 at 19:20

    beowolf, Yes, but it’s also important that newcomers can understand the old stuff, and critique it effectively. Do you think they could critique Cagan’s study of hyperinflation, for instance. I don’t get that impression reading their comments.

    Tschaff, If you go back a couple weeks you’ll find three or four posts on MMT, where I explain all my objections. The fallacy of composition lies at the center of monetary economics. An individual can get rid of cash, but society as a whole cannot. When the Fed puts more cash into society that it wants, the price level is what restores equilibrium. Some MMTers respond that the Fed can’t put money into circulation if people don’t want more–which is false.

    Martin. You said;

    “Scott, imagine a closed economy and 100% tax rate, where is the inflation going to come from now? The government can’t consume more than what the economy produces and there is no one else to consume.”

    This isn’t the way to think about inflation. Think about cash. Inflation is nothing more than a fall in the value of cash. For that to happen all you need to do is increase the supply of cash. If apples were money, then anytime the value of apples fell you’d have inflation. It’s got nothing to do with the size of government, or even whether a government exists. You don’t need government to have fiat money.

    Peter, We have lots of evidence that high powered money is far more inflationary than bonds. Compare Australia and Canada.

    TC, So far as I know all macro texts say T-bonds are risk free because the government can always print money to pay them off. That’s what I was taught, that’s what Luis was taught, and as far as I know that’s what everyone else was taught.

    Tom, Then don’t go around saying “monetizing public debts is not inflationary.” Say “monetizing public debts is not inflationary if countries follow MMT principles.”

    Ron, How about “banks never lend cash” Then they claimed they never said that. Or “The Fed can’t inject new base money if the public doesn’t want to hold it.” Or “Monetizing the debt is not inflationary.” Then they said “well, it’s not always inflationary. They keep moving the goalposts.

    JKH, Mainstream theory has never argued that the money multiplier applied to interest bearing reserves. Having said that, I’m not really a fan of multiplier theory.

    Ron, You said;

    “I am also one of those non economists and I easily see how unrealistic your theories and explanations are. They are refuted based on insitutional structure of the monetary authorities, they violate accounting, and they are not supported by evidence.”

    I’m not sure how something can “violate accounting,” maybe someone can explain which of my beliefs violate accounting.

    I’m afraid it’s comments like yours that make me think it might be a cult. Do you seriously believe that your criticism of my theories is at all persuasive? Violate accounting?!? Accounting is a system of organizing information. How can I violate accounting? Please explain.

    You said:

    “I see clearly why the Fed cannot control NGDP unless it changes the rates,”

    I have no idea what this sentence even means, so how can I know if I agree or not? Perhaps if MMTers used language clearly it would be easier for us outsiders to understand their theory. Which rates do you refer to? Are you talking about the Fed setting those mysterious rates directly, through administrative control, or influencing them indirectly, by changing the stock of money. Are you saying the Fed must indirectly target those rates through whatever policy instrument they use, or are you saying they don’t need to indirectly target those rates, but as a factual matter NGDP targeting will lead those rates to move around. God only know what you guys are talking about. But you are so sure you are right.

  68. Gravatar of Peter D Peter D
    16. August 2011 at 19:23

    John

    Paper money creation or counterfeiting, transfers resources to those who created the money and those who sell to those who created the money.

    Ask Luis Enrique above and he should be able to educate you that ALL govt spending is “paper money creation” or, rather, electronic money creation. It is obvious from your comment that you have no idea how our monetary system operates and just want to promulgate your Austrian views.

    W. Peden

    I seem to remember debating MMT’ers on the transmission mechanism between central bank actions, the broad money supply and NGDP on here for quite some time. They did not come out victorious…

    You assumed the following transmission mechanism: M0 > cash balances > financial assets > nominal wealth > bank lending > broad money > NGDP. You did not prove it.

  69. Gravatar of Tschäff Reisberg Tschäff Reisberg
    16. August 2011 at 20:28

    “An individual can get rid of cash, but society as a whole cannot. When the Fed puts more cash into society that it wants, the price level is what restores equilibrium. Some MMTers respond that the Fed can’t put money into circulation if people don’t want more-which is false.”

    What mechanism does the Fed have at its disposal that allows it to force the money supply above money demand? The monetarists have invented the helicopter drop of cash, in which the fed adds net financial assets to the non-government sector. In real life, the helicopter drops are fiscal policy with a few minor exceptions.

  70. Gravatar of johnleemk johnleemk
    16. August 2011 at 20:49

    Comments like Reisbergs are why I clear out the moment MMT rears its head. There’s no arguing with these cultists.

  71. Gravatar of Yes, Ron Paul Is Getting Screwed, But We Must Ignore It Yes, Ron Paul Is Getting Screwed, But We Must Ignore It
    16. August 2011 at 20:59

    […] I have noticed this type of thing when trying to argue with, say, proponents of the Fair Tax (or MMT). I can’t quite put my finger on it, but there’s something that drains your precious […]

  72. Gravatar of Diatome Diatome
    16. August 2011 at 21:16

    Me: When the government sells a treasury security, it can only be paid for with reserves.

    You: Wrong, it can be sold for cash. Most of the money injected into the economy through OMPs was cash, not reserves, until 2008.

    Me: You’re defensively nit-picking, ok I should have said high powered money or monetary base. I was going by the Fed website when I made that statement. http://www.newyorkfed.org/markets/openmarket_concepts.html:
    -Temporary open market operations involve repurchase and reverse repurchase agreements that are designed to temporarily add or drain reserves available to the banking system.
    -Permanent open market operations involve the buying and selling of securities outright to permanently add or drain reserves available to the banking system.

    Then I’d add that it matters not if it drained/injected cash or reserves since they both count towards the reserve requirement. I’ll quote from the Reserve Maintenance Manual at http://www.frbservices.org/files/regulations/pdf/rmm.pdf:

    The institution must satisfy its reserve requirement in the form of vault cash or, if vault cash is insufficient to satisfy the requirement, in the form of a balance maintained either directly with a Reserve Bank or in a passthrough arrangement. The portion of the reserve requirement that is not satisfied by vault cash is called the reserve balance requirement.

    “It’s also true that silver can be easily converted into cash, but no one calls silver money.”
    Ron Paul might, but seriously silver doesn’t function well in performing the indispensable role by performing the familiar list of functions we need money to serve, that being a medium of exchange, store of value, means of unilateral payment, and measure of value. Mind you, MMTers avoid the use of money whenever possible when describing a particular financial asset. For example are demand deposits at banks “money?” Technically they are liabilities on the bank’s balance sheet. What about credit cards? MMTers noticed that there is a hierarchy of money: http://ideas.repec.org/p/wpa/wuwpma/9805014.html

    “The point is that neither silver not T-bonds can easily be used in transactions. That’s why cash is different. That’s why silver and T-bonds are close substitutes for cash.”
    Yes they are different, but the thing is the physical cash that exists is a desire from those in the private sector, with existing wealth to convert it into cash to spend. The Fed accommodates this portfolio shift, but doesn’t cause it.

    “That’s why changes in the supply of cash change the price level.”

    I still don’t follow how this allows vendors to raise their prices.

    Me: “It should be recognized that the fed supplies/drains whatever quantity of reserves is necessary to hit their target. Failure to do so would cause an unstable FFR since banks wouldn’t be able to attract cash deposits as needed.”

    You: “They do that during periods when they target the ffr, but not during periods when they don’t target the ffr.”

    Nit picking again, key point: The Fed sets the yield on short term govt debt, it has demonstrated this for years. These rates aren’t set by the f’ing bond market. It could set rates longer down the yield curve with the proper methods, although I don’t want to get into that.

    “In any case, you are mixing up short run endogeniety of money with long run exogeniety, just as commenter anon1 mentioned above.”

    I’m not sure what you’re referring to when you say money, but I realize now that I left out the part where the fed announces a rate target and endogenously the rates gravitate towards that target. Then exogenously the Fed can add or drain HPM as necessary.

  73. Gravatar of Tschäff Reisberg Tschäff Reisberg
    16. August 2011 at 21:24

    @johnleemk- I have been polite, even complimentary, and am engaged in civil discourse. I’m sorry if asking a question like “What mechanism does the Fed have at its disposal that allows it to force the money supply above money demand?” make me a cult follower. The question wasn’t rhetorical, if Scott S. knows something I don’t I’d love to know.

    Your comment is hurtful, and previous rude comments from others just makes me want to avoid this negative space.

  74. Gravatar of RebelEconomist RebelEconomist
    16. August 2011 at 23:23

    Scott, you write: “the Fed can’t put money into circulation if people don’t want more-which is false”

    Really? How can the Fed put money into circulation if the people don’t want it?

    I suspect that this is an important flaw in your thinking, so I hope you get round to reading this comment. I am no fan of MMT, but, if I may say, I think you are writing far too many posts to gain much from the discussions, both in terms of exposing the frailty of schemes like MMT and in appreciating ideas that might be new to you. In my opinion, blogging can offer a whole new means of academic progress, because it can open dialogue with knowledgeable and/or clever people who are not otherwise engaged in academic discussion, but it has to be rigorous. Getting rid of commenters like Morgan Warstler, who fill the discussion with off-topic noise might help too.

  75. Gravatar of Morgan Warstler Morgan Warstler
    16. August 2011 at 23:35

    Floccina,

    “Are you saying that the fed should do a bad job so owners of hard assets can wrest some power away from democratic Government?

    You make too many assumptions.

    A GOOD JOB is to the ensure the owners of hard assets are worried about first by the Fed.

    Why do you think the Fed think 9% unemployment is acceptable under it’s dual mandate? The owners of hard assets want it that way.

    Let me explain something to you in simple terms: The owners of hard assets ARE THE BOSS. They are the boss of government, they are the boss of the Fed.

    If you (or MMT) wants to form real policy you must first work within the boundaries of what those with hard assets say about things.

    MMT doesn’t like to hear this, but tax collection cannot be taken for granted in a country where the Tea Party has 200M+ guns, are ALL likely voters and comprise 40M plus owners of hard assets. That’s just the base.

    Why do you think tax rates have been going down historically?

    Answer: the holders of hard assets WANT it that way.

    MMT doesn’t want to have to BEG the holder os hard assets to print money.

    Too bad. The facts are the facts. It is UNINTERESTING to say the government can print money – sure it can.

    The question is: WHY would it print money because a bunch of dirty hippies without a pot to piss in want it to?

    The answer is: it won’t.

    I’m the guy you MMT mouth breathers have no answer to – you are just a bunch of have nots upset that you don’t get to control the Fed.

    My team fires warning shots over Ben’s head saying “stop printing” – and he’s a conservative Republican.

    Mine are the facts. You are people who don’t like the facts. You can circle jerk all you want with egghead economists, when you get done the people who own the hard assets are still going to make the decisions.

    You’d have a BETTER chance spending the next two hundred years working to acquire some hard assets, then at least people will pay attention to you.

    BTW, if Mosler has any balls he’d publish clearly when he is going to next try and speak at a Tea Party rally.

  76. Gravatar of JKH JKH
    16. August 2011 at 23:50

    same question as Rebel Economist

    and precisely the same suspicion

    although I think I’ve asked the question before

    I’ll let him pursue it

  77. Gravatar of Jim Glass Jim Glass
    16. August 2011 at 23:59

    I’m sorry if asking a question like “What mechanism does the Fed have at its disposal that allows it to force the money supply above money demand?” make me a cult follower. The question wasn’t rhetorical, if Scott S. knows something I don’t I’d love to know.

    MMTers don’t know how the Law of Supply and Demand works, at even the first quarter of a 101 course level.

    It is as simple as that.

    For any given, fixed level of demand, increasing the quantity supplied lowers the price and *increases the quantity demanded*.

    MMTers don’t know the difference between level of demand and quantity demanded — something that would cause one to flunk the first quiz on supply-and-demand in a high-school level course!

    And on not knowing the difference between the level of demand and the quantity demanded — did I mention one would need to know this to pass a high-school level econ course? –they build their Cathedral, in which they endlessly chant and proclaim the ignorance and foolishess of the of the all the world’s Nobel economists, Finance Ministers and Central Bankers of the world.

    Then, when not treated with deference by the same — or by people who actually do know how the law of supply and demand works — they feel unjustly wronged.

    It’s just amazing.

    So here’s an invitation to all MMTer out there: Explain why the Law of Supply and Demand does *not* apply to money *alone* of all things.

    For if it does, you have no way around the fact at any given, fixed level of demand for it, increasing the quantity supplied will both increase the quantity demanded and reduce its price — that is, increase inflation.

  78. Gravatar of Jim Glass Jim Glass
    17. August 2011 at 01:04

    RebelEconomist: Here’s a simpler question than my last for you, JKH, et al, to answer.

    And to help you consider it, here’s an interactive graph that will assist you in becoming belatedly acquainted with the basics of supply-and-demdand.

    Note the explanation:

    If the quantity supplied, Qs, is greater than the quantity demanded, Qd, at a price P0, then a surplus exists at P0. Because of this surplus, consumers will bid down the market price. As the market price decreases, the quantity demanded will increase….

    That is, at a fixed, unchanging level of demand, with an increase in supply “the quantity demanded will increase”

    Play with the chart to see for yourself. Keep the “level of demand” line rock steady. Then increase supply, and see how you move *along* the unchanged “level of demand” line to points where ever greater quantity is demanded. There is no increase in the level of demand for the item, and more and more quantity of it is demanded.

    Now, here is the question for you to answer:

    Given *no* increase in demand for an item, just how do you imagine that you can increase the supply of it WITHOUT increasing the quantity demanded of it? (And also lowering its price.)

    Please explain.

    Then show us on the interactive graph, or on any other interactive supply-demand graph of your choice. There are plenty to choose from.

  79. Gravatar of RebelEconomist RebelEconomist
    17. August 2011 at 02:20

    @Jim Glass

    I suspect that what you are calling a “level of demand line” I would call a demand “schedule”. The term “level” is ambiguous; “quantity” is not. You should not mistake an ability to confuse people by using imprecise terms for a superior understanding of basic economics.

    In this case, however, the point is moot, because Scott seems to be suggesting that the Fed can somehow “force” base money into the economy rather than shifting its (horizontal) supply schedule and allowing the market to clear.

  80. Gravatar of Martin Martin
    17. August 2011 at 02:44

    Scott,

    “This isn’t the way to think about inflation. Think about cash. Inflation is nothing more than a fall in the value of cash. For that to happen all you need to do is increase the supply of cash. If apples were money, then anytime the value of apples fell you’d have inflation. It’s got nothing to do with the size of government, or even whether a government exists. You don’t need government to have fiat money”

    And I don’t disagree, however this is how people, such as Milton Friedman (I found that out yesterday), thought about taxes and inflation in the war.

    This interview is part of the interviews collected in the book “inside the economists mind” it’s full of interesting and relevant tidbits.

    http://www.milkeninstitute.org/publications/review/2007_2/65-85MR34.pdf

    JBT: When did your interest in monetary economics begin, exactly?

    MF: I guess when I was serving in the Treasury Department from 1941 to 1943, because the crucial question was, “what are we going to do to keep down infl ation?” Everybody was aware that during the First World War taxes had paid for a very small fraction of the war and during the Second World War they were determined to raise the fraction paid by taxes. At the same time, they also had the problem of predicting infl ation and that’s how I got involved. I was at the Treasury, Division of Tax Research, and our job was to prepare tax proposals for Congress. The problem – it was interesting from a political point of view and from a scientific
    point of view – was that a group in the administration who were trying to get a price control statute didn’t want us to come up with a tax proposal because they were afraid we would say, “We can stop inflation through taxes, we don’t need price controls.” They wanted price controls.Our estimates of how much taxes you would need to stop inflation were much higher than comparable estimates made by those favoring price controls. A month after the price control law was passed, their estimates were much higher than ours. Now they wanted all the help they could get from the tax system.

    JBT: Why didn’t people mention the money supply through all of this talk about inflation? Was it discussed at all?

    MF: Hardly. As a result of the Keynesian revolution, money had almost dropped out of the picture. I look back at that and say, “How the hell could I have done that?” I had good training in monetary theory at Chicago and yet, once the Keynesian revolution came along, everything was on taxes and spending, everything was on fiscal policy, and that’s why I was trying to answer the question about the level of taxation needed to stem inflation. With a sufficiently expansive monetary policy, no amount of taxes could do it. It was the wrong question. The right question was, “What monetary policy do we need?” That was the result of the mind-set we had.

