MMT says that the only constraint on spending is inflation, but also turns around and says that you can always print more money. That’s a contradiction.
Printing more money does not change the real wealth in the economy. You can’t create additional purchasing power with an increase in the money supply because prices will adjust to the new level.
I'm not criticizing your logic, but I feel like my entire adult life (I'm 42) I've been bombarded with tales of EVERY proposal will "obviously result in inflation". During this time gold has also been upheld as the only safe investment, doom is always around the corner, Europe has been on the brink of financial collapse, etc
At this point, any argument, even those that might be completely correct, that something will "obviously result in inflation" is suspect. All I've learned in this time is (1) Economists and politicians speak different languages, (2) Economics has done very poorly when it comes to modeling the future - there's always SOME model that predicted some event, but no model that has been widely reliable, and (3) Doom has been falsely predicted a ton of times, but that real financial hardships absolutely CAN happen.
Which leaves me to conclude that I can't trust what I hear, that someone is probably right, and that I have no practical way to know who that is.
The real issues are that:
* Inflation is treated as a bogeyman in the investor managed media rather than an integral and necessary part of a monetary system (you want real pain? try DEflation).
* Complete misrepresentation of the risks of hyper inflation and a total misrepresentation of why it happens (e.g. idiotically pretending that all zimbabwe/weimar/venezuela did was spend just a little bit too much on social programs).
I kind of wish inflation were kept in band between 7 and 12% via fiscal spending and taxation (as MMT says is possible). That would keep it below the level at which it would impact growth and above the level where wealth slowly gets hoarded by the 1%.
Low and middle income people tend to have little in the way of savings (40% of Americans are one paycheck away from poverty) and a lot in the way of debts - debts which will be constantly devalued in a high inflation environment.
Why wouldn't lenders just charge higher interest rates to offset inflation?
Which is true.
OTOH, MMT observes that the government doesn't actually need to acquire debts to pay for a gap between spending and revenue in the first place.
> This argument falls into the same boat: sure, the banks will change how they price loans, but for the lucky guys with loans it’ll be glorious!
Sure, and that's why
runaway inflation is bad. MMT doesn't favor more-inflationary policy, it just recognizes that inflation, not the availability of revenue, is the constraint on government spending.
The government can pay its own debts as many times as it wants.
It can also dial the interest rate up and down virtually at will through QE or raising interest rates.
It actually makes less sense to think of government debt as debt and makes more sense to think of it mainly as a publicly run savings account.
The government can also push private sector loan interest rates up or down at will through the setting of the base rate.
Obviously governments can pay off debts as often as they want, and there was a time when that was common. But a government that runs up big debts and pays them by making the currency worthless soon has a hard time finding anyone willing to lend it money.
But sometimes they manage. Russia is notorious for defaulting on its debts (which isn’t the same thing as paying with devalued currency, but should be a lesson to future lenders), but they still manage to borrow money. But they do have to pay higher interest rates than other countries to make up for the higher risk of default.
As I said, it doesn't really make sense to think of the national debt as a debt. It's a government run savings account accommodating the private sector's desire to save money.
In the same way if maxlybbert printed maxlybbert dollars, spent them and then "borrowed" them back it wouldn't really be doing it because he actually needed them. He's providing a service.
I don’t really care whether it’s truly borrowing when a country sells bonds and promises to pay the bondholders back with interest. As long as the country feels it has an obligation to pay those bondholders, it has a temptation to pay them with devalued currency. Most countries don’t do that because they expect few people will buy bonds the next time the government wants to sell some.
That is one way to put it, but you could also say inflation punishes responsible people who work and save money, and rewards less responsible people who spend beyond their means.
If you pretend that wealth is fairly distributed it makes a certain amount of sense.
This isn't true, or at least there isn't consensus around that idea all of the time
> doom is always around the corner
That's just the boom and bust nature of the economic cycles. It's true of any other natural cycle, from the fall from paradise to the fall of Rome. I recommend Georges Canguilhem "The Normal and the Pathological", though I must admit I didn't even fully understood that book when I read it as a teenager.
I'm not saying it's true, nor that "most" people were saying it, just that enough loud voices were doing it.
My point was not that (often uninformed) people have been feeding enough BS about the economy for so long that "obvious" is untrustworthy.
The money supply has almost quadrupled in the last 10 years, yet inflation has been low.
MMT says that spending new money only causes inflation when the money is spent on stuff the private sector is also bidding for. Since that's pretty much everything that the government would want to spend money on, MMT & conventional economics are not in much disagreement here.
"MMT says that the only constraint on spending is inflation, but also turns around and says that you can always print more money. That’s a contradiction."
