MMT bleg, one more try
I received a number of comments from my previous post on MMT. No one gave me a satisfactory answer, but one commenter (Sam Levey) did actually answer the question.
Recall that I wanted to know what would have happened in 1998, when T-bill yields were 5%, if the Fed had suddenly doubled the base from $500 billion to $1000 billion by purchasing bonds. The standard model says that money is neutral in the long run, but the MMT textbook suggests that OMOs are “irrelevant”. But why?
Levey said:
MMTers essentially argue that any effect of OMOs have to happen through prices, not quantities. I.e. if it doesn’t affect interest rates, then it doesn’t affect inflation. And even if it does affect interest rates, it may not actually affect inflation, if there isn’t a large enough reaction from aggregate demand to actually cause prices to move.
That puzzled me for two reasons:
1. We know that banks don’t want to hold lots of excess reserves when interest rates are 5%, and the public’s demand for cash is very modest with 5% interest rates, say around 5% to 10% of GDP. So if interest rates don’t change, why would the public plus banks double their holdings of base money as a share of GDP? Why hold all this new zero interest base money? What about the hot potato effect?
2. If interest rate do adjust (and Levey implicitly allows for this option), then it is indeed possible that the public would hold the extra base money and prices and output would not change. So I’m going to assume that’s the assumption that MMTers would make. Option #1 is too bizarre to contemplate. After all, how plausible is it that the Fed could dump another $500 billion in base money into an economy with T-bill yields of 5%, doubling the monetary base, without dramatically reducing interest rates? (Sure, John Cochrane might argue that rates would go up due to the Fisher effect, but in that case MMTers would be wrong in claiming no effect on inflation.)
And if interest rates do fall to zero, bringing mortgage rates from say 7% to 2% in a booming economy . . . forever . . . how likely is it that this action is “irrelevant” for the broader economy? You wake up in the summer of 1998 and read the Fed cut rates from 5% to 0%—seriously; how do you react? Irrelevant???? Yeah, savers earn less interest—but irrelevant for investment decisions like building a new house?
I say “forever” because if you argue the interest rate reduction is just temporary then there would be a long run inflation effect from people trying to get rid of excess cash balances once interest rates rose again. That’s actually what would occur, but they seem to deny it. So the irrelevance claim seems to require that interest rates fall permanently.
I just don’t get it. What’s the new long run equilibrium for base money demand, interest rates, the price level, etc. after a big increase in the base when nominal interest rates are strongly positive?
I don’t know if Sam Levey correctly characterized MMT theory, but this explanation doesn’t really provide a satisfactory answer to my question. I wish MMTers would say, “I see why you are puzzled, but here’s the intuition of why you are wrong”. But some of the responders didn’t seem to understand why this claim is so perplexing at first glance. People, you need to understand the alternative model. Don’t be like those Trumpistas that can’t figure out why most of us are skeptical of claims of massive election fraud.
If I were to try to develop a radical new macro theory, I’d try to come up with a way of explaining my new model using the framework of existing models. Actually, I often do that here, translating market monetarism into New Keynesian language. I’m not seeing that with MMT. And it’s not just me. I see other bloggers like Noah Smith, Paul Krugman, Brad DeLong, Nick Rowe, etc., who seem to have an equally hard time trying to figure out what MMTers are claiming. MMTers should understand why we are confused, and have plausible answers. One sign that you are truly on top of an issue is if you can see why others hold a different view, and explain things in their language.
PS. And please don’t tell me the Fed can’t increase the base because they target interest rates. That’s completely irrelevant to the question at hand. It’s a thought experiment.
Update: After I wrote this I saw a few more responses. Sam Levey’s second response was more exasperating:
“This is one of those ‘paradigm shift’ issues. Your language doesn’t work within our paradigm, and clearly ours doesn’t work within yours. In our a paradigm “what are the effects of OMOs” isn’t a sensible question, because OMOs are not a discretionary instrument.”
So the MMT textbook says OMOs are irrelevant. When I call them on this point, asking what would happen if the Fed had bought $500 billion in bonds in 1998, they retreat to the claim that discretionary OMOs are impossible. Then why didn’t the textbook just say so! That’s a radically different claim, not to mention a false claim; discretionary OMOs are possible as long as you are willing to allow interest rates to move, which is exactly the monetarist position.
I see why Paul Krugman called debating MMTers a game of Calvinball.
And this is far worse (my statement then his response):
“Nominal lending is reserve constrained and real lending is demand constrained.”
I honestly have no idea what this means. “Nominal lending” and “real lending” refer to the exact same thing, but measured in different units. How can one of them be reserve-constrained and the other not be?
This is why I suspect that MMTers do not understand the theories they are criticizing. You may disagree with me on reserves and lending, but how can one fail to understand a basic EC101 point about money neutrality, about the distinction between what determines real variables and what determines nominal variables?
As for his question, take a look at figures for nominal and real lending in Zimbabwe in 2008. Nominal lending went up perhaps a trillion fold, while real lending probably declined.
Tags:
25. November 2020 at 10:53
I wonder if you can’t get any answers because the MMT train ended when Biden became the Democrat nominee. And now that the Democrats are unlikely to have a majority in the Senate and Yellen will be Treasury Secretary, any major shift to unorthodox fiscal policy is pretty much ruled out until at least 2025.
25. November 2020 at 12:40
I was thinking about some possible intuitions that MMTers might use to explain their model and came up with:
– The decrease in interest rates causes the public to hold more of their wealth in cash but not to spend more. This is because MMTers probably use a standard Keynesian consumption function where spending is determined only by income and wealth.
– Unless the government simultaneously decreases taxes or increases spending then a reduction in interest rates is the same as a reduction in the deficit (because it pays less out in bond interest). This will be deflationary.
– If one adopts a cost plus markup basis for prices (and assume that interest rates are a cost for producers) then a fall in interest rates has an additional reason to be deflationary.
Both of these latter reasons might lead one to expect an outcome opposite to what Market Monetarists might expect from an increase in base money.
