Modern Monetary Theory

The economist with their take on MMT.

https://www.economist.com/finance-a.../is-modern-monetary-theory-nutty-or-essential

 

The use of mathematical models is what screwed up economics. They tried to treat a super complex chaotic problem like Newtonian physics.

 

Negative interest rates is kind of the opposite of MMT in a way.


MMT claims that there is not need for debt, money can just be created with out having to record a liability.

With low interest or negative rates, there is still debt, but it cost is very low.

Negative rates mean people are actually willing to pay you to lend you money.

Investors lose money to buy treasuries from Japan and Germany, why? because they think they are a safe place to park their money.

So what you have is not MMT is Kenesyan economics of government spending with low cost borrowing.

As long as people are willing to lend money at low rates to the government, this can go on for a long time (see Japan).

The problem is that usually low government debt cost tends to happen when the economy is slow or investors don't have other "safe" options.


In theory when the global economy booms, there are more options for investment, so people will lend their money to higher return projects, pulling it from lower interest investments (Government debt), so the cost of governments to issue debt gets more costly and they have to balance their budgets or pay higher interest on their growing debt.

Balancing budgets is easier when governments can raise taxes easily or if they have short term spending obligations that can be scaled back quickly, when government future liabilities are tied up on long term commitments, then cutting debt becomes difficult. This is the difference between stimulating the economy building roads vs higher pensions promises.

 

Indon't know how this relates to Magical Monetary Theory, but the idea of negative interest rates that ceezmad and others have mentioned pops up here, too, n an article about the idea of creating money that expires.

https://www.npr.org/sections/money/2019/08/27/754323652/the-strange-unduly-neglected-prophet

Silvio Gesell hated money. A German entrepreneur who moved to Argentina for business in the late 19th century, he witnessed a massive financial crash in 1890 that convinced him that money was behind the world's economic problems: poverty, inequality, unemployment, stagnation.

The problem, Gesell believed, was that money served two roles that often came into conflict: It was a way for people to store wealth, and it was the thing everybody needed to conduct business. The fact that money could store wealth meant its holders had a reason to cling to it, especially in crises like the one he saw in Argentina, when opportunities to safely put that money elsewhere looked grim. It was a typical story. When people got scared, they hoarded cash and brought business to a standstill. It led, Gesell said, to a situation of "poverty amid plenty."

Gesell wanted to create a new kind of money — a money that would "rot like potatoes" and "rust like iron" so no one would want to hoard it, a money that was "an instrument of exchange and nothing else." And the crazy part is that he did create it. Through a series of pamphlets, articles and books, Gesell inspired a worldwide movement that introduced a completely new form of money. It's one of the most fascinating, and largely forgotten, stories in economic history.

But after 70 years of obscurity, Gesell is making a comeback....​

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In response to the question, why donwe care about this now, the article sayeth...

When the economy enters a downturn, {central banks} usually cut interest rates to encourage spending. But interest rates are already close to zero, which could be a huge problem in another recession. For a long time, economists believed rates couldn't go negative for a simple reason: If saving in places like a bank costs people money, they will instead just hoard cash, which won't cost them money. Cash becomes a roadblock to economic stimulus. One way around this is higher inflation, which devalues or "taxes" money in real terms, but central banks like the Fed have been showing that they have much less power to increase inflation than previously thought.

. . . .

In our technological age, a Gesellian system of unhoardable cash wouldn't actually have to involve stamping paper bills for a fee. It could involve high-tech physical cash, such as magnetic strips that allow the government to impose a "Gesell tax" on holding cash, as one economist proposed some years ago. Harvard University's Kenneth Rogoff has been advocating we get rid of paper money altogether and move almost completely to a system of electronic cash. He believes it could give central banks the power to impose negative interest rates deep enough to rescue our economy from future recessions. In all of this, Gesell was a pioneer.​

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I don't really like the idea of a completely electronic economy, since a cashless society is like to be a surveillance society, but there it is.

If this doesn't add anything, my bad.

