Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 16 March 2016

MMT: not so modern

Followers of Modern Monetary Theory (MMT) often comment on my posts. I had never heard of MMT before I started this blog. From what I could gather from comments

  1. MMT seems obsessed with the accounting detail of government transactions
  2. This seemed to lead to ideas that I thought were standard bits of macroeconomics

Occasionally I would out of curiosity try and read something by MMT’s leading lights, which reinforced these impressions. For example MMTers seemed to think that they had discovered that a government with its own central bank need never default on its debt, but as far as I was concerned that was a standard and rather trivial implication of the government’s consolidated budget constraint. MMTers also seem curiously averse to equations.

Lately these MMT comments have been getting rather annoying, so I thought I would write all this down. Luckily I do not have to, as Thomas Palley has already done it for me (here and here). I have absolutely nothing to add, except to note that the upshot is not that what MMT says about this budget constraint is wrong, but that it was well known long before MMT and that it is hardly a complete macro theory.

Let me give an illustration of this last point. Some have commented that my recent discussion of fiscal rules ignores the fact that governments can finance investment, or anything else, by creating money. What would happen if the government started doing exactly that: stopped issuing debt and just created money. Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why. Of course in a recession with interest rates at their zero lower bound (ZLB) things are different, but MMT does not pretend to be just ZLB macro.

This raises the question of why MMT seems to have quite a following. Perhaps it is a reaction to mediamacro’s often implicit assumption that a country like the UK or US could go bust through a forced default. And, to be fair, some mainstream economists seem to want to keep that misapprehension alive, while others take the existence of independent central banks as a binding constraint. It is suggested too often that the government cannot create money in reaction to a funding crisis because this would cause inflation, even when we are at the ZLB, inflation is well below target and the central bank is creating huge amounts of money.

Finally a request. I am bound to get comments on this post disputing what I say, which is fine. But please, for the sake of those people who may still have an open mind, keep these short and to the point. If you accept that a government’s deficit must equal new borrowing plus the creation of new (base) money, there is no need to go into the accounting or transaction details therein.



215 comments:

  1. "I had never heard of MMT before I started this blog."

    Wow.


    Thanks for the Palley links.

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  2. Perhaps really good investment is disinflationary.

    For example, imagine lots of wonderful infrastructure appeared overnight, gifted to us by generous aliens. Living standards should rise, i.e. real GDP should increase. But without any extra money, nominal GDP must stay fixed (ignoring velocity changes) which means that would see prices falling.

    Significant monetary easing may be needed simply to keep inflation positive, pushing nominal GDP up to keep up with real GDP.

    Of course, aliens won't give us this. But imagine an incredibly efficient infrastructure project costing 1 billion pounds, which will increase real GDP by a huge quantity requiring helicopter drops of 2 billion. Therefore, 1 billion of helicopter money should be used to pay for the infrastructure, and the other 1 billion distributed among the population.

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    1. But if the central bank is targeting inflation, it will ensure this happens. Has nothing to do with fiscal rules.

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  3. Some have commented that my recent discussion of fiscal rules ignores the fact that governments can finance investment, or anything else, by creating money. What would happen if the government started doing exactly that: stopped issuing debt and just created money.

    No. MMTers say creation of money happens now and has always happened in fiscal operations and government debt is solely a liquidity drain to aid interest rate management.

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    1. Which is just a restatement of the consolidated government's budget constraint.

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    2. No. You read it as a consolidated budgetary constraint. An MMTer looks at the same model and concludes there is no constraint beyond Lerner's inflation I.

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    3. Which is exactly what any mainstream economist would say. If you create a lot of money you get inflation.

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    4. Money needs to be spent to get inflation not just created.

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    5. No Danny money can't & isn't idle,if it doesn't get to the demand side it will inflation asset bubbles which we are now seeing

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  4. Speaking as an MMTer, I’ve always said that MMT is Keynes writ large. I.e. I agree that there’s nothing desperately new about MMT. However MMT (and Keynes) are a hundred times better than the pro consolidation / pro austerity clap-trap we got from the IMF, the OECD and other so called “professional” economists like Kenneth Rogoff at the height of the recent crisis. I.e. I agree with SW-L that MMT is a “reaction to macromedia”.

    “which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this,”. MMTers most certainly do not advocate excess inflation. They always make it perfectly clear that the constraint on having the state print and spend money is inflation.

    One significant difference between MMT and the conventional wisdom is that MMTers ignore the ZLB because they don’t think much of interest rate adjustments. I.e. given excess unemployment, they tend to favour “print and spend” even if interest rates are well above the ZLB. I agree with that. Certainly Warren Mosler, a leading MMTer advocated the abolition of government debt. Milton Friedman advocated the same. And in that scenario, artificial interest rate adjustments are not possible.

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    1. If the "constraint on having the state print and spend money is inflation", why did some people commenting on my fiscal rules post say that not including money creation was a fatal flaw?

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    2. Because inflation is only a *potential* constraint, and is not at the moment?

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    3. My fiscal rules were meant to apply in all circumstances, not just right now.

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    4. Interest rates do influence demand, just in the complete opposite direction that the mainstream believes.

      Hence why MMTers would rather just let the policy rate stay at its "natural" level of zero, and use the appropriate fiscal adjustments to manage demand (i.e. when demand is low, depending on your political views you can cut taxes or increase spending).

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    5. But that is not the world we live in. Its fine to say we do not need debt based fiscal rules because we shouldn't be using monetary policy to target demand/inflation. Its not fine to say that because I propose such a rule I do not understand how government financing works.

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  5. "What would happen if the government started doing exactly that: stopped issuing debt and just created money. Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why."

    I haven't actually seen any of the main figures of MMT to ignore inflationary pressures caused by government deficits at full employment.

    What I have actually seen is a thorough inspection of the accounting flows, something which you haven't actually done in the above passage.

    If the government were to stop issuing debt then the central bank would credit the government account with necessary funds and hold some form of claim on the government as an asset (which would probably be interest bearing). Any deficit would end up increasing bank reserves. As long as the central bank had an interest rate target it would have to pay Interest On Reserves, just like the Fed currently does. The amount of banknotes in circulation would depend (as always) on the public's demand and nothing more.

    So it is not clear how a non-debt financed deficit would 'drive interest rates down'. What would ultimately change is the form and duration of 'government liabilities' that would be held by the private sector. Instead of long-term government bonds, the private sector would hold overnight reserve accounts at the central bank which would pay interest. The central bank might decide (for various reasons) to use various tools at its disposal such as term deposits and central bank bills to lower the amount of reserves. It would not lose the ability to target interest rates, just as the Fed has not lost the ability to achieve non-zero overnight interest rates despite several trillion $ of excess reserves.

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  6. HA HA HA HA
    "
    This seemed to lead to ideas that I thought were standard bits of macroeconomics"

    Yet MMT is derided as fringe and ridiculed for radicalness.
    Why is that? For what? For standard bits of macro?

    That is such a funy way of explaining how you accepted MMT as useful after so much ignorance and ridicul about it.

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    1. I think my point was that MMT has not taught me anything. As my post said, MMT may get its popularity because it contradicts what some economists assert, but those assertions never came from standard theory.

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  7. Why accounting i important?
    It explains how banks, money and state work. Without this knowledge, it is easy to persuade people to cut their benefits and impose austerity.

    How much problems do you have to explain to people why austerity is bad?
    With knowledge of state and bank accounting it would be easy to talk about it and to persuade people, but no, you mainstream economist need complicated mathematics that requiers exceptional knowledge in order to pick the right model that should apply the conditions at the present.
    It requiers art skill to know which model should be used.

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    1. The government's consolidate budget constraint tells you all you need to know. One equation, one sentence.

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    2. Could you give us that equation and sentence? I am not an MMT and don't know much about it but I am interested. One thing that might disturb me about the neo=classical budget constraint is if it is derived from micro-theory or it starts bringing in stuff like Ricardian Equivalence. If it does people have good reason to be suspicious. For example Sargent (who I assume uses standard theory and probably made it) was asserting during the financial crisis that the government budget constraint will "make government expenditure sustainable".

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    3. The difference between government spending and taxes has to equal creation of new debt or money. There is nothing neoclassical about budget constraints.

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    4. Just to fill in the details (with interest payment on debt). The equation is

      G(t)+i(t)D(t)-T(t)=M(t+1)-M(t)+D(t+1)-D(t).

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  8. Lack of equations is important for easier understanding of economics, that explains increasing following. Even many nonacademics can pursue knowledge of economics with simplifications that MMT offers.
    Yes, it offers the missuse of simplified theories but not as much as missuse of countless models that mainstream economics use.

    Lack of equations has another benefit. It forces analysts to look at the real world to see effects and correct the policy. Compare that to mainstream models where academics rely on models to continue policy no matter what is going on in the real world. By believing in their models and not watching the real world, economists can keep claiming; "there was not enough austerity, we have to cut more" while employment and suffering is worsening.

    Or they can keep with QE no matter what is doing to economy. Nothing.
    Why QE is inefective, only MMT can explain because that reason is in accounting of banks.
    Lack of equations forces policy makers to look at the real world more.

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    1. That QE is ineffective is the standard prediction of the New Keynesian model.

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    2. then it's very interesting that (mostly NK) central bankers are doing so much of it! Just because it's the only tool they have control over?

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    3. Partly that, and that they are trying to use effects outside that basic model.

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  9. Why I went with MMT instead of mainstream macro?

    Mm never gave me answers to many questions i had when GFC started:
    1) Fight with inflation was succesfull after so many years, why the problems started as soon as inflation went down to 1%?

    2) Why is credit crunch the probem for economy as Paulson claimed as he asked for the bailout?

    3)How is debt forgivness in bankrupcy possible?

    4) How is that high inflation is possible in a country with fixed exchange rate with high interest rates at the same time?

    5)How is possible that base money expands over long term while printing money by state is prohibited? who expands the base money if state doesn't?

    6)what is the difference if a state has to borrow in foreign currency to pay for imports?

    All these questions and some more are not answered by mainstream macro, because they never have to talk about banks and state accounting. Only MMT offers explanations on how these things happen. And only those that included money in the reasoning about economy have predicted incoming GFC, none of those mainstream models users did.

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  10. http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

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  11. I'm not informed enough to comment on all of this. However I note with wry amusement that when the idea first came to prominence, that government's with their own currency couldn't default unless they chose to, it seemed to cause a lot of consternation among the mainstream commentators. Indeed that didn't really die down until Paul deGrawe wrote his piece explaining why Eurozone eonomies were suffering inflated rates whereas non-EZ countries weren't (because of the currencies they were borrowing in).

    It would appear as though some ideas are born trivial, some ideas become trivial and some have triviality thrust upon 'em ;-)

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  12. And yes, those are standard bits of macroeconomics, but most of the standard economists do not consider them as important or completely ignore them even tough in their earlier papers they wrote about importance of exactly those bits.

    Ony a handfull of economists can be persuaded to place importance on those insights and one of them is you SW-L. Only a handfull of academic economists can skill to use what matters in ther models and by knowing real world can properly sellect correct models.

    MMT allows many amateurs to get the correct importance of those bits without spending decades studying economics.
    I connected the dots with only 2 yeears of studying GFC and one year of reading MMT. MMT enabled me to connect the dots of how everything works even tough i had to learn system dynamics before that happened.

    Lack of mathematics and simplifications allowed me to quickly connect the dots. Previous experience with accounting, taxes and owning a buisness gave a base for further understanding of how economics work.

    Only in 3 years i knew why QE will not work and why low interest rate do not help Japan, not even after 20 years of QE and 0% rates.

    If interest rates affect an economy by going trough banks when issuing credits to firms and persons, when official rates go too low the banks will not offer them to customers. Banks do not go lower then 3,5% interest even if official is negative.
    The spread of official and offered rates is rising just as real interest rates rise.

    Real interest rate is the name academics gave to spread between official and rates offered to customers of banks. That is why ZLB can last forever.

    Why is that so is only in MMT domain to give answer, not in mainstream that doesn't bother with banking.

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    1. I think you will find plenty of that in mainstream domain.