25. November 2020 at 13:33
Since he isn’t mentioned in your list of figures perplexed by MMT, John Cochrane is also *very* sceptical on his blog. See e.g. https://johnhcochrane.blogspot.com/2020/07/magical-monetary-theory-full-review.html , I seem to remember there was a later blog post addressing some further issues also.
25. November 2020 at 15:15
I don’t understand your point on nominal/real lending, given your Zimbabwe example. Shouldn’t it be nominal is demand constrained and real is reserve constrained?
Thank you
25. November 2020 at 16:27
Yet for all of the weaknesses of MMT, there remains the solid prospect that money-financed fiscal programs (MFFP) are good economic policy in certain junctures or epochs.
Ben Bernanke recommended use of MFFP in Japan in 2002, so MFFP is not some crazy wacko idea promoted only by people who do not understand simple macroeconomic theories. For his part, Milton Friedman recommended Japan go to quantitative easing.
In either case, solid credentialed macroeconomists have recommended that central banks print money to stimulate the economy.
Some very smart people think that simple quantitative-easing is enough, that the “Hot Potato” effect is enough.
Yet surely the “expectations channel” is a rather weak reed to stand on. For decades America’s top macroeconomists forecast much higher inflation and interest rates due to Federal Reserve policy. Instead, in the real world outside of theory, interest rates and inflation went down for decades. No one believes in authority figures anymore, anyway.
People can expect whatever they want from Fed policy, but the market will deliver.
A second weakness in relying on the actions of a lone central bank to stimulate the economy of a sovereign nation is the globalization of capital markets and general economy.
Do you believe that a lone central bank can create enough hot potatoes globally to affect the economy inside a defined geographic region, that is a sovereign nation?
What impact do the actions of the Bank of Japan, the People’s Bank of China, the European Central Bank, the Bank of England, and the Swiss National Bank, have upon the US economy?
Are the global central banks not also adding or subtracting hot potatoes from globalized capital markets?
Perhaps you believe the Federal Reserve will impact the domestic economy through bank lending at domestic commercial banks. That may be true, but then you are relying upon the Rube Goldberg device of the Federal Reserve and the claptrap of the commercial banking system to stimulate the domestic economy. And that, by building up debt.
Would not simple MFFP work a lot quicker, better and without piling up debts?
25. November 2020 at 17:11
Rajat, The real problem with MMT is their view of monetary policy.
Market, You said:
“The decrease in interest rates causes the public to hold more of their wealth in cash but not to spend more. This is because MMTers probably use a standard Keynesian consumption function where spending is determined only by income and wealth.”
But the standard argument is that lower interest rates (from monetary stimulus) boosts investment. Other things equal, what does lowering the mortgage rate from 7% to 2% do to housing affordability? Isn’t the answer obvious?
Thanks Matty.
25. November 2020 at 17:18
Ricardo, Start with the real amount of lending. That will depend on conditions in the lending industry, just as the real amount of any good or service is determined by conditions in the industry in question. Here’s an analogy. The Fed doesn’t determine how many apples are produced; that’s based on production technology and consumer willingness to buy apples. But the nominal quantity of apples sold depends on the real amount and also the purchasing power of money. Thus in Zimbabwe the nominal amount of apples soared due to hyperinflation.
The same applies to lending. The real quantity is determined according to the laws of microeconomics. The nominal quantity is a macro concept, and depends heavily on changes in the value of money—i.e. inflation.
25. November 2020 at 17:37
‘Other things equal, what does lowering the mortgage rate from 7% to 2% do to housing affordability? Isn’t the answer obvious?’
Within the model I was thinking of (and that I don’t actually endorse) the change in interest rates would cause a shift in relative demand towards things like housing where interest rates would seem likely to have a big effect on demand and away from most other goods where this is not the case. Overall the price level and NGDP would not necessarily move upwards as MMists would predict for the reason I gave earlier.
I think (but am not 100% sure) that within cost + markup pricing models lower interest rates does not spur greater investment.
The type of models I am thinking of are those described in ‘Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth’ by Godley and Lavoie that I spent some type looking at a few years ago and are held in high esteem by Post_Keynsians (and I assume by MMTers).
25. November 2020 at 17:49
Scott, I will try to give you an answer because I have been reading and mostly enjoying your blog for years now, and probably owe you something for that. And I have also been studying MMT for several years now. But I am not an MMT economist and can only explain my understanding of it. So for whatever it is worth, this is my understanding about this question-
“Recall that I wanted to know what would have happened in 1998, when T-bill yields were 5%, if the Fed had suddenly doubled the base from $500 billion to $1000 billion by purchasing bonds. The standard model says that money is neutral in the long run, but the MMT textbook suggests that OMOs are “irrelevant”. But why?”
In my opinion- MMT would consider that Fed action as mostly a ‘swap’ of financial assets that takes place between some individuals, but really mostly institutions, that had already determined or needed to save or hold ultra safe assets. The Fed buying Treasury bonds from actors previously determined to save by using an equally safe, but slightly more liquid asset, cash or reserves at the Fed, does not mean the sellers go out and start on a consumption binge. Many of the institutions the Fed bought those bonds from will need to buy an equally safe asset like new Treasury bonds if they do not want to hold reserves. New T-bill yields would drop. Probably a lot. But that drop will not much influence the propensity to save in the currency overall.
Pretty much I think that MMT considers that T-bills and US Treasury bonds and Fed reserve balances and actual cash are all part of what you call ‘the base’ in this question. If you are holding a Treasury that pays 5% interest and the Fed offers to buy it from you- well you will sell it when the money they offer entices you to sell it. But that doesn’t mean you are going to buy a Ferrari just because you have the cash. You had the Treasury to begin with either because you needed to as an institution, or because you wanted to save safely. Why would you consider the proceeds from your sale as some kind of potato that you did no longer want? I mean you just purchased that potato by exchanging your bond for it willingly?
26. November 2020 at 01:15
Total domination!
Sidney Powell drops bomb on GA and MI at midnight.
Bye Bye Joseph “Corrupt” Biden, and Scott “CCP” Sumner.
Game. Set. Match.
Beautiful communist tears.