 

I'm afraid that this will lead to further financialization of the economy where instead of getting bank accounts people will get a new sort of easily accessed gold or oil or private corporate bond fund owning something that doesn't lose value relative to the economy. That would just create a larger scale version of the current problem where rich people are putting money into real estate and paintings and commodities. First, you get asset inflation, where prices of some things get out of whack with the rest of the economy. Second, turning houses and industrial commodities into wealth stores is bad because people need to live in houses and punch metal into doodads and turn oil into getting to work. Those things held as wealth reserves couldn't be used for those activities because you can't have your cake and eat it too. Or people put the money into something semi-fictional, like gold or stocks, or fully-fictional, like bitcoin, which doesn't solve the problem either.

The problem Gesell is getting at is that money velocity has to increase to improve the quality of life of most people (so this does connect to MMT), but I don't think his solution will work. In fact, it would hurt the poor who couldn't access my nightmare hyper-financialization system and it does nothing to shift the money between classes. I don't really see an unmanaged solution to the problem of wide-ranging wealth (which is good) running into the physical limits of resources and creating a mess (like the end of the 1970's). MMT is a managed solution. Maybe you can combine spoiling money with a guaranteed-income system, which would get you that management combined with forced inflation, but I honestly don't think our current problems come from getting middle-to-poor people to spend money they get.

 

You know who would love this idea?

People that sell gold.

If you can't hoard cash, gold is the next best.

Or what spejic said.

 

Indeed. With so much manpower at war and so many resources used for war, the economy actually did reach its physical limits of what it can produce, and so without government intervention (price controls and rationing) we might have had a runaway inflation due to excessive government spending on military during these times. Note though that MMT economists would argue that this is not the case now though - in response to increases in government demand companies would increase production rather than prices as even with the current relatively low unemployment there is still considerable slack in the economy.

This is not a critique of MMT though. MMT, in its sectoral balances analysis, differentiates three sectors - government, domestic private, and foreign sector. The deficits and surpluses of these three sectors have to net to zero by accounting logic.


The above is maybe the most used image by MMT economists. It depicts the sectoral balances in the US 1952-2010. Deficit of one sector is the surplus of another. Whenever someone says, she wants the government to run a surplus, she by necessity also says that either the foreign or private sector have to run a deficit.

Partially correct. The FED is less independent than one might think it is. For one, the FED as an institution is a creation of congress, and its chair is appointed by the president. For another, operationally, as the analysis of both fiscal as well as monetary operations done by MMT economists would imply (foremost economist to be named here would be Scott Fulwiler), the Treasury and the FED are cooperating constantly in their daily activities. It would be impossible for the FED to hit its interest rate target without cooperation with the Treasury.

With regards to rich f***, there actually was a rich f*** called Warren Mosler who, independently of MMT economists, came up with similar ideas of how government spending operates, and, upon discovering that there actually are some economists who share his views, decided to fund the UMKC economics department for a while. Unfortunately the bureaucracy of UMKC at some point pissed him off for some reason so he stopped doing it.

This is a huge problem, and this is why Kelton is so into framing. Republicans have just been waaay better at this than Democrats. It is for this reason that the affordability question never comes up when it comes to military spending but always is at center stage with social spending (see the current Medicare for all debate).
There is a book by another MMT-influenced economist called Jamie Galbraith that goes into detail regarding this called "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too"

Technically incorrect - MMT would argue that money is debt - it appears as a liability on the FED's balance sheet. What is true is that there is no need for governments to issue liabilities with an interest rate - this is a voluntary decision by the government. There might be reasons for such a practice (if one thinks interest rates are an effective tool at curbing inflation; or if one thinks it is good for an economy to have a risk-free tool of saving), but I believe most MMT economists would prefer government to abandon this practice and let the rate of interest on the interbank money market fall to zero.

This is where the MMT analysis significantly differs. It would argue that governments are always in control of the interest rate (This is what setting an interest rate target is all about, after all). In a globalised world, you would think that Japanese investors would eventually come around to invest in other assets (if nothing else, at least other assets deemed absolutely safe such as other government bonds like US treasuries, which until 2008 would've provided a better return than Japanese ones), and that should've driven up their interest rates, especially given how indebted the Japanese government already is relative to their GDP. If the role of government debt is to support the respective central bank in their interest rate target and not to finance government spending, then it makes much more sense why some countries can have huge debt but zero interest rates but others have much lower debt burdens but higher interest rates.