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  13. "Let’s assume that real output is at its ‘full employment’ level. "

    That's like saying "let's assume we are at light speed".

    As soon as you hear anybody say that, then everything that follows can be politely ignored because that is not the current situation, nor is it anything that is likely to happen any time soon if at all. Postulating what life will be like on Mars after terraforming no doubts keeps academics suitably entertained, but it doesn't get unemployed people in Barnsley a job.

    There are currently 3.899 million people in the UK without work that want it and 1.209 million people short of work. That's from today's unemployment release.

    It's rather unhelpful of you to dismiss those people with a rhetorical flourish. That is several UK cities full of people without a job and a decent income. These are not numbers in some silly equation. They are real people with real lives currently being let down by lousy advice to politicians.

    Under MMT, where we understand there are no fiscal limits only real ones, I can give every one of those people that wants to work a job earning a living wage income working for the public good. I have the solutions to the fiscal problem, the matching problem, the real output problem and the value anchoring problem largely via the Job Guarantee, promoting fiscal policy to the primacy, demoting monetary policy to a backroom operation where it belongs and proscribing the assets banks are allowed to generate.

    I can say to businesses "I will generate effective demand, which I expect to be met with increased output intensity - more overtime, more investment, more intensive use of assets. If that doesn't happen then I will tax you to redistribute, increase the competition in your market or where necessary replace you".

    Under an MMT viewpoint full employment means full employment - everybody who wants a job has one - not some redefinition of it that hides millions of real living people behind a percent sign.

    That's the MMT difference. It gets you beyond the numbers and makes you think about real things and real people.

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    1. What you are describing is an argument against the MPC assuming that the output gap is currently near zero. What has that got to do with fiscal limits? It is an argument about the Phillips curve.

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    2. Agreed Neil, it does bother me what macro-economic students have been and continue to be taught nowadays. I have to agree with Warren Mosler when he says, from hands on experience, that every market Trader knows the system works MMT style; only NK economists and ideological neo-liberal politicians don't.

      Anyway, to move on Simon. Everyone here assembled shall read the words of the OBR. http://cdn.budgetresponsibility.org.uk/March2016EFO.pdf Particularly can I draw your attention to "Sectoral net lending" at para 3.116 onwards. Chart 3.39 should worry us all. Neil Wilson is the UK MMT specialist in this matter, he may comment. Read on to the end of Chapter 3.

      Household debt has to replace government spending to enable Osborne to achieve a budget surplus (Chart 3.29); and, the UK households' love for them imports.

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    3. Why does the MPC think we are at output capacity with 4 million unemployed? What would Keynes have to say to them? MMT leaves arguments about the Phillips curve to the wider Post-Keynesian family, where for example, the NAIRU is regarded as conflict theory of inflation and is usually endogenised, and not considered some function of LMI density. The Job Guarentee, their flagship policy, builds that endogeneity into the auto-stabiliser. They need to emphasise freedom on the deficit to stop a low wage equilibrium from emerging if the policy gets the go ahead.

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    4. He's not arguing the MPC does not exist, he's arguing any inflationary pressures can be dealt with by tightening marginal taxes on upper income range. Phillips curve becomes moot.

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    5. "What has that got to do with fiscal limits? It is an argument about the Phillips curve."

      Well if you have a buffer stock of jobs rather than an unemployed buffer stock they are cheaper and easier to hire from a business point of view than people not working. So you get more private sector employment for the same inflation.

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    6. I share the definition – and objective – of full employment as ‘everybody who wants a job has one’ but I’m not convinced that the Jobs Guarantee (‘employer of last resort’) is the best way to achieve and sustain this. It’s not ambitious enough to deal with 5 million unemployed or under-employed.

      That might sound a surprising criticism but the problem with JG/ELR is its passivity. The posts and articles I have read by its advocates show little interest in the problems of what those employed under the scheme would be producing or how productive they would be. If the state is paying the wages of those employed by others (e.g. non-profits) then productivity will be low and tend to zero at the margin. Yes, that’s higher than the always zero productivity of being unemployed but we can do better than that.

      That better alternative is a large scale public investment programme – funded by a judicious mix of low interest debt and money creation – that would aim directly at meeting social needs (e.g. housing, environment) and boosting productivity (e.g. infrastructure, R&D, skills). This has the advantage over JG/ELR of more substantially raising output in critical areas and stimulating sustained growth. Such a programme could greatly reduce unemployment, both directly and indirectly through multiplier effects on the private sector. As output would be higher than under JG/ELR, the inflationary impact should also be reduced.

      I can see a potential role for JG/ELR at the margin. In particular, it might be useful in an employment market that is becoming increasingly flexible and precarious (zero-hour contracts, uncertain self-employment, payment by task via the internet ‘gig economy’, ‘uberisation’, etc.). Here the security of knowing that in a bad week someone could fall back on some JG/ELR work (probably less than full time) would be welcome.

      But JG/ELR is not up to the ‘heavy lifting’ of reducing mass unemployment measured in millions.

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    7. Lyn,

      This sort of thing would be better on the google group where others can chip in:

      https://groups.google.com/forum/#!forum/modern-monetary-theory-uk

      "That better alternative is a large scale public investment programme"

      And where are the skills going to come from to meet that 'investment programme'? Surely you've noticed that the construction industry is crying 'skills shortage'. Anybody who could have a job on a 'match the job' basis in infrastructure likely already has a job because there is a bit of a housing boom on.

      Public infrastructure is largely, although not exclusively, time sensitive. Which means it has to take away skills from the private sector to do the job in a time frame. That is the job of taxation, limiting banking and limiting planning. You can't really do it counter-cyclically.

      There will be some contracts that can be 'shelf contracts' that are given a fixed 'take it or leave it' price. Replacing the central reservations of motorways with concrete is one type of contract that has served well as a counter-cyclical balancer over the last few years. A set of those should always be available so that contractors can drop onto them when the private sector has one of its wobbles.

      The Job Guarantee is actually a public investment programme, or at least can be - in that it provides 'cost free' workers to any other public sector programme that is running. Effectively an army of volunteers. But most of those will be in service - the 'current account' side of the balance sheet. Simply because that is where their skills are best deployed.

      And finally you have missed the feedback effect of the Job Guarantee. When you start a Job Guarantee the first thing you do is pay people the wage while you ramp up the job side. That money given to people will in the short term bring the effective demand of the economy up to speed causing the economy to hire any remaining skills off the pile - reducing the number of people on the Job Guarantee.

      Only when that effect subsides do you then look for and create jobs *that match the people* on the Job Guarantee. That's the key difference of JG that solves the matching problem. Find people something to do, not come up with something to do and find the people.

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    8. Random, thanks for these serious comments and that link but let me respond here, as we’ve started.

      Skills are certainly an issue but one that can be tackled. The construction industry is already taking some steps to address it. Many of the missing skills are in areas that can be learnt relatively quickly (months if not weeks) so we can deal with this with enough focus. For me, building the skills base is a type of investment, even though the ONS does not today include it within capital formation.

      Skills development is also relevant to my concern around the JG proposal to ‘match jobs to people’. We should think harder about improving working life but ultimately work is only useful if it produces goods or services that other people want. Finding people ‘something to do’ doesn’t guarantee that, which is why I described JG as unambitious. Instead we should be putting more effort into training and assistance so that people can build skills and experience that support both their own aspirations and social demand. We should not see the skills pool as fixed.

      The question of what people do impacts the feedback loop. Paying a wage higher than benefits would increase demand (as would basic income or helicopter money) and the immediate effect in current circumstances would be to stimulate the private sector and create jobs there too. The problem would be sustaining this on a large enough scale to approach true full employment without generating high inflation. True, that’s tomorrow’s problem but we still need to think about it. This is why I emphasised productivity. If we keep adding demand without increasing output in step with this, then eventually inflation will rise but if we can ensure that the extra workers are highly productive then we can push that resource constraint back.

      Hence, the emphasis on public investment both to meet needs and to raise output. We surrendered ‘supply side economics’ to the ‘greed is good’ of neoliberalism and we need to take it back. MMT does not seem to offer anything here. You are right to note the limitations of infrastructure as a counter-cyclical tool, although some investment can be adjusted at the margin to match demand fluctuations. So I am not proposing it as a short-term demand management tool but as a means of tackling longer-term problems of ‘secular stagnation’ and low productivity, substantially reducing mass unemployment as it does so.

      Hence I do not see JG as capable of addressing the major structural problems of the economy but I can see a role for something along those lines on a smaller scale, particularly for those working outside traditional job patterns.

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  14. Bernie Sanders is backed by some of these.

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  15. "What would happen if the government started doing exactly that: stopped issuing debt and just created money."

    First of all, All govt spending and taxing is done with reserves, so all govt spending creates base money, and all govt taxation destroys base money (held by non-Govt).

    "Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down,"

    This is totally wrong. The CB can always set whatever rate it wants via paying interest on reserves. How do you not know something so basic? Issuing TSY CDs is not the only way to achieve a positive interest rate, as the current QE environment definitively proves.

    "which in turn would raise demand and create inflationary pressure, which is not really desirable."

    So many assumptions embedded in this comment. The number one being the mythical belief in a mechanical transmission mechanism between interest rates, borrowing, and inflation.

    "MMTers tend to ignore this, and it is not at all clear why."

    Total bullshit and lazy intellectual work here.

    "Of course in a recession with interest rates at their zero lower bound (ZLB) things are different, but MMT does not pretend to be just ZLB macro."

    Things are not different at the ZLB. Everything works exactly the same, thats what the focus on accounting demonstrates.

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    1. 1. What does that tell you or any interest?

      2. So if you replace government debt with reserves that pay a similar interest rate, what have you achieved?

      3. Is the view that lower interest rates do not increase demand, or that higher demand at FE does not raise inflation?

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    2. In MMT the natural rate of interest is considered to be zero. So there isn't much said about what happens when rates change up and down.

      I think the main point of difference here is that MMTers would say that govt is always in full control of the rate it pays on its own debt, because it can always fund bond purchases by issuing bank reserves, therefore it can always support the bond market at any desired level, paying no more interest than it likes into private sector accounts.

      If this idea turns out to be correct, would it not be considered a "new" insight?

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    3. One possibility is that MMT denies that interest rates have any impact on demand and inflation. That would be a radical departure from standard theory, and it would be interesting to know why they think that.

      Alternatively interest rates do influence demand, and the central bank sets them to a level that stabilises inflation. So governments can either sell debt at the rate consistent with that, or create money at some lower rate. Doing the latter will tend to force down interest rates, creating inflation.

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    4. That is essentially it - MMT considers interest rate policy to be an ineffective stabilisation tool and prefers fiscal policy at all times, combined with hefty financial regulation to prevent asset inflation. Here is Prof. Bill Mitchell of Newcastle University, who is probably the leading MMT academic. Prof Mitchell is rather long winded but he has the answers to ALL of your questions about MMT!

      "Modern monetary theorists consider monetary policy to be a poor tool for counter-stabilisation. It is indirect, blunt and relies on uncertain distributional behaviour. It works with a lag if at all and imposes penalties on regions and cohorts that may not be contributing to the price pressures (for example, when Sydney property prices were booming all of regional Australia which was not was forced to bear the higher interest rates). There is also no strong empirical research to tell us about the impact on debtors and creditors and their spending patterns. It is assumed implicitly that borrowers have higher consumption propensities than lenders but that hasn’t been definitively determined.

      For a modern monetary theorist, fiscal policy is powerful because it is direct and can create or destroy net financial assets in the non-government sector with certainty. It also does not rely on any distributional assumptions being made.

      Further, the natural economic state for a modern monetary theorist is full employment which means less than 2 per cent unemployment, zero hidden unemployment and zero underemployment. Deviations from full employment reflect failed fiscal policy settings – not a large enough budget deficit (other things equal).

      The size of deficit has to be judged in terms of the desire of the non-government sector to save in the currency of issue. So if the deficit is inadequate and unemployment arises we know the net spending has not fully covered the spending gap.