26. November 2020 at 02:26
‘Now, this doesn’t “debunk” MMT. MMT cannot be debunked because MMT has never been implemented anywhere.³ Yes, some people think MMT has been in place for decades because they advocate persistent deficits, but persistent deficits are not MMT. MMT is specifically a macro theory for full employment and price stability using persistent deficits with a Job Guarantee as a policy tool to achieve those goals. A large scale Job Guarantee used as a price anchor and full employment tool has never been implemented in any developed economy.
I will readily admit that there’s a chance that the optimal implementation of this tool could result in a more balanced and better performing type of capitalist economy than what we have now. I am not closed-minded about something like this. But we really don’t know. I think there are huge potential risks to letting the government become the employer of last resort offering somewhat phony jobs at a living wage with full benefits.4 But this doesn’t debunk MMT because MMT, as its adherents promote it, has never really been tried.’
You Can’t Debunk MMT – Pragmatic Capitalism (pragcap.com)
26. November 2020 at 02:28
“The simple fact is that MMT does not, definitively does not, describe the existing reality of the monetary system. Let me explain.”
https://www.pragcap.com/stop-saying-mmt-describes-reality-it-doesnt/
26. November 2020 at 03:00
I actually thought this was a really interesting point to make. On its face, the first sentence is true. And the second sentence does indeed appear to follow from the first.
I’d like to provide my idea of what’s going wrong here; I think the meaning of “the exact same thing” has changed between the two sentences:
Nominal lending and real lending refer to the same thing, measured in different units. This is true at every instant, but the ratio between those units differs from point to point in time.
Thus, if you graph the two values over time, the shapes of the two graphs may be arbitrarily different from each other.
Thus, if (for example) both values *should* increase, but nominal lending runs into a reserve constraint, real lending can increase anyway if the value of a dollar changes accordingly. (I guess, in this case, the value of a dollar would have to rise; deflation.) And if both values should increase, but real lending runs into a demand constraint, nominal lending can increase anyway if the value of a dollar falls accordingly.
Is this basically right?
26. November 2020 at 06:30
Sumner is confused as usual. His worldview is shaped by the prior that money is not neutral, but it largely is. The scales would drop from his eyes if only he accepted this simple fact: money is always and everywhere neutral. Done. But if he did this, his whole life would be exposed as one big waste. Only once in all the years I’ve read this blog has Sumner mentioned–in a single sentence fragment–that money might be neutral short term, when he said “if money is neutral, then…”
The existence of Bitcoin as a payment medium is evidence of money short-term neutrality. Another is that a documentary found in the 1970s, in the remote jungles of the Amazon, in areas with *no* radio (it was in a valley? weird but that’s what I recall), the price of gold in a gold mining town was accurate to the world price within hours. There are numerous other examples (economics Nobelian Fisher Black believed in money neutrality).
PS–Notice Sumner replies to everybody but Dr. Ben Cole. Telling, the truth must hurt.
26. November 2020 at 07:28
Another meaningless post.
The US dollar will be worthless in 6 months, and the CCP will be the new world master.
Most Americans won’t have jobs, and you’ll have a new puppet regime telling you genuflect to the CCP.
Sumner, of course, will gain some notoriety after selling his soul to the CCP, while the rest of Americans are sent to suffer in gulags. Such is the motives of the totalitarian left.
26. November 2020 at 07:40
The left is mentally sick.
https://twitter.com/ninnyd101/status/1331723725520199683?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1331723725520199683%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.infowars.com%2F
I heard that low IQ AOC is making a list of American Patriots to be sent to future gulag’s. Perhaps we should also start procuring a list of the left communists for a firing squad. These people are sick and twisted. And quite frankly, the embodiment of evil.
26. November 2020 at 08:03
AOC is simply a product of affirmative action.
When you feel bad for stupid people, and admit them to schools they don’t qualify for based on skin color, you get stupid people in positions they should never be in.
And you cannot fail anyone anymore who pays 50K a year, or you are bound to be sued for discrimination by some attorney trying to make a name for themselves. It’s simply not worth one’s career.
26. November 2020 at 09:47
Market, If that’s the MMT view (and I don’t think it is), then the model is even odder than I thought.
Jerry, I appreciate the answer, which may be partly right. But if one is going to convince others, then you must address their specific reservations. Again, does this cause interest rates to fall by 5%, and does a 5% fall in interest rates matter?
It not enough to say it doesn’t affect the propensity to consume, you need to address the specific concerns I raised.
Xu, Love it! Keep posting here.
Michael, It’s very simple; they differ when the price level changes. And reserve injections that are both permanent and exogenous can cause the price level to change.
Ray, You said:
“PS–Notice Sumner replies to everybody but Dr. Ben Cole. Telling, the truth must hurt.”
Kind of funny that you don’t understand that Cole doesn’t think money is neutral; he constantly blames the Fed for slowing the economy.
Harry, Nick and Jayne, Love it! Keep posting. Trump will win when the massive fraud is exposed!
26. November 2020 at 10:43
Have you read this Bill Mitchell blog criticising money neutrality:
http://bilbo.economicoutlook.net/blog/?p=12473
26. November 2020 at 13:03
I took a closer look at the Post-Keynesian models in ‘Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth’ and find they have models that show:
– A doubling of the monetary base could only be achieved by a lowering of the interest rates on bonds (assuming everything else is held constant)
This would have two short term affects both of which would increase NGDP:
– investment and new personal loans are a function of the real lending rate so these would increase as a result of the fall in interest rate.
– In addition the value of bonds would increase (due to the lower interest rate) which would lead to additional spending
However they then claim that these 2 short term effects would eventually be reversed by the longer term affect of the lower interest rates leading to a smaller government deficits which would mean that attempts to double the base by lowering interest rates would ultimately lead to a fall in NGDP.
26. November 2020 at 13:23
@Benjamin Cole: Your comment shows that you don’t understand the difference between the nominal economy and the real economy. Esp. all your concern about “globalized markets”.
E.g. this: “Are the global central banks not also adding or subtracting hot potatoes from globalized capital markets?”
The answer is simple: no, only the Fed can create a hot potato “dollar”. Other global central banks can create their own currency, but they cannot create dollars. So when analyzing the path of the value of dollars, where you examine the changes in the supply and demand for dollars, the supply of dollars is only changed by the US Federal Reserve. The actions of other “global central banks” are completely irrelevant when looking at the supply of dollars.