    MMTérs aren’t wrong, they’re just asking the wrong questions. 😉

  81. Gravatar of Luis Enrique Luis Enrique
    17. August 2011 at 03:16

    Peter D, TC

    Yes plenty of people are excessively worried about deficits and printing money.

    But when mainstream economists worry about the govt. going bust, they are worrying about losing the ability to finance spending without having to resort to printing $ to pay our $ debts. The fact we can print $ to pay our $ debts is not in dispute.

    There’s a difference between saying bank lenidng is not reserve constrained, and saying, as Krugman does, that banks may find themselves with what they regard as excess reserves and do something about it. Text book money multiplier theory is not wrong, properly understood it is a tautological accounting relationship. It would be wrong to teach it as a mechanism that can always be exploited; a typical 1st year essay question is: if the CB prints more H, does M necessarily increase? And the answer is no, theta may increase (hope that makes sense to you, see any undergrad presentation of multiplier if not).

    Peter, I’d certainly not say all government spending is money creation. If hand over tax dollars and get highway maintenance in return, that’s no more money creation than me handing over a dollar at Walmart and getting a cheesecake in return. I said that in the long-run, money is created by deficit spending. In the short run, of course, the Fed may buy outstanding bonds, but in the long run it would run out of bonds to buy, unless there was some net new borrowing by the govt.

    Mainstream econ says in a recession you can get away with having the CB buy govt debt – QE – but that at some point you need to reverse it to avoid inflation. And you need to be careful or you could achieve stagflation. And that if you push spending too far beyond your ability to tax, you get in trouble.

    What does MMT say that’s substantively diffrent? Yes you can finance some debt with CB money creation, and yes you may need to reverse it at a later date to avoid inflation. But does MMT say you never need worry about stagflation, or that you never need worry about pushing spending too far beyond tax revenues? If it does say that, I think it’s wrong or at least I need more convincing than what I’ve seen to date, if it doesn’t say that I fail to see how it differs from the mainstream.

    Kotlikoff wouldn’t be worried about solvency if he believed the US was going to, say, double its tax/GDP some time in the next decade. MMTers seem to say, don’t worry about printing money to finance our spending today, we can always tax like crazy tomorrow to control inflation. Well yes, raising future taxes does tend to satisfy mainstream solvency concerns too.

  82. Gravatar of W. Peden W. Peden
    17. August 2011 at 04:04

    Peter D,

    “You assumed the following transmission mechanism: M0 > cash balances > financial assets > nominal wealth > bank lending > broad money > NGDP. You did not prove it.”

    I put it forward based on uncontroversial premises. IIRC, MMT’ers were forced to the absurdity of saying that cash is a perfect substitute for appreciating financial assets.

    Now, if you have an argument against that transmission mechanism, I’d be happy to hear it. Until then, monetarism is right and MMT is worthless.

  83. Gravatar of Ron T Ron T
    17. August 2011 at 04:44

    Luis E,

    “I’d haven quite happily said that banks don’t actually need reserves before they can lend, and that policies that increase reserves need not increase lending, although banks may have a desired reserve ratio and take some actions to achieve it. (…) I can never understand why some MMTers regard these as great insights hithertofore denied by the mainstream.”

    Hmm, tell that to Sumner, he thinks that he can trick banks into making loans they otherwise wouldn’t have made by shifting their portfolios into reserves. So “tight money” he sees is simply banks not lending to businesses that see no demand on the horizon and the private sector trying to pay down debt and not take on more. Very simple.

    So yes, to Sumner it would be a great insight to see that his descriptions mix cause and effect and that nothing he proposes makes any sense at all.

    MMT proved to him that is grand idea (negative IOR) would be contractionary. It is enough to know how banks actually work. These are indeed not grand insights, just baby steps.

  84. Gravatar of W. Peden W. Peden
    17. August 2011 at 04:47

    Ron T,

    “So “tight money” he sees is simply banks not lending to businesses that see no demand on the horizon and the private sector trying to pay down debt and not take on more. Very simple.”

    Very simple and very worthless, because it is a story about monetary policy that doesn’t feature assets.

  85. Gravatar of Ron T Ron T
    17. August 2011 at 05:07

    W Peden,
    “it is a story about monetary policy that doesn’t feature assets”

    Huh? It does, but you didn’t notice because you are not used to think in terms of the private sector’s balance sheets. Their assets are down, that is why they are trying to pay down debt, not take on more. Repairing their balance sheets can happen through fiscal policy only, it is not even econ, it is accounting.

  86. Gravatar of W. Peden W. Peden
    17. August 2011 at 05:11

    Ron T,

    So you’re saying if their assets were up, they would be more willing to take on debt (and it would be easier to pay off their debts)?

  87. Gravatar of W. Peden W. Peden
    17. August 2011 at 05:33

    (And banks would be more willing to lend to them, of course.)

  88. Gravatar of Nick Rowe Nick Rowe
    17. August 2011 at 08:26

    Jim Glass:

    “MMTers don’t know the difference between level of demand and quantity demanded “” something that would cause one to flunk the first quiz on supply-and-demand in a high-school level course!”

    Before getting to that level, you might want to consider a more basic question:

    What is the difference between “quantity demanded = quantity supplied”, and “quantity bought = quantity sold”?

  89. Gravatar of W. Peden W. Peden
    17. August 2011 at 08:45

    Nick Rowe,

    I never had a high school course in supply & demand, but isn’t equivalence of the quantity demanded and the quantity supplied for a given product something that holds at equilibrium, whereas the equivalence of “quantity bought with quantity sold” just means that the purchases of a product in a given period are the same as the sales of that product. The former deals with a property of competitive markets over the long-run, whereas the latter is an accounting identity within any given period of time i.e. that ever seller sells to a buyer.

    So the former isn’t something that need ever happen, whereas the latter always “happens” because it’s a tautology.

  90. Gravatar of W. Peden W. Peden
    17. August 2011 at 08:47

    I will add that the former can serve as the basis of a empirical hypothesis but not as a definition, whereas the latter can serve as a definition but not as the basis of a hypothesis.

  91. Gravatar of Nick Rowe Nick Rowe
    17. August 2011 at 09:32

    W. Peden: Yep.

    (You might want to add that “quantity demanded” means the quantity buyers *would like to* buy, given prices, income, etc.,….; and that “quantity supplied” means the quantity sellers *would like to* sell, given prices, etc.,…, just to make it clearer.)

  92. Gravatar of W. Peden W. Peden
    17. August 2011 at 09:39

    I actually hadn’t thought of it that way before, but that does clarify a lot.

    One of my ambitions this summer is to actually sit down with Mankiw’s textbooks and go through the basics…

  93. Gravatar of Floccina Floccina
    17. August 2011 at 10:32

    Morgan Warstler, I am not an MMTer!

  94. Gravatar of Floccina Floccina
    17. August 2011 at 10:37

    Luis Enrique, money can be created by the fed buying any assets not just gov debt.

  95. Gravatar of Gregor Bush Gregor Bush
    17. August 2011 at 10:38

    Ron T,

    “Repairing their balance sheets can happen through fiscal policy only, it is not even econ, it is accounting.”

    So your position is that fiscal policy can affect private sector balance sheets but monetary policy cannot. So if the Fed raised the Fed funds rate to 6% tomorrow and held it there for two years while fiscal policy reaimed unchanged (that is, goverment purchases and tax rates are no different than is currenctly expected) your forecast for household and corporate debt/income ratios (or debt/asset ratios if you like) would be no different than in the case where the Fed held rates at 0%?

  96. Gravatar of Ron T Ron T
    17. August 2011 at 10:46

    Wray resonds to Krugman in what would be a good primer for SS and his readers on how exactly the government spends. Spoiler: bonds don’t guard against inflation.

    http://www.economonitor.com/lrwray/2011/08/16/paul-krugman-still-gets-it-wrong-modern-money-theory/

  97. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 11:04

    Floccina, you make the same mistake.

    Economics does not happen in a vacuum.

  98. Gravatar of Nick Rowe Nick Rowe
    17. August 2011 at 11:25

    W. Peden: Greg Mankiw’s Intro text is very good (I was a Canadian co-author).

    One tiny flaw, right on this topic. Greg defines quantity demanded as the quantity people are willing *and able* to buy (emphasis added). And quantity supplied as the quantity they are willing *and able* to sell.

    I know why he did that. It’s to rule out the “if wishes were horses beggars would ride” sort of interpretation of demand. But it’s unfortunate. Because if there’s a binding price ceiling, there’s excess demand, so buyers won’t be *able to* buy as many as they want to, because there aren’t enough willing sellers. Quantity demanded exceeds quantity actually bought.

    (I crossed out all the “and able” bits in the Canadian edition.)

  99. Gravatar of Tschäff Reisberg Tschäff Reisberg
    17. August 2011 at 11:48

    This whole thread is a mess. A textbook worth of topics without the textbook precision. Here Wray answers Krugman’s latest. Everyone here will find it a worthwhile read.

    http://www.economonitor.com/lrwray/2011/08/16/paul-krugman-still-gets-it-wrong-modern-money-theory/

  100. Gravatar of Detroit Dan Detroit Dan
    17. August 2011 at 11:56

    Thanks Tschaff. I agree…

  101. Gravatar of Scott Sumner Scott Sumner
    17. August 2011 at 12:17

    Tschaff, They can buy T-bonds with new money. Indeed that’s the method they use to increase the monetary base. It’s the reason we have inflation.

    Diatome, You are completely ignoring my responses. What happens during those periods where the Fed doesn’t set the rate on short term bonds? Suppose they target the monetary base? Or M2?

    My point about cash was not vault cash, but cash held by the public. The Fed can sell the bonds to the public for cash, it makes no difference.

    RebelEconomist and JKH, See my answer above to Tschaff. I assume this is a rhetorical question, you guys are both well enough informed to know how I’d answer the question.

    Martin, Good find.

  102. Gravatar of Scott Sumner Scott Sumner
    17. August 2011 at 12:29

    Tschaff, You said;

    “Everyone here will find it a worthwhile read.”

    I don’t. Wray’s whole argument is based on the premise that issuing interest-bearing bonds is just as inflationary as issuing currency. But that’s false, as we know from numerous examples.

    And it’s a bit rich for him to talk as if Krugman can’t be expected to understand monetary economics, because it’s not his specialty. That’s one of Krugman’s fields. He wrote the classic article “It’s baaack” in 1998.

  103. Gravatar of W. Peden W. Peden
    17. August 2011 at 12:59

    Nick Rowe,

    I’ll keep a look out for that. I used Mankiw (along with some past editions of Samuelson’s textbook) as part of an essay in the philosophy of economics and I got into a PhD at Cambridge partly on the basis of that essay, so I clearly “get along” with Mankiw’s writing.

  104. Gravatar of Ron T Ron T
    17. August 2011 at 13:23

    SS,

    “Everyone here will find it a worthwhile read.”

    I don’t. Wray’s whole argument is based on the premise that issuing interest-bearing bonds is just as inflationary as issuing currency. But that’s false, as we know from numerous examples.

    That is “false” only in your reality-untainted ivory tower.

    He showed it is not false, at the level of balance sheets (heard about those?). So the “numerous examples” have to show something else, like constant spending in the face of collapsing output, or too high spending (not only by the govt btw. – each espending is equally inflationary past full capacity – but still something that a lower deficit would take care of).

    Just in case, you should ignore this, because you could actually learn from those examples. You just “know”.

  105. Gravatar of RebelEconomist RebelEconomist
    17. August 2011 at 13:46

    So, Scott, the bottom line is that the central bank cannot “FORCE base money into the economy” (your words, eg here: http://www.themoneyillusion.com/?p=10178). Since you evidently can’t be bothered to respond rigorously to even focussed comments before moving on to new posts, I’ll leave you to work out the implications that that fact might have for some of your policy opinions.

  106. Gravatar of Nick Rowe Nick Rowe
    17. August 2011 at 14:33

    OK. I have now looked at that piece by Randall Wray. I gave up about a quarter way through.

    The insistence that deficits really, really, really *are* money-financed is pointless.

    He misunderstands Paul Krugman. If the public doesn’t want to hold bonds, what does it want to buy or hold instead?

    There is no discussion of what might equilibrate I-S+G-T+X-M. (Is it interest rates? Exchange rates? The price level? Can it *only* be real income?)

    More accounting identities and balance sheets, when what we need are the MMT behavioural relations and equilibrium conditions.

    I’ve hit badly diminishing returns trying to get something out of this that is not in Old Keynesian economics circa 1950.

  107. Gravatar of Tschäff Reisberg Tschäff Reisberg
    17. August 2011 at 15:30

    A person holding $1M in cash or $1M in treasuries both has the potential to make a large purchase. As I said the Fed accommodates portfolio shifts into cash. The fact is cash and tsy secs both are assets to the non-govt sector. If larger monetary base = inflation then QE, and QEII should have majorly caused inflation but it didn’t. Just like it didn’t in Japan.

    I’m done with this discussion, people here are nasty and defensive to the point where they won’t budge an inch.

  108. Gravatar of Ron T Ron T
    17. August 2011 at 15:59

    Nick Rowe,

    “There is no discussion of what might equilibrate I-S+G-T+X-M. (Is it interest rates? Exchange rates? The price level? Can it *only* be real income?)”

    This is an accounting identity, a record of transactions, there is nothing to equilibrate. Good discussion of this on the example S-I=0 in a closed economy without government:
    http://seekingalpha.com/article/175009-investment-makes-saving-possible

    The identity S-I=0 is obeyed at all points of time and space at any interest rate, exchange rate, whatever because it is just an accounting record of the same transactions.

    ” I’ve hit badly diminishing returns trying to get something out of this”

    I would disagree, you have a LOT more to learn from MMT.

  109. Gravatar of Tschäff Reisberg Tschäff Reisberg
    17. August 2011 at 16:10

    Lastly guys, all errors of monetary procedures are mine, and mine alone. Please don’t blame MMT for them. I am just a enthusiastic laymen trying to understand how the world works.

    The way “I” understand that accounting identity is keeping in mind it is applies strictly to flows, not stocks, and it is ex post. I agree with Ron that that it is an accounting record between any two given points of time. I am working now on taking this paper that explains why S=I and simplifying and illustrating it so normal people can understand it. http://www.scribd.com/doc/54980645/Savings-Equals-Investment-AP-Lerner

  110. Gravatar of Tschäff Reisberg Tschäff Reisberg
    17. August 2011 at 16:17

    P.S. Ron- When I first read your link it was the best description of why S=I that I had ever come across, but it still left a lot of unanswered questions like the interface between nominal and real. Or how as individuals we are free to chose how much of our income we save, but as a collective we are not free, in fact we are limited by by how much was invested. Then there is saving vs net saving. Who knew such simple arithmetic could be so hard to comprehend?

  111. Gravatar of Tschäff Reisberg Tschäff Reisberg
    17. August 2011 at 16:40

    P.P.S.
    It’s pretty odd Scott S, that you focus strictly on cash, as if other financial assets don’t do anything in the economy.

  112. Gravatar of Nick Rowe Nick Rowe
    17. August 2011 at 16:45

    Ron T.: “This is an accounting identity, a record of transactions, there is nothing to equilibrate.”

    Oh Christ. Look. The mainstream of the economics profession figured out the difference between I-S+G-T+X-M=0 understood as an accounting identity, and understood as an equilibrium condition in the “ex-post ex-ante” debate back in the 1950’s. We wasted a lot of time and ink getting that straight. I don’t want to re-hash that old ground that MMTers are still mired in.

    I’m afraid you have just confirmed my worst fears about MMT. You guys don’t understand the difference between “quantity demanded = quantity supplied” and “quantity bought = quantity sold”.

    And then Tschaff re-confirms.

    You are teaching your grandmother how to suck eggs. And, getting it wrong.

    Sorry, but this is why I (sometimes) despair.

  113. Gravatar of W. Peden W. Peden
    17. August 2011 at 16:49

    Tschäff Reisberg,

    I try to get people on here to discuss financial assets all the time…

    Re: QE- it all depends on the scale, how much the MB is appreciating in value, and expectations. If the MB is bearing interest (i.e. the CB is paying IOR) or the increase in the MB is not expected to be permanent, then the increase in the MB will have to be huge before it satiates the warped demand-for-M0 of commercial banks.

    Obviously, I’m prepared to go into more detail e.g. how the MB relates to the broader monetary aggregates, even if bank rate doesn’t change.

  114. Gravatar of Ron T Ron T
    17. August 2011 at 18:06

    Nick,

    Sorry if my lack of education offended you. I am not an economist. If you can use this as an excuse to diss MMT as a whole, feel free.