You can always spend more money, but only if you tax enough back to tame inflation. It's a constraint, not a contradiction.
"Printing more money does not change the real wealth in the economy."
Exactly. MMT doesn't create goods & services out of thin air, but what it does do is unlock idle capacity in the system. If Joe Sixpack is unemployed, he's a resource that the private sector is not utilizing, but he's a drain on society because somebody is paying for his food & shelter. MMT and the jobs guarantee would utilize that resource for good, and it won't affect inflation or the private sector as long as the jobs guarantee wage is at the minimum wage mark.
Caveat: beginner level understanding of MMT
Explained by "traditional" (e.g., Keynesian) economics already:
When QE was introduced, the US political Right went ape shit talking about inflation. Krugman (for one) predicted it would be fine because of interest rates, citing Japan as an example:
> Everyone knows about the infamous open letter warning Ben Bernanke not to engage in quantitative easing, lest he cause inflation and currency debasement; many are also familiar with the remarkable unwillingness of that letter’s signatories to admit, after more than four years of low inflation and a rising dollar, that they were wrong.
If the private sector is not spending, then the public sector (gov't) should to take up the slack in a lack of demand:
> The problem, of course, is that you can’t cut interest rates below zero (if you try, lenders will just hoard cash.) So the Fed simply can’t do what the rule says it should.
> This is why we need a huge fiscal stimulus, unconventional monetary policy, and anything else you can think of to fight this slump. Quite literally, the usual rules no longer apply.
There are a finite amount of resources in an economy, and when an "infinite" amount of cash goes after that, you start to big up prices: inflation. I don't think that mainstream (Left-leaning) are against deficit spending to boost the economy; it's just that many of them don't see MMT is adding to what they've already been saying.
Well, he was wrong on that point.
>Crazy as it sounds, several of Europe’s central banks cut interest rates below zero in 2014, and then Japan followed. By mid-2016, some 500 million people in a quarter of the world's economies were living with rates in the red
He revisits the point:
> We now know that interest rates can, in fact, go negative; those of us who dismissed the possibility by saying that people could simply hold currency were clearly too casual about it.
The Great Recession was really an "interesting" time for economists: one usually can't run experiments on macroeconomic theories / hypothesis. :)
I.e. some form of tax on held cash?
So, I can tell you that Warren Mosler at least is formulating the theory a bit differently. He starts with the fact, or the claim, that taxes are the primary driver of demand for a Fiat currency. I argued with him about this point. Economists with other views to balance out MMT.
So, I can tell you that warren Mosler at least is formulating the theory a bit differently. He starts with the fact, or the claim, that taxes are the primary driver of demand for a Fiat currency. I argued with him about this point. But if you except it, then it follows that taxes create a scramble by many participants in the local economy to obtain enough money to pay those taxes. Then the government prints the very money that everyone is scrambling to obtain. Warren Mosler concludes by saying that the government is not constrained in how much debt it can take on because a dollar and a treasury bond for a dollar are just two different types of accounts that exactly balance each other. To me this is ignoring everything outside the system. It’s like saying a bank can leverage its reserves as much as it wants because every loan it gives are just assets and liabilities on different sides of the ledger. MMT always acknowledges inflation matters, but it seems to be lip service.
I have come to describe the macroeconomics of the USA very simply:
1. Every country fights to protect its exports because that’s what lets its citizens import everything they need. Russia will fight to export natural gas. And so on.
2. After Bretton Woods, our chief export is not even Music and IP, it’s DOLLARS. We print them, and for decades everyone arouns the world produced goods and services for us, in exchange for dollars.
3. Our dollars and treasuries are used as reserves by banks. Also we engage in petrodollar warfare. We used to buy oil from Saudis, and now we sell weapons to them for the same money we gave them. And so on.
4. The USA is unique in its immunity to inflation and printing. Most countries cannot sustain such high debt to GDP ratios without their treasuries becoming devalued. USA treasuries may eventually face competition from China etc. but we still have a lot of demand for our export, by the world banks and consumers.
5. Being able to print your own currency and run your own monetary policy is essentially the power to impose a flat tax on your local economic activity. When PIIGS countries had their own currencies, they could finance public parks etc. When they joined the Eurozone, they lost a lot of that power and their public infra got bought by German banks. Greece, the “originator” of DEMO KRATIA (power of the people) lost power to foreign capitalists. People and jobs emigrated, capital flight ensued. This also happens in the USA on a city level (Detroit) and state level (Illinois and Puerto Rico).
6. Conclusion: Having your own money supply allows you many chances to print your way out of debt, and also run monetary policy. That always leads to stronger local communities vs the foreign capitalists. But doing too much causes capital flight and an increase in money velocity, ie devaluation of your local currency from an outside perspective.