Here’s another one: “a lone central bank to stimulate the economy of a sovereign nation”
You need to understand that it’s a two step process: first the central bank would stimulate the domestic nominal economy, raising the price level / inflation. Second, rising domestic inflation might (or might not) increase growth in the real economy. Which step are you objecting to? Do you even know that there are two steps?
“…will impact the domestic economy through bank lending at domestic commercial banks. … by building up debt”
No. Monetary stimulus works through the Hot Potato Effect. Not through increased commercial bank lending. That is not a significant monetary policy transmission mechanism. (Increased lending is an effect, not a cause.)
26. November 2020 at 14:20
“So if interest rates don’t change, why would the public plus banks double their holdings of base money as a share of GDP?”
How would public get ahold of base mđney from OMO?
SUch assumption is totaly wrong. By MMT public can not acces such cash but in monetarist minds bank reserves somehow can enter economy. That is where you are wrong and the reason that Sam Levy tells you that you are arguing an irelevant question.
It is important, really important to grasp that Bank reserves do not intermingle with economy but is only a part of interaction with FED and government, a remnant of old practitces that lose more and more practicability but comlpicate the public understanding of governmnet finances.
Simply put, there are two separate finance systems that barely intermingle (except in bad economists minds)
1) base money/bank reserves system with FED and treasury dicteated by Congress
2) Economy and banks with digital money and cash separate from government and Bank reserves
If you can not comprehend the separation of base money from economy/ the real world you will never comprehend what is MMT talking about nor why is that the only truth.
OMO from Fed can happen only with Primary Dealers, Nobody from economy will sell Assets to Fed just because OMO is happening. Banks will sell assets to FED and they will increase their reserves. Exces reserves will reduce interbank lending and such interest rates but not FED set interest rates. That willl also not lower mortgage rates as you suppose and claim as monetarist dogma.
Spread between 30y T-bills and prime loans widened from around 1% to 2.5% after 2008. Banks did not follow official rate and offer it to the public but kept intereset rates high for public. Raies were lowered only to the government. hence the reason that monetary policy did not work and can not work bellow 3.5% because banks will not follow it that low.
In order for monetary policy to work, banks must offer it to the public, to the economy, not keep it above 4.5% while official rate is 0%. Negative interest rates are so crazy considering that banks will never offer it to public.
In Europe,state owned banks did offer 1% loans to the public but in USA banks tightened the loan terms while keeping interest rates the same level so no wonder monetary policy culd not work.
OMO will not make some private person decide to sell their paper asset. Where did you get such an idea?
And even if private person sells some assets it will reinvest in another paper asset, not spend into economy and cause inflation Unless that was a decision absolutely irelevant of OMO happening or not.
You are forgetting about propensity to spend. Can OMO change that? it is only such monetarist idiocy that can come up with such stupid ideas to excuse another stupid idea prooven false.
Unless you can comprehend a division of two finance systems existing in almost complete parallel with very little interaction, you will not be able to comprehend MMT.
26. November 2020 at 15:20
“And if interest rates do fall to zero, bringing mortgage rates from say 7% to 2% in a booming economy . . . forever . . . how likely is it that this action is “irrelevant” for the broader economy?”
Woow Thats a Crown Jewel to show what your models are.
Can you find, throughout the whole history of USA, a 2% loan offered to the public?( unleass as a part of a hidden bribe). Have you had such loans being offered to you?
Yes, you can? In your model, aha. WHat about the real world
, Can you check the real world please
As i can recal, i had all my Credit cards at 0% before 2008 and then raised to 2 or 3%. Nice monetary policy effect, don’t you say. Oficial inerest rates went down while my rates went in opposite direction just as many that i knew at the time. Is that how monetary policy works. And new mortgage terms go really tight even tough rates went doen but nobody could get them. So check the real world against your model and those magic 2% mortgages which you torture us with as if there were any, ever ever, ever
YOur model is bs but you refuse to chech it against the real world. Ah, those are official rates, you say, but nobody in economy, the real world, can get it, so your questin does not apply in the real world.
You keep mixing up the nominal world of official rates and those existing in the real econmy.
Anyway, some investigations show that interest rates do not affect the level of new loans because of the animal instictis/hope to profit above interest.
It has been shown that loan terms are much more effective at managing new loan issue then monetary policy. But that is the real world, your model does not care about it.
” You wake up in the summer of 1998 and read the Fed cut rates from 5% to 0%—seriously; how do you react? Irrelevant???? Yeah, saver earn less interest—but irrelevant for investment decisions like building a new house?”
Do you enjoy Fed rates? DO you?????? Anyone?
Yes irrelevant. My bank rates are relevat to me and businesses, not FEd rates. How far are you removed from the real world?
Savers are locked into long term rates, so Fed rates irrelevant again. New home building, Fed rates irrelevant again. Bank loan rates and terms is what is relevant here. Again, How far are you removed from the real world?
26. November 2020 at 17:00
OT:
This report from the Swiss NZZ is just gold:
“Undiplomatically, China’s diplomats demand that Australia fulfills a list of 14 demands. This list also deals with core values of Australian democracy.
The threat is abundantly clear: “China is furious. If you make China the enemy, China will be the enemy,” a Chinese embassy representative in Australia told local media this week. The embassy wanted to inform journalists about why, from Beijing’s perspective, relations between Australia and China are so bad. The embassy employee provided the journalists with a list of 14 points that particularly bother Beijing.
What is striking is that the Chinese embassy is not making official contact with the Australian Foreign Ministry, but is trying to put pressure on Scott Morrison’s government through the media. For its part the government complains that Beijing is not taking its calls. This year China has imposed import restrictions on Australian imports of wine, wood, coal and lobster. Until now, Beijing has always claimed that there are trade and health reasons for this.