      We also know that budget deficits add to bank reserves and create system-wide reserve surpluses. The excess reserves then stimulate competition in the interbank market between banks who are seeking better returns than the support rate offered by the central bank. Up until recently this support rate in countries such as Japan and the USA was zero. In Australia it has been 25 basis points below the cash rate although there is no theoretical reason for that setting.

      It makes much better sense not to offer a support rate at all. In that situation, net public spending will drive the overnight interest rate to zero because the interbank competition cannot eliminate the system-wide surplus (all their transactions net to zero – no net financial assets are destroyed).

      So in pursuit of the “natural” policy goal of full employment, fiscal policy will have the side effect of driving short-term interest rates to zero. It is in that sense that modern monetary theorists conclude that a zero rate is natural. This article by Warren Mosler and Mathew Forstater is useful in this regard.

      If the central bank wants a positive short-term interest rate for whatever reason (we do advocate against that) – then it has to either offer a return on excess reserves or drain them via bond sales.

      Our preferred position is a natural rate of zero and no bond sales. Then allow fiscal policy to make all the adjustments. It is much cleaner that way."

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    5. I found this question interesting so I went to search for an answer in the highly prolific "billyblog."
      I found this http://bilbo.economicoutlook.net/blog/?p=32891
      Its seems that the experience of stagnation over decades in Japan inspite of a low interest rate has exposed the neoliberal belief that monetary policy can act on its own. Fiscal policy is needed.
      To quote BM, in the Eurozone low rates will not entice firms to borrow if they do not see anyway of making money. (Perhaps they lack sales due to the austerity policies)?

      My own thoughts are tempered by experiencing the early eighties.
      The Thatcher government put up interest rates to 15% to control inflation and the money supply under Friedmans Moneterist advice. Inflation went up. The problem as I saw it regardles of whether it was effective or not, was that it hurt people with established loans. It decimated industry, creating unemployment, and increased mortage payments, thus decreasing demand.
      So it has an effect on the macro economy, a terrible one.
      But lower bounds do not increase demand if the economy is in a slump.
      BM:
      "Monetary policy is largely ineffective as a counter-stabilising policy tool, irrespective of how much scope there is for changing interest rates up or down"

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    6. So if we are agreed that the answer to the puzzle I presented in my post is that interest rates do not influence demand, that raises two questions:

      1) Why did people who say they follow MMT argue against my fiscal rules because I was ignoring money. Far simpler, and clearer, to say that monetary policy is ineffective so need fiscal policy to manage demand.

      2) What on earth does MMT think happened at the end of the 1970s. Interest rates went up sharply and inflation did (with the usual lags) come falling down.

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    7. I don't think met says that raising interest rates have NO influence on demand and inflation they just disagree it's the best tool to use.

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    8. MMTers focus on the cause of the inflation from the 70's namely the OPEC induced oil spike of 400%. As soon as the OPEC spike ended, inflation returned to its normal level. OPEC doesnt set prices based on the FFR, so why would you assume that a high FFR forced OPEC to lower its prices again?

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    9. "One possibility is that MMT denies that interest rates have any impact on demand and inflation. "

      I don't think so. From what I have read, they say the effects are uncertain.

      The reason is the effect is distributional, from savers to borrowers and vice versa.

      When the central bank puts interest rates up there could well be a short term boost to the economy - increasing demand.

      Why? This is caused by savers getting more money from borrowers and increasing spending, whereas fixed rate borrowers don't change anything and variable rate borrowers fail to cut back as quickly (often taking eighteen months or so to scale back).

      Delete
    10. Experience and evidence indicate that monetary policy is less effective than often assumed, at least when inflation is outside a desired moderate range. The Volker rate hike did bring down inflation but the lag entailed a deep and damaging contraction. Today it appears that the interest rate reduction required to restore inflation to target would take us several points below the ZLB, which does not seem possible.

      There are a couple of reasons for this. NK economists recognise that in the short term reduced demand impacts quantity more than price, even if REH denies this. We also need to acknowledge how financial assets absorb much of the impact of interest rate changes (or QE) reducing the effect on demand for goods and services. The growth of financial assets in recent decades has constrained the effectiveness of monetary policy as a demand management tool.

      Delete
  16. Most leading lights as you put it are fully aware that MMT is not "new". Have you really read enough about MMT or are you merely expressing your prejudices? Have you read http://bilbo.economicoutlook.net/blog/?p=22701. I would be far more interested in your response to this rebuttal rather than linking to worn out critiques.

    I am not an expert on MMT but even I can see you have adopted a false argument in the sense of positing an extreme position without exploring the policy options available before this position is reached. Can you reference where those involved with MMT have ignored the possibilities of inflationary pressures? I see it only in those criticising MMT who have failed to read the literature. MMT is clear, Governments are constrained by the real resources available. It would have been of far more value to use an example of a policy action suggested by MMT with which you disagree and explain why.

    ReplyDelete
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    1. I just did. Governments need fiscal rules concerning debt and deficits. Does the existence of money mean that is fatally flawed? No.

      Delete
    2. Simon when you say that government needs fiscal rules concerning deficits and debts: do you mean politically or economically?

      If you look at surveys about why people decided, in the end, not to vote for Labour it was found that austerity was quite popular - or at least the expression of the similar phrases of "living within our means".

      I remember that when George Osborne introduced his fiscal rule you were a signatory to a letter to the Guardian an extract of which was as follows,

      "Economies rely on the principle of sectoral balancing, which states that sectors of the economy borrow and lend from and to each other, and their surpluses and debts must arithmetically balance out in monetary terms, because every credit has a corresponding debit. In other words, if one sector of the economy lends to another, it must be in debt by the same amount as the borrower is in credit. The economy is always in balance as a result, if just not at the right place. The government’s budget position is not independent of the rest of the economy, and if it chooses to try to inflexibly run surpluses, and therefore no longer borrow, the knock-on effect to the rest of the economy will be significant. Households, consumers and businesses may have to borrow more overall, and the risk of a personal debt crisis to rival 2008 could be very real indeed."

      Why isn't that paragraph an argument against all fiscal rules rather than just George Osborne's?

      Delete
    3. No. The government's budget position influences the rest of the economy. Therefore we need some rules.

      Delete
    4. "The government's budget position influences the rest of the economy. Therefore we need some rules."

      But my point is the government does not have control over that.

      MMT talks about the build up of excess savings in the non-government sector - these 'savings net of investment' - and it allows them to build up first in the causal chain. That means that the non-government sector can be seen as 'pushing' money onto the government sector. This is the view that MMT takes and bases its economic model upon - the non-government sector is the one doing the 'net saving' which the government sector then has to react to.

      With a Neo-Keynesian model it cannot - the government has to be 'pulling' money from the non-government sector. I think that is one key difference.

      Thanks for writing this Simon. It makes it much clearer.

      Delete
  17. Market Fiscalist16 March 2016 at 08:07

    "governments can finance investment, or anything else, by creating money. What would happen if the government started doing exactly that: stopped issuing debt and just created money. Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why."

    I am not an MMTer but have read some of their stuff, and I do not think this is correct. They do recognize that increasing the money supply at full employment is inflationary.

    see:
    http://neweconomicperspectives.org/2012/06/mmp-blog-51-the-efficiency-fairy-and-inflation-goblins.html

    ReplyDelete
    Replies
    1. My paragraph deliberately talked about MMTers i.e. some people who purport to follow MMT ideas. These suggested that my discussion of fiscal rules was fatally flawed because I did not mention money. That is not consistent with a view that creating money is inflationary.

      Delete
    2. There appears to be confusion on the part of some commentors. An MMTer would not assume money creation is inflationary. They assume additional spending beyond productive capacity/import capacity would result in a rising general price level.

      Delete
    3. But the government budget constraint links the two. You are talking about the same thing!

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    4. The constraint is real resources. Never numbers.

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    5. And that depends on the absence of any strong impact of interest rates on demand.

      Delete
  18. The main problem with the MMT camp is that it seems to be filled with the most thoroughly unpleasant, toxic people imaginable. Just try reading Bill Mitchell's blog to get an idea of what I'm talking about.

    Most MMT commentary is political charged commentary wrapped in mediocre economics, and massive straw-manning at an industrial scale against so called 'mainstream' economics.

    ReplyDelete
    Replies
    1. That is very unfair. It is really all heart, and very clever stuff.

      Thomas Palley is a very smart cookie, and he agrees that the central tenants are Keynesian. They also have a large dose of Abba Lerner. But so what? I think that is a good thing.

      Thomas Palley has also criticised New Keynesians, saying that Paul Krugman is not a true Keynesian.
      https://video.search.yahoo.com/video/play;_ylt=A2KLqINr5OpW_0sAYps0nIlQ;_ylu=X3oDMTByZWc0dGJtBHNlYwNzcgRzbGsDdmlkBHZ0aWQDBGdwb3MDMQ--?p=Thomas+Palley+-+Paul+Krugman+Is+Not+a+True+Keynesian&vid=cda8fba37a0639d196bc56a070216ef1&turl=http%3A%2F%2Ftse2.mm.bing.net%2Fth%3Fid%3DOVP.Vc43fceb444a2841f8967a9de72989197%26pid%3D15.1%26h%3D320%26w%3D480%26c%3D7%26rs%3D1&rurl=http%3A%2F%2Fwww.hulu.com%2Fwatch%2F591042&tit=Boom+Bust%3A+Thomas+Palley%3A+%E2%80%98Sorry%2C+But+Paul+Krugman+Isn%E2%80%99t+a+Real+Keynesian%E2%80%99&c=0&h=320&w=480&l=1539&sigr=110qml8vg&sigt=12glbbqo3&sigi=131ds5fvk&age=1391170267&fr2=p%3As%2Cv%3Av&fr=yhs-adk-adk_sbnt&hsimp=yhs-adk_sbnt&hspart=adk&tt=b

      This does not invalidate him! We need to look into all avenues to cure our present problems, and keep listening to each other.

      Delete
    2. This comment has been removed by the author.

      Delete
  19. From the very beginning MMT has been saying that there is nothing particularly "new" about most of it's ideas, and that it mostly reminding people of things that have been forgotten or ignored.

    If you think otherwise it's because (IMO) you haven't really listened to what MMT theorists are actually saying. The most significant "new" idea is probably that we should set up a government funded job guarantee to act as an employment buffer and be another automatic stabilizer.

    By the way MMT doesn't claim that there are no constraints on government spending, only that these constraints are not financial ones.

    And the "Modern" isn't meant to be a claim about the school of thought, but rather means that it thinks it is descriptive about how modern money systems run by sovereign governments actually work today.

    ReplyDelete
  20. I agree that MMT is a derivative theory that offers almost nothing new.

    What you are saying is not new to MMT-ers. "We knew all this before." Let me give you an example of a person who did not know this before. Paul Krugman wrote in his blog http://krugman.blogs.nytimes.com/2011/07/16/italy-versus-japan/

    "A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.

    I ask this because in a number of ways the two countries look similar. Both have high debt levels, although Japan’s is higher. Both have awful demography. In other respects, the numbers if anything favor Italy, which has a much smaller current deficit as a percentage of GDP."

    So what’s going on?"

    It really puzzled him, he didn't understand that Italy was a currency user and Japan was a currency issuer. After MMT-ers did some explaining to him, he wrote about the same topic again: http://www.nytimes.com/2011/11/11/opinion/legends-of-the-fail.html

    "What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies."



    Now Paul Krugman understands this yet you say that MMT has nothing new to offer to hot shots like you. Well, It does to guys like Krugman. Since mainstream economists are nothing short of being charlatans, perhaps you excuse the MMT-ers that offer you a different worldview. http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_3HK5k8CCffR7iV7

    ReplyDelete
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    1. I got the importance of this from Paul De Grauwe. I do not know where Paul got it from. And mainstream economists are not charlatans.

      Delete
    2. This is why MMT enthusiasts are roundly disliked. Not only does insulting someone never, ever persuade them, it's just rude.