7. MMT correctly advocates, like Keynsians, issuing money to pay for infrastructure and Universal Health Insurance / Food / Basic Income. Because it can lead to more real economic activity. It’s like a startup that spends correctly on the things tht make it grow and provide a return on investment. More coins chase more goods and services so there is no inflation. In fact, it attracts real capital to the community. But if there is malinvestment and bad bets, too many of those cause inflation.
8. Inflation isn’t just redistributing from the lenders to the borrowers. It also makes the wage earners who aren’t immediately investing their currency into something else the losers. It makes a hot potato hotter and hurts those who don’t have great wealth management.
It seems to me that’s kind of half-a-loaf MMT. Or, to borrow from The Matrix trilogy, it's the spoon-bending level.
Where the full loaf (“there is no spoon”) is: Government is not constrained to take on debt at all to finance an excess of spending the over revenue. The idea that, if the State chooses to create net new tokens in the economy (remember, the key points of MMT is that fiat money is created by the issuing government spending and destroyed by the issuing government recovering it), it must seek the permission of someone with a surplus of existing tokens willing to sacrifice them for a greater number of future tokens, after which the government's pet (but “independent”) token-issuing body will see to the issuance of additional tokens is kind of bonkers, but that seems to be how MMT would view the current relation between fiscal and monetary policy.
The status of fiat being legal tender for all debts is what makes lenders unable to demand other currencies but they can execute forward contracts of X versus a basket of commodities for example.
So let's say that Joe Sixpack can't get a "real" job. Then society's choices for him are
1. Let him starve to death. Hope that if his alternative is starving then he will reform himself enough to get a job.
2. Give him money with no strings attached (currently various welfare programs, possibly UBI in the future)
3. Give him money but make him work a gov't job where he subtracts value (e.g. he is actively making things worse than if he was just not there)
4. Find some kind of gov't job where he creates less value than he is getting paid but is still creating positive value
If we ignore #1 (because if you believe #1 is always the answer then the rest of the conversation is pointless) then the question is who falls into bucket 3?
My guess is that you have two types of people, people who are not capable of doing productive work (which I'd argue are very, very few) and people who will choose to be unproductive because of the jobs guarantee (they know that they have a job no matter how badly they do it).
So maybe the jobs guarantee should be combined with a UBI with differing levels of support. Provide a UBI which covers basic needs and a jobs guarantee which provides a little more money. There will always be people who want to work just for something to do and there will be people who want to earn the extra money to improve their lifestyle. Then you don't force people into jobs where they create negative value.
Making money for all intents and purposes is the definition of creating value.
There are some exceptions, but they usually involve distortion by the government or theft.
I think the MMT argument is that one can reduce the money supply through taxation. From the article:
> In MMT’s ideal world there would still be taxes, but their main purpose, aside from lessening inequality, would be as “offsets” to keep inflation under control. Taxes would drain just enough money from consumers and businesses so total spending in the economy won’t be excessive.
So currently Left-leaning people are labeled "tax and spend": you increase revenues, which you then turn around and spend on programs/infrastructure. With MMT it's the opposite (AFAICT): "spend and tax". Run the proverbial printing presses to pay for the programs, and then use (higher?) taxes to drain the 'excess' money supply.
MMT also (AFAICT) seems to make the central bank subservient to the finance/treasury people, instead of independent (which is the modern way of doing things). This control of interest rates is important for technical reasons:
The MMT argument is stronger: taxes only exist in a fiat money system to reduce the money supply (and, to create behavioral incentives with specific targeting.) Viewing them as “paying for” government spending in a balanced sense where you need $1 in revenue (or debt financing which you pay back with interest to a lender) to pay for $1 in spending is, through an MMT lens, wrong, and the result of applying commodity money thinking in a fiat-money world.
> MMT also (AFAICT) seems to make the central bank subservient to the finance/treasury people, instead of independent (which is the modern way of doing things). This control of interest rates is important for technical reasons:
It need not: a system which deeply incorporates MMT might retain a central monetary authority separate from the authority that makes spending and tax-targeting decisions (calling this a “fiscal” authority is perhaps no longer apt), exercising interest rate levers to manage inflation and employment levels as the Fed does today; it might even give it more tools by assigning it then ability to set the rates of broad, non-behaviorally-targeted taxes (like to control a parameter that is a factor in the rates of all income tax brackets), as MMT recognizes that general tax level is an important money supply lever and nothing else. The importance of public confidence in the money supply remains in MMT, and having technocrats insulated somewhat from the pressures of legislative politics primarily responsible for administering such policy under broad policy goals remains, as well.