These pretexts are now being dropped. Beijing is ultimately demanding that Canberra changes its behavior. If Australia stopped the 14 activities listed, it would “contribute to a better atmosphere”, it is said in a press release. Specifically, the government should stop funding a China-critical think tank, as well as “unfriendly and antagonistic reports about China” in the local media. Beijing also holds the Morrison government responsible for statements by individual members of parliament.”
https://www.nzz.ch/international/china-ist-wuetend-und-gibt-das-australien-deutlich-zu-spueren-ld.1588046
Furthemore the article says that CCP China has already been quite successful against Norway and South Korea with similar demands. So now it is Australia’s turn.
It is always said that the West does not understand CCP China. Has it ever been reported in detail that CCP apparently does not understand the West at all? These buffoons really seem to believe that the West can control its media and parliamentarians as much as the fascists from CCP China.
Who is going to stop them and how? No need to worry, Beijing Biden is in charge now.
26. November 2020 at 17:22
Don G–
I appreciate your comments.
BTW, you might want to review the Swiss National Bank, and its long-running war to try to prevent the Swiss franc from appreciating. The SNB, in various spurts in recent years, has accumulated a balance sheet near $800 billion, which roughs out to about $100,000 per Swiss resident.
You can eyeball Swiss GDP, real/nominal, and inflation, and see…nothing. Swiss inflation is dead.
To match the Swiss effort, the Federal Reserve would have to build up a balance sheet of about $33 trillion. And given the results in Switzerland, nothing much would happen domestically.
Suppose, for sake of argument, that if the Fed boosted its balance sheet to $33 trillion (the equivalent of the SNB), that “would work.” Domestic output would rise.
But…would the Fed have the resolve for such a large increase in its balance sheet? When? Not in 2008 and not now. So, when?
If your NFL tea can’t run with the ball, then you have to pass forward….
—–
OK, let us follow your arguments (although I disagree about the endogenous creation of money).
OK, in the here and now:
The Fed says it wants to hit a 2% inflation target (PCE core), but might be willing to go to a little higher than that, but not—gasp—you know, to something wild like 3%, or anything dangerous like that.
This policy is supposed to get me spending? Get investors investing? Budging inflation (as measured) by a few tenths of a percent? You find this compelling?
Beyond that, there are various central banks that have inflation targets…and nothing happens. The People’s Bank of China has a 3.5% target, and they are under 1%. The Bank of Japan has a 2% inflation target (think of a long-long running TV series with a quest but no conclusion), and they are near deflation now. The Bank of Thailand has a rough 3% target and no inflation. The ECB and so on.
So…if no one in the real world has any expectations regarding inflation and central bank stated policies….where does that leave you?
Are you expecting a “exchange rate” effect? That is, a cheaper US dollar would boost US exports, cut imports, and stimulate domestic GDP?
In the end, I have to say, “Why not just hit your target by hitting your target?”
You want more spending inside the US?
Leave taxpayers with a lot more money, especially those taxpayers who will spend it. This will work, everyone knows it will work. MFFPs works.
The arguments against MFFPs are usually that the pols will go crazy and we have permanent spend-a-thons, see Zimbabwe. That is a valid concern.
Stanley Fischer has advocated the Federal Reserve have a fiscal facility, thus somewhat saying fiscal stimulus would be under the Fed’s control, and not the loose pols. Well, maybe that would work.
All that said, I appreciate your civil and intelligent commentary. Would that more conversation go this way.
26. November 2020 at 17:36
Kester, Money neutrality is a “conservative” idea? Seriously?
And this:
“What the Classical economists wanted to assert was that if MV > PY then the change in prices was assumed to be positive, and if MV < PY then the price level would fall." It's an identity. There cannot be any inequality between MV and PY. I don't know what he's talking about. And this: "So Classical theorists (and monetarists and more modern variants) had to make some assumptions or assertions about the behavioural nature of the variables underlying the accounting identity. So they assumed that V is constant and ground in the habits of commerce – despite the empirical evidence which shows it is highly variable if not erratic." That's just idiotic. Milton Friedman co-authored a 700 page book showing that velocity is highly volatile, and explaining why. He's the leader of monetarism. This guy seems to know nothing about monetarism.
26. November 2020 at 17:37
Christian, China is a paper tiger and the Aussies should ignore them. They always back off on their sanctions threats.
26. November 2020 at 17:43
Jure, Your comment is full of laughable errors, but I only have time to mention two. During the 1990s, over 90% of new base money injected in the economy went out as cash in circulation. So yes, the public can get access to this new money.
And a bank in Denmark offered negative mortgage rates, so 2% is not far-fetched in a world where 10-year T-bond yields are zero.
Sorry to be impolite, but you are in way over your head.
26. November 2020 at 19:01
The MMT model is simple. Assume you know nothing about economics. Observe and describe. Correct and modify assumptions. Observe and describe.
So in the end what we get is a description of an operational model that includes existing institutional constraints, knowledge of what happens without them, knowledge of other institutional constraints in place with the rest of the world and an understanding of how new institutional constraints may be innovated.
So what would happen if the central bank bought $500 billion more bonds. Well these bonds have to be on issue before they can even be bought so they already exist as a net financial asset. So all it does is change a portfolio allocation of financial assets. It may rally other asset prices like stocks and real estate under Keynesian animal spirits but it is likely that is a short-term effect – a temporary bubble. As many in the MMT community like to point to: Japan.
Even if these are new security issues – given they are only temporarily in the public domain through primary dealers & then bought back – the outcome is likely the same.
Now if the OMO includes REPOs, we are changing the yield rate to target the overnight rate
We can similar events happening all over the world now.
Now why anyone would want to put a new paradigm into New Keynesian or Market Monetarism language (jargon) is beyond me, unless it is to keep information inaccessible.
26. November 2020 at 19:03
“Jerry… Again, does this cause interest rates to fall by 5%, and does a 5% fall in interest rates matter?”
I have no idea. MMT does not analyze the economy according to the amount of ‘base’ money the Fed creates by purchasing previously held financial assets. But MMT would say that the Fed could, and basically does, set the interest rate on the bonds the US federal government issues. That is of course a different interest rate than anyone in their right mind would offer me. Does a 5% fall in that interest rate matter? I think MMT would say it surely matters to many different people in varying ways but that aggregating those ways it matters is very difficult to do.
Scott, you say “If I were to try to develop a radical new macro theory, I’d try to come up with a way of explaining my new model using the framework of existing models.”