      Delete
    3. Sorry, what Kristjan says is completely wrong. Interest rates on italian debt were much higher before Italy joined the euro, than afterwords. https://research.stlouisfed.org/fred2/series/INTGSBITM193N The reaon of this is exactly that MMters have it wrong. While the Bank of Japan and Japan's government are credible, which implies low inflation expectations and low rates; the Bank of Italy and the Italian government were known for their inflation bias and high fiscal déficits used to buy electoral votes. The market expected high inflation and demanded high rates as a consequence. If déficit and money printing never, under any circumstance, created inflation, as MMTers seem to believe; italian debt in the Lira years would not have paid more tan Japan's debt.

      Delete
    4. "If déficit and money printing never, under any circumstance, created inflation, as MMTers seem to believe; "

      Um, this is actually the opposite to what MMT posits. MMT tries to remind people that the limit on deficits *is* inflation not a random relationship like DEBT/GDP etc.

      Delete
  21. you just wrote in english what @AlbertoBagnai said more or less 4 years ago in italian http://goofynomics.blogspot.it/2012/03/mmt-no-grazie-per-ora.html

    ReplyDelete
  22. Cullen Roche wrote a nice critique of MMT. He seems to agree with your view:

    http://www.pragcap.com/modern-monetary-theory-mmt-critique/

    ReplyDelete
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    1. This comment has been removed by the author.

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  23. Simon, do you have any comment on the recent publication of the latest release of the Scottish government economic statistics (GERS)?

    ReplyDelete
  24. My understanding is that MMT does believe inflation comes increased government spending at full employment. It also believes that is the only time we should worry about limiting money creation, when resource constraints would cause inflation.

    MMT is in opposition to the idea that we should fixate on debt levels and inflation instead of employment. Get full employment then lessen spending.

    The one other thing is it thinks the standard story about money creation is backwards. That banks use deposits to create money create money with loans. MMT posits that banks create money with loans and then the Fed makes sure there is enough base money to cover.

    ReplyDelete
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    1. Banks do not create money with loans.

      Delete
    2. The Bank of England says they do. I can't post the pdf link from my phone. Google "Bank of England endogenous money".

      Delete
    3. Strange then that the Bank of England thinks they do exactly that. http://www.bankofengland.co.uk/publications/documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

      Delete
    4. Anyone can create 'money'. Print out this comment and I will give you £5. There.

      Banks swap their (more accepted) IOUs with your IOU via balance sheet expansion.

      Delete
    5. The Bank of England say they will explain the creation of money but they do no such thing. I refer you to Page 6, Figure 2 of "Money creation in the modern
      economy". Figure 2 shows the consolidation of assets and liabilities of both the seller's and buyer's bank. If you examine the very last panel in the figure which should ultimately show the creation of money there is only an asset called "New Loan" and a liability called "New Deposit" on the buyer's bank side of the ledger. The last panel is accompanied by the following explanatory words:

      "So the buyer’s bank will in practice seek to attract or retain new deposits (and reserves) — in the example shown here, from the seller’s bank — to accompany their new loans"

      However, if you look at that last panel it is exactly the same as the second panel at the time of the loan creation. So the last panel explains nothing. It does not explain how the loan is getting converted into cash/reserves because loans do not create money. In actual fact the thing called "New Loan" is really just an accounting device used by the bank to keep track of the money. This asset will reduce in value as the buyer pays down the loan. The bank does earn interest from the loan but that has to paid from cash elsewhere in the system.

      Delete
  25. I thought the MMTers accepted interest bearing debt for pensions in particular. But you have to admit that - theory apart - government overtly and regularly creating money would bring the bankers up short and in current circumstances surely that has to be worth a try. The bankers will otherwise continue to rule, because they are the world's best lobbyists and have been since the creation of the Bank of England. And that is certainly not a theory!

    ReplyDelete
  26. I imagine you felt that you were being bombarded by MMT proponents all saying mostly the same thing after the last post. I can assure you that it was not some kind of coordinated assault, at least on my part- it was a function of the lag between when a comment is submitted and when it actually appears. I apologize for any annoyance my comment caused you, and can promise that I would not have submitted it had I known that others were making the same point (often much more effectively).

    ReplyDelete
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    1. Fair enough, and I agree the fact that I have to filter out spam is very annoying for everyone. (If anyone knows of a blog platform that has an effective spam filter please let me know.) But it was not so much that, but that every time I write about debt I get the same comments.

      Delete
  27. "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

    -U. Sinclair

    ReplyDelete
    Replies
    1. Actually it doesn't. Try harder next time.

      Delete
    2. .
      The comments here have been very good.

      May I add that, while I am not an expert on the subject, it may well be that the ultimate utility of MMT is not economic insight but psychological freedom: The freedom from the constant dread of debt levels.

      That explicit psychological freedom may provide the liberation needed to create a society where everyone feels that they can get a family supporting capable job - which would profoundly increase social happiness indexes.

      The psychological component in many things is too often ignored.

      ( My comment, upon review, may just be a derivative of a previous comment. )
      .

      Delete
    3. Can't we have that psycholigical freedom without MMT? It's true that, perfectly naturally though mistakenly, people are inclined to think of the nation's finances on an analogy with their own private finances, and that politicians eager to shrink the state unscrupulously encourage and exploit this misconception. Personally, I owe my emancipation from the misconception in large part to bloggers like Simon and Paul Krugman rather than to MM theorists.

      Delete
    4. Patrick
      "Can't we have that psycholigical freedom without MMT?"

      Of course, MMT is mostly just a set of factual observations:

      Govts are the currency monopolist
      As such they control their own interest spending (not markets) as they control both the maturity issuance of TSY CDs and the prime rate
      Accounting (RE: sectoral balances)
      Endogenous money (no such thing as loanable funds or the money multiplier)
      Capitalism runs on sales
      There is no special difference between Reserves and TSY bonds (they are both Govt IOUs and are really nothing but checking accounts and term accounts at the CB). For only propaganda reasons, the mainstream calls reserves "money" and TSY CDs "debt" when in reality they are both Govt "debt" so there's no reason worrying about TSY CDs outstanding.

      none of these are special MMT things. MMT people just seem to be the only group of economics that actually acknowledge these fundamental realities of our monetary system and economy.

      Delete
  28. "MMTers tend to ignore this, and it is not at all clear why."

    I view MMT as a reaction to the fact that modern macro (including both neo-Keynesianism and neo-Monetarism) ignores the fact that growth (or the increase in the product of a "fully employed" economy) depends fundamentally on the banking sector's money creation process, and just as with MMT "it is not all clear why." (Schumpeter explained all this in his tome responding to the "General Theory" in 1939: http://dx.doi.org/doi:10.1522/030021081 It is, of course, no coincidence that Schumpeter was Minsky's advisor.) MMT supporters may not have figured out yet how to express clearly what it is that modern macro is missing, but they are surely correct that they have insights that Keynes and Keynesians have missed.

    ReplyDelete
    Replies
    1. Banks do not create money. They may borrow it from the Central Bank but that is a different thing entirely.

      Delete
    2. That is some low-level trolling, Pinkybum.
      Except for Monetarists and undergraduate textbooks (featuring the static money multiplier) I am not aware of anyone who would seriously take this position. Post-Keynesians (horizontalists and structuralists) as well as New Keynesians admit that the supply of money is endogenous. Not only commercial bank-created inside money but also (required) reserves due to central bank policy. Though this is no natural law that the central bank HAS to accommodate the demand for (required) reserves of the commercial banks it does so for various reasons (e.g. to maintain the retail payment system). Thus the CB can influence the pace and extent of inside money creation through commercial banks through the cost of lending.

      Delete
  29. Palley has identified the wrong contrast to the explanatory statement made by MMTers. The statement that government spending isn’t financed by taxes and borrowing is not contrasted with the statement that government spending is financed some other way (viz., by printing money). It is contrasted with the statement that the converse is the case: government spending funds tax payments and purchases of government bonds. This is most easily expressed by first rearranging equation (1) from above:

    (1a) G = T + θ + β.

    Palley reads this equation ‘right-handed’ (as Joan Robinson would say), interpreting it to mean that the government’s spending (G) is financed by net tax revenue (T) plus the printing of currency (θ) plus the selling of government bonds (β). MMTers read it ‘left-handed’: the equation tells us that the government’s spending finances the non-government sector’s payment of tax (T), accumulation of currency (θ), and purchasing of bonds (β).

    This is a conceptual shift of extreme importance. But it is not shown in the equation itself. It is a matter of how the equation is read: left-handed or right-handed. Thus by proffering the equation as evidence that the central MMT claim is “widely understood and acknowledged” Palley shows only his own failure to understand or acknowledge that claim. The point, for MMT, is not the inclusion of the term θ. It is the way in which the whole equation is interpreted.

    Why is the shift so important? If the equation is true, what difference does reading it left-handed make? Doing so gives us a new view on the central aim of macroeconomic policy. Standard macroeconomics sees two roles for government spending. First, obviously, it pays for the goods and services supplied to the public sector. Secondly, it supports aggregate demand – if and when monetary policy is insufficient for this purpose. The MMT insight – that equation (1a) should be read left-handed – gives us a different perspective on the second purpose. The point is not simply to support aggregate demand. It is, far more specifically, to finance the non-government sector’s tax payments, its purchases of government bonds, and its accumulation of currency balances.

    ReplyDelete
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    1. That's from my blog post. Thanks for the acknowledgement. :/

      https://originofspecious.wordpress.com/2016/02/24/me-and-mmt/

      Delete
    2. Oh dear. A budget constraint is just that. No one reads it any particular way.

      Delete
    3. Hmm, maybe I shouldn't have owned up to being the author of that! In fairness, I think it makes a bit more sense in context... I'm trying hard to see if there are real *conceptual* differences between heterodoxy and orthodoxy.

      Delete
    4. Random, this is an identity. You cannot deduce direction of causation from an identity. MMT correctly reminds us about this in relation to sectoral balances, but seems to forget about it in relation to taxation and spending within a budget cycle.

      True, in the first ever budgetary cycle spending must have preceded taxation, but when that event happened is lost in the mists of time.

      Delete
    5. "Oh dear. A budget constraint is just that. No one reads it any particular way."

      In theory yes. In practise no - as people read things in western countries left to right.

      So I am glad this other perspective is highlighted.

      Delete
  30. As someone much too old to have learned about MMT except through this and similar blogs I certainly have not understood the accounting details. But I find seductive, and at least up to a point convincing, the (to me) fundamental point that (currency-issuing) governments should use expenditure to get things done and taxation to keep inflation under control (and if inflation starts to rise that may be - almost certainly is - an indication that there is a risk of crowding-out). Debt is just a way of transferring income rights from one group (generally poorer) to another (generally richer)!

    I certainly haven't thought through the impact on and of currency movements but since the value of an individual currency doesn't seem to have been a valuable indicator for policy purposes since the collapse of Bretton Woods, I'm not too worried.

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  31. I think the glaring difference between MMT and the mainstream, is loans create deposits. Why, if MMT is promoting nothing new?

    The Krugman/Keen controversy reveals a cognative dissonance that has been swept under the rug.

    http://www.cnbc.com/id/46944145

    Enough said.

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    1. It's funny. I remember reading in an economics book in my high school library that banks create money when they make loans. That shocked me at the time, but it's true, isn't it? But it does show that that MMT idea is nothing new. I think that the book was written in the 1940s or 50s.

      Delete
    2. Yes Bill, but that is not what standard economics has been teaching in the undergraduate or graduate syllabus for the last four or five decades or so. When I went into my first interview at for an economist position at a bank after getting a first class economics degree I was told I would have to 'unlearn' the economics I was taught. That was back in 1994.

      Delete
    3. "...loans create deposits." and "...banks create money when they make loans."

      Jeepers creepers it boggles my mind the misconceptions that MMT has promulgated. The only extra thing the bank creates when making a loan is an asset so that they can keep track of the credit they have issued. The loan asset is NOT money/reserves. The asset will be paid back slowly over time be the loanee and the asset value will reduce commensurately. The extra money the bank earns is the interest but that extra money will come from other money in the system.