    My take on savings vs investment is such: I think everybody is confused that “savings” means not spending, whereas S in the above equation means something else: it is spending on something else than consumption (assuming the govt and foreign sector away).

    That is why you can have an accumulated income from the previous period and spend less than your income this period (or not spend at all), but this is not what S is. S is a record of a transaction that was made by someone not intending to consume but to invest (please rad the above link if I am rambling). So whatever ex ante ideas of investment are, they will be ex post reflected as “unconsumed income” = Y-C=I. End of story. But this S is a record of spending, not refraining from spending as we colloquially tend to think of “saving”.

    Why would anyone ponder if ex ante S=I is beyond me (I hope it is not post Keynesians who wated time on this?), as investment I reflects sovereign decision to spend on investment, and S just records this as “unconsumed spending=unconsumed income”.

    As I understand this, there is no equilibrium involved, as no deviations are mathematically possible. If you play a coin toss with an opponent X and every time person A wins +1 point, person B loses 1 point, we have:

    delta_points(A)+delta_points(B)=0,

    and talking if this is “true ex ante” or “can deviate from equilibrium” is pure nonsense. I can see economists debating this though.

  115. Gravatar of Ron T Ron T
    17. August 2011 at 18:16

    I’m afraid you have just confirmed my worst fears about MMT. You guys don’t understand the difference between “quantity demanded = quantity supplied” and “quantity bought = quantity sold”.

    I think we do. Quantities: “supplied” and (certainly) “demanded” are unmeasurable and hence of no concern to MMT, just like “expectations”, “rationality” or Sumner’s tautological definition of “tight money” (= “crisis” how he defines it, and since the definition of “crisis” already exists, creating another one with the same meaning only serves to obfuscate things). Inventing a plethora of such unmeasurable quantities is very useful for economists whose only contribution is counting angels on a pin.

  116. Gravatar of Tschäff Reisberg Tschäff Reisberg
    17. August 2011 at 18:32

    WTF Nick? If you’re going to use two autodidacts admittedly incomplete knowledge of MMT to “confirm your worst fears about MMT” then you are seriously a fool. God I hate this place, why do I keep coming back.

  117. Gravatar of Ron T Ron T
    17. August 2011 at 18:45

    Tschäff,

    C’mon, you reduced one guy to calling you a cultist, that is a sign of his utter helplessness, you rule this place! People fear MMT, it is obvious. They need to ridicule it. Find some stupid statement by a guy who studied medicine, or pick on tone of some bloggers, like Krugman did in his last blog post (“John Galt” – how lame)- he couldn’t come up with anything of substance and got torn to shreds by Wray today.

  118. Gravatar of dilletaunted dilletaunted
    17. August 2011 at 19:02

    really though i think a lot of the problem in communication (at least for a guy like rowe who’s actually interested) is because a good portion of the monetarists here are phd’s and all of the mmt’ers are just guys on the internet. there are only a dozen mmt economists alive

    another example of why the internet is awesome. the barbarians are at the gates, fellers

    “And it’s a bit rich for him to talk as if Krugman can’t be expected to understand monetary economics, because it’s not his specialty.”

    krugman straight up said that banks lend reserves. this is false. what’s the problem?

  119. Gravatar of Ron T Ron T
    17. August 2011 at 19:14

    dilleta

  120. Gravatar of Ron T Ron T
    17. August 2011 at 19:18

    dilletaunted,
    krugman straight up said that banks lend reserves. this is false. what’s the problem?

    you see, you are not getting it, Sumner said that Krugman published some paper based on QTM and this fact makes him an expert! Now he can say that banks lend reserves (something Sumner himself believed as recently as 2010) and he is still an expert, and forever will be. And MMT is bunk because some guys on the internet who like it can’t tell apart “quantity pondered” from “quantity desired” or some other unobservables.

  121. Gravatar of Gene Callahan Gene Callahan
    17. August 2011 at 19:28

    So Morgan Warstler, I guess owning lots of hard asset and being a really creepy guy are not mutually exclusive?

  122. Gravatar of Diatome Diatome
    17. August 2011 at 19:40

    Monetarist re-programming:

    Step 1) State the obvious.

    Total Spending = Total Income

    This can hold ex post, agree? Nothing needs to change to bring the two into equilibrium. After all if someone is spending, the flip side of the transaction is someone is receiving. Simple enough right? Notice this is only related to flows, stocks of money exist on another plane, and are inapplicable to this identity.

    Step 2) Exclude government and foreign sectors for the moment, and divide spending into two categories then set it equal to income. Income can come only from consumption and investment expenditures.

    C (Consumption) + I (Investment)= Y (Income)

    It’s not important to split hairs over what you consider investment or consumption, whatever accounting scheme you use the equation will always hold.

    Step 3) What Mr. Keynes means by saving is what is left of your income after consumption. Income is either consumed or saved. Y-C=S. Mind you this definition of saving doesn’t mean to accumulate money. That would be savingS and is a stock variable and not applicable to this identity. Saving (without an S) is a non-action. It means to refrain from consuming one’s income. It’s one one does with income. It’s important to be specific here because if one isn’t it can cause a lot of confusion.

    Step 4) Put it all together and prove it
    a) Total income = total consumption spending plus total investment spending Y=C+I,
    b) Investment spending = Total income – total consumption spending. I=Y-C
    c) Total income = total consumption spending + total saving Y=C+S
    d) Saving= total income minus total consumption.
    So.. S=Y-C and I=Y-C therefore S=I

    Step 5) Reasons you know that I causes S. If no investment takes place, nothing can be saved. No matter how strong people wish to save. Willpower isn’t enough to raise people’s incomes from which they can save and consume from. Likewise incomes will rise if investment spending increases no matter how little the people in the economy wish to save.

    Now as Tschäff commented the interface between real and nominal: It’s easier to see how I causes S in nominal terms. Real saving is total produced – total consumed. If something was produced, and not consumed, then it had to add to the stock of plant, equipment or inventory. That’s what real investment is. Without investment, firms couldn’t increase their plant and equipment or inventories, thus there would be no S.

    To Tschäff’s other complaint: Saving (flow) accumulates into Savings (stock). Savings are measured at one point in time. Flows feed stocks. One individual’s Savings may increase his stock of money. But everyone saving will not increase the economy’s stock of money. The stock of money is whatever the creators of money make it.

    Ah, that was a nice change of topic. :) Makes a lot more sense than the loanable funds model once you wrap your mind around it.

  123. Gravatar of Gene Callahan Gene Callahan
    17. August 2011 at 19:42

    @ Warstler: “to me the obvious issue is that we are a nation of immigrants, we’re not all descendant form the same tribe.”

    So the really obnoxious guy doesn’t have any idea what he is talking about! Singapore is ethnically mixed, with the largest group being Chinese… all of whom are immigrants! It has the sixth highest foreign-born population in the world.

  124. Gravatar of Diatome Diatome
    17. August 2011 at 19:43

    hit send too soon, 2 corrections:

    “It’s easier to see how I causes S in nominal terms.”
    should be
    “It’s easier to see how I causes S in real terms.”

    and

    “One individual’s Savings may increase his stock of money.”
    should be
    One individual’s Saving may increase his stock of money.”

  125. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 21:02

    “I guess owning lots of hard asset and being a really creepy guy are not mutually exclusive?”

    Gene, I assume you’d be creeped out by most people who own a bunch of hard assets, right? Don’t be annoyed with my approach to MMT, somebody has to play the trump card with these idiots.

    On Singapore, dude, the point is that even shitty Greece has a hard time living like Germans… there’s science on this, just go look it up. Homogeneity influences sharing. I know you want Singapore to look like Amsterdam, it doesn’t.

    I’m not concerned with with ought to be, I’m concerned with what should be.

  126. Gravatar of W. Peden W. Peden
    18. August 2011 at 04:29

    Diatome,

    “The stock of money is whatever the creators of money make it.”

    This is wrong. Banks are restrained by the need to find creditworthy borrowers. Borrowers are constrained by the willingness of banks to lend. The creditworthiness of borrowers is identical to their expected nominal wealth over the period of repayment. And expected nominal wealth is where central banks come in and MMT goes out the window…

  127. Gravatar of W. Peden W. Peden
    18. August 2011 at 04:39

    Diatome,

    It’s funny how people don’t bat an eyelid when they classify inventories as investment…

  128. Gravatar of W. Peden W. Peden
    18. August 2011 at 04:45

    Also, all income-expenditure models are totally irrelevant to the real world, since they break down if one allows for the accumulation of private property.

  129. Gravatar of Nick Rowe Nick Rowe
    18. August 2011 at 05:01

    Diatome @19.40 gets the explanation of (actual)S=(actual)I understood as an accounting identity nearly right. That’s what I have taught every year for the last 30 years in ECON1000. I first learned it in high school. It is certainly not news to me.

    But he fails to understand the role of (desired)S=(desired)I as an equilibrium condition that can help us understand which determines which, and what adjusts to bring desired S equal to desired I.

    An interpretation of MMT that would make sense of MMT as a logically coherent theory would be this:

    Desired S depends on Y. It is an increasing function of Y. If, at some initial value of Y, desired S exceeds desired I, then firms will be unable to sell all the goods they are producing. Because the quantity of consumption goods demanded plus the quantity of investment goods demanded will be less than the total quantity of goods produced. (Undesired inventories pile up). So Y falls until desired S equals desired I.

    And the above is what I learned in high school, and have also taught for many years in ECON1000. It’s an (oversimplified) version of Keynesian economics circa 1950.

    I know you guys are autodidacts. But:

    1. Either you have been taught very wrong or have learned very wrong something very very basic to MMT (namely the S=I or I-S+G-T+X-M=0 equation).

    2. Or MMT at it’s very roots is horribly confused in thinking that an accounting identity is a causal explanatory theory of the world. Because if a serious MMTer were to restate on his blog some of the things you guys have just stated in the above comments, then the credibility of MMT would instantly drop to zero among all trained economists.

    For example:

    Ron T. “Quantities: “supplied” and (certainly) “demanded” are unmeasurable and hence of no concern to MMT, just like “expectations”, “rationality” or ….”

    Which is it? 1 or 2?

    So, I suggest you ask a serious MMT economist to set you guys straight, and also set the record straight on what MMT says, about the difference between S=I as an accounting identity and S=I as an equilibrium condition.

  130. Gravatar of Ron T Ron T
    18. August 2011 at 05:30

    There is nothing “desired” about S, it just an accounting record of investment transactions, geez. The transaction is initiated *each time* by someone deciding to invest, not save. If you insist, since always ex post S=I, you can say “desired S” =”desired I” but it is useless to talk about relationshipes between two unobservable, unmeasurable quantities.

  131. Gravatar of Rob Rob
    18. August 2011 at 05:35

    Scott –

    Even though I side with MMT, I thoroughly enjoy your blog and the engaging posts and commentary.

    Nick – in regards to your post (18 August 2011 at 5:01pm) unfortunately both Diatome and Reisberg are very enthusiastic and passionate, they are clearly not accurately representing the scholarly work of MMT. Please see the following blog posts by the sources:

    From Bill Mitchell: Why Budget Deficits drive Private Profit http://bilbo.economicoutlook.net/blog/?p=12003

    From Heteconomist: Sectoral Balances and Keynesian Causation
    http://heteconomist.com/?p=2360

    Thinking in a Macro Way
    http://heteconomist.com/?p=641

    Investment preceeds saving
    http://heteconomist.com/?p=2043

    Identities Do Not Imply Equilibrium
    http://heteconomist.com/?p=2029

    I would urge you to read these sources especially Bill Mitchell who links throughout his post further posts that detail his thinking.

    It’s great that you and Scott S. are willing to engage with MMT. As has been suggested I would be thrilled to see a direct dialogue between you guys and the MMT scholars, that would be insightful and fun to watch.

  132. Gravatar of wh10 wh10
    18. August 2011 at 05:35

    Nick, you should get in touch with Wray, Fullwiler, Mosler, etc personally and discuss this, probably a couple times (phone, skype, etc). It would be a much more productive use of your time. Think how much time you waste debating this with peons such as us, though we appreciate it greatly!

    Then report back to us what you learned. And if you still think MMT is bogus, those originally disagreeing with you would then find what you say to be more credible.

    I suggested this to Sumner as well. I would suggest this to the econ profession as a whole. Panels/debates with different schools of thought would be awesome! Is everyone too scared? Or is it just that it would take a lot of work to organize? Or the money?

    With Skype, Google+ (can hold chats with 10 people or something), it’s made much easier. I bet you could even record the convos and sell them!

  133. Gravatar of Morgan Warstler Morgan Warstler
    18. August 2011 at 05:52

    Yes Nick, and when you are done with that, I need a foot massage. When Scott gets done doing my nails, he’ll be reporting back to us what he’s learned.

    wh10, dirty hippies do not count.

  134. Gravatar of Peter D Peter D
    18. August 2011 at 06:00

    Because if a serious MMTer were to restate on his blog some of the things you guys have just stated in the above comments, then the credibility of MMT would instantly drop to zero among all trained economists.

    This made me laugh. The credibility of MMT is probably negative “among all trained economists” right now. As far as I can tell, it is the butt of everybody’s jokes. And yet, funnily, Krugman, Rowe and Sumner seem intrigued enough – either by MMT itself, or by the internet phenomenon that it has become – to come back to it again and again in their blogs. I don’t think Austrians get anywhere as much attention, while being much more established, published, funded etc. Austrians are just considered “not-even wrong” among most economists. MMT somehow manages to look stupid and intriguingly right at the same time.
    Nick, I really appreciate your comments. I don’t understand half of what you’re saying, being an uneducated “peon” myself but one day I might.

  135. Gravatar of W. Peden W. Peden
    18. August 2011 at 06:03

    Peter D,

    I’d say more stupid and intriguingly wrong…

  136. Gravatar of W. Peden W. Peden
    18. August 2011 at 06:04

    (In the sense that working out what is wrong with MMT makes one learn a lot about how money really works in a modern economy. There are many roads to monetarism…)

  137. Gravatar of Ron T Ron T
    18. August 2011 at 06:12

    W Peden,
    you are master of one liners that soothe your soul. Once you “work out what is wrong with MMT”, please share it with us, we will have a good laugh. So far Sumner, Rowe and Krugman failed, they need to resort to saying that MMT is annoying and “obviously” wrong. Hah. Sumner gave you a research project: prove that inflation was caused by the composition of govt spending (reserves vs bonds) in the case of “Argentina, Turkey, Brazil, Bolivia, Israel, Chile”. I’d say if you prove one of them, it will be enough to drive the stake thru MMT. I say go at it.

  138. Gravatar of wh10 wh10
    18. August 2011 at 06:17

    Morgan, if those guys are really dirty hippies, then why is Sumner and Rowe even bothering debating with us? And what does that make us?

  139. Gravatar of W. Peden W. Peden
    18. August 2011 at 06:26

    Ron T,

    I’ve already driven a stake through the heart of MMT: monetary policy ALWAYS affects NGDP. Also, there’s the empirical fact that money is neutral in the long-run.

    Apart from long-run non-neutrality and the impotence of monetary policy, what is there of interest in MMT?

  140. Gravatar of Diatome Diatome
    18. August 2011 at 06:27

    @W. Peden
    Me: “The stock of money is whatever the creators of money make it.”

    W. Peden: This is wrong. Banks are restrained by the need to find creditworthy borrowers.

    Me: Agreed.

    W.P: Borrowers are constrained by the willingness of banks to lend.

    Me: Agreed

    W.P: “The creditworthiness of borrowers is identical to their expected nominal wealth over the period of repayment.

    Me: I would change creditworthiness to expected creditworthiness.

    W.P: And expected nominal wealth is where central banks come in and MMT goes out the window.

    Me: Huh? MMT accords with all you just said. Plus you still haven’t explained to me how I’m wrong about money existing without having had to be created, you just explained one of the ways it can come to exit. :)

    W.P: It’s funny how people don’t bat an eyelid when they classify inventories as investment…

    Me: You’re going to have a hard time explaining why inventory investment isn’t an important economic activity or why it should be excluded from the umbrella of investment.

    Nick R: There is nothing necessarily Keynsian about it. It’s the result of 500 years of double-entry book keeping.