In all honesty, I am not sure that Warren Mosler started out trying to develop a new macro theory. I think he was looking at how things actually worked, as part of his job, as far as government debt and bonds and noticed a discrepancy between what was actually occurring and what most economic theory said should occur. So when he pointed out actual realities that should not occur according to the framework of many previously existing economic models- well why try to explain what was happening using that faulty framework? Some of reality just does not fit into those existing models.
MMT says some of the framework you are using is wrong. There is no getting around that- MMT rejects some of it to the point that if you try to use that frame to understand MMT, or try to put MMT into that frame, you will not really be able to see why MMT reaches some of the conclusions that it does.
But MMT is not really hard to understand, even if you have a previous exposure to economic theory. But you just can’t just jump into the middle of the ideas expressed and expect them to conform with everything you presently hold as true. You kind of have to start at the beginning and follow the chain of argument through. And if you can do that and then find a major fault in their reasoning- well that would be more than I can do.
26. November 2020 at 20:58
Back to the really important stuff-
How come Anonymous at 19:01 gets a cool owl picture next to their name
and all I get is the same weird G rolled on its back?
26. November 2020 at 22:10
“During the 1990s, over 90% of new base money injected in the economy went out as cash in circulation. So yes, the public can get access to this new money.”
Thats what Treasury can do, not Fed. Treasury by orders from Congress places money into peoples accounts through Fed that fills base money to banks and then banks copy ammounts into peivate accounts. Did it go out as cash or digital money is irelevant. Treasury can turn base money into economy not Fed with OMO. You were talking about OMO not about fiscal facility from Treasury.
Again, you keep mixing up terms at will just not to see your mistakes. You did not make my comment wrong.
“And a bank in Denmark”
I have mentioned 1% loans in Europe and now you believe that your sentence proves me wrong about the USA system which we are talking about. Fed OMO is happening in USA not in EU dont you remember?
You did not point to my mistakes but to you avoiding the topic and your own question.
26. November 2020 at 23:27
Stray thought:
OK, so you develop a theory of the macroeconomy, and it looks like a 40-lb dog. The theory makes sense, the design of the dog works.
Then you observe the real world. Yes, the macroeconomy looks like a 40-lb dog, but it also has a muscular 50-lb tail. That tail is institutional imperfections, structural impediments.
So, is the tail wagging the dog?
27. November 2020 at 01:08
Mercatus Center is funded by the Koch Brothers, who have significant interests with members of the CCP and CCP affiliated owned companies. In fact, the Koch brothers were the first to throw a hissy fit over Trumps tariffs, as the tariffs reduced their profit margin substantially.
There should be an investigation into Scott Sumner, to see if there are any undisclosed connections to CCP funded groups and individuals. It is very likely that he’s compromised.
27. November 2020 at 03:28
More disgusting sick radical left people.
https://www.infowars.com/posts/video-covid-cops-try-to-break-into-gym-as-owner-continues-to-use-it-during-lockdown/
Trump 2020! Save America from the sickness of the left.
American Hero’s trying to save America from the communists.
Sidney Powell!
Lin Wood!
Rudy Giuliani!
The truth will prevail!
27. November 2020 at 09:04
Sumner’s CCP radical left party is at it again.
small business owners and their employees are now being sent to the gulag’s.
https://twitter.com/TinaYazdani/status/1332034563795718145?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1332034563795718145%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.infowars.com%2Fposts%2Frestaurant-owner-arrested-after-opening-in-defiance-of-covid-restrictions%2F
This is the World Sumner approves of. He is in love the CCP. And he wants to see this type of police state in America.
The election isn’t over. Powell’s lawsuit in Georgia and Michigan has stunning affidavits attached to it. Biden, Harris, and Communist sympathizers are shaking in their boots because they know Powell and Lin Wood have caught them. The Judge’s blocking of certification in PA on the 25th is only just the start.
America will NEVER be a communist country. And nobody here will be going to the gulags like the gentlemen above.
27. November 2020 at 09:11
Great post Scott – please keep these monetary theory posts coming!
I’ve always seen MMT as a branch of Chartalism – which argues that state money has value because the government accepts it for taxes and other legal obligations. In my view Chartalism is obviously true.
The problem I have with some MMTers is the conclusions you draw from that. MMTers argue that the government can never run out of money because they are the money-issues. This is true, just like a corporation can never run out of its own stock. However, the relevant question is what is the opportunity cost of issuing new currency.
If you take a simple case of a central bank that only buys and sells government bonds, you can come up with a simple equation for the monetary base:
M = S – T – B + C , where
M is the monetary base
S is government spending
B is government borrowing
C is central bank purchases of government bonds
Under our current system S – T – B always nets to zero, so M = C. Chartalism essentially rejects that and combines the Bureau of the Public Debt with the central bank, which gives us:
M = S – T + (C – B) = S – T + (net government bond purchases)
Again, I believe that is true, and it’s a useful model for thinking about money in an economy. Where some MMTers go off the rails (not Warren Mosler, IMO) is they fail to recognize that for any level of the monetary base, any additional dollar of spending over taxes still means one more dollar of outstanding bonds. You can argue that they want there to be one more dollar of monetary base instead, but if we want one more dollar of monetary base, why not just simply have the central bank buy one more dollar of bonds.
So I come down on the side of the market monetarists. The central bank already has the necessary and sufficient means to hit any monetary base, so it should just do that. And then we should consider any government spending program on its merits compared to its tradeoffs of either higher taxes or more bond issuance.
27. November 2020 at 09:45
Anonymous, If you don’t have anything serious to say, why even waste time commenting here?
Jerry, You said:
“I have no idea. MMT does not analyze the economy according to the amount of ‘base’ money the Fed creates by purchasing previously held financial assets.”
That’s obviously false. In my earlier post I quoted the MMTers analyzing a change in the base and claiming it is “irrelevant”.
But nice try.
You said:
“MMT says some of the framework you are using is wrong.”
Yes, and I’m asking why they think it’s wrong. And no one is answering my question.
You said:
“You kind of have to start at the beginning and follow the chain of argument through. And if you can do that and then find a major fault in their reasoning- well that would be more than I can do.”