      Delete
    4. This is definitely another area where mainstream economists need to have more engagement with people working on the ground:

      https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_Me_8_14_13.pdf

      Delete
    5. Dear Pinky-

      You are really bad on economics:

      "The only extra thing the bank creates when making a loan is an asset so that they can keep track of the credit they have issued. The loan asset is NOT money/reserves. "

      So funny. you seem to ignore the LIABILITY the bank creates when they make a loan......the bank deposit!!!!!
      When banks make a loan for $100K It increases its assets (the 100K loan contract) and its liabilities (your 100K checking account deposit).

      Look at how ignorant and confused the mainstream has made you about very basic banking and monetary operations. This is what you get when you ignore accounting (like SWL and most of the orthodox do)

      Delete
    6. The extra money comes from spending the money. Bankers spend money too they are human too!

      If you have net saving in any sector you need deficit spending.

      "Jeepers creepers it boggles my mind the misconceptions that MMT has promulgated."

      Except we haven't. Any evidence?

      Delete
    7. "Jeepers creepers it boggles my mind", " The loan asset is NOT money/reserves" MMT agrees that it is not reserves, just a bank financial asset that can be used to transact business.

      "The extra money the bank earns is the interest but that extra money will come from other money in the system." Partly true but the 'extra' money can also be from additional bank loans, one reason that debt seems to need to grow in perpituity if the economy is going to continue to expand.

      Delete
    8. Pinkbum: Of course the newly created deposit is just a bookkeeping entry but society has for whatever reason agreed to use bank deposits in payments and as long as deposits are transferred electronically for purchases within the banking system society can't get rid of them like a "hot potato" to paraphrase Tobin. Interestingly he used the analogy in his famous 1963 piece without even noticing how it would undermine his own reasoning. Anyway, of course there are constraints to bank lending and thus money creation but they indeed are creating money when granting loans. Whether this is "ex nihilo" is an entirely different question and I personally doubt that if a loan is linked to a transaction (especially an investment). Things may look differently when a loan is taken up just to purchase existing assets.

      Delete
    9. Auburn Parks - you are under a complete mis-comprehension about what double entry bookkeeping is. A deposit is a liability to the bank they cannot use that as cash - there has to be an asset on the other side of the ledger which is the cash/reserve.

      The other responses all involve circular reasoning much like the Bank of England paper, here is my response from earlier:

      The Bank of England say they will explain the creation of money but they do no such thing. I refer you to Page 6, Figure 2 of "Money creation in the modern
      economy". Figure 2 shows the consolidation of assets and liabilities of both the seller's and buyer's bank. If you examine the very last panel in the figure which should ultimately show the creation of money there is only an asset called "New Loan" and a liability called "New Deposit" on the buyer's bank side of the ledger. The last panel is accompanied by the following explanatory words:

      "So the buyer’s bank will in practice seek to attract or retain new deposits (and reserves) — in the example shown here, from the seller’s bank — to accompany their new loans"

      However, if you look at that last panel it is exactly the same as the second panel at the time of the loan creation. So the last panel explains nothing. It does not explain how the loan is getting converted into cash/reserves because loans do not create money. In actual fact the thing called "New Loan" is really just an accounting device used by the bank to keep track of the money. This asset will reduce in value as the buyer pays down the loan. The bank does earn interest from the loan but that has to paid from cash elsewhere in the system.

      Delete
  32. So many angry comments and not one of them goes beyond Prof. Wren-Lewis' statement about the consolidated budget constraint. I hope the MMTers do realise that they really are discrediting themselves with this senseless talk ;)

    And SpinningHugo - did "wow" mean you were surprised Simon did not know about this? You'll have to elaborate on that and back your claims with evidence to be taken seriously or make your point, otherwise you just come across as an internet troll, I'm afraid.

    ReplyDelete
  33. Good on you for replying individually to all these comments!

    Nick Rowe tries to capture some of the MMT ideas within a standard IS-LM framework here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/reverse-engineering-the-mmt-model.html

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    1. Thanks. That is what I have suspected for a while, but if this is the case why does MMT simply state clearly that they think the IS curve is vertical? Because that would make what they say (1) a special case of the standard model, and (2) subject to empirical testing?

      Delete
    2. Yes, I'm not sure why they don't say that. One reason might be that they don't like IS-LM in general, for reasons I don't claim to fully understand (section 16.7 here: http://bilbo.economicoutlook.net/blog/?p=25143)

      Also, Scott Fullwiler's comment on Rowe's post suggests that MMTers believe the IS curve to be "an unreliable squiggle" rather than vertical. Mosler's comments, by contrast, suggest that the IS curve might be slightly *backward* sloping (since the government is a net payer of interest, so that the income-effects of rate rises outweigh the substitution effects). Maybe there is no MMT consensus on this.

      I think it would help facilitate communication between MMT and mainstream macro if they could say, at least as a zeroth degree approximation, that the IS curve is vertical or near enough. Do you suspect that that wouldn't hold up to empirical testing?

      Delete
    3. They don't think it's really vertical though. They admit that when you add housing investment (to business I), the IS curve is downward sloping in the conventional sense. As far as MMT's functional finance component is concerned, your post is right. It's really the job guarantee and its supposed ability to keep prices stable which is the innovative part of MMT. My two cents.

      Delete
  34. Some American economists seem to have accepted the false premise that a currency-issuing government can run out of its currency.

    Our political leaders often argue over how new programs will be "paid for." It's nonsense, yet it's deeply ingrained in the minds of most members of the public.

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    1. I agree, and the person who has done most to counteract that view is Paul Krugman. To have any influence, you have to work within the mainstream, particularly when your economics is standard.

      Delete
    2. "To have any influence, you have to work within the mainstream, "

      Appeal to authority.

      Delete
    3. No, appeal from empirical experience. Heterodox economists have been predicting the overthrow of mainstream economics for longer than I have been doing economics!

      Delete
  35. Also, I try to identify what Palley might be missing here: https://originofspecious.wordpress.com/2016/02/24/me-and-mmt/

    ReplyDelete
  36. Back in the spring of 2010, when the fearmongers of national debt and deficit launched a strong propaganda assault, nearly all of the economists who stood up to the onslaught that I was aware of -- I was not aware of this blog -- were MMT proponents. That is how I first heard of MMT. If the verities of MMT are standard macroeconomics, where was the rest of the profession? Why their acquiescence?

    In May, 2009, President Obama said in a CSPAN interview that the US government had run out of money. Why didn't his economic advisors disabuse him of that notion? After he said in a state of the union address that people were tightening their belts, and the government should, too, why didn't they resign in protest?

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    1. I think that is a fair point, which I also made in my post (although perhaps less strongly)

      Delete
  37. "For example MMTers seemed to think that they had discovered that a government with its own central bank need never default on its debt, but as far as I was concerned that was a standard and rather trivial implication"
    Well, if it's trivial, why about 99% of economists don't think that way? I don't know much about MMT history, but I guess they never claimed that they discovered anything new... What I know is that most of economists ignore the fact that a lot of countries issue their own currency. Countries are treated like households.

    "was a standard and rather trivial implication of the government’s consolidated budget constraint.".
    Budget constraint for most economists is "Government Tax Revenue >= Government Spending". They do not seem to understand what the "consolidated budget constraint" means. That's the "standard" in economics profession.

    "What would happen if the government started doing exactly that: stopped issuing debt and just created money."
    Maybe it could bring some inflation to Europe and Japan... Wouldn't it be nice?

    "Let’s assume that real output is at its ‘full employment’ level."
    First you have to assume that there is a "full employment level", that guarantees zero inflation (and beyond that, there is inflation). That is a theory. Not a convincing one. And MMT does not support that theory. So maybe MMT is not a standard bit of macroeconomics.

    "That would force interest rates down,"
    Only if the government chooses to set the interest rate down. If the government desires, it can simply let the interest rate fixed at some value.

    "which in turn would raise demand and create inflationary pressure, which is not really desirable."
    MMT theory does not link interest rates to inflation. This causal relationship doesn't exist in MMT theory. Again, maybe MMT is not a standard bit of macroeconomics.

    My critics on MMT is that they lack a theory on inflation. So it is an incomplete theory. But the completed part is quite good.
    On the other hand, orthodox theory has a lot of theories on inflation. All of them do not pass the empirical evidence test. I have trouble in calling these theories "science", because they are not science at all...

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  38. Great read by Palley, clear as a bell. Just one point he makes

    "With regard to real output effects, there is a long standing literature, initiated by
    Krugman and Taylor (1978), about the possibility of contractionary devaluation whereby exchange rate depreciation lowers economic activity. The likelihood of such an outcomedepends on the characteristics of the economy such as the price elasticity of import andexport demands; the extent of reliance on imports; availability of substitutes for imports;the nature and structure of domestic production; and the extent to which increased importprices feed through into domestic prices.

    Actually these very points were made decades before Krugman by people like Abba Lerner and MacGee (hence tthe Marshall-Lerner condition) - these are just the ones I remember looking at the literature way back doing my master's thesis. It is ironic that Krugman has largely forgotten them - for example he makes blanket statements that countries can find their way out of difficulties if it could devalue if they have their own currencies- for Greece and South American countries, for example, that is less than clear. This is where you must be careful with theory, which must always be context specific.

    It is also bad when the right people do not get credited for these ideas.

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  39. Thanks Prof. Wren-Lewis for acknowledging the interest in MMT among some of your commenters. Speaking as someone who has left the occasional (I hope not overly annoying) comment in this vein, I can say that part of the reason I did so was because you strike me as a highly reasonable and decent person, whose views I value, on this as on any topic touching on economic policy.

    Turning to the substance:

    "[T]he upshot is not that what MMT says about this budget constraint is wrong, but that it was well known long before MMT..."

    While I'm certain you are correct, so far as the economics profession is concerned (I have no professional knowledge on the basis of which to contradict you), I will say this: Until I became acquainted with MMT, I had essentially no idea that "a government with its own central bank need never default on its debt." Rather, I confess, the possibility of the government "running out of money" had seemed an unquestionable fact. I had read a variety of economists (Keynesian, Marxian, Neo-liberal), but never encountered a refutation of that proposition.

    Worse, I seem to remember that specter playing a major role in the great diminishing of progressive hopes raised by both Mitterand's victory in France, and Bill Clinton's in the U.S.--and again, many years later, by the coming of the first Obama administration.

    At the time, these episodes of diminished hope seemed to be grudging but necessary concessions to some economic reality principle. Or, at least the first two did. By the time of the third, it already seemed a needless abdication of real possibilities. The difference was that, in the interim, I had read some MMT, and was disabused of the notion that that government of the United States can run out of U.S. dollars.

    Or, to give another example: I have over the years sat through many briefings by corporate 'retirement planners' who, in the process of selling my coworkers and I on the benefits of tax free retirement accounts, mentioned almost ritualistically, as unquestionable fact, that U.S. Social Security cannot be counted upon in retirement, due to its supposed funding issues. Until reading a bit of MMT, I never quite fully appreciated how completely that annual claim of financial doom was a piece of pure political propaganda, rather than in any sense an informed judgment about actual economic constraints on the government's freedom of action.

    "What would happen if the government ...stopped issuing debt and just created money. Let’s assume that real output is at its 'full employment' level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why."

    Here I'm obliged to say that quite literally all of the MMT texts I have read readily acknowledge, and indeed even insist on this point. I take it to be a core tenant of theirs, that inflation will occur will nominal demand exceeds the capacity of an economy to respond via the mobilization of real resources. Indeed, they offer a theory of inflation anchoring, based on the notion of a 'liquid' buffer stock of labor, that is said to be an essential component of the theory.

    "This raises the question of why MMT seems to have quite a following. Perhaps it is a reaction to mediamacro’s often implicit assumption that a country like the UK or US could go bust through a forced default. And, to be fair, some mainstream economists seem to want to keep that misapprehension alive."

    This may very well be. Again, I can only speak from my own experience. MMT struck me as a radical liberation, intellectually, from what had seemed a persistently crippling argument against the sort of economic policies that my political sentiments had always made me favor. I remain grateful to it for that, however intemperate or obdurate or simplistic some of its online advocates might occasionally appear.