    I fail to see why(desired)S=(desired)I is true. I know very few people who don’t desire higher S or even higher Y from which they can have higher S and higher C. But this might just be terminology. Usually the first thing an increased desired S does is result in an undesired I, as businesses find themselves with undesirably large inventories. It also doesn’t make sense why businesses desire to invest the same amount people desire to save. When C drops due to people trying to meet their desired S, the usual response from businesses is to reduce I after they notice an unintended inventory buildup, GDP drops unless another source of demand from government or the foreign sector compensates from the drop of C+I and people discover they are unable to make their desired S their actual S.

    This is why demand can fall below full employment levels, and there is no reason to think that full employment is an equilibrium condition.

    I won’t speak for MMT, just like I didn’t in all my previous posts, but I’ll point out that the accounting identity doesn’t say anything about causality. For that you have to look at flows. Dollars circulate around the economy continuously. Wages, profits, sales revenues, taxes and dividend are all flows. Pay close attention to these and you’ll find the actual causality isn’t necessarily your desired causality.

  141. Gravatar of W. Peden W. Peden
    18. August 2011 at 06:37

    Diatome,

    If you accept that central banks can affect nominal wealth, then you can’t have MMT, because then you get stuck with my transmission mechanism-

    M0 > cash balances > financial assets > nominal wealth > bank lending > broad money > NGDP

    – which contradicts the MMT proposition that central banks have absolutely no control over NGDP.

  142. Gravatar of W. Peden W. Peden
    18. August 2011 at 06:41

    Also, the point of inventories is to show the empty nature of the equations: it’s not that investment = savings in the ordinary language sense, but rather than these are redefined to make an accounting identity.

    Also, if MMT’ers reject IS-LM (as good Post-Keynesians) doesn’t that just leave them with the income-expenditure model, which is useless?

  143. Gravatar of W. Peden W. Peden
    18. August 2011 at 07:24

    (By the way, the money stock isn’t endogenously determined by the demand for credit either. It is exogenous.)

  144. Gravatar of Peter D Peter D
    18. August 2011 at 07:37

    “which contradicts the MMT proposition that central banks have absolutely no control over NGDP.”

    I don’t think MMT contradicts that. Rather, this control is shaky, at times unreliable and less preferable to fiscal adjustments.

  145. Gravatar of Diatome Diatome
    18. August 2011 at 07:41

    @W.P I don’t think MMTers would agree that central banks have zero control over NGDP, just that it is an indirect control and somewhat ambiguous due to the many moving parts. The reason we’re having this convo is because central banks don’t make large purchases of real output. They don’t spend large sums on cars, fish tanks, computers, and airplanes etc.. Right? They adjust interest rates. They try to lower interest rates in hopes it will boost bank lending. People borrow when they want to make a purchase. So the transmission mechanism they are trying to use is:

    HPM (adjust whatever quantity is necessary to hit their interest target or pay interest on excess reserves) -> bank loans -> borrowers purchases and the knock on effects of those -> NGDP

    It can fail because step 2 is not under the direct control of the Fed. Maybe people are up to their ears in debt and don’t want to take on more however low the interest rate. Lower interest rates mean less income for lenders, more for borrowers, lower interest rates mean less debt payments from the treasury, and that’s just a small sample of consequences. That’s why MMTers prefer fiscal policy as a much more sharp tool (but absolutely not the only necessary tool) for macroeconomic stabilization.

    “M0 > cash balances > financial assets > nominal wealth > bank lending > broad money > NGDP”

    If you look at the Fed’s balance sheet the liabilities+equity and assets side are equal to each other. When the fed makes a purchase, it swaps one financial asset (usually a tsy sec) with another financial asset (HPM), so unless there were capital gains or losses, net financial assets of the non-government sector isn’t increased or decreased from this financial asset swap. http://www.clevelandfed.org/research/commentary/2010/2010-8-1.gif

    I can’t speak to MMT’s rejection or acceptance of IS/LM. If I had to guess, I’d say they’d agree with Mr. Hicks that it should’t be used as more than a classroom gadget. They prefer to use Krugman’s cross. http://neweconomicperspectives.blogspot.com/2009/07/employing-krugmans-cross-farewell-mr.html

  146. Gravatar of W. Peden W. Peden
    18. August 2011 at 08:00

    Peter D,

    “I don’t think MMT contradicts that.”

    Yes it does, unless you’re going to say that MMT’ers endorse the exogeneity of money.

    After all, if central banks had this power to affect NGDP, then it would be possible for governments to run surpluses and yet for economic contraction to be avoided by loosening monetary policy. (Incidentally, there are historical cases of this happening.)

    But if that’s possible, then what’s left for MMT? What happens to propositions like “continual budget deficits are necessary for a growing economy that wants to avoid deflation”?

    Also, if that’s so, why have MMT’ers on here gone to so much effort in the past to argue that (a) there is no real difference between cash and bonds & (b) that there is no transmission mechanism between OMOs and the money supply?

    No-one disputes that the central bank’s control of NGDP is somewhat shaky and at times unreliable. We’re looking at what makes MMT distinctive (and wrong).

  147. Gravatar of W. Peden W. Peden
    18. August 2011 at 08:14

    Diatome,

    “If you look at the Fed’s balance sheet the liabilities+equity and assets side are equal to each other. When the fed makes a purchase, it swaps one financial asset (usually a tsy sec) with another financial asset (HPM), so unless there were capital gains or losses, net financial assets of the non-government sector isn’t increased or decreased from this financial asset swap.”

    The QUANTITY of financial assets of the non-government sector isn’t changed by asset swaps, but the PRICE is changed. Indeed, all assets are indirectly affected by central bank operations, hence the effect (say) of QE2 on the US stock market. This links up OMOs with nominal wealth, and the rest should be familiar at this point.

    I was under the impression that those MMT’ers who knew their stuff were Post-Keynesians, which would mean that they’ve stayed close to the old income-expenditure model found in Keynes.

    Looking at interest rates, like the creditists (who control almost all modern central banks) and the Keynesians do is just a recipe for disaster. Notice, for instance, how the way I laid out the transmission mechanism doesn’t mention interest rates at all. The discount rate and reserve requirements &c. could be totally ineffective, and yet the monetarist transmission mechanism would still hold.

    (Interest rates only come into the story when ironing out the details of the “hot potato” nature of M0 and as an epiphenomenon expressing the relation between commercial banks and the borrowing public.)

    If people expect their wealth to appreciate dramatically in value, they’ll take on more debt regardless of how indebted they are. Look at what happened in the housing boom: highly indebted people sought and got loans to buy housing, because the nominal value of that housing was appreciating so quickly.

    As for fiscal policy, it can have a useful role e.g. keeping fiscal policy continent means that the central bank can have a looser monetary policy and still keep demand under control. It is desirable to avoid situations like the 1980s in the US when huge deficits meant that very tight monetary policy was necessary to bring NGDP down.

  148. Gravatar of Diatome Diatome
    18. August 2011 at 08:31

    W. Peden: “After all, if central banks had this power to affect NGDP, then it would be possible for governments to run surpluses and yet for economic contraction to be avoided by loosening monetary policy. (Incidentally, there are historical cases of this happening.”

    Me: NGDP grew the last time government ran a surplus. There isn’t a question in MMT if this is possible, it’s over how sustainable is it for the government to add fiscal drag?

    W.P: What happens to propositions like “continual budget deficits are necessary for a growing economy that wants to avoid deflation”?

    Me: Historically the non-government sectors have desired, almost always, to net save dollar financial assets. The only possible way this can be accommodated is for the government to run a deficit.

    W.P: there is no real difference between cash and bonds & (b) that there is no transmission mechanism between OMOs and the money supply?

    Me: We don’t say there is no real difference, we say that bonds and cash, add to a person’s ability to make a purchase. Right? If you get $1,000 in bonds or $1,000 in cash in your Christmas stocking, if you want to purchase a new computer you have the means. If you were given a lump of coal in your stocking, you’ll not be able to buy that shiny new computer. That’s what we want to point out. People with financial assets have financial wealth. Therefore they have the ability to cause demand-pull inflation when they decide to make a purchase.

  149. Gravatar of W. Peden W. Peden
    18. August 2011 at 10:24

    “There isn’t a question in MMT if this is possible, it’s over how sustainable is it for the government to add fiscal drag?”

    Go on. I’m genuinely interested. So, when a government runs surpluses and NGDP grows, then ?

    “Historically the non-government sectors have desired, almost always, to net save dollar financial assets. The only possible way this can be accommodated is for the government to run a deficit.”

    So borrowing isn’t being crowded-out by government deficits, such that the private sector borrowing ratio goes up. Where’s the problem?

    “We don’t say there is no real difference, we say that bonds and cash, add to a person’s ability to make a purchase. Right? If you get $1,000 in bonds or $1,000 in cash in your Christmas stocking, if you want to purchase a new computer you have the means. If you were given a lump of coal in your stocking, you’ll not be able to buy that shiny new computer. That’s what we want to point out. People with financial assets have financial wealth. Therefore they have the ability to cause demand-pull inflation when they decide to make a purchase.”

    That’s false, of course, but I’m sure you know that.

    Anyway, so you acknowledge the transmission mechanism between OMOs and NGDP, via balance effects (i.e. OMOs change the value of the portfolio of asset holders, which increases the money supply, which increases NGDP)?

  150. Gravatar of Peter D Peter D
    18. August 2011 at 11:02

    Go on. I’m genuinely interested. So, when a government runs surpluses and NGDP grows, then ?

    I’m jumping in but I couldn’t resist.
    You know what happens? One part of the private sector, that is running down its NFAs to pay for those govt surpluses, is now in debt to another part of the private sector (the banking sector.) In the slightly longer run this indebtedness turns into debt slavery. People want to sustain their standard of living, but since their NFAs ooze into the black hole of govt surpluses, they have to borrow more and more from the bankers. Ask Hyman Minsky what happens next. Or just look at the latest crisis. Or look at the fact that every single period of govt surpluses was followed by a recession in the US.

  151. Gravatar of Nick Rowe Nick Rowe
    18. August 2011 at 11:07

    Rob and wh10: I read your comments (in response to my last) too late!

    Anyway, since I have already just finished posting my own explication of what “I=S” means, anyone who is interested can read it further. And I mean “anyone” because it’s not *just* (some) MMT (followers) who get confused by this. Half the economics profession got a bit confused by this over 50 years ago. Even Keynes went a bit wobbly at times. “Saving”, being defined as a thing we are *not* doing with our income, is a hard concept to visualise.

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/08/is.html

    I *think* there’s nothing in my post a *serious* MMT economist would disagree with. (Unless I’ve made some accursed arithmetic mistake, which always happens when I teach this damned thing!)

  152. Gravatar of W. Peden W. Peden
    18. August 2011 at 11:25

    Peter D,

    “You know what happens? One part of the private sector, that is running down its NFAs to pay for those govt surpluses, is now in debt to another part of the private sector (the banking sector.) In the slightly longer run this indebtedness turns into debt slavery. People want to sustain their standard of living, but since their NFAs ooze into the black hole of govt surpluses, they have to borrow more and more from the bankers. Ask Hyman Minsky what happens next. Or just look at the latest crisis. Or look at the fact that every single period of govt surpluses was followed by a recession in the US.”

    What if those paying down their NFAs have the value of those surpluses increased in line with the fall in their quantity, such that the net nominal wealth of the country doesn’t fall? Remember, this monetary policy isn’t passive in this scenario: we’re assuming that the central bank is maintaining the net nominal wealth of the country by increasing its price, such that the net fall in nominal wealth (as opposed to the QUANTITY of assets) of the public that results from these surpluses is 0.

    Every period of anything was followed by a recession in the US. However, I’m not sure how far you’d have to go back to find a government surplus in the US. There wasn’t one during the Bush years leading up to the crisis (quite the opposite- there were huge deficits) and there wasn’t a surplus at any point during the Clinton administration. Indeed, the US national debt has been rising every year for a very long time.

  153. Gravatar of Peter D Peter D
    18. August 2011 at 12:07

    “What if those paying down their NFAs have the value of those surpluses increased in line with the fall in their quantity, such that the net nominal wealth of the country doesn’t fall? Remember, this monetary policy isn’t passive in this scenario: we’re assuming that the central bank is maintaining the net nominal wealth of the country by increasing its price, such that the net fall in nominal wealth (as opposed to the QUANTITY of assets) of the public that results from these surpluses is 0.

    Really, I don’t know what this means. Are you talking deflation?

  154. Gravatar of W. Peden W. Peden
    18. August 2011 at 12:19

    No.

    Say the central bank offsets the contractionary fiscal policy by increasing the monetary base (and it has stopped paying interest on excess reserves). Commercial banks now have more non-interest bearing money than they want, so they buy financial assets to get rid of it. But, of course, they can’t get rid of that cash by swapping it with each other.

    So maybe some financial asset holders swap it with holders of other assets. But, of course, they can’t get rid of that cash by swapping it with each other.

    Eventually, through leakage and differential preferences to hold cash being satisfied, the hot potatoes are finally cooled. At no point does the cash disappear.

    So what changed? Well, the prices of all those bought assets will have shot up. Hence QE that is expected to be permanent correlates with things like the stock market going up.

    In the scenario, therefore, the net nominal wealth of the public is unchanged. The quantity of government bonds has fallen as the government pays them off, but the price of all assets is unchanged due to the hot potato effect.

    And here’s the impressive thing: this process begins to have effects instantly, because we’re dealing with human beings and human beings act on expectations of the future. Hence QE2 started having effects as soon as it was anticipated.

    That is how it is possible for a government to run surpluses with no change in NGDP. Ever.

  155. Gravatar of Scott Sumner Scott Sumner
    18. August 2011 at 17:24

    Ron, You said:

    “That is “false” only in your reality-untainted ivory tower.
    He showed it is not false, at the level of balance sheets (heard about those?)”

    Let’s see, I look at actual real world examples, and he looks at “balance sheets” as proof of causation. Hmmm, who’s in the ivory tower?

    RebelEconomist, There is nothing in that post that contradicts what I am saying over here. And I am one of the few bloggers that tries to answers all the comments–so your criticism is really pretty immature.

    wh10, An academic really ought to be able to explain ideas to other academics in a paper. If they can’t, then having a “conversation” won’t solve the problem. MMTers need to learn how to communicate more effectively. I don’t agree with Austrians, Keynesians, etc, but I can usually follow their logic. All this nonsense about banks lending or not lending reserves is no way to explain a theory. I asked very specific questions on earlier posts and MMT experts came over here and were unable to address my questions to my satisfaction. Then I notice that lots of other economists I respect have the same opinion, so it’s not just me. Then I notice that MMTers are the most insulting commenters that I get over here. Coming here with an attitude that everyone is stupid who doesn’t agree with them. “Krugman doesn’t even know that banks don’t lend reserves, nah nah nah” That’s the attitude. They don’t even realize that all he’s saying is that banks can get rid of reserves if they want to. Whether they lend it out or buy securities doesn’t matter. I could go to my bank tomorrow and borrow $5000, and take the loan in cash–and disprove all of MMT. Maybe I’ll do that, just to show them. :)

  156. Gravatar of Jim Glass Jim Glass
    18. August 2011 at 18:36

    “We don’t say there is no real difference, we say that bonds and cash, add to a person’s ability to make a purchase. Right? If you get $1,000 in bonds or $1,000 in cash in your Christmas stocking, if you want to purchase a new computer you have the means. If you were given a lump of coal in your stocking, you’ll not be able to buy that shiny new computer. That’s what we want to point out.”

    Oh, you are cheating!

    Because if you got $1,000 worth of coal you’d certainly be able to buy that shiny new computer — $1,000 of coal adds to your total wealth just as much as $1,000 of bonds or $1,000 of cash.

    So coal, bonds and cash all “add to a person’s ability to make a purchase. Right?”.

    Really, you MMTers have to try harder, pick it up a notch.

    In another forum recently I got this “adds to the power to make a purchase, just like money” logic from an MMTer and was able to use it to get him to admit that a 20-year old Chrysler on blocks in my back yard that I could sell for its cash value tomorrow is a cash equivalent — and thus further proof that the Fed can’t change the true money supply, but only substiute one asset for another.

    MMT: three letters that spell “fun”. :-)

  157. Gravatar of Peter D Peter D
    18. August 2011 at 18:57

    Jim Glass

    Oh, you are cheating!

    Because if you got $1,000 worth of coal you’d certainly be able to buy that shiny new computer “” $1,000 of coal adds to your total wealth just as much as $1,000 of bonds or $1,000 of cash.