I am reading a 600 page MMT book, from the beginning, and finding major flaws on almost every page. So tell me what I’m doing wrong. I’m seeing logical flaws, which I will discuss in my next post. I’m seeing the authors not seeming to understand concepts like interest rate targeting, money neutrality, the money multiplier, monetarism, endogeniety, discretionary fiscal policy, etc. How can you not see it?
Jure, You said:
“Did it go out as cash or digital money is irelevant.”
LOL, First you say I’m wrong, and then you admit I’m right but claim it’s irrelevant. With you MMTers it’s always a game of whack-a-mole.
rinat, You said:
“Mercatus Center is funded by the Koch Brothers, who have significant interests with members of the CCP”
Yeah, the Koch brothers are a bunch of commie sympathizers. LOL.
Negation, You said:
“I’ve always seen MMT as a branch of Chartalism – which argues that state money has value because the government accepts it for taxes and other legal obligations. In my view Chartalism is obviously true.”
OK, but then what’s the obvious explanation for why Somali money still had value after their government collapsed? Or Bitcoin.
27. November 2020 at 11:43
@Benjamin Cole: “To match the Swiss effort, the Federal Reserve would have to build up a balance sheet of about $33 trillion.”
Yes, MV=PQ, but you’re too fixated on an apparently direct connection between delta-M and delta-P. It doesn’t work like that. Inflation is not a simple function of the quantity of the monetary base.
The Japanese and Swiss banks (and now the Fed) have large balance sheets relative to GDP, because of the low inflation environment. What they need is not “more stimulus”. What they need instead is a change of monetary regime, with a commitment to “do whatever it takes” to meet their inflation targets. With such a credible regime, they would meet their inflation targets with smaller balance sheets.
It’s Nick Rowe’s concrete steppes: Chuck Norris doesn’t actually need to beat up very many people, to get the party to move. He just needs to credibly commit to beating up as many people as necessary.
Japan, SNB, and the Fed have not made that commitment.
“that “would work.” Domestic output would rise.”
I continue to be concerned that you’re not carefully distinguishing between the nominal economy and the real economy. What does “would work” mean, to you? A rise in (nominal) inflation? But then you immediately talk about “domestic output”, which is a real concept. They are very different things.
“But…would the Fed have the resolve for such a large increase in its balance sheet? When? Not in 2008 and not now. So, when?”
We agree that the Fed has failed to achieve its inflation targets.
“The Fed says it wants to hit a 2% inflation target … This policy is supposed to get me spending? Get investors investing?”
You have causation backwards. First the Fed causes more spending (via expectations and OMOs and then the Hot Potato Effect). It is the rise in aggregate demand which causes the resulting inflation. It is not that inflation causes spending.
“Beyond that, there are various central banks that have inflation targets…and nothing happens.”
We agree that the world’s major central banks have failed to meet their inflation targets for the last decade.
“Are you expecting a “exchange rate” effect? That is, a cheaper US dollar would boost US exports, cut imports, and stimulate domestic GDP?”
No. Exchange rates are a free market price, and thus have no causal impact on their own. Every time you ask this question, the answer is always the same: OMOs and the Hot Potato Effect.
“This will work, everyone knows it will work. MFFPs works.”
Look, we agree that real-world central banks have failed to achieve their targets. So what is to be done about that? Your proposal is to abandon monetary policy, and force a second-best fiscal policy. Sumner’s recommendation instead is to put the blame solely where it belongs: the central banks have (and have always had) the power to achieve their targets. If the current central bankers don’t use that power, they are violating their fiduciary duty and should be fired and replaced with bankers who will do the job assigned to them.
Fiscal policy is worse in essentially every way: it interferes with the free market allocation of real resources via inferior central planning; it takes much more time to implement; it is costly, and needs to be paid back with future taxes (possibly avoided with MFFP, to be fair); as you say, is vulnerable to political capture, since everyone loves to get services and goods “for free”, forever.
27. November 2020 at 16:37
Don G.
Again, thanks for your courteous and intelligent reply.
The type of MFFP advocated by me are simple tax cuts, so the distortion in the economy would be very limited. (I believe in a much smaller federal government anyway).
A holiday on Social Security taxes, for example.
The impact of such tax cuts should be nearly immediate. Employees and employers would quickly have more money to spend.
In your version, I still ponder if the Fed, by buying bonds, is attempting to generate a “hot potato effect” through globalized capital markets.
I remain dubious about the public’s expectations of any central bank. Recent history reveals a curious paradox, in that most credentialed experts expected (for much of the last 40 years) higher rates of inflation due in large part to easy Fed policies, but instead we had lower rates of inflation.
Put a minus sign in front of the expectations fairy?
The Fed can propose, the public can expect what they want, but the market will dispose.
By the way, I think Scott Summers approach might work in a “Steady As She Goes” clear-sailing type economy.
But when you hit a 2008 or a 2020, you have to pull out the heavy artillery.
MFFP!
28. November 2020 at 00:55
So individuals exchange financial assets for ‘potatoes’?
Are these ‘potatoes’ hot?
28. November 2020 at 01:07
“Fiscal policy is worse in essentially every way: . . . ”
‘Pure’ fiscal policy is ineffective?
“ . . . whereby the coefficient for ∆g is expected to be close to –1. In other words, given the amount of credit creation produced by the banking system and the central bank, an autonomous increase in government expenditure g must result in an equal reduction in private demand. If the government issues bonds to fund fiscal expenditure, private sector investors (such as life insurance companies) that purchase the bonds must withdraw purchasing power elsewhere from the economy. The same applies (more visibly) to tax-financed government spending. With unchanged credit creation, every yen in additional government spending reduces private sector activity by one yen.
“Equation (22) indicates that the change in government expenditure ∆g is countered by a change in private sector expenditure of equal size and opposite sign, as long as credit creation remains unaltered. In this framework, just as proposed in classical economics and by the early quantity theory literature, fiscal policy cannot affect nominal GDP growth, if it is not linked to the monetary side of the economy: an increase in credit creation is necessary (and sufficient) for nominal growth.