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  40. Professor thanks for this post. I must admit that reading MMT material without any prejudice in mind, I always found it compatible with standard Keynesian theories. MMT places a lot of emphasis on full employment and suggests that with the adequate policies (normally they advocate a Job Guarantee) it can be achieved without endangering price stability. Up until full employment, Government spending would not cause runaway inflation. Would you disagree with such a proposition??

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    Replies
    1. As I would define full employment as the level at which inflation was stable, yes.

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    2. So if we have construction workers that are unemployed, whose employment would not bid up wages for other construction workers, then the government could "safely" spend the money to employ them, as that would not be inflationary?

      Delete
  41. If with one hand the Government creates money, and banks are thus enabled to create extra money, then to control inflation, at some point, Government must be prepared to destroy money with its other other hand. Presumably this could be done via enough extra taxation to create a budget surplus?

    Back in the seventies, when wage-price spirals were a political/economic issue, I remember Denis Healey threatening to do just this if wage deals exceeded productivity gains.

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    Replies
    1. Banks create money as a debt, only in accordance with the confidence they have that it will be repaid, and some time not even that, as the GFC showed. They know they will be underwritten government. They do not lend in accordance with reserves, there is no connection. They worry about reserves only to make sure they can settle up day to day transactions and dealings with other banks.
      Bank money is a liability, it is not an asset like government money, as anyone who has received a grant for University or houe improvements in the past can recognise. The alternative is a bank loan, which is a burden, not an asset. Especially if it grows beyond your, or your economies ability to repay.

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  42. What would happen if the government started doing exactly that: stopped issuing debt and just created money.

    I have a problem with this. Money are debt, debt are money. The thing is, QE doesn't add up money to economy, it is just an asset swap. Less liquid form of money (debt) is exchanged for more liquid - hyperpower money (notes or reserves of commercial banks at Central bank)

    Gvmt (the state to be exact) can create money only in two forms (and ways): issue bonds and by that create a less liquid, but interest bearing money, or it can create notes and reserves and pay by it to private sector for goods, services, or as some suggested lately, for free (helicopter).

    ReplyDelete
  43. I've written a partial response here, which I hope you don't mind me posting: https://originofspecious.wordpress.com/2016/03/17/wren-lewis-mmt-and-fiscal-policy-with-trees/

    ReplyDelete
    Replies
    1. You need an OLG model to understand why debt can be a burden on future generations. Have you read this, and the relevant links?

      http://mainlymacro.blogspot.co.uk/2015/02/the-burden-of-government-debt-again.html

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    2. Yes, and I had a very helpful discussion with Nick Rowe about it. I now understand the point. I've mischaracterised your position on my blog (you argue that debt *can* burden future generations, whereas I'm arguing against the proposition that it *necessarily* does so). I'll try to fix that, and I apologise.

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    3. (I've now put an update and an apology to you on my blog post.)

      Delete
    4. 'Burden on future generations'? Your article says debt can redistribute income between generations even if aggregate consumption is not affected.

      I guess its how you define burden. Given the mainstream is intent on destroy real future capacity in the pursuit of limiting financial assets available to future generations, that seems to be the real burden on future generations.

      Delete
    5. David: Agreed. To reduce debt by cutting back on useful public investment increases rather than reduces the burden.

      Delete
  44. I think I can decipher what is going on a bit here. First, I think you are right that the monetary reality of MMT is in standard macro, if you fully understand it. However, I would suggest that the majority of economists (upwards of 85%) do not fully understand standard theory, and hence they do think that even sovereign currency-issuing government must balance their budget at some point.

    Let me give an example of the widespread misunderstanding within the profession.

    Last year I spoke at a debate at the Economics Society of Australia, with about 200 of the nations leading academic and professional economists. As part of my argument I said that it is standard theory that governments only face real resource constraints, and that there are no monetary constraints, hence we can't say honestly as economists that balancing the federal budget should be a concern for a welfare-maximising government.

    I was bailed up in the corridors and on the street for hours afterwards having professors of economics try and explain to me how I was wrong, and how there are monetary constraints, and all that. I told them to read Abba Lerner, and others, and was meant with blank faces, as if these issues had never been raised before in their careers.

    So that's why I say economists don't even understand their standard theory.

    A second reason is that the textbooks do contain any material that reflect how money is created and destroyed in reality through central banking systems. Each year the masses of economics teachers regurgitate demonstrably wrong material to the next generation. So in many ways there is a destructive cycle of ignorance within the profession.

    One final point, on a different matter. You ask what happens if a government "stopped issuing debt and just created money". Yet to be clear, creating money (including printing cash bills) is just another form of debt, which sits on the liability side of the central bank accounts. The one thing MMT does teach is to be clear that account always add up, and someone's asset is someone else's liability.

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    Replies
    1. I share 100% of your view. Economists don't seem to understand their standard theoruly.

      Delete
    2. On your main point, you may be right. When I wrote "some mainstream economists seem to want to keep that misapprehension alive" perhaps what I should have added is that others have just not thought this through, partly because it is not in the textbooks.

      One point I would add, however, is that there are perfectly good reasons why you would be concerned about the level of government debt, that have nothing to do with market panics or default. They are

      1) intergenerational redistribution
      2) crowding out

      You need an OLG model for both.

      3) you need to raise distortionary taxes to service the debt

      On your last point, I do not think cash is anyone's liability. Instead I think it is irredeemable. But that is not critical to this discussion.

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    3. It is surely private debt that is a burden to the young, not Government debt. Government debt equals private wealth. When the Attlee government built the NHS, free education, council housing and much more, during my grandmothers day, it was both a benefit to her genration as well as to mine. I did not feel the burden of government debt, I felt the benefits of past government and ongoing government investment. My children are not suffering from that debt, they are suffering from current public sector cuts, and growing PRIVATE debt, or bank money, which they are forced to borrow for their degrees, and plummeting wages, and grossly inflated private debt for housing.

      As Michael Hudson has said, "public debts and deficits are not the problem, private debt is." http://michael-hudson.com/2013/03/government-debt-and-deficits-are-not-the-problem-private-debt-is/

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    4. "I do not think cash is anyone's liability. Instead I think it is irredeemable"

      That is a slippery slope. If central bank has an inflation target it needs to redeem its liabilities as requested. I agree that MMT is nothing new but Post-Keynesian (Palley being one) has many insights not widely understood:

      http://www.concertedaction.com/2016/01/17/national-accounting-as-atheism/

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    5. Pretty sure that the intergenerational redistribution argument is another one of those things that most people think is true in the standard theory, but is actually not. MMT makes this clear because someone's debt is someone else's asset. Hence, although debts can be passed on through generations, assets too must be passed on. You can't pass on net debt as a government (apart from external debts when you consider just one country's residents. But again, from a global perspective, there can't be a net generational transfer of debts).

      I have tried to explain this here
      http://www.fresheconomicthinking.com/2014/07/a-tribal-ceremony-reconciling-economics.html

      In terms of cash being a liability, this again is a lesson from MMT - that all assets are someone's liability. Cash (physical bills) is certainly a liability of the central bank, and you will find this recorded on their financial statements, and it is clearly redeemable for tax liabilities.

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    6. "On your last point, I do not think cash is anyone's liability. Instead I think it is irredeemable."

      It is a liability. That's why it says "I promise to pay the bearer on demand the sum of ten pounds" on a tenner. It is a receipt for liabilities held in the Bank of England's issue department. They are 0% perpetual bearer bonds. Bank reserves are similar but limited to authorised institutions.

      "2) crowding out

      You need an OLG model for both.

      3) you need to raise distortionary taxes to service the debt"

      No. The BoE offers *unlimited intra-day overdrafts* and nobody operating those accounts needs to co-ordinate the balances until the end of the day. That's how it works. I've explained it to you several times but you never listen!

      The money for paying the interest on Gilts comes from HM Treasury's Cash Buffer and on a heavy spending day the intraday overdraft - aka created - to pay the interest. It is either spent or saved in precisely the same way as any other government spending - generating taxation and net-increases in saving to the penny.

      Government spending is always paid for by spending the money. It's just a way of pushing the velocity of money higher and therefore getting more real output out of the same real assets.

      And there is no financial crowding out. Money is endogenous as proved beyond all reasonable doubt by Professor Richard Werner. So the limit is only creditworthy borrowers willing to pay the current price of money. There is no real crowding out because businesses never run at full capacity. If you go into a hairdresser with a newly minted £10 they will work longer/faster/harder and cut your hair. They will not close the shop and put the prices up. We are nowhere near light speed.

      And there is *no reason to issue government debt at all*. As Warren Mosler says interest rates should be locked to zero, and Treasury issue at most nothing longer that 3 month bills. The rest should be done on the Ways and Means Account with people holding bank deposits or National Savings bonds if they are residents and require a pension in payment.

      Fiscal policy deals with the stabilisation process - primarily via advanced auto stabilisers like the Job Guarantee.

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    7. 1) intergenerational redistribution

      This is IMO a moot point. The time travel - which is an interesting idea but why the government debt is always pointed as a vehicle?

      It looks to me obvious that in an OLG model the older cohort can sell any asset to the younger cohort for the same time travel effect. Certainly the asset can be government debt - but isn't there a more general concept? Maybe I just do not get it.

      One counter argument is that it is fair to sell a private asset and unfair to sell public asset. Maybe but then one should point out that any consumption (also if made possible by an asset sale) by the older people is "a burden for future generations". Yep, moot and no neat time travel theory.

      And it is also moot because the assumption behind the time travel idea is that the older cohort controls the government (society) - no surprise they can screw the younger cohort as they like (e.g. pension scheme).

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    8. Cameron Murray: "although debts can be passed on through generations, assets too must be passed on."

      But the time travel argument still holds - the older cohort can consume more by selling assets to younger cohort. But as above it can be any asset - not just government debt.

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    9. OLG models are limited by their 'representative agent' assumption which hides much of the impact of debt on future generations. It is true that every debt has a corresponding asset but those debts and assets are not held by the same people. Even if we look just at domestically held debt, bondholders are a narrower (and typically richer) subset than taxpayers. Hence government debt to fund consumption by one generation will tend to increase inequality in the next.

      Delete
    10. All money is debt (and hence a balance sheet liability) but not all debts are redeemable. This is the case under a reserve requirement regime for commercial bank reserves held at the central bank. Those reserves are a liability for the central bank but the commercial bank cannot redeem them without shrinking its own balance sheet.

      Recognising this is important as reserve requirements are a potential tool for managing the risk that money creation to fund government spending might subsequently lead to inflation.

      Delete
    11. Random, the endogeneity of money does not allow you to conclude that “the limit is only creditworthy borrowers willing to pay the current price of money”. The solvency and liquidity of lenders also matters. Remember that the run on Northern Rock was not provoked by borrower defaults but by its inability to borrow on financial markets to balance its books. Bank lending is restricted today not just by borrower creditworthiness but also by banks’ need to raise equity to meet tightened capital adequacy regulations.

      Looking at the problem from both sides shows why, although loans create deposits, savings supplied to the finance sector from foreign or domestic sources also matter, not because banks are passive intermediaries but because those savings provide a foundation of liquidity (solvency is less certain) on which banks can then lend to create deposits, i.e. increase the money supply.

      One reason the Fed found it difficult to manage money growth prior to the crash was that raising interest rates drew the ‘savings glut’ (i.e. a shortage of profitable investment opportunities) into the financial sector. With banks paying little attention to creditworthiness, this enhanced liquidity – magnified by creation of assets bought and sold within the financial sector – supported an expansion of lending to credit-constrained customers that overwhelmed the deterrent effect of higher rates to borrowers, until excessive leverage brought about the crash.

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  45. Creating money whether by PQE or deficit spending would create demand, as Keynes stated. The demand would create incomes and jobs, and help people pay their private debts.
    While private debt is being paid off, and the government money is being absorbed into jobs and services, inflation would not get out of control.
    Private banks create inflated debt for over priced housing, and destroy the money when the debt is paid off, so this would be a "sink" for money and a relief for those indebted, helping them to keep their assets or homes. The trade deficit is also a sink for government money, as it goes abroad.
    I would be very interested in your thoughts on this, and I have done my best to think for myself, not promoting any particular person or theory.
    I just want to discuss to learn.