    I agree. This is not why cash and bonds differ from coal. Rather, if you sell your piece of coal to somebody, that somebody just got fewer bucks so, in aggregate, the private sector is neither poorer not richer. Ont he other hand the mere existence of govt bond is due to an earlier injection of NFAs into the private sector, that became richer by the value of the bond (in nominal terms, yes.)

  158. Gravatar of Peter D Peter D
    18. August 2011 at 18:58

    W. Peden, let’s take your scenario to the extreme. The gov keep running surpluses and reduces NFAs of the private sector to the point where there are people without any. Even if we suppose that the Fed aces the price level and the total value of those NFAs is unchanged, those without any NFAs wouldn’t care much whether their 0 assets cost X or 100*X. 0 times anything is still zero.
    And, of course, acing the price level is in itself not a given. Maybe it can be done effectively, I don’t know. How many people follow the Fed’s announcements? What do you think will affect their expectations more: Fed’s commitment to replacing bonds with cash or seeing their NFAs being depleted?
    Finally, If the value of bonds goes up, what happens to the value of cash? Does it also go up (deflation), does it go down (inflation), stays the same?

  159. Gravatar of wh10 wh10
    18. August 2011 at 19:36

    Dr. Sumner, other than Morgan Warstler, fine :).

    Whatever the case may be, I still don’t see why you would rather spend your time conversing with arm chair economists like us (on this topic) than the real MMTers. It’s kind of like, go pick on someone your own size. But, hey, thanks! It’s fun chatting with famous dudes :).

  160. Gravatar of Diatome Diatome
    18. August 2011 at 19:38

    I think I did pretty well defending MMT. I read another one of the real MMTer’s responses to Krugman and it says essentially what I said: http://bilbo.economicoutlook.net/blog/?p=15722

    It’s not that long of a post but I’ll copy and paste the key points for the lazy:

    0)”Logically, we cannot loan the government its own currency until it has spent it. Bank reserves have to exist before the government can borrow from them.”
    1) “The government deficit (treasury operation) determines the cumulative stock of financial assets in the private sector. Central bank decisions then determine the composition of this stock in terms of notes and coins (cash), bank reserves (clearing balances) and government bonds with one exception (foreign exchange transactions).”

    2)Government bonds in the hands of the non-government sector than deposits. As I said before, they are liquid assets. It is spending that is potentially inflationary. This goes against the conventional wisdom that increasing the quantity of some asset must delude the exchange value of it.

    3) “If the central bank has a positive interest rate target – that is, the policy rate that it sets as an expression of its monetary stance – then it cannot “monetise” deficit spending by the treasury – which Krugman calls printing money. Such a central bank has no option – it either has to issue debt to drain the reserves that are boosted by the deficit spending (on a daily basis) or it has to pay a return on the reserves that are held with it by the private banks.

    The two options – debt-issuance or paying a support rate – are from an operational perspective equivalent.

    If the central bank didn’t do either then it would immediately lose control over its target policy rate. Why? Because the private banks would seek to shed the excess reserves (over and above the balances they deemed necessary to ensure all cheques drawn on it cleared) via the interbank market. That is, to loan them to other banks which might need reserves.

    But as noted above, when the system is in excess, this interbank lending does nothing other than shuffle the excess around. But the competition that accompanies this “shuffling” drives the overnight rate down to zero (in the case of no support rate being offered by the central bank) and so the central bank monetary policy stance is thwarted.”

    So now you know why Krugman’s article is nonsensical on numerous levels.

    I like W. Peden because he’s the most interested in understanding MMT vs Sumner and Rowe who are desperately trying to debunk it. The real MMTers put them in their place much better than me as you can see in the comments section here: http://www.economonitor.com/lrwray/2011/08/16/paul-krugman-still-gets-it-wrong-modern-money-theory/

    Your idea of W.P of the fed buying financial assets to raise the price makes sense in that it can have a “fiscal” effect. Remember above the one exception I said to the asset swap that QE is if there are capital gains or losses. People with more capital gains than they’d otherwise may add to AD than they otherwise would have. It’s ugly though from a fairness/distributional standpoint. I’d rather see fiscal transfers to states on a per capita basis and a full FICA tax holiday.

    “Because if you got $1,000 worth of coal you’d certainly be able to buy that shiny new computer “” $1,000 of coal adds to your total wealth just as much as $1,000 of bonds or $1,000 of cash.”

    Actually the worse and more shameful cheat is that cash (Fed liability) and bonds (Treasury liability) are assets to you. Coal is just an asset, with no corresponding liability. I regret making that analogy because it will clutter thinking more than clear it. The point I was trying to make is that tsy secs and just as liquid as bank liabilities.

  161. Gravatar of Jim Glass Jim Glass
    18. August 2011 at 20:37

    RebelEconomist wrote:
    I’m sorry if asking a question like “What mechanism does the Fed have at its disposal that allows it to force the money supply above money demand?” make me a cult follower. The question wasn’t rhetorical, if Scott S. knows something I don’t I’d love to know.

    Jim Glass wrote:
    MMTers don’t know how the Law of Supply and Demand works, at even the first quarter of a 101 course level. It is as simple as that.

    For any given, fixed level of demand, increasing the quantity supplied lowers the price and *increases the quantity demanded*….

    Here’s a simpler question than my last for you, JKH, et al, to answer. And to help you consider it, here’s an interactive graph that will assist you…

    Q: Given *no* increase in demand for an item, just how do you imagine that you can increase the supply of it WITHOUT increasing the quantity demanded of it? (And also lowering its price.)

    RebelEconomist wrote:
    You should not mistake an ability to confuse people by using imprecise terms for a superior understanding of basic economics.

    OK … this intro-to-economics interactive ‘how supply and demand works’ graph is too confusing to the MMTer who cricizes PhDs and Nobelists for the lack of understanding of economics. :-)

    One would think that a corrector of PhDs and Nobelists would be above being confused by my imprecise terminology, especially with the assistance of an interactive graph…

    In this case, however, the point is moot…

    “I can’t answer your question, but but pay no attenton.”

    Nick Rowe adds separately but relatedly:
    I’m afraid you have just confirmed my worst fears about MMT. You guys don’t understand the difference between “quantity demanded = quantity supplied” and “quantity bought = quantity sold”.

    Ron T responds:
    Quantities: “supplied” and (certainly) “demanded” are unmeasurable and hence of no concern to MMT…

    Evasive action from both supply-and-demand *and* factual reality! As if airlines and a hundred other industries don’t know the demand schedules they face — how much they’d sell at every price — in detail. From measurement.

    MMTers on this blog have often bragged about their superior knowledge of banking. Maybe so, but it’s not looking like they know much about business. (Isn’t that bad for bankers?)

    RebelEconomist closes with…
    So, Scott, the bottom line is that the central bank cannot “FORCE base money into the economy” (your words, eg here: http://www.themoneyillusion.com/?p=10178) … I’ll leave you to work out the implications that that fact might have for some of your policy opinions.

    … substituting “cannot” for own Scott’s “can”, as in: “Even so, the Fed can literally force base money into the economy, by buying….”

    Perhaps RebelE is raising a legalistic quible. The Fed can’t *force* anyone to sell anything, that would be illegal. (Events of 2008 aside). As I can’t *force* my neighbor to sell his car on blocks in his back yard to me. But if I offer him enough money, HE WILL — and that money will be “in the economy”. And if the Fed offers him that much he will too — and that will be that much *new money*  in the economy.

    Thus we see how the quantity of demand changes with no change in the level of demand.

    And so much for the horizontal supply curve for money.

  162. Gravatar of Peter D Peter D
    18. August 2011 at 20:56

    Jim, seems to me that is the Fed is paying too much for your bond then we’re talking fiscal policy

  163. Gravatar of Jim Glass Jim Glass
    18. August 2011 at 20:59

    I agree. This is not why cash and bonds differ from coal. Rather, if you sell your piece of coal to somebody, that somebody just got fewer bucks so, in aggregate, the private sector is neither poorer not richer.

    Well, after someone put a gift of $1,000 cash or $1,000 in bonds in my Christmas stocking the private sector wasn’t any poorer or richer either. So you’ll agree that example was bogus.

    On the other hand the mere existence of govt bond is due to an earlier injection of NFAs into the private sector, that became richer by the value of the bond

    Really? The govt is handing out $1,000 bonds for nothing?

    Where do I get in line? I want to do my part in making the private sector richer!

  164. Gravatar of wh10 wh10
    18. August 2011 at 21:24

    Jim, here’s the accounting for how deficit spending works – http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html

  165. Gravatar of W. Peden W. Peden
    19. August 2011 at 04:46

    Peter D,

    “let’s take your scenario to the extreme. The gov keep running surpluses and reduces NFAs of the private sector to the point where there are people without any. Even if we suppose that the Fed aces the price level and the total value of those NFAs is unchanged, those without any NFAs wouldn’t care much whether their 0 assets cost X or 100*X. 0 times anything is still zero.”

    Then the Fed can start buying things from the government, increasing the price of the government’s assets. So even in the absurd case, I’m right.

    Also, accumulating NFAs isn’t the only way that a government may run surpluses. It can also sell its existing assets i.e. privatisation.

    “And, of course, acing the price level is in itself not a given. Maybe it can be done effectively, I don’t know. How many people follow the Fed’s announcements? What do you think will affect their expectations more: Fed’s commitment to replacing bonds with cash or seeing their NFAs being depleted?”

    I think people pay quite a lot of attention to what the Fed does. Just look at market reactions to QE.

    Look at periods of surpluses e.g. Britain’s surpluses in the late 1980s, which were accompanied by loose monetary policy until 1989. Are they always associated with gloom?

    “Finally, If the value of bonds goes up, what happens to the value of cash? Does it also go up (deflation), does it go down (inflation), stays the same?”

    If the quantity of X in circulation increases, then what would you expect to happen (ceteris paribus)?

  166. Gravatar of Peter D Peter D
    19. August 2011 at 05:04

    “Then the Fed can start buying things from the government, increasing the price of the government’s assets. So even in the absurd case, I’m right.”,/i>

    Missed my point. First, the Fed is part of the govt sector. there is no point in separating the balance sheet of the two for this exercise. Second, I am talking about people depleting their NFAs. How “increasing the price of the government’s assets” is going to help here?

    “Also, accumulating NFAs isn’t the only way that a government may run surpluses. It can also sell its existing assets i.e. privatisation.”

    That would be swapping real assets fro financial assets, which also drains NFAs from the private sector, as I understand it. Suppose the govt owns factories in the amount of total NFAs out there. It sells those and gets the NFAs. The private sector now has the factories, but no NFAs.

    “I think people pay quite a lot of attention to what the Fed does. Just look at market reactions to QE.”

    Yeah, keep looking at the markets. How many people in the US own stocks? Something like 10%?

    “Look at periods of surpluses e.g. Britain’s surpluses in the late 1980s, which were accompanied by loose monetary policy until 1989. Are they always associated with gloom?”

    Nobody says surpluses should always be “associated with gloom”. But persistent surpluses will drive the non-banking sector into debt.

    “If the quantity of X in circulation increases, then what would you expect to happen (ceteris paribus)?”

    So, we are talking inflation?

  167. Gravatar of W. Peden W. Peden
    19. August 2011 at 05:16

    Peter D,

    “Missed my point. First, the Fed is part of the govt sector. there is no point in separating the balance sheet of the two for this exercise.”

    Of course there is. We’re talking about NGDP growth in these circumstances. If the government’s assets are appreciating, then they will find it easier to borrow and thereby increase the money supply.

    “Second, I am talking about people depleting their NFAs. How “increasing the price of the government’s assets” is going to help here?”

    It’s not going to help them (after the point that they have no more NFAs) but G is a component of Y, last time I looked. In fact, we’re getting close to an economy that is sufficiently absurd that Keynes’s income-expenditure model isn’t entirely worthless.

    “That would be swapping real assets fro financial assets, which also drains NFAs from the private sector, as I understand it. Suppose the govt owns factories in the amount of total NFAs out there. It sells those and gets the NFAs. The private sector now has the factories, but no NFAs.”

    The government could exchange the factories for cash.

    “Yeah, keep looking at the markets. How many people in the US own stocks? Something like 10%?”

    And how much of the total wealth of the country does that 10% own?

    “Nobody says surpluses should always be “associated with gloom”. But persistent surpluses will drive the non-banking sector into debt.”

    No-one disputed that. The issue is whether this debt incurred by government surpluses is onerous? (So onerous, apparently that it is the cause of many recessions, including the most recent one somehow). If the central bank is keeping the nominal wealth of the non-banking public from falling, then the answer is “no”.

    “So, we are talking inflation?”

    Good grief! Of course not. Inflation, in the modern sense of the term, is a phenomenon of price changes. We’re talking about devaluation, which logically may or may not involve inflation. If the supply of X increases and the demand for X doesn’t change, then the value of X is diminished. Very simple stuff.

  168. Gravatar of W. Peden W. Peden
    19. August 2011 at 05:19

    Sorry, that was unduly harsh and it was wrong of me to get hysterical. But supply & demand is very, very fundamental. Even more fundamental than accounting identities.

  169. Gravatar of Peter D Peter D
    19. August 2011 at 05:36

    “Of course there is. We’re talking about NGDP growth in these circumstances. If the government’s assets are appreciating, then they will find it easier to borrow and thereby increase the money supply.”

    The got does not need to borrow that which it creates.

    “The government could exchange the factories for cash.”

    Yes, I got that, but cash is a part of non-govt sector’s NFAs: bonds+cash+reserves.

    “And how much of the total wealth of the country does that 10% own?”

    I was actually wrong. It is more like 50%, although it is to a large extent passive ownership (401K plans). Well, most of the wealth is concentrated within a very small group of people. The rest are supposed to become debt slaves to those?

    “The issue is whether this debt incurred by government surpluses is onerous?”

    It has been for the US, I believe.

    “We’re talking about devaluation, which logically may or may not involve inflation.”

    OK, I was wrong to use “inflation”. Or, I guess, inflation could be understood more broadly to refer to asset prices as well.
    Maybe I am wrong, but this does not seem to be too far from what MMTers are proposing. They say retire the bonds, except maybe for some short term ones and just pay interest on reserves at the target rate, which could as well be 0.

  170. Gravatar of Peter D Peter D
    19. August 2011 at 05:38

    Above should read “The government does not need to borrow that which it creates.

  171. Gravatar of W. Peden W. Peden
    19. August 2011 at 06:11

    Peter D,

    “The got does not need to borrow that which it creates.”

    It might want to borrow foreign currency.

    “Yes, I got that, but cash is a part of non-govt sector’s NFAs: bonds+cash+reserves.”

    Then the privatisation approach won’t work, I suppose.

    “I was actually wrong. It is more like 50%, although it is to a large extent passive ownership (401K plans). Well, most of the wealth is concentrated within a very small group of people. The rest are supposed to become debt slaves to those?”

    Nope.

    “It has been for the US, I believe.”

    What surpluses?

    “OK, I was wrong to use “inflation”. Or, I guess, inflation could be understood more broadly to refer to asset prices as well.”

    Yes, there is one way of defining inflation that’s actually very useful to understanding the transmission mechanism between OMOs and the real economy: inflation is caused by too much money chasing too few goods OR assets.

    “Maybe I am wrong, but this does not seem to be too far from what MMTers are proposing. They say retire the bonds, except maybe for some short term ones and just pay interest on reserves at the target rate, which could as well be 0.”

    I don’t want to deny that there are some aspects of MMT that are laudable: the rejection of the money-multiplier story; the recognition of the different ways of financing government expenditure and so on. Where I disagree with MMT is the following-

    1. The endogeneity of money.

    2. The long-term non-neutrality of money.

    3. The function of reserves in the financial system.

    4. The possibility of private saving without a government. (Though even Nick Rowe can’t quite place his finger on what the disagreement is here.)

    5. The exogeneity of wages and the determination of the price level. (IIRC some discussions on here, in the tradition of the pseudo-Marxist early books of the General Theory, MMT’ers use a wage-determination explanation of different price levels between different countries.)

    (Maybe) 6. I’m not sure if MMT’ers are using a Keynes-style income-expenditure model, but I have an issue with that obviously.

