
Ignored for Years, Modern Money Theory Is Gaining Converts - ec109685
http://www.bloomberg.com/news/articles/2016-03-13/ignored-for-years-a-radical-economic-theory-is-gaining-converts?bcomANews=true
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carsongross
Here is what I now believe: MMT doesn't really matter that much. How base
money is produced doesn't really matter that much. A metal standard, fiat via
government coercion, rocks at the bottom of the ocean, wampum, whatever. As
long as it isn't insane and chaotic, it will probably work.

What matters is no longer allowing the banking system to engage in fraud by
introducing multiple claims on the same currency unit in the same time period,
which is to say that currency deposits must be duration matched with loans. No
more borrowing short and lending long.

Of course, practically, MMT will be used to justify more government
boondoggles, wars, and bail outs of the rich, rather than something that might
actually be effective, like a citizens dividend, but that's politics, not
economics.

~~~
mindslight
What you're describing isn't crazy, it's how _any other entity besides a bank
must operate_. If a friend asks to borrow $50, I have to open up my wallet and
give him $50 from it (or deny the loan). I can't keep the $50 in my wallet,
promise to not spend it, and print out a shiny new $50 bill to give him!

Banks were given this privilege because they were highly regulated,
essentially just extensions of the Federal Reserve itself. Of course over time
they argued this was unfair and chipped away at the regulation, while still
retaining the privileges.

Given how much is at stake, I don't see anything changing until it all falls
apart. Easy creation of money directly supports the Federal Reserve's mission
of overstimulating the economy through artificially forcing inflation. The
proceeds aren't just skimmed by a countable corrupt cabal, they're funding the
entirety of several industries!

~~~
snowwrestler
No, this is how banks have worked for hundreds of years. Regulations and
(especially) insurance have now made this much safer.

~~~
mindslight
A few hundred years is really not that long to prove a social system.
Previously banks created their own currencies - this system allows them to
create _the_ currency. The "safety" is the elimination of direct feedback,
which allows problems to _accumulate_ and creates a "too big to fail"
situation. A lack of bank runs is fantastic, but when the run finally occurs
on USD it will not be pretty.

~~~
snowwrestler
"Too big to fail" has nothing to do with fractional reserve banking. All banks
work the same way, but the vast majority are not too big to fail. And, many of
the too big to fail financial institutions are not banks.

Banks in total provide about 20% of the total credit in the U.S. Even if they
were perfectly risk-free, you'd still have the other 80% to worry about.

If you're worried about fractional reserve banking, you're worrying about the
wrong thing IMO.

~~~
mindslight
The "too big to fail" I'm referring to is the currency itself. If a smaller
country were to inflate the fuck out of its monetary base the way USG does,
they would get corresponding exchange rates in short order. But being the
global reserve currency, inflation of USD instead sets the tempo of the global
economy. That is until it results in a long term shift away from USD, at which
point we're completely fucked as the reserve bubble pops.

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hodwik
Ignored for years? What? From what I can tell that's how we got into $19
trillion dollars of debt. The only reason it's now being defended as a
systematic theory is that it's become embarrassing to still believe it in the
face of all evidence.

Simply put: MMT completely ignores floating exchange rates.

The only reason that hasn't been completely catastrophic (for the US) is that
we're the global exchange currency, and can basically tax the whole world by
printing more money.

The long term problem is that too much inflation (or, more accurately,
taxation) may drive people away from our currency, and MMT will be shown for
the sham that it is.

~~~
pjc50
I don't think you _can_ drive people away from the US dollar, simply because
any such destabilising action will hit the real economy first. And the US has
seen low consumer inflation for years now.

MMT absolutely does take account of forex by recognising that a government has
a large amount of power to dictate money flows _within_ the country, but very
little power to compel terms of trade overseas. And most countries need to
continuously import certain things which cannot be substituted locally,
especially fuel.

Expanding the money supply lets people buy more _locally produced_ stuff, but
not more imports. This even scales down to local token currencies ("Bristol
pound") or Krugman's "babysitting tokens" thought example.

~~~
hodwik
> "Expanding the money supply lets people buy more locally produced stuff, but
> not more imports."

Right, so for most developed nations this would be disastrous.

~~~
kaonashi
The worst you can be imposed on you (outside an embargo situation) is balanced
trade, paying for real imports with fx acquired through real exports.

~~~
hodwik
Which, for the US, would be a very serious downgrade from our current
situation.

~~~
kaonashi
Depends on your position in the current situation.

~~~
hodwik
Well, then let's clarify: For almost all Americans -- who produce essentially
nothing of value, yet consume a lot of very real, imported goods -- balanced
trade would be a complete disaster.

~~~
kaonashi
Trade deficits are definitely a net positive, but that lack of demand they
cause actively harm a large swath of Americans.

There's a reason NAFTA has been so unpopular.

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evolve2k
I had an economics lecturer spouting this crap about how major countries never
need worry to repay their debts and could lean on their massive
power/influence if they got stuck. Fast forward to a post GFC world and
suddenly it's like the story of the group of friends where everyone owes money
to everyone else and it's all good until one new friend doesn't owe anyone and
suddenly turns around and tells everyone it's time to pay up. Party stopped
pretty quick after that.

~~~
crdoconnor
"I had an economics lecturer spouting this crap about how major countries
never need worry to repay their debts"

Because if you print your own currency, the risk of you running out of it
(insolvency) is _exactly zero_.

Of course, when you thought you heard "major" what he probably said was
"sovereign in the currency they borrow". Big difference (US is sovereign;
Japan is sovereign; Greece is not; Zimbabwe was not).

"and could lean on their massive power/influence if they got stuck"

"Stuck"?