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  46. I think MMT is mainly a backlash against the right wing political economics.

    It draws people because it has highlighted fuzzy concepts in mainstream (school) books, esp. money multiplier.

    I'm with Palley (who's a Post-Keynesian economist and thus not mainstream - sure some readers didn't know).

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  47. A but a Government with its own central bank can be forced into default in at least five ways:

    If it has legal or constitutional limits on aggregate debt (USA).
    If the currency is pegged to a fixed store of value (Gold Standard / ERM).
    If it issues debt in foreign currency (Argentina).
    If it issues inflation-indexed debt.
    Even if it issues debt only in its own floating currency, if that currency becomes devalued to the point the government cannot pay for required imports (former Yugoslavia).

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  48. I'd appreciate your comments on the argument that a country (like Germany) with an ageing population has a particular need to reduce government debt. Do demographics influence the debate or is the claim simply wrong?

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  49. I am tad disappointed, especially given your blog is apparently for ‘non-economists’ as well, that you choose to deride MMT on the basis that it is nothing new...or something to that effect. Some of us heard Stockhausen the first time round, etc.

    “Let’s assume that real output is at its ‘full employment’ level “

    Why? Why would we presume that? In any case, why would we presume the government choose to start spending (in place of any borrowing) at some magical time when real output is at its ‘full employment level’? Do we presume that because it suits your hypothesis?

    Surely the government would look to curb inflation? Or would inflationary pressures subside in an economy operating at full capacity just because someone mentioned MMT?

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    Replies
    1. The 'nothing new' comment matters for the following reason. If MMT is just using standard theory to criticise the policy position of other economists, why not say so. That would

      1) make it a lot easier for mainstream economists to understand what is being said, and

      2) have a lot more influence.

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    2. MMT analysis is largely standard in 'old' Keynesian terms with but they are scornful and dismissive of NK and reject the language and assumptions of 'modern' macro - ratex etc,hence the communication difficulties.

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    3. But my point is that it is not clear what they are accepting or rejecting. Is the IS curve vertical or not? If not, does funding deficits by creating money rather than debt reduce interest rates? If it does, why is this not inflationary. If it is, why do MMT people keep insisting that you never, ever need to worry about deficits.

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    4. Professor, after four days of reading comments to your post, how can you say "MMT people keep insisting that you never, ever need to worry about deficits"?

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    5. Professor, it has been pointed out numerous times that MMT holds that spending in excess of capacity can cause inflation and that government deficits can sometimes be part of that excess spending. It is just wrong to assert that MMT insists that you never, ever need to worry about deficits. Please, if you don't learn anything else about MMT, please learn that.

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    6. they don't say deficits never ever matter only that govt should not target them as they are endogenous

      They agree that creating money without bonds will send interest rates to zero

      As discussed already they would use fiscal policy and financial regulation eg credit controls if necessary to prevent inflation, also they believe the job guarantee would act as an automatic stabiliser and inflation anchor. Read the literature or Bill Mitchell blog or book - I've provided the links. you can't expect to understand MMT from commenters alone (including me?)

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    7. http://bilbo.economicoutlook.net/blog/?p=15753

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    8. I believe they would say that if forced to define it in terms of the IS curve that the curve is ambiguous. Interest is income for bond holders and a cost for borrowers so if you raise the rate you increase income and the cost of borrowing. Both income and cost of borrowing affect how much people/businesses borrow but they affect it in opposite directions. So which has the bigger effect? Does one always have a bigger effect than the other and if not does the dominant one change over time?

      MMT sees no difference between running a deficit and issuing bonds that pay interest rate x vs creating reserves and having the central bank pay x interest on reserves. What rate you set can have an inflationary effect but the method you use to set the rate does not.

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  50. Governments CAN create money but none does today (or has since the Great Depression). Why?

    Because finance has been given the monopoly power to create money and they are able to enforce their monopoly by cutting off the flow of needed loans.

    Also: central banks cannot create anything because they are collateral constrained: they cannot create money, either. The central banks are conduits between central governments and finance. Governments simply borrow in the place of the country's citizens ... when the citizens themselves are unwilling (or unable) to do so.

    If the citizens are unable to borrow, the government borrowing in their place is a pointless exercise.

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    Replies
    1. "Central banks cannot create anything because they are collateral constrained: they cannot create money, either."

      Is this true? In the purely abstract sense, I might agree. But since virtually anything can serve as collateral is this an independent, realistic constraint? As we saw happen following the collapse of financial markets in the crisis, central banks can, and do, create money to prop up collateralized asset prices.

      I'd agree that central banks are not so effective as government in injecting the money they've created into circulation. Their currency liabilities swell reserve account balances, which of late sends but an indirect, and wobbly at best, boost to demand for goods and services.

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  51. Slightly different conclusions about MMT.

    One of its strengths is its accessibility. If the conclusions are the same as NKE and it reduces necessary mathiness it is a better tool.

    I saw the focus not on the impossibility of gov default but rather the consequences of insufficient government borrowing: forced private borrowing.

    Impossibility of default is simply a focus in the blogosphere because it is novel to a lot of commenters unfamiliar with modern econ.

    The idea of "insufficient" government borrowing is a departure from mainstream modern econ.

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  52. Slightly different conclusions about MMT.

    One of its strengths is its accessibility. If the conclusions are the same as NKE and it reduces necessary mathiness it is a better tool.

    I saw the focus not on the impossibility of gov default but rather the consequences of insufficient government borrowing: forced private borrowing.

    Impossibility of default is simply a focus in the blogosphere because it is novel to a lot of commenters unfamiliar with modern econ.

    The idea of "insufficient" government borrowing is a departure from mainstream modern econ.

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  53. Tenets, people, tenets. Leave the poor tenants alone. They have enough trouble paying their landlords without being expected to take part in economics discussions too!

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  54. If the basic propositions of MMT are accurate, why would a government ever borrow money, when it could simply print it in an equivalent quantity?

    Just because of central bank independence/the risk of the facility being abused for short term political gain at the expense of longer term stability? Or something more?

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    Replies
    1. Issuing a TSY CD is not really a borrowing operation in any way that is analagous to your personal experience. Nobody thinks Chase bank borrows its own checking deposits from its customers when it issues them CDs account alternatives. This is exactly the same thing that happens with Govt. The Govt is exchanging one type of IOU for another, and it pays off its IOUS with more of its own IOUs. So there is no real difference between reserves and TSY CDs.

      When you or a business borrow money, it requires you to use your assets to pay off your debts (usually in the form of your bank deposits, but sometimes not). The Govt NEVER pays off its debts with its assets, it only ever pays off its TSY CDs (Debts in the misleading mainstream parlance) with more of its own debts (reserves aka currency).

      This is the main difference between mainstreamers and MMTers. MMTers are right about the accounting and mainstreamers are factually wrong

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  55. I am in the MMT camp. I agree with some points you raise, and some places where I disagree I believe is the result of my having a different understanding of MMT than yourself. However, I question your statement about the governmental budget constraint (that it implies that the government cannot default).

    That constraint assumes that there is no default by the government. We cannot apply it to a case when the government defaults. We need to look at the institutional factors that might cause a default.

    If we assume that the government cannot default, the MMT description is consistent with the constraint. That's because accounting is accounting. (The infinite horizon portion of the constraint is an object of debate; I would characterize it as either trivial or wrong. That would be too big a subject for this comment.)

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  56. The fear of money printing via whatever mechanism, is that either it will trigger a sudden and uncontrollable inflationary effect - we have seen shocks like this in the past ('74, '79, and I think '88? for instance) and the social impact is substantial.
    Or that it will be interpreted by other nations as the opening shots of a currency war and will result in a response as if it were.

    I do not know what would happen were we to print money and just hand it out, but I understand it would hike inflation, and devalue sterling (Is that even desirable in a country that imports so much?), can you put a precise figure on it? Could you say that we won't need 15% interest rates to catch the rabbit once it's out of the hat?

    Sorry a bit rambling, I'm obviously not an economist.

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    1. I hope the author of this blog does not mind, but there is an excellent video of a lecture on line that explains government money, and should be adequate to help you understand sovereign currency issue, and should dispel myths about "money printing." The speaker is Steve Hail of the University of Adelaide. He claims to be speaking plain facts, not polemics, and quotes evidence from people like the heads of the federal reserve, as well as others.
      I think it makes an excellent primer for the general public.
      https://www.youtube.com/watch?v=qBpm5sVmGYc

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  57. I'm not an economist, and had but a very rudimentary, beginning level, education in macro at university many years ago with a layman's interest in the subject ever since. But what I've learned about MMT in the last maybe 4 to 5 years is very different from your impressions here.

    First, MMT's "obsession" (as you call it) simply serves to "prove" (in the math sense) that what many people "believe" about modern world currencies and government debt is demonstrably, factually wrong. Most people conceptualize money as if it were an asset only, whereas all money has an asset side and a liability side, and that some party necessarily holds a corresponding debt corresponding to each unit of currency in circulation. Similarly some government, be it one's own or some foreign government, holds the debt for each unit of currency held net assets of the private sector aggregate. The accounting, in other words, "proves" savings equals debts and in order for the private sector to save, some government must hold the debt.

    The "obsession" with accounting also helps debunk many mistaken notions about money creation in banking. So it's odd that you also claim MMTers are "curiously averse to equations". No, they're just generally more careful to test economic assertions based on equations against what we know to be demonstrably fact via accounting identities. I have a stronger background in science, so I tend to think in those terms, but in science there are observable facts and theoretical explanations, which are constrained and tested against those facts, to understand the what, why, how patterns of facts and make predictions. So as I see it, simple accounting equations serve as a basis of very rudimentary, but nonetheless inarguable, factual information which should constrain the theoretical macroeconomic equations.

    And on your question of "what would happen"; "what would happen if government started issuing money without debt?" Respectfully, I suggest that we're in hypothetical territory here because that is not how anyone does it and MMT itself does not suggest it would be "preferable" to do this. What happens now is that when government issues debt equal to its deficit spending, an amount equal to that money creation is reabsorbed from money previously created and circulating, and then "parked" or "deposited" in a timed savings account. Money that is not in circulation cannot push up prices, so there's presumably some fraction less inflationary effect from the money creation. (Of course, there are many variables involved, such as where the funds to purchase the treasuries comes from and preterm interest payouts, etc.) People can irrationally push up prices based on myths they believe about the size of debt, but there's no more real direct cause behind this than if they were to bid up prices when they see the tally of dead dinosaurs grow.

    So, the chief reasons as I see them to discontinue the double ledger currency system for government deficit spending would be to calm down the irrational fears (and interference) of the debt phobes. Beyond this, there might be a good argument for separating government treasury bond levels from government deficits accumulations ... but I haven't seen one. It seems Central Banks can serve the same purpose now -- by freely purchasing and reselling treasuries into and out of the market.

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    1. The reason I wrote this post was that I kept getting comments every time I wrote about government debt that everything I was doing was flawed because I did not mention money, or that governments did not need to issue debt. Both comments only make sense if that "hypothetical" is possible.

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    2. Sorry SWL, the reason you keep getting it wrong is because you seem to believe that there is something special about TSY CDs you think they are "debt" and reserves=currency=base are "money". When in reality, they are both Govt "debt" and are both "money".

      MMTers are the only ones that point this out.

      And sure, you may say its possible for Govt to only issue reserves and not "debt" but then that would be inflationary (you said it would necessarily imply ZIRP forever which is categorically false as QE definitively proves you can have 10% rates if you want with no outstanding TSY CDs thanks to CB paying IOR). Or the mainstream would say that you have to issue TSY CDs because otherwise bank lending would go crazy. But in the real world (again as QE definitively proves) there is no such thing as the money mulitiplier or loanable funds, so there is no reason to think the macro reserve position has any bearing whatsoever on bank lending.