  172. Gravatar of Diatome Diatome
    19. August 2011 at 08:25

    1)Monetarists claim that the central banks control the supply of money because their liabilities are held by banks, and HPM was the basis for banks to expand loans. Thus banks were exogenously constrained by the CB. MMT says this can’t work in practice and explains why. CBs accommodate bank’s (quantity) demand for HPM at whatever price (interest rate) the FOMC decides. W.P. you acknowledged the behavioral supply and demand constrains on banks decision to loan, which is a huge step towards understanding money. Monetarists on the other hand continue their preoccupation with believing the CB can over and under supply the economy with money. That’s why we had Bernanke, Friendman & Schwartz blame the Fed for the Great Depression. Their solution was to exogenously control the quantity of money so it would perform it’s neutral veil and full employment is maintained over the natural business cycle. All of this antiquated monetarist thinking came from the mythical idea that in the ancient past precious metal coins where issued (exogeneously) by the monetary authority and were provided for the “public good.” It leaves out bank credit-money and bank clearing which is what is behind virtually every transaction in capitalist economies.

    2) The neutrality of money is a paradox held by orthodox economists in which they see money as a “neutral vial” that covers the inner workings of the real economy. This is why they assume, despite data to the contrary, that changing the quantity of some money aggregate changes price levels. One of the sillier concepts they came up to explain it is rational expectations of inflation. In pretty much all my economics classes they left money out of any model like the ultra sophisticated general equilibrium. No matter how ‘neutral’ money is in the undefinable long run, we don’t have satisfactory explanations of the existence of money or functions of money which is where MMT is very enlightening.

    3)Banker JKH explained the role of reserves nicely in his comment: I usually say banks do not lend reserves to non-banks; i.e. they do not lend reserves in the case of almost all of their borrowing customers. Non-bank customers have no direct access to the bank reserve market.

    Bank lending is always a function of capital management; only rarely a function of liquidity management. The second part is normally vice versa.

    Krugman assumes an absurd premise in the example of banks “lending” currency (i.e. central bank notes). The misunderstanding of the supply and demand for currency is a deeply rooted and pivotal flaw in “monetarism”, along with the treatment of reserves and “the multiplier”.

    4. Private saving without a government is possible if you’re talking about a commodity currency like Sea shells, cigarettes or nails. In capitalist economies, every financial asset is also a liability on someone’s balance sheet. Every IOU is a credit/debt depending on if you are owed or owe. Thus they net to zero. In our world, saving by the non-government sector is possible without a government sector, but NET saving isn’t.

    5. I don’t know any place where MMTers discuss how wages are set in detail, but I am sure they reject the notion that it is necessarily equal to the value of labor to the company. Galbraith has quite a bit about this in his book the Predator State.

  173. Gravatar of W. Peden W. Peden
    19. August 2011 at 09:04

    Diatome,

    1. The problem with the demand-side view of credit creation is that it is incomplete, because it ignores the interrelationship of central banks, the monetary base and nominal wealth in the process of money creation. If you want a detailed monetarist account of how the broad money supply is exogenous, read Tim Congdon’s work, specifically “Money and Asset Prices in Boom & Bust” and “Keynes, the Keynesians and Monetarism”.

    2. Actually the long-run neutrality of money is an empirical proposition and it’s survived extremely rigorous econometric studies. Again, monetarists have done all the relevant work here e.g. how output can be sensitive to the money supply in the short run, but not in the long-run.

    3. Now you’re backtracking: do banks never lend reserves or usually not lend reserves?

    4. NET saving is NEVER possible, regardless of whether there is a government sector.

    5. If they’re Post-Keynesians, they’ll have an exogenous view of wages i.e. the determination of wages (and therefore inflation) is ultimately a sociological question, not an economic question. This kind of reasoning has led in the past to the adoption of wage & price policies to contain inflation, leading to falling productivity, social decay and eventual breakdown of the counter-inflationary strategy in every case where these policies have not been supplemented by monetary discipline.

    The “wage theorem” was probably Keynes’s darkest hour.

  174. Gravatar of W. Peden W. Peden
    19. August 2011 at 09:42

    * Net saving in the sense of net creditoring. For every creditor, there’s a debtor.

    Also, if inventories are investment and investment is saving, then isn’t the build-up of inventories by the private sector a form of net saving?

  175. Gravatar of W. Peden W. Peden
    19. August 2011 at 09:43

    ^ No, now that I think about it.

  176. Gravatar of Diatome Diatome
    19. August 2011 at 10:55

    1. MMT isn’t strictly focused on the demand side of credit creation. I’d say with pretty high confidence that you and MMT will have no quarls re credit creation.

    2. “Actually the long-run neutrality of money is an empirical proposition and it’s survived extremely rigorous econometric studies.” In the long run we are… (sorry couldn’t resist) :) Regardless about how neutral it is, inflation or deflation has distributional concequences. What happens when there is deflation? Borrowers have to sell more real goods and services to repay the loan. Reverse for inflation. It is a source of uncertanty. Some prices are more neutral than others. Suffice it to say most people who know MMT prefer to aim for reasonable price stability as the aim of policy.

    3) Banks loan reserves to banks, not to non-banks. I know JKH wasn’t clear.

    4) Net saving for the whole is not possible, true. Government Balance + Non-Government Balance = 0. That’s why I said net saving for the non-government sector, which can only be accomplished with government deficits.

    5)

  177. Gravatar of Peter D Peter D
    19. August 2011 at 12:51

    The discussion on Nick’s blog is very educational for me as well. W. Peden, I think you’ll find Andy Harless’ comment
    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/08/is.html?cid=6a00d83451688169e2014e8ac2ec9f970d#comment-6a00d83451688169e2014e8ac2ec9f970d
    and reply by RSJ
    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/08/is.html?cid=6a00d83451688169e2014e8ac314af970d#comment-6a00d83451688169e2014e8ac314af970d
    apropos our discussion.

  178. Gravatar of W. Peden W. Peden
    19. August 2011 at 13:14

    1. I suspect the difference is here: I hold money to be exogenous, indirectly, because of the central bank’s influence on asset prices. So the difference isn’t at the point of credit creation (I don’t endorse either the MM or the Kaldorian argument) but at the determination of creditworthiness. This is because I am a monetarist, not a Post-Keynesian.

    2. I think long-run non-neutrality is very important. The short run is just a brief snippet of the long-run.

    3. What about this case: I get an overdraft from a bank and take it out in cash? Or I get a loan from a bank and convert it into cash? Neither are very important, of course, because in a modern monetary system the central bank supplies base money at a level such that commercial banks can meet their liabilities for cash.

    4. Then where I differ, it seems, is whether or not this matters. Apart from the case where the government has not only paid off all of its bond-debts but also built up sovereign funds from all the NFAs of an economy, we’ve not even got close, PROVIDED (a) money is exogenous and (b) the central bank meets the demand for money.

  179. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 15:33

    Diatome, I don’t follow. Why couldn’t the private sector loan cash to the government, and then later the government might spend it? Why bank reserves?

    You said:

    “The government deficit (treasury operation) determines the cumulative stock of financial assets in the private sector.”

    I don’t follow. If a corporation issues a bond, doesn’t that affect the stock of financial assets?

    Diatome, You said;

    “2)Government bonds in the hands of the non-government sector than deposits. As I said before, they are liquid assets. It is spending that is potentially inflationary. This goes against the conventional wisdom that increasing the quantity of some asset must delude the exchange value of it.”

    Every dollar spend is matched by a dollar of revenue received. the claim that spening is inflationary is equivilent to claiming that seeling goods is inflationary. Is it?

    I’d say inflation doesn’t come from spending, but from monetary policy.

    You said:

    “3) “If the central bank has a positive interest rate target – that is, the policy rate that it sets as an expression of its monetary stance – then it cannot “monetise” deficit spending by the treasury – which Krugman calls printing money. Such a central bank has no option – it either has to issue debt to drain the reserves that are boosted by the deficit spending (on a daily basis) or it has to pay a return on the reserves that are held with it by the private banks.”

    This is flat out wrong, as any central banker who lived through the 1970s can tell you. Monetizing the debt can raise interest rates by creating high inflation expectations.

    You said;

    “I like W. Peden because he’s the most interested in understanding MMT vs Sumner and Rowe who are desperately trying to debunk it.”

    Why would I be “desperate” to debunk it? I’m trying to get the Fed to print more money. If anything, I should be “desperate” to debunk Austrianism.

    It’s a bit rich for MMTers to come over here as you have, and put forward one patently false statement after another, and then accuse me of being too stubborn to understand MMT. You need to first learn the basics of monetary economics before criticizing the “mainstream model.”

    Rebeleconomist, The Fed can force more money into the economy than people want to hold at the current value of money. If they try to do so the value of money will fall, just like any other good. And of course a fall in the (relative) value of money is by definition an increase in the price level.

    Diatome, You said;

    “Monetarists claim that the central banks control the supply of money because their liabilities are held by banks, and HPM was the basis for banks to expand loans. Thus banks were exogenously constrained by the CB. MMT says this can’t work in practice and explains why. CBs accommodate bank’s (quantity) demand for HPM at whatever price (interest rate) the FOMC decides.”

    This is really getting ridiculous. Monetarists do not claim the Fed controls the supply of money if the Fed is pegging interest rates. Monetarists certainly understand that if you peg interest rates the money supply becomes endogenous.

    You said;

    “Friendman & Schwartz blame the Fed for the Great Depression. Their solution was to exogenously control the quantity of money so it would perform it’s neutral veil and full employment is maintained over the natural business cycle. All of this antiquated monetarist thinking came from the mythical idea that in the ancient past precious metal coins where issued (exogeneously) by the monetary authority and were provided for the “public good.” It leaves out bank credit-money and bank clearing which is what is behind virtually every transaction in capitalist economies.”

    This is just breathtaking. Do you seriously think that this is an effective critique of Friedman, one of the smartest economists that ever lived. “Oops, he didn’t realize the Fed doesn’t control the stock of money. What a silly mistake!!”

    And the idea that bank credit is behind virtually every transaction in a capitalist economy!! Have you never visited a store?

    You said;

    “Non-bank customers have no direct access to the bank reserve market.”

    Wrong. I can borrow cash from a bank anytime I wish.

    BTW, FYI Krugman is not a monetarist–not even close. His point was that banks can get rid of reserves through either loans or asset purchases; which technique is used is not important. The banking system as a whole can get rid of reserves. But the economy as a whole cannot get rid of base money–only the Fed can do that.

    You said;

    “Thus they net to zero. In our world, saving by the non-government sector is possible without a government sector, but NET saving isn’t.”

    New saving is not possible huh? I’d love an explanation of that, given net saving by the private sector exists in many economies around the world.

  180. Gravatar of JKH JKH
    20. August 2011 at 05:13

    Scott,

    Small point:

    Sometimes I say “banks don’t lend reserves to non-bank customers” or “non-bank customers have no access to the bank reserve market”.

    That’s a bit sloppy I suppose. What I really mean is that banks don’t lend the balances they have in their reserve deposit accounts at the central bank. That is strictly true.

    As far as the “lending” of vault currency is concerned, I also think that’s not quite the best way to look at it. There’s no contract that stipulates currency per se must be returned, so it’s not really a loan of currency. Currency is the means of settlement for the loan at the front end. But it doesn’t have to be when the loan is repaid.

    Moreover, once the currency is in the hands of the borrower, it no longer constitutes bank reserves obviously, so it’s not really a loan of bank reserves in that sense either. You might see this particular point as a bit of a stretch, but it’s more or less in line with an interpretation that non-bank customers don’t have access to the bank reserve market per se, which may be an obvious point from this perspective. So I see currency as bank reserves being converted to customer money in settlement of the loan advance, at best, rather than being loaned per se.

    But there are other reasons why I would tend to overlook currency in characterizing things as I do, which I won’t bother you with right now. Because of that, my semantics get a bit sloppy around the point at times, and I’ll concede that.

  181. Gravatar of Diatome Diatome
    20. August 2011 at 07:03

    @W.P.

    W.P: “I suspect the difference is here: I hold money to be exogenous, indirectly, because of the central bank’s influence on asset prices.”

    Me: If I’m understanding you correctly, you want the Fed to buy other financial assets, since lower interest rates aren’t leading to more credit creation? So you advocate the Fed putting a price floor on other assets via QE3,4,5..100? Sure they could do it, what are the potential negatives though?

    W.P: So the difference isn’t at the point of credit creation (I don’t endorse either the MM or the Kaldorian argument) but at the determination of creditworthiness. This is because I am a monetarist, not a Post-Keynesian.

    Me: How accurate creditor’s predictions of credit worthiness go depend on the health of the economy, although it is possible to transfer the IOU’s to the Fed’s balance sheet at the cost of those who made bad bets being financially rewarded and remaining in power.

    W.P: 2. I think long-run non-neutrality is very important. The short run is just a brief snippet of the long-run.”

    I didn’t mean to say it’s unimportant, just that there has been an attempt by monetarism to establish a determinate quantitative short-run relation between money and goods (money’s purchasing power) that has utterly failed. By focusing on the theory of the ‘real’ economy and long run neutrality of money, it became a severe handicap to making theoretical advances.

    W.P. 3. What about this case: I get an overdraft from a bank and take it out in cash? Or I get a loan from a bank and convert it into cash?”

    Me: What about it? Could it stimulate the economy (once spent)? Sure. Is the private sector willing to take on higher levels of debt? Maybe, but not likely for a long time, especially now that the government is on the austerity track which depending on what they do will just put more people on the street and raise unemployment numbers.

    Or did you mean the operational details of these actions?

    W.P: Neither are very important, of course, because in a modern monetary system the central bank supplies base money at a level such that commercial banks can meet their liabilities for cash.

    Me: Right!

    W.P.: 4. Then where I differ, it seems, is whether or not this matters. Apart from the case where the government has not only paid off all of its bond-debts but also built up sovereign funds from all the NFAs of an economy, we’ve not even got close, PROVIDED (a) money is exogenous and (b) the central bank meets the demand for money.

    Me: For the treasury to pay off its debt it would need to run surpluses, that is tax more than they spend, until all the net financial assets of the non-government sector are gone. That would cause an economic catastrophe given historically the non-government sector has desired to save NFA’s and will reduce their consumption in order to try to achieve it which of course reduces incomes from which they can save from. That’s where in the absence of running a trade surplus, the government must run a larger deficit to offset the fall in private spending then demand to support high levels of output. Households can reach their savings desires and employment will not fall. This is the opposite of what governments in europe are doing, and which we are now attempting to do.

    Some of the PhD MMTers find the government paying to borrow back its own currency a form of corporate welfare, and would rather see a law changed so that the treasury could run an overdraft at the Fed or use coin seigniorage. They also note it’s potentially more inflationary given that the treasury now adds interest income to bond holders that they otherwise wouldn’t have had to if they had just spent without issuing bonds. (See here: http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html)

    ———-
    *Grabs a doughnut and sips her coffee*
    ———-

    @S.S
    You: “Why couldn’t the private sector loan cash to the government, and then later the government might spend it? Why bank reserves?”

    Me: Could be either. When the Fed gets the cash they throw it into the shredder (at least they do to the unfit bills) and digitally credit the treasury’s reserve account. http://www.flickr.com/photos/ari/3731717652/

    You: If a corporation issues a bond, doesn’t that affect the stock of financial assets?

    Me: Yes. He was talking about NET financial assets owned by the non-government sector. Sorry for the confusion.

    You: I’d say inflation doesn’t come from spending, but from monetary policy.

    Me: It can have numerous causes. Putting strict focus on monetary policy is like saying heat waves are a solar phenomena. Well, yes they are, but you aren’t going to be able to understand them much if all you do is take recordings about the sun. I was reading this morning, the from the MMT bastion the St. Louis Fed , a Fed bulletin which had a section about Weimar Germany. http://fraser.stlouisfed.org/publications/frb/1923/download/50485/frb_061923.pdf%20(p.%20697). To understand their hyperinflation you have to know what was going on in their country. They were transitioning back from being a war economy, there had been much destruction to their population and productive capacity. Food production was down sharply. They were the world’s largest sugar exporter before the war and after they exported nearly zero sugar. Many germany coal mines were given to the allies. Germany’s physical economy to put it mildly was in shambles. They had nothing to export except “paper marks” which they had to produce (by running government deficits). Not even the most highly skilled central banker could have prevented a collapse of their economy.

    You said: This is flat out wrong, as any central banker who lived through the 1970s can tell you. Monetizing the debt can raise interest rates by creating high inflation expectations.

    Me: Prove it. The Fed sets a fixed bid price for treasuries which they have unlimited power to defend. Interest rates never deviate much from the FOMC’s target. When you’re a sovereign currency issuing government with a floating exchange rate your risk of involuntary default on obligations denominated in your currency is zero. This makes short term treasuries a substitute for interbank lending. I acknowledge inflation can be impacted by expectations. Right now we’re seeing people freak out about QE, so they buy up commodities actually causing the inflation they fear.