 

Well if Sanders or Warren win, that may mean a big internal fight for speaker of the house after the election.

Maybe the left can try to primary Pelosi.

 

Well Bernie already said he's going to bring his Bernie Bros to West Virginia if Manchin does not comply with his policies, so why not take em to SF as well

I would say Democrats are uniquely great at shooting themselves in the foot, but actually I believe more that they hide their disdain for policies that would actually help the working class behind their silly affordability concerns. But hey, next time the military needs another quadrillion the floodgates will be open again.

 

Oh hell's no, outsourcing, robots and now MMT want to kill-off accounting jobs.

I guess people do not understand the basics of double accounting.

Hey, Enron also did not like it, and they got away from it for a while (that is very simplistic of what they did)



I do believe that Algebra is even older than double accounting. Maybe we can also get rid of Algebra, Many high school kids would be happy.

 

Well Bernie isn't a Democrat.

 

It's been re-invented multiple times going back 2000 years, but it started to be the standard around 500 years ago, so I say 500 years old.

 

Or even the US, as we pumped lots of money into the economy through quantitative easing during the Great Recession to prevent catastrophe and as we recently started again to.. wait, why are we doing QE now? Do I even want to know? Now I'm scared.

 

I'm not sure I like that. Money isn't just a means of exchange and a store of wealth, it is a thing in and of itself. You need that inflation to keep the velocity of money up. Also, those wealths it is a store of are things in and of themselves as well. If your nation gets rich sending natural rubber all over the world and then the world no longer needs it, it means your standard of living has to go down, which means that money is going to be worth less no matter what the government's fiscal and monetary policy is. You can't remove human nature and the real world from thinking about money.

You need one other variable to tell what it means. GDP is the ratio between money supply and velocity, so you need either GDP or velocity. Since we know the GDP has been on a fairly constant slow growth for the last decade, it must mean velocity has gone down if the money supply has gone up. Here is the graph of just how much this has happened (I made this in FRED):



So now we have a picture of what the overall economy is doing. But that isn't enough. We need some knowledge of how different parts of the population are being influenced by this, because it isn't equal. As a poor person, I know my velocity hasn't changed - I spend what I get on rent and food and necessities. So it means rich people are keeping the money amongst themselves and not spending it on, say, R&D-type investing or employee wages. The continued QE is just going to the stock market and fancy French paintings. The question is is the resource-limited real economy doing the best it can and spreading the rich's riches will just bring inflation, or is there slack in the economy and will putting money in poor people's hands make things better for the vast majority? That's an open question, but I'm kind of leaning towards the latter.

I blame inflation on resources. But I do agree with MMTers that the blame isn't just on printing money. I think increasing green power generation and the further rise of intangible goods will further weaken conventional economists arguments.

 

Thinking about this, I may have misunderstood your question. Instead of asking "what does an increasing money supply mean to the economy?", you may have been asking "why is the money supply still being increased?". I'm not totally sure of the details, which is why I made that "I'm scared" post above. But it's clear Trump wants to continue to goose the economy at any price and that no one in charge of the money is actually worried inflation will result (because those people have a religion, and that religion's most holy commandment is "don't increase inflation"). I don't know how much of this is under Trump's scrutiny. Clearly he thinks the stock indices are important, and this is a great way to keep them up.

 

I can't say because they aren't even admitting they are doing it, let alone why. The non-scary answer is just that Trump wants a booming stock market. The scary answer is that they know something about banks they are not telling us and are propping things up.

I do know the results. We are getting asset inflation leading to bubbles which will pop. And I also know it's not a bug, it's a feature. It's another round of rich people get richer, non-rich people get the bill.

 

Lots to unpack, but this first jumped at me, bank loans can be secured with collateral or unsecured.

Sure banks can lend on demand with out needing deposits (by law they have to have a % of deposits as a safety reserve, but that can be done away with).

But if banks do lend according to demand, but then the ability to payback of those that took out loans falls, banks will have a shortfall, specially if depositors get scared and start to pull money out.

India is experiencing something similar to this with non regulated lending banks going bankrupt because they can not collect on their loans.

So the solution for this tends to be bank bail outs by the government.