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    3. I think the cry that "there's nothing new here" has been consistently acknowledged by the likes of Bill Mitchell, Randall Wray et.al. They have claimed that mainstream economists have consistently misrepresented the role of government debt. The MMT view is that it is not a funding operation but a monetary one, that is it's aim is to control the price of money not to "fund" government spending (in a fiat money system such as sterling). They also argue, by the same token, that taxes are necessary to create (amongst other things) demand for the currency a government might issue and is not, in a fiat system, a funding operation.

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    4. Here are some links to books and papers by MMT academics - better to read these than comments by MMT followers who sometimes get MMT wrong.
      http://neweconomicperspectives.org/mmt-scholarship

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    5. AP: Forget the money multiplier. No serious economist believes in it, and why it is still in the textbooks I do not know.

      And you have not actually said what I have got wrong, apart from making claims that I believe things that I do not.

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    6. No serious economist believes in the money multiplier?

      Paul Krugman has a money multiplier in his textbook. If he doesn't believe in it then why is it there? Is he simply lying to students? If so, why? The onus is on you to explain why the major textbooks written by Nobel Prizewinners in economics have the money multiplier in them. Thee onus is not on your critics to look the other way.

      I think what you mean to say is that few economists believe in the money multiplier AFTER THE 2008 CRISIS. Maybe that is true. But that reflects poorly on a profession that needs reality to overthrow its theories rather than having its theories explain reality accurately.

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  58. I agree with your standard econ assessment and believe MMT has done itself a disservice in not building on the foundation Abba Lerner supplied with his Functional Finance.

    MMTer's commenting are proponents/campaigners (sometimes poorly or annoyingly in your case)attempting to highlight the economic reality which is understood among academics but sadly not by the public and politicians.

    For my part, I've attempted to resurrect Lerner with functionalfinance.org to bring the public around to understanding modern money and our public representatives role in managing the economy which again is poorly appreciated.

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  59. Simon, the best way for an economist like yourself to understand where MMT is coming from is to read the book Full Employment Abandoned by Bill Mitchell and Joan Muysken which is written for an academic audience. It's an interesting read.

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  60. You lost me here:

    "Let’s assume that real output is at its ‘full employment’ level. That would force interest rates down, which in turn would raise demand and create inflationary pressure, which is not really desirable. MMTers tend to ignore this, and it is not at all clear why. Of course in a recession with interest rates at their zero lower bound (ZLB) things are different, but MMT does not pretend to be just ZLB macro."

    If this is your impression of MMT, you clearly have made no real attempt to understand MMT. If you had, you would have come across statements like this:

    "the real point MMT is making is that the government’s budget constraint is the wrong constraint—the correct constraint is whether or not a particular budget position will raise inflation beyond an official target rate (say, 2%, which seems to be the choice of most central bankers)."

    http://neweconomicperspectives.org/2015/01/replacing-budget-constraint-inflation-constraint.html

    MMT emphasizes that the relevant constraint is inflation, yet you seem to have completely ignored this.

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    1. No, I do not ignore it. I want to know why swapping debt for money is not inflationary, even if the primary surplus/deficit is unchanged.

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    2. Unless the price of debt is used to calculate the CPI?

      Exchanging one financial asset for another has no immediate impact on real resources that are included in the CPI. (Think saving bonds vs saving deposits).

      Purchasing real assets with new financial assets does impact price inflation measured by the CPI. (Think rising government price floors for low income housing).


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    3. One reason might be that debt commands higher interest rate and thus people are / will feel richer?

      If central bank buys everything for the money - would that be inflationary at the limit? What is the price of the last asset purchased, higher or lower than the first one?

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    4. SWL - I may have your question incorrect but my understanding is that a swap of debt for money is not inflationary because it only changes the composition of private sector savings, not the amount. E.G., if you have a government bond and I (the government) print up some money, give you the money and take away your bond - you are no wealthier. Indeed, you will be complaining that you lost interest income - slightly deflationary at the margin. Does that explanation addres your question? Thanks.

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    5. Swapping debt for money is not inflationary. All it does is drive interest rates down. Interest rates have indeterminate effects.

      But even if you thought that interest rates have determinate effects (an a priori assumption with no solid evidence) then you could just offset this fall in the interest rate by raising the interest paid on reserves.

      MMT makes the point that a government could be fully funded via money creation and the interest rate could be controlled by manipulating the interest paid on reserves. Most central bankers actually recognise this now. The only reason it was previously hidden from them was due to the arcane constructions of mainstream economists who had a very poor understanding of institutional monetary operations prior to the 2008 ripping the mask off for them.

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    6. SW-L
      I will try to write exactly about that:" I want to know why swapping debt for money is not inflationary,"

      Only difference in these CB operations would be in bank reserves. Just as with QE. QE only increased bank reserves. Did QE change budget size decisions? Or did incresed reserves increase willingnes of more private borrowing? Private borrowing is inflationary not increasing bank reserves.
      As you can see when banks do not offer official interest rates but stay quite high, having more reserves does not put money in economy, only when private sector show willingness to borrow more. But, high spread is not letting them to get the funds and riskiness of jobs or less income is preventing private sector from borrowing which would be inflationary.

      This says that having more bank reserves is not inflationary, and if only difference in budget spending by debt or by money is in bank reserves which is not inflationary then money instead of debt is not infationary.
      Budget spending/deficits is inflationary, not how is done.

      But, using debt(draining reserves) instead of printing money is the PREFFERD way by CB to do monetary policy in normal times, to make CB decisions stick or to force private banks to accept official interest rate when lending to borrowers by draining bank reserves
      But only when rates rise, when rates fall the competition between banks for borowers is making banks lower rates. But, they stop lowering rates at around 3,5%. No bank offers rates lower then that. It is like cartel agreement. And there is no competition for borrowers at ZLB because banks became extremaly risk averse due to higher potential to loosing of jobs for potential borrowers. And bank's main income becomes spread between landing and borrowing.

      Deficit spending by budget decisions is inflationary, not the way it is done.

      But, the problem of using debt for financing the government is that after the need for stimulus ends, government have to keep spending more then economy needs because income that interest rate provides to economy. This is distortionary after stimulus has ended while this problem can be avoided if money is used instead of debt. Debt increases income of savers that never intended to spend that money anyway and only increase savings while putting preassure on budgets. Savings go into reserves that increase them and needs more draining by CB to make monetary policy stick.

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    7. Question from above:
      "Is the IS curve vertical or not? If not, does funding deficits by creating money rather than debt reduce interest rates? If it does, why is this not inflationary."

      Is banking reserve a factor in calculating desired interest rate by CB? No, it is not.
      And only difference in money financed spending or debt is ammount of bank reserves.
      By using debt, Treasury first fills bank reserves by budget spending and then CB drains them by selling debt.
      CB allows temporary overdrafts to Treasury and to banks just to allow such process.


      By using new money Treasury only fills bank reserves without drainingthem. This makes problems for CB because can not force banks to accept interest rates if there is too much reserves. Too much reserves makes interest rates go to 0, no matter what CB wants.
      But that doesn't mean that banks will offer such rates to economy. Such rates are only for other banks and state borrowing.

      As this natural experiments shows, economy does not enjoy such IR as states and banks do, no matter ammount of reserves in banks.

      But there is another option. CB can order banks on the level of IR to state and to economy and that would remove the need for using debt.

      using debt or money makes difference only for state and bank accounting, not into economy(deficits stay equal)

      Using debts for deficits makes a lot of difference in future, not today. Debts requiers more spending later on when economy doesn't need it. And since debts are financed by debt and servicing is finaced by more debt indefinetly. This is income only to savers/wealthy which is distortionary.

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    8. Now the question of excess reserves in good times.
      As we learned in this natural experiment, amount of reserves does not affect amount of borrowing. It is the level of IR that is offered to private economy and its willingness to borrow. By economy borrowing it creates more reserves so it is not reserve constrained for lending.
      But CB can not force desired IR on banks if there are excess reserves. It would have to drain all excess reserves by selling TSY, by making government debt larger just to force official rates on banks.

      This says that monetary policy is to blame for government debt: CB needs debt in order to force IR on banks. Deficits are not primery driver of debt but a nice excuse for austerity.

      But CB could use another option if it wanted to lower reserves if there are plenty like today. It could increase requierd reserves from 8 to 20% and imediately excess resserves would dissapear.

      But that is not how to control borrowing in private economy. Borrowing will keep raising if animal spirits are alive no matter the level of interest rate or the level of reserves.

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  61. I think you've missed out on the political philosophy dimension of MMT: https://originofspecious.wordpress.com/2016/03/20/mmt-is-political-philosophy-not-economics/

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  62. thatss the problem mainly macro you assume that there is full employment (but there isnt full employment) and mmt speaking about a state where there is idle resources like labour capital and etc.

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  63. mainly macro: now i understand your question the answer for that is here

    read:
    http://bilbo.economicoutlook.net/blog/?p=33191#more-33191

    bill mitchel answer in the first question answer this question

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    1. What that answer says is that if the government just created more reserves, the central bank to maintain its desired interest rate would have to sell government debt. So the private sector end up holding as much debt as they would have if the government had issued more. What happens when it runs out of government debt to sell. It can no longer maintain its interest rate, and the interest rate falls. And if - unlike MMT - you think that this increases demand, inflation will rise.

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    2. I'm clearly missing something here, I don't understand. How can the cb run out of bonds to sell? A bond is just a piece of paper surely it can just print more?

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    3. Good point. However, doesn't paying interest on reserves, where it is done (like in the US), avoid that scenario? So reserves pile up (as they have done) and the central bank is also able to maintain its interest rate target. Thanks.

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  64. Most of this can be cleared up pretty quickly.

    1) MMT along with many other Post-Keynesians do not believe in a NAIRU. For them inflation is determined by worker bargaining power. This can be increased with increased employment but it need not be. This is another way of saying that the Phillip's Curve is nonsense. This is an empirical statement. The Phillip's Curve has failed over and over again. In the 1970s with stagflation. In the mid-to-late 1990s when Greenspan let the unemployment rate fall despite all the naysaying by economists overly wedded to poor estimation techniques.

    2) The idea of a job guarantee (JG) eliminates the NAIRU even if we do allow for an inflation/unemployment trade-off. Why? Because in order for full employment to impact inflation wages must rise. But under a JG the wage is government mandated. The effects is identical to putting in place a minimum wage or even a social safety net with £x of basic weekly income. Neither will cause inflation. Nor will the JG. But the JG guarantees - by construction - full employment. It should also be noted that the JG was first invented by the inventor of the NAIRU concept, Abba Lerner. So NAIRU proponents should pay attention to the theory's grandaddy.

    3) MMT and other Post-Keynesians do not believe that there is a linear relationship between interest rates and output AT ALL. This is because (a) there should not be one in theory and (b) there is no empirical evidence that there is one. Interest rate changes have complex causal effects. What is more, when they do increase aggregate demand they do not do so in the same manner as that assumed in models with "natural interest rates" or "Taylor Rules" in them. The Wicksellian framework is completely untenable, oversimplified and misleading.

    4) MMT criticises mainstream economists - including the author of this blog - for not adhering to basic accounting identities when making policy statements. The profession seems completely ignorant of the binding constraint of the sectoral balances framework. When they are confronted with this they tend to mutter something about it being an "identity" a if this diminishes its importance. Mainstream economists are wedded to closed-economy macro. They do not seem to understand the implications of a world in which trade imbalances are the norm and the Marshall-Lerner condition cannot and does not hold. Because of this their policy prescriptions - including those of the author of this blog - are completely incoherent and could never be achieved.

    5) Mainstream economists tend to look at MMT and think of it in terms of a model. This is due to their myopia in thinking that all economics can be reduced to models. This simply reflects the professions' biases. In fact there is much in economics that is interesting that is not technically a model. The institutional relationships and the history of money that MMT puts forward is worthwhile knowledge in and of itself. The fact that mainstream economists cannot recognise this merely speaks to the fact that their discipline is intellectually limited and creatively closed.

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  65. "What happens when it runs out of government debt to sell."

    They offer time deposits for reserves that pay whatever interest rate they want. They can't run out of those, and they can keep offering them for as long as they like. So what is the problem?

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