It probably wouldn't be constituted the way the Fed is, which is driven by the desire of the government to give bankers confidence in the currency because the government will be going to the bankers to borrow debt in the currency to fund deficits.
Because what it would do is eliminate the practice of acquiring debt to finance “deficit” spending in the first place, which changes the constituency at which monetary policy is aimed.
I think this is like the image of the snake eating its own tail, and what you see may depend on whether you see start at the end-end of things or the tail-end. Or the optical illusions that change if between duck/rabiit, etc.
spending = taxes + printed money
new money supply = old money supply + printed money
But, I believe that MMT is saying that taxes and spending could be logically separated by assuming that all taxes go to the shredder and all spending comes from newly printed money:
spending = printed money
new money supply = old money supply + (spending - taxes)
So it wouldn't be 'increasing spending by taxes', it would be 'reduce inflation by taxes'. The size of 'big-gov' should be measured as spending/GDP regardless of the actual tax rate. The tax rate would float depending on the current inflation target instead of on the current federal spending.
The article follows that up by saying:
>> As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment
and later on:
>> To stabilize employment, MMT would add a federally funded, locally administered job guarantee. Government would employ more people in slumps than in booms.
So I think the idea is that MMT recognizes that inflation would indeed occur if you kept printing money without a demand for that money, which they say will be supplied by government-sponsored full employment.
What I don't understand is: is there a situation in which full employment has already been achieved and the government just keeps printing money for new initiatives, and we're back to inflation?
Nope, it's when too much money chases too few goods and services. Inflation is everywhere and always a dynamic process. The federal reserve can print 100 trillion dollars and credit it to their own account and it won't affect inflation at all until they start spending it or transferring it to parties that will.
Imagine you're trying to make a meal and some incompetent dummies want to do some work in the kitchen. It might turn out that someone competent does better work when dummies are not interfering with his work and instead are watching TV. It's called "Too many chefs in the kitchen". Full employment and job creation are not necessarily good for the economy.
Again, I am not here to defend this theory. In fact, I have witnessed your anecdote myself and agree with the premise, at least on a micro scale.
Are you trying to describe unsuccessful startup founders?
If you have more money chasing the same amount of goods you get inflation. Yes. But if supply is currently in excess, or if production is well below production capacity, then inflation is much less likely. I'd argue that in today's international economy, there is actually a huge excess of supply capacity that is under utilized.
By "supply capacity" here do you mean idle capital? I'm interested in this, but I'm not really sure what metrics show it.
If you believe that there is untapped productivity in the economy then, by increasing money supply and spending the additional money in those areas, it is possible to increase productivity whilst avoiding inflation.
No, it's not. And that's backwards: MMT says that because you can always print more money, the only constraint on spending is inflation, not revenue, and that taxation serves the purposes of creating incentives by specific targeting and limiting inflation by it's overall level, but doesn't actually “pay for” spending in the balanced sense this applies to participants in an economy who are not the sovereign money issuer of the primary currency.
The key upshot of this is that:
(1) the idea that an excess of spending over revenue must be financed by debt owed to some particular party is an artifact of structures which obscure the fundamental nature of fiat currency and try to mimic commodity-based currency; and
(2) the idea of long-term budget balance as a goal is bunk Ina fist money system; in fact, as base money supply is tokens created by government issuing and spending them and destroyed by government recovering them, having a money supply in such a system is synonymous with long-term surplus of spending over revenue.
> Printing more money does not change the real wealth in the economy
> You can’t create additional purchasing power with an increase in the money supply
You can't create additional aggregate purchasing power that way, but you can create new purchasing power for the entity holding the newly-printed money (at the expense of purchasing power of those holding existing money of th same currency, and with three side effect of also tranferring purchasing power from all holders of assets denominated in the currency to all holders of liability denominated in th currency.
No, but you can create wealth with that newly printed money. Of course, as soon as you print it you are diluting the value of all other money which one might argue is unfair, but on the other hand is the rather arbitrary model of redistribution we happen to have landed upon right now completely fair?
And setting aside fairness, is the current economic model we've come to right now even roughly optimal?
> You can’t create additional purchasing power with an increase in the money supply because prices will adjust to the new level.
This isn't "wrong", but I wonder if it's too simplistic to accurately describe the current globalized & automated economy.
I think the point is more thatn printing money and transferring it to treasury coffers effectively is a tax on anyone holding USD. More government spending -> bigger deficits -> more money printed -> higher inflation (taxes). That's my understanding anyway.
If I have a car, I own the car. If you break in and steal the car, then you have stolen from me. But if the car company that produced the car decided to overproduce so that there is an excess used car supply in the market (lowering prices), well sorry friend, but the car company didn't steal from you.