Notice that this conclusion is not dependent on the classical assumption of full employment. Instead of the employment constraint that was deployed by classical or monetarist economists, we observe that the economy can be held back by a lack of credit creation (see above). Fiscal policy can crowd out private demand even when there is less than full employment. Furthermore, our finding is in line with Fisher’s and Friedman’s argument that such crowding out does not occur via higher interest rates (which do not appear in our model). It is quantity crowding out due to a lack of money used for transactions (credit creation). Thus record fiscal stimulation in the Japan of the 1990s failed to trigger a significant or lasting recovery, while interest rates continued to decline. ”
http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf
28. November 2020 at 08:17
No idea whether this came up in the discussion here, but all of this is covered on pages 362-4 of the textbook.
On page 364, it notes that central banks do not have discretion in setting the level of reserves, for reasons explained there.
28. November 2020 at 09:18
Don, I explained the SNB to Ben numerous times, but he always ignored me. I’ve stopped.
Brian, You said:
“On page 364, it notes that central banks do not have discretion in setting the level of reserves, for reasons explained there.”
If they are pegging interest rates. But what if they are willing to allow interest rates to change?
28. November 2020 at 16:33
“ If I were to try to develop a radical new macro theory, I’d try to come up with a way of explaining my new model using the framework of existing models. Actually, I often do that here, translating market monetarism into New Keynesian language. I’m not seeing that with MMT”
I completely agree. I tried to build a model to study one aspect of MMT. https://www.briancalbrecht.com/Mejia_Albrecht_MMT.pdf The MMTers online were not happy with our understanding of MMT though. They acted like we had never read a single piece. It’s a tough discussion.
28. November 2020 at 20:42
Scott,
Hard to say what you are talking about here.
Paper tiger? China’s economic power over countries like Norway, South Korea, Australia seems to be extreme.
Sanctions? You could name it that if you want to. They invent trade barriers that are clearly politically motivated. The CCP mixes up trade and politics completely and in a really disturbing way.
Threats? The “sanctions” have long been implemented.
Backing off? According to the linked sources, the experts there are saying the opposite. In the case of Norway and South Korea, China has only stopped after all their main demands have been met unilaterally. Conclusion: with Australia it will be exactly the same.
Now that Trump is gone, we will certainly see hundreds of articles from you on how CCP China is acting as an extreme Trumpian style bully. No doubts about that, right?
29. November 2020 at 09:32
Christian, Did Norway revoke the 2010 Peace Price to the Liu Xiaobo? They they apologize for it?
You said:
“Now that Trump is gone, we will certainly see hundreds of articles from you on how CCP China is acting as an extreme Trumpian style bully. No doubts about that, right?”
They are already there, how did you miss them?
https://www.themoneyillusion.com/dont-kowtow-to-china/
https://www.themoneyillusion.com/dont-confuse-science-fiction-with-reality/
https://www.themoneyillusion.com/putting-a-smiley-face-on-the-chinese-communist-party/
30. November 2020 at 07:11
Scott,
MMT is depression economics. It only works properly when interest rates hit zero. In that case, everyone wants to save and no one wants to spend. If no one is willing to spend the money that is saved, then demand will fall, production will fall, and GDP will fall. Government becomes the only entity that can spend. We saw this in the Great Depression in the 1930s. We saw something similar in the Great Recession in 2009. And we are close to this situation now with the Covid recession.
You say that open market operations will increase the cash that banks hold and they will lend it to someone. I say that they will keep it on their books as deposits at the Fed and it will not be lent or spent. If it is not spent then it can’t increase inflation.
How does deflation happen? It happens when spending is weak. It’s the paradox of thrift, which happens in a depression.
Books that describe this include Trade Wars Are Class Wars by Klein and Pettis, The Return of Depression Economics by Krugman, and Richard Koo on Balance Sheet Recessions.
30. November 2020 at 21:27
Scott,
you know they can’t revoke it. But here is what happened, it took about six (!) years. This is pure madness:
https://www.lowyinstitute.org/the-interpreter/beijing-s-bad-books-australia-can-learn-norway-and-south-korea
It is really frightening that the CCP thinks that they have to punish the Norwegian government for something that they objectively cannot influence in any way.
This is Trumpian style insanity, don’t you find that frightening? This is not just one person, it seems to be the agenda of huge parts of the CCP, at least Xi and the powerful circles around him seem frighteningly ignorant.
Until now I always thought the CCP government was totalitarian and vicious, but in a Machiavellian way: They know what they are doing, they are good at judging the West and they know where to start for their vicious goals.
It turns out that these CCP people know nothing about us.
They seem to be quite arrogant as well, and boderline insane, and they really seem to think that it is rational, effective and legitimate what they are doing.
6. December 2020 at 05:44
Scott,
In 1998 the economy was running hot. Adding money with OMO will cause inflation when the money is borrowed and spent.
Opponents of MMT say that MMT will lead to inflation. But MMT says that if you see inflation above your target then you need to increase taxes to drain money out of the economy. So MMT has a good way to control inflation and the money supply.
I don’t trust politicians to implement MMT correctly, but I don’t trust them to run the Fed either.
10. January 2021 at 11:13
Scott,
I have been researching how “de facto MMT” has caused a mainstream rethink.
https://gaiamoney.wordpress.com/2021/01/10/real-existing-mmt-nudging-mainstream-off-orthodoxy/
I wonder if ultimately it’s all about profligacy?
best caw
10. January 2021 at 12:38
Caw, That’s a pretty misleading article. To say that mainstream economists are adopting MMT views while denying doing so is just silly. It’s a crackpot theory, with almost no mainstream support. The fact that both groups might both favor fiscal stimulus at a point in time is just coincidence.
Anyone who doesn’t believe me should read the Macroeconomics textbook by Mitchell, Wray, and Watts. It’s a mess.
10. January 2021 at 12:39
Face, You said:
“In 1998 the economy was running hot. Adding money with OMO will cause inflation when the money is borrowed and spent.”
That’s true, and it’s why MMT is wrong. They deny that claim.
18. January 2021 at 15:27
https://themountaingoateconomics.com/2021/01/17/how-increasing-returns-leads-to-non-neutrality-of-money/