    The rest of your comments weren’t even worth responding to. I don’t think you’re ready to challenge your mistaken beliefs. This will be my last comment on this post.

  182. Gravatar of Diatome Diatome
    20. August 2011 at 07:14

    P.S. The Fed doesn’t have the choice of controlling quantity or price of reserves. It can only chose price for reasons MMTers explain in their academic literature. It was attempted in the US and UK, and failed which came as no surprise for those who understand how the payment system works. If I’m not mistaken Friedman in the end stated that it was a mistake for him to focus so much on quantity.

  183. Gravatar of Diatome Diatome
    20. August 2011 at 08:39

    P.P.S-
    You: “And the idea that bank credit is behind virtually every transaction in a capitalist economy!! Have you never visited a store?”

    Me: Ok I see I’m really not getting my message across. Maybe rather than lecture on, I’ll try to have you come to me. How did that cash you’re focused so much on come into being? Once you can answer that thoroughly you’ll see what I’m talking about.

  184. Gravatar of Morgan Warstler Morgan Warstler
    20. August 2011 at 09:42

    Diatome,

    I think you skipped the one thing Scott assumes that you don’t, so please answer, I think it will be most telling:

    “Why couldn’t the private sector loan cash to the government, and then later the government might spend it? Why bank reserves?”

  185. Gravatar of Scott Sumner Scott Sumner
    20. August 2011 at 15:55

    JKH, I’m glad to accept your interpretation, except that of course it shows that the accounting facts that MMTers rely upon don’t have any behavioral implications at all. The fact is that reserves can be converted to currency, and hence banks can get rid of reserves. This is even true of deposits at the Fed. A bank can ask the Fed to send part of its reserve balance to the bank, in the form of cash. Then the bank can let the cash flow out of the bank through normal operations, and decide not to replace the cash. In fact, the breakdown between cash held by the public and bank reserves is determined by the actions of various parties in the private sector. During normal times those actions mean that over 90% of total base money, and indeed more than 90% of new injections, ends up as cash, not as reserves. Of course that changed drastically as the Fed started paying interest on reserves. Indeed interest-bearing reserves are not high powered money at all, yet they are still part of the monetary base. All the old textbooks treat high powered money and base money as being identical. But they aren’t any longer. So I think some MMTers are assuming the “mainstream” believes things about high powered money that they don’t actually believe.

    Diatome, You are pretty arrogant for a guy who basically admitted he was wrong about several of the points I called you on.

    You said:

    “You said: This is flat out wrong, as any central banker who lived through the 1970s can tell you. Monetizing the debt can raise interest rates by creating high inflation expectations.
    Me: Prove it. The Fed sets a fixed bid price for treasuries which they have unlimited power to defend. Interest rates never deviate much from the FOMC’s target. When you’re a sovereign currency issuing government with a floating exchange rate your risk of involuntary default on obligations denominated in your currency is zero.”

    Prove there is a Fisher Effect? You must be kidding. And no, the Fed doesn’t target Treasury bond yields, it targets the fed funds rate. If you actually would pay attention to the ff market you’d find that short and long term rates often move in the opposite direction in response to monetary surprises–something that would be impossible if your reply was correct. And of course default risk has zero bearing on the Fisher effect. Your combination of arrogance and ignorance is quite impressive.

    So do you now admit that people spend cash in store or are you still deny it happens? It doesn’t matter to me if most transactions involve checks and credit cards. I have a robust theory that can address an economy that lacks checks and credit cards. The MMTers do not have such a theory. Cash is an inconvenient fact they really don’t know how to deal with. Compare the cash/GDP ratios of Australia and Canada, and then compare their government debt to GDP ratios. That’s the sort of thing MMTers simply can’t model, because their theory is wrong.

  186. Gravatar of wh10 wh10
    20. August 2011 at 17:18

    ^ I *think* the disagreement over the 1970s is this:

    Sumner is claiming monetization raised long rates via high inflation expectations in the 70s. MMT is saying creating excess reserve balances drives the FFR (a very short term rate) to 0. These ideas aren’t mutually exclusive? (That said MMT would argue inflation expectations due to QE like QE2 are not justified based upon fundamentals.)

    But looking at this graph it seems there weren’t significant excess reserve balances in the 70s, which is what should naturally happen from ‘debt monetization’: http://research.stlouisfed.org/fred2/series/EXCRESNS. Additionally, the FFR was well above 0 in the 1970s, which seems fine since there doesn’t appear to be a massive balance of excess reserves.

    I am young though so I don’t have much context for what happened in the 70s.

  187. Gravatar of wh10 wh10
    20. August 2011 at 17:19

    To be clear, MMT says that as long as IOR isn’t paid.

  188. Gravatar of wh10 wh10
    20. August 2011 at 17:31

    Also the whole thing about ‘omg Krugman doesn’t get operations, banks don’t lend reserves’ is the claim (not just MMT, many orthodox researchers, a recent BIS paper, etc) that banks don’t ever need reserves to lend. Your example of disproving MMT by asking for a loan in cash misses the point.

    The point is that Krugman sees all these excess reserves as fuel for future loans (‘We’re assuming that there are lending opportunities out there, so the banks won’t leave their newly acquired reserves sitting idle’). That’s just not right. Reserves are always supplied on demand to banks; the Fed has to in order to defend the FFR and maintain stability of the banking system. So it doesn’t matter if banks have a ton of excess reserves from money printing or if they don’t if bond sales drain reserves in conjunction with deficit spending. Banks have the same lending capacity in either situation. The difference between the two scenarios is that money printing will drive the FFR to 0, altering the term structure of rates, and perhaps that leads to a change in loan creation. The point is it is the interest rate that matters for loan creation, not the quantity of reserves.

    And just to reiterate, a loan results in the creation of an asset and a deposit liability for a bank, and vice versa for the loanee. No reserves are used in the process. If the bank needs to get reserves to meet the RR (or give Sumner cash), then they go to the interbank market to buy at the FFR or to the discount window.

  189. Gravatar of wh10 wh10
    20. August 2011 at 17:57

    Sorry, to clarify above, the banks will have enough cash on hand to meet the needs of their customers, and the Fed will ensure this. So if people are withdrawing cash more often or Sumner keeps asking for loans in cash, banks will hold more vault cash. The point remains that Fed supplies reserves on demand, so loan creation is not reserve constrained. It’s the price of reserves that matters (which the Fed changes via the ‘announcement effect’, NOT OMOs, or changing the IOR), not the quantity.

  190. Gravatar of Jim Glass Jim Glass
    20. August 2011 at 22:13

    This is just breathtaking. Do you seriously think that this is an effective critique of Friedman, one of the smartest economists that ever lived. “Oops, he didn’t realize the Fed doesn’t control the stock of money. What a silly mistake!!”

    Scott, I told you, the MMT Creed is:

    “All the Nobelists and Finance Ministers and Central Bankers of the entire world are *stupid*. We are smarter than them all! (Albeit with the advantage of being unhampered by all their mistaken textbook knowledge.)

    “Now let me tell you how I spent 20 minutes patiently explaining the ‘paradox of thrift’ to Larry Summers, step-by-step, until he finally sort of got it.“.

    This is what their entire “theory” resolves to.

  191. Gravatar of Morgan Warstler Morgan Warstler
    20. August 2011 at 23:39

    Jim, that pisses me off.

    What it resolves too, in the final breath, is MMT’s desire to say “government controls money”

    WITHOUT admitting there is a bigger force that control government (and money).

    And the real economists that hang around here don’t like my trump card because you don’t like being told there is a bigger game than yours – but of course there is, and you all know it deep down.

    I’m not saying you can’t win in your own little game, I’m saying if you just start with the thought mentally, before you speak, “these nimrods want to be the boss,” you’ll more quickly find the stoppers to their argument.

    Remind them casually how ideas don’t matter, strategy to deploy ideas matters, rely on any of the basics of memetics, and you’ll more quickly get them to crack.

  192. Gravatar of Jim Glass Jim Glass
    20. August 2011 at 23:56

    “I agree. This is not why cash and bonds differ from coal. Rather, if you sell your piece of coal to somebody, that somebody just got fewer bucks so, in aggregate, the private sector is neither poorer not richer.

    “On the other hand the mere existence of govt bond is due to an earlier injection of NFAs into the private sector, that became richer by the value of the bond”

    Wow, the mere existence of a govt bond increases the *wealth* of the priviate sector, makes it “richer by the value of the bond”.

    Really? The govt is handing out $1,000 bonds for nothing? Where do I get in line? I want to do my part in making the private sector richer!

    “Jim, here’s the accounting for how deficit spending works …”

    Well, I see there a nice if mundane look at the TT&L account, leading to the unsurprising conclusion that government borrowing leads to an increase in the private sector’s holdings of ‘net financial assets’. And while some might wonder about the peculiar signifigance MMTers put on this fact, nobody would deny it is true.

    But as to the mere existence of government bonds increasing the private sector’s wealth by the full value of the bonds … wow, we seem to be missing an opportunity here. More bonds, please!

    Unless one were to take the skpetical view that there may be a significant difference between increasing holdings of financial assets and increasing wealth by the full value of those assets.

    And in the last T-account at the bottom of that explanation, I don’t see the wealth of “Private Sector Kelton” increased by the value of that bond.

    Try again?

  193. Gravatar of Jim Glass Jim Glass
    21. August 2011 at 00:17

    Jim, that pisses me off. What it resolves too, in the final breath, is MMT’s desire to say “government controls money”…

    And the real economists that hang around here don’t like my trump card because you don’t like being told there is a bigger game than yours – but of course there is, and you all know it deep down… .

    Morgan, I have no idea what the real economists here think because I’m just a mere shyst.. legal pleader on behalf of ever-less-monied interests.

    However, I see no need for the MMTers to engage in such relentless personal belittling and patronizing of the leaders of the economics profession — such as the proclaimed 20 minute step-by-step teaching of the paradox of thrift to Larry Summers by Mosler — ever since the first days of their existence in the 1990s, if their prime agenda was merely to argue that “government controls money”.

    So I’ve made my case and I’m sticking with it.

  194. Gravatar of wh10 wh10
    21. August 2011 at 04:13

    Jim, I think you’re just being impossibly stubborn now; and it’s understandable, because it is 100% clear you have no tolerance for MMT at all.

    If we’re running in circles and you’re now back at square 1, asking about the difference between nominal and real, the answer is that it increases nominal wealth undeniably, whereas in real terms the answer is obviously situation dependent and more complicated. But of course, MMT completely recognizes the threat of demand-pull inflation; this was why MMTers were so upset Krugman claimed that MMT says ‘deficit don’t matter.’

    As for you not understanding the net change in NFA for the private sector in the example, read the article again. It’s all laid out with narrative explanation and the accounting; if you’re going to claim that is wrong, then explain yourself.

  195. Gravatar of Scott Sumner Scott Sumner
    21. August 2011 at 07:57

    wh10, You said;

    “Sumner is claiming monetization raised long rates via high inflation expectations in the 70s. MMT is saying creating excess reserve balances drives the FFR (a very short term rate) to 0. These ideas aren’t mutually exclusive? (That said MMT would argue inflation expectations due to QE like QE2 are not justified based upon fundamentals.)”

    This really doesn’t address my criticism at all. Right now the Fed is not monetizing the debt, so it has no bearing on what happened in the 1970s. QE involved interest bearing reserves–i.e. not monetizing with cash.. And as far as I know there has never been a situation where easy money drove long term government debt yields up to 20% or 30%, while driving short term rates to zero. I’m not saying it’s completely impossible, but it certainly wasn’t the norm in the 1970s.

    You said;

    “But looking at this graph it seems there weren’t significant excess reserve balances in the 70s, which is what should naturally happen from ‘debt monetization’:”

    No, why would banks sit on zero rate ERs when they could earn double digit rates on Treasury debt? In any case, I didn’t claim the US was doing a lot of debt monetization (although it certainly did some) the big villains were the developing countries.

    You said;

    “Reserves are always supplied on demand to banks; the Fed has to in order to defend the FFR and maintain stability of the banking system.”

    Again, this has no bearing on Krugman’s point. He’d never deny that if the base is endogenous (interest rate pegging) then ERs would not be inflationary if the Fed raised rates when the economy recovered. But he’d say that’s because they’d raise rates by removing the ERs from circulation, or else paying interest on them. There’s nothing wrong with that view, you guys keep accusing Krugman of not knowing things that he completely understands.

    You said;

    “And just to reiterate, a loan results in the creation of an asset and a deposit liability for a bank, and vice versa for the loanee. No reserves are used in the process. If the bank needs to get reserves to meet the RR (or give Sumner cash), then they go to the interbank market to buy at the FFR or to the discount window.”

    That’s a complete non sequitor–you are missing the bigger picture. You can’t just keep saying the Fed will supply reserves as needed because of the interest rate peg, you need to take one step back and model the interest rate peg. The Fed often adjusts the peg precisely to stop banks from borrowing more reserves and making more loans.

  196. Gravatar of Jim Glass Jim Glass
    21. August 2011 at 16:14

    Jim, I think you’re just being impossibly stubborn now; and it’s understandable, because it is 100% clear you have no tolerance for MMT at all.

    Yes, I think that’s understandable too!

    As for you not understanding the net change in NFA for the private sector in the example…

    I’ve understood the net change in NFA for more than 15 years (though the significance y’all put on in still escapes me).

    But the claim this time was that the “mere existence” of federal bond increases the wealth of the private sector by the full value of the bonds, it “became richer by the value of the bond”.

    Wealth = assets – liabilities. Increasing wealth (“becoming richer”) means increasing the amount by which assets exceed liabilities. MMTers haven’t changed that, have they?

    read the article again. It’s all laid out with narrative explanation and the accounting

    Hey, I just read it again, and I still don’t see where in the last T-account the assets minus liabilities of Private Sector Kelton have inceased by $10.

    1) Can you point that out to me? Just point to that change of net +$10 in the last T account, OK?

    Now, from the narrative:

    Whew! So where does all of this leave the private sector? My bank account has an additional $10 in it (my asset), which is offset by the fact that BoA owes me an additional $10 (their liability). This nets to zero.

    But, wait! There is still a new financial asset out there . . . the government bond! And this clearly shows that deficit spending, even when we account for the sale of government bonds, increases the private sector’s holding of net financial assets.

    2) Yup. There is indeed an increase in the private sector holding of net financial assets. But you are reading this as an increase in wealth?

    Private Sector Kelton transfers inventory worth $10 to the govt and receives a bond worth $10. (Yup, a new financial asset there!) So one asset holding is reduced by $10, while another is increased by $10, net = $0.

    You are saying that by this Private Sector Kelton increases wealth, “becomes richer”, by $10?

  197. Gravatar of wh10 wh10
    21. August 2011 at 17:36

    I can’t take it anymore. I am done.

  198. Gravatar of Jim Glass Jim Glass
    21. August 2011 at 17:50

    As an aside, I did enjoy this from “the narrative”, recalling the days when they called themselves “New Chartalists”, back before hitting on “MMT”…

    ~~ quote ~~

    I did something here that adherents to MMT may wish I had not done – I began with the payment of taxes rather than with government spending.

    As we in the MMT tradition consistently insist, spending must, as a matter of logic, precede taxation in the first instance (for it would be impossible to collect dollars from the private sector unless they had first been spent into existence by the public sector).

    ~~ end ~~

    So, *logically*, money such as wampum, the Great Stones of Yap (fiat money if ever there was!), cigarrettes in POW camps, the gold and silver of olden days, and yes even the US dollar of 1789, and of following decades too when govt spending was 2% of GDP, could never have existed “unless they had first been spent into existence by the public sector”.

    Also, “as a matter of logic” … “in the first instance”, since government spending is needed to spend money into existence … what does the government spend in that first instance before money exists?

    “Logically, in the first instance”, how does the population calculate prices for sales to the government in a money that does not exist yet? Why does the population accept payment in that money that doesn’t exist yet, instead of insisting on payment in money it has long valued and used after being selected by itself for its own needs — be that wampum, or Great Stones, or the pieces of eight that morped into the dollar?

    Logically inquiring minds want to know about that first instance.

    The entertainment never ends.

  199. Gravatar of Jim Glass Jim Glass
    21. August 2011 at 18:07

    I can’t take it anymore. I am done.

    What??

    Before so very simply pointing me to the T-account where wealth went up by $10? And to the comment in the narrative that says that happens?

    Or before you alternatively explain that MMT has changed the definition of “wealth”, so that it no longer relates to assets minus liabilities?