~~~
ohnomrbill
Consider a hypothetical situation where we have to print a lot of currency to
repay our debts. Foreign debt-holders realize that they are effectively
getting robbed by our monetary policy and complain to their governments. Those
governments decide to threaten with military power, to convince us to change
our monetary policy or to take some of our assets.

In that situation, our balance sheet would be ok, but our country would be in
very bad straits. So we would be stuck in a real sense, if not in an economic
sense.

His lecturer probably (naively) believes that America will be dominant for so
long that we won't have to worry about pesky things like the threat of war
from other countries on economic grounds.

~~~
crdoconnor
>Consider a hypothetical situation where we have to print a lot of currency to
repay our debts.

Why? The US government _could_ pay off all of its debts tomorrow by printing
money but the hypothetical situation where it would 'need' to simply won't
arise.

Same for Japan. Or the UK. Or anybody. Inflation is the only real problem most
governments need to concern themselves with (and is inflation too high in the
US or Japan?).

>His lecturer probably (naively) believes that America will be dominant for so
long

And I suppose Japan has managed to remain solvent with ~220% debt/gdp by being
a superpower as well?

His lecturer wasn't being naive. The austerian economists who predicted
hyperinflation in Japan in the late 90s for the exact same reasons you're
proposing were being naive.

~~~
gozur88
>Why? The US government could pay off all of its debts tomorrow by printing
money but the hypothetical situation where it would 'need' to simply won't
arise.

It could arise pretty easily if international markets lost confidence in the
USG's ability to repay. In terms of wealth, I mean. Of course the government
can print money to pay in dollars, but from an investor's perspective there's
no difference between a country that inflates its currency and a country that
only pays a percentage of obligations in an uninflated currency.

Most US debt is short term. It has to be rolled over, and it has to be rolled
over at very low interest rates. That was the real genius of QE - they found a
way to print money and lower interest rates at the same time.

>And I suppose Japan has managed to remain solvent with ~220% debt/gdp by
being a superpower as well?

Japan has remained solvent because that 220% number isn't real. If you
subtract out interagency borrowing it's more like 130% (or it was, anyway, the
last time I looked into it), which, while not ideal, doesn't exactly put the
country in a league of its own.

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WorldMaker
«The 20-something-year-old doctrine»

Much older than that, MMT is based upon turn of the last century American
socialist (specifically the Social Credit Party) economic theory, but the red
scare nearly eliminated it from American discourse for most of a century. It's
especially interesting in that it is especially cyclical with respect to
depressions/recessions.

Edit to add: Not that there isn't important additional knowledge and theory
that MMT brings to the table on top of the turn of the last century theory
work, just that it's enough of a direct successor I'd draw the line of history
longer.

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tryitnow
Wow. I don't know where to start with some of these comments. There's just a
real lack of understanding of central banking.

Protip: Your critique of "status quo" (e.g. central banking) systems will be
taken more seriously when you demonstrate thorough knowledge of the subject
matter and don't rely on emotionally laden arguments involving "fraud" and
"lies."

~~~
meric
Whether the critics are aware of how central banking works, central banks are
losing credibility.

They've tried everything in Japan & Europe, getting governments trillions into
debt, and now they want to go negative interest rates. Clearly what they did
before didn't work, and now they are trying something else. They're shooting
in the dark and unknowingly killing the economy. It doesn't take a genius to
figure out people will just keep cash at home if you impose negative interest
rates, and by keeping cash away from banks, reduce the reserves banks hold,
and the money they can lend, reducing the money supply, exacerbating the
deflation the NIRP was supposed to fight in the first place.[1]

There's no fraud and no lie, except for the fact central bankers operate on
economic models detached from reality. The only lie is claiming to know more
than they do.

The policies the Japanese central bank tried to impose to lower the value of
the Yen in the past few months, only raised it.
[https://au.finance.yahoo.com/q/bc?s=USDJPY=X&t=3m&l=on&z=l&q...](https://au.finance.yahoo.com/q/bc?s=USDJPY=X&t=3m&l=on&z=l&q=l&c=)

"Central bank impotency" heading your way.

[1] [http://www.wsj.com/articles/japanese-seeking-a-place-to-
stas...](http://www.wsj.com/articles/japanese-seeking-a-place-to-stash-cash-
start-snapping-up-safes-1456136223)

~~~
mindslight
> _Clearly what they did before didn 't work, and now they are trying
> something else_

Erm no, they're trying the exact same thing _even harder_. The top of the
economy is awash in capital with nowhere to go, while the bottom has to run
ever faster on the debt treadmill. Creating even more debt that funnels wealth
upwards is obviously the solution <g>.

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csense
On the one hand, printing money instead of [1] taxing is good because you can
get rid of whole government departments (saving real resources) and tax
collection no longer has to invade people's privacy by forcing them to give
the government extensive records of their economic activity.

On the other hand, taxation is good because it reminds people there are costs
to government services when they have to actually pay the tax, and in addition
you can use a tax to inject a market signal about costs that would be normally
externalized.

[1] Unfortunately, MMT implemented by any government will likely be "in
addition to" rather than "instead of" existing tax mechanisms.