    It’s an odd thing about that explanation, purportedly so transparently showing how “the mere existence of a govt bond increases private sector wealth by the value of the bond”.

    I look twice and can’t see it. *You* can’t see it to point it out to me.

    Why, it’s so transparent it’s like it’s not even there!

    :-)

  200. Gravatar of wh10 wh10
    21. August 2011 at 18:19

    Look at for the ENTIRE PRIVATE SECTOR, Jim. Everything nets to zero, except the bank now has a net new $10 in bonds (Kelton doesn’t have it, though that’s what you wrote. She has $10 new in deposits). It’s very clear for the private sector as a whole wealth = assets – liabilities, in all forms, increases by $10 in nominal terms.

    Here’s a different approach. Pretend instead of selling widgets, Kelton was hired to work on highways. The story is the same. Financial wealth for the private sector as a whole goes up by the same.

  201. Gravatar of wh10 wh10
    22. August 2011 at 04:02

    Actually Jim, I’ll retract my statement. In that specific example, wealth is not altered. But you could easily make it so if for Kelton, the T account was +100 on the asset side, and +100 on the liability side (ie equity), if again, say she was hired to do work. If she sold real goods she could have sold in the private market, her wealth would not have changed.

  202. Gravatar of Peter D Peter D
    22. August 2011 at 05:21

    Jim.
    I don’t like the word “wealth” myself because everybody has a different mental picture of what it means. What MMTers are saying is that Net Financial Assets of the private sector always increase with govt spending, regardless whether the govt issues bonds or not. So, if Private Sector Kelton was as stupid as to sell an amazing widget for some pitiful price to the govt, then, yes, she’s probably poorer in the cosmic sense, but her financial assets just went up by whatever amount the govt paid. And with that the NFAs for the private sector as a whole. So, the precise statement is that NFAs of non-govt sector increases with govt spending. Wealth is another matter.
    Now, as a point of logic, how would you pay taxes to the govt unless you have that which is accepted as a payment of taxes? Since you cannot create that last one (unless you’re counterfeiting), the govt spending must come first.

  203. Gravatar of Peter D Peter D
    22. August 2011 at 05:30

    The Great Stones of Yap don’t look like fiat money at all to me. Fiat money has value because the govt said that is has a value, usually as a legal tender and in the payment of taxes. With Yap looks to me more like gold standard – you could dig your own gold or find your own Great Stone, but it is hard.
    Look for this good explanation of tax-driven money:
    http://cas.umkc.edu/econ/economics/faculty/Forstater/papers/BookChaptersEnclopediaEntries/TaxDrivenMoney.pdf

  204. Gravatar of hangemhi hangemhi
    30. October 2011 at 07:59

    If the non MMTers claim that we’re not telling them anything new with some of the simpler concepts, then why don’t we all get on the same page about that and put an end to the economics myths that the general public, the media, and our politicians believe.

    For that we all go back to Luis’s comment http://www.themoneyillusion.com/?p=10530#comment-76654

    The general public does not know that deficit inject new money into our economy, and surpluses are what actually “steals” it.

    Imagine if the general public knew this…. they would throw out any politician who demanded austerity.

    Yet what we have are legions who claim gov spending is what steals. That just seems to be another argument by the 1% for the 1%. They’ve got all the money, so they don’t want new money debasing it or “crowding out” their opportunities. That is just an intellectual argument that is meaningless in today’s economic environment. It is the bottom 80% are broke and SPENDING in the form of tax cuts or jobs programs DIRECTLY benefiting the bottom 80% will get this economy going again. It seems the only other choice to debasing the top 1%’s money is to tax it out of their hiding places.

    If you think MMTers are arrogant – you’d get us to stop if you would acknowledge the simpler concepts and help us get that message accepted by the mainstream. The idea that Obama could propose a jobs bill and follow it with “here’s how we’re going to pay for it” means he does not get it. That the tea party wants cuts and no new spending mean they do not get it. That COngress has convenened a Deficit Commisions means they do not get it. That the general public even allows this kind of conversation without burning down the Capital means they do not get it.

    MMTers agree we have a spending problem – years of malinvestment have led to an exorbitant “debt” that has produced an inequal and sputtering economy. Had that money been invested wisely we’d have full employment and a robust economy. But not understanding MMT – which is simply to say, not understanding these simple concepts in Luis’s comment – has led to years of ill conceived fiscal and monetary policy.

    If MMTers are saying nothing new – then why are you all allowing the public and politicians to believe in economic myths?

  205. Gravatar of Scott Sumner Scott Sumner
    31. October 2011 at 16:14

    hangemhi, You said;

    “The general public does not know that deficit inject new money into our economy, and surpluses are what actually “steals” it.”

    I didn’t know that either

  206. Gravatar of Philip Pilkington Philip Pilkington
    14. November 2011 at 15:58

    “Not only is it possible, it happens almost every time a country tries to rely on money creation to pay its bills, at least for any extended period of time. Very easy money usually makes interest rates rise.”

    QE? In both Japan AND the US — AND the UK… Hmmm…

    I’d say you didn’t understand the criticism. See:

    “There’s a very simple reason for this-it is operationally impossible to finance a bond issue with “money” unless you have a zero interest rate target, in which case in your own paradigm you are in a liquidity trap.”

    But then… I’d just be a wacko MMTer. Right? Hmmm…

    Here’s a terrifying prospect: maybe you actually don’t understand the argument. Maybe.

  207. Gravatar of Philip Pilkington Philip Pilkington
    14. November 2011 at 16:23

    “Argentina, Turkey, Brazil, Bolivia, Israel, Chile . . . . case after case of countries experiencing extremely high inflation and extremely high nominal interest rates, all because they were monetizing their debts.”

    Hmmm… obvious problems here. (Indicating the author hasn’t read the relevant material — once again… the arrogance of ME!).

    Argentina: You’re referring to during the crisi? It had a dollar peg.

    Chile: Pre-1985? They had a dollar peg too.

    Turkey: Fixed exchange rate…

    Bolivia: One of the few LatAm countries to still have a fixed excahnge rate (dummies…).

    You see a pattern? See: also Russia etc.

    MMT claims that its theory only applies to FLOATING currencies. Hence why monetisation in the US, the UK or, given the situation in the Eurozone right now… the Eurozone, will lead to 0% interest rates unless different action is taken.

    If you’d read the literature properly you’d have checked if your examples were of fixed pegs and hence irrelevant to the MMT argument. But you didn’t.

    And now you’re going to whine that you have another MMTer calling you on something. But in this case, I’m afraid you said Y and I responded to Y.

    Y = example of fixed exchange rate regimes.

    Y = are subject to different rules than those laid out in MMT for fully sovereign (read: floating) currency systems.

    Me responding to Y is simply scientific criticism insofar as I’m insisting that you examine your presuppositions of a theory before you criticise it.

    I say again: terrifying as it may be. MAYBE. JUST MAYBE, you don’t understand the theory. And MAYBE. JUST MAYBE you don’t understand it because you haven’t engaged honestly with the literature.

    Laziness on the internet knows no ends.

  208. Gravatar of Scott Sumner Scott Sumner
    14. November 2011 at 18:48

    Philip, No, those countries didn’t have dollar pegs during their hyperinflations. MMTers need to understand the basic stylised facts of hyperinflation, otherwise they won’t be able to make any persuasive arguments. Monetizing the debt does not drive interest rates to zero, it’s likely to drive them to 1000%.

  209. Gravatar of Philip Pilkington Philip Pilkington
    15. November 2011 at 13:42

    Test.

  210. Gravatar of Philip Pilkington Philip Pilkington
    15. November 2011 at 13:45

    Facts?

    Brazil interest rates 1995+: http://bit.ly/t8fg2N

    At this point the Brazilian economy was in the midst of hyperinflation: http://bit.ly/dSBNZz

    But the currency was pegged in a bid to bring down the inflation: http://bit.ly/uU6LrO

    “In 1994 the “Plano Real” pegged the real to the USD to prevent Brazilian politicians from inflating their way out of Brazil’s deficit problems.

    Although inflation was brought down to single digits, it was not enough to avoid a foreign exchange rate appreciation. Exports decreased, and the balance of payments worsened. The Real Plan did eventually eliminate inflation, but the large current account deficit became problematic as worldwide risk premia increased, following the Asian crisis in 1997-98.

    The IMF offered monetary assistance, conditional on Brazil going through another painful round of economic reforms. The offer was for US$41.5 bn USD after Brazil submitted a credible fiscal adjustment program. Brazil removed its dollar peg, bolstering otherwise sluggish growth in 1999.”

    Others refer to this peg as the Brazilian Real being subject to an ‘adjustable band’:

    http://bit.ly/tu701R

    Same thing. As you know.

    Now look back at those interest rates. When they depeg in 1999… bang, rates are back under central bank control.

    More facts to follow. Maybe you’d put together a post with them. You know, refuting MMT…

  211. Gravatar of Philip Pilkington Philip Pilkington
    15. November 2011 at 13:49

    More (inconvenient?) facts.

    Turkey.

    Inflation facts — http://bit.ly/sQ99CN:

    “Inflation figures include year 1996 with hyperinflation, 1997-2001 inflation averaged 121.8 percent, 1998 at 100 percent, 1999 at 65 percent, 2000 at 39 percent, 2001 at 65 percent, 2002 at 40 percent…”

    From same source – Turkey’s interest rates:

    “At the time of the currency crash in the lira in February 2001, interest rates in Turkey skyrocketed to 7,000 percent.”

    Also see for interest rates: http://bit.ly/upYH55

    Now, what was their exchange rate doing in these years? This paper is useful: http://bit.ly/rUgKuD

    “Still, there was no political stability after the 1994 crises and the official monetary policy strategy was to maintain monetary and financial stability through means of monetary policy so that the Treasury can borrow without disrupting the economic stability. At the same time crawling-peg regime has been institutionalized with minor changes on the settlement of official rates.”

    As this whole mess broke down the Turkish authorities softened the peg:

    “A gradual shift toward a more flexible exchange rate regime was intended to begin on July 1, 2001, with the introduction of a progressively widening band around a central exchange rate path.”

    And finally killed it in 2002:

    “However, the financial crisis in February 2001 increased the cost of continuing the pre-announced exchange rate regime and free floating became effective just after the crisis, almost a year earlier than programmed.”

    “Although the year 2002 was the first year of floating exchange rate regime and it was completely new and unknown for all market participants, the intervention was quite rare and it was limited to extremely volatile movements that were not justifiable through fundamentals including market sentiment.”

    Now, scroll up there and have a look at the interest rates. As Turkey softened the peg and then depegged the central bank regained control of the rates.

    That’s all the digging I’m doing today. You’re 110% wrong on both those examples. I’m fairly sure you’re wrong on all the others too. Do some research. Neoclassicals spend far too much thinking with their theories. They need a reality check from time to time.

    The politburo used to rewrite history. Now our universities do it for us. NeoCla. The new DiaMat?

  212. Gravatar of Philip Pilkington Philip Pilkington
    15. November 2011 at 13:55

    “At the time of the currency crash in the lira in February 2001, interest rates in Turkey skyrocketed to 7,000 percent.”

    Sorry, that’s actually wrong. See:

    http://www.tradingeconomics.com/turkey/interest-rate

    It peaked at 500% and 300%, in 1994 and 2001 respectively.

    The inflation rates in the same link are pretty accurate though:

    http://www.tradingeconomics.com/turkey/inflation-cpi

    Sorry. I’m a stickler for facts. My sin, I suppose.

  213. Gravatar of ssumner ssumner
    15. November 2011 at 14:58

    Philip, You said;

    “Argentina: You’re referring to during the crisi? It had a dollar peg.

    Chile: Pre-1985? They had a dollar peg too.

    Turkey: Fixed exchange rate…

    Bolivia: One of the few LatAm countries to still have a fixed excahnge rate (dummies…).

    You see a pattern? See: also Russia etc.”

    You seem to have a shaky understanding of history. Argentina had deflation during the banking crisis of 1998-2001. The inflation came after they devalued.

    Chile did not have much hyperinflation before 1985, it was during 1973-74.

    You admit that Turkey devalued sharply. So did Russia.

    Here are the facts. During the 1960 to 1990 period countries like Argentina and Brazil averaged about 70% inflation every ryear. They averaged about 70% money supply growth every year. The currency also depreciated at roughly that rate each year. That blows MMT right out of the water.

    To end this hyperinflation some countries adopted fixed exchange rates. The fact that they might have had a few years of fairly high inflation under fixed rates, before another (inevitable) big devaluation doesn’t change the fact that countries with very high inflation see their currencies lose value in the forex markets over time. And they don’t have near zero interest rates, they usually have very high rates, despite rapid growth of the money supply. Indeed BECAUSE OF very rapid growth in the money supply, which causes high inflation, which causes high nominal rates (Fisher Effect) and which also causes falling exchange rates.

  214. Gravatar of Philip Pilkington Philip Pilkington
    15. November 2011 at 15:07

    We’re talking about interest rates and fixed exchange rate regimes. Stay on point.

    I’ll repeat:

    MMT does NOT apply to fixed exchange rate regimes.

    You denied that these countries had dollar pegs:

    Sumner: “No, those countries didn’t have dollar pegs during their hyperinflations.”

    I’ll repeat that to be clear:

    Sumner: “No, those countries didn’t have dollar pegs during their hyperinflations.”

    But they did have pegs in those years. I just showed you those facts. They are facts. Look again. Facts.

    Devaluation has nothing to do this. I’ll repeat:

    Me: “We’re talking about interest rates and fixed exchange rate regimes. Stay on point.”

    I’m not conducive to chicanery. If you say X and X is factually wrong, I’m not getting diverted into argument Y.

    In this case you said X — X being that these countries weren’t pegged. I argued that X was wrong — they were pegged. Now you’re arguing Y — that this has to do with devaluation.

    I’m not falling for this. My brain doesn’t work well with evasion. Focus.

  215. Gravatar of Philip Pilkington Philip Pilkington
    15. November 2011 at 15:17

    To repeat. Because it might save time.

    YOU said that interest rates spike when debt is monetised. And gave examples.

    I said no, this only occurs under fixed exchange rate systems and that MMT only refers to floating exchange rate systems. And that all your examples were fixed exchange rate systems.

    YOU igonored my point and started off on some pointless tangent about devaluation.

    Socrates is rolling in his grave.

  216. Gravatar of Philip Pilkington Philip Pilkington
    15. November 2011 at 15:32

    “Chile did not have much hyperinflation before 1985, it was during 1973-74.”

    Eh… 1973-74 IS BEFORE 1985.

    Christ. I dunno. I might run this stuff on NC. It’s too good.

    You economists learn logic at all? Or just you know… sentence structure?

  217. Gravatar of Scott Sumner Scott Sumner
    16. November 2011 at 16:49

    Phillip,

    “I said no, this only occurs under fixed exchange rate systems and that MMT only refers to floating exchange rate systems. And that all your examples were fixed exchange rate systems.”

    No, my examples were all floating exchange rate systems. It seems like you must be young. No one who lived through the 1960s through the 1980s could think developing countries had fixed exchange rate systems when they suffered from hyperinflation. It is one of the most basic stylized facts of macroeconomics. MMTers seem to have no understanding of the superneutrality of money. Milton Fraiedman said that in 200 years we’ve just gone one derivative beyond Hume. MMTers don’t seem to have gone even one derivative beyond Hume.

  218. Gravatar of Payam Payam
    17. November 2011 at 22:10

    Wow Scott, you really are quite something. pegged exchange rates are not floating exchange rates, unless you count “dirty” floats as floating.

    Money is non-neutral. Anyone who continues to argue today that money is neutral is simply a fool. M-C-M’!!!! how can anyone deny this

    My history of thought professor argues that many mainstream economists like yourself like think that something that has come out in 1970 for example is better and more true than something that came out in 1830…but this is simply not the case. First of all, we(meaning most of us that were taught mainstream and only know mainstream economics) really haven’t learned or advanced anything useful whatsoever since the General Theory.

  219. Gravatar of Scott Sumner Scott Sumner
    18. November 2011 at 19:07

    Payam, Not sure how your comment relates to anything I said. I never claimed money is neutral in the short run.

    And yes, I do know the difference between pegged and floating rates

  220. Gravatar of Vince Vince
    14. September 2013 at 07:49

    I found the flaw in MMT and I fixed it:

    http://howfiatdies.blogspot.com/2013/09/cmmt-cates-modern-monetary-theory.html

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