Modern Monetary Theory

Been busy with moving, and didn't really wanna post a reply in the coronavirus thread more than 100 pages (!!) after the question was posed, so I thought I put it here. I hope that's ok with the mods.

The thing to me is, if people like Sanders or AOC are proposing big spending measures and the first response from another politician or television pundit would be "INFLATION!!!!" I would hug him, pet him and tell him what a good boy he is. According to MMT, the question of inflation is exactly the conversation that we should be having, and not 'affordability'. How many times has Sanders been asked about the affordability of M4A and how he will pay for it during the dozens of debates? 15 times? 20 times? How many times has he been asked about the inflationary effects of it? A big whopping 0! If we got to the point where the first response was inflation concerns, MMT would have achieved moving the debate a considerable bit already. Alas, we are definitely not there yet.

This being said, for reasons already mentioned in this thread, you are correct in arguing that MMT economists are significantly less concerned about the inflation effects than other economists. This does not mean, however, that MMT does not consider government spending to be inflationary whatsoever. Add a couple zeros to Trump's $1200 to every American and you will certainly have runaway inflation.
Interestingly, as well, in contrast to the majority of economic crises, this Coronavirus crisis might turn out to be, and in part is already, a crisis of supply rather than demand. The choking up of international supply chains and compulsory closing of production facilities might actually mean that, in response to expansionary fiscal policy, companies cannot increase supply (as they usually would in the face of increased demand), which might incentivize them to increase prizes instead - inflation. Similarly, if a significant part of the workforce were to get sick at the same time, this also causes companies to be unable to increase supply in response to government spending, also causing inflation.

So to your question, there's at least a chance that we might actually see significant inflation if shit were to really hit the fan. But if it doesn't, and I still think this is the likelier case, I'm pessimistic that it will change anything. Warren Mosler, who I have talked about before in this thread, being the financial wheeler-dealer that he is, is very well connected in DC and has, according to him, gotten to meet quite a substantial amount of senators and representatives over the years. He said that there are a lot of politicians who actually understand the way appropriations bills create the money necessary to fund the spending in it, but they are either unwilling to say it aloud because it suits their political objectives, or because they are afraid that it will hurt them electorally. Note that even Sanders, having had Stephanie Kelton as his chief economic advisor, still yields to the government narrative of having to come up with taxes to finance his policy proposals. I really hope that someone like AOC, who definitely understands MMT, will be bold enough to go all out MMT and really test the argument that you cannot be elected openly espousing MMT tenets.

I will get to some of the other posts in this thread that I haven't responded to a couple months ago tonight hopefully.

 

I love that people on here are smarter than I. In some areas.

 

It should be noted here that this is a theory of commercial bank money creation called 'Endogenous Money Theory' which is not unique to MMT. Notably, some of the economists most responsible for this theory such as Bob Pollin are actually quite critical of MMT. Bob Pollin is definitely no mainstream economist, but even among those this theory is now relatively widely accepted.
As you are mentioning your economics education, this is one of the most frustrating things about mainstream economics to me: there are things they know to be wrong, but just continue to put into their textbooks. The money multiplier theory of commercial bank money creation is still taught in every intro to macroeconomics class, while even such mainstream outlets as the Bank of England calls it a bogus theory without any empirical foundation in its working papers. It is insane!

Two points about this:
(1) MMT is quite skeptical of fine-tuning the economy through ad-hoc measures as well. What it would like to do is have as many programs as possible that are countercyclical and thereby reduce inflationary or deflationary pressures automatically, without the government needing to act in the form of passing new legislation.
(2) Instances of actual hyperinflation are fairly rare in the developed world. What MMT would argue is that they are fairly consistently an issue of supply constraints rather than excessive government spending. If you have to ship 30 something percent of your annual output to the victor countries of a world war, as Weimar Germany had to do, this will cause hyperinflation. If you completely destroy your productivity by breaking up your land into tiny parcels and giving it to people who have no clue about farming, as Zimbabwe did, this will also cause hyperinflation.

 

The natural rate of interest is a concept that comes out of mainstream economics, and as I don't think the underlying theory makes much sense, I have a hard time saying what the natural rate of interest should or should not be. Given how I interpret the empirical mainstream literature on this topic, even mainstream economists don't know.

What I will say is that without FED intervention, the federal funds rate (=interbank lending rate) will drop to zero.

This is because of the following (sorry for the wonkiness): I have already established in one of my previous posts that by accounting logic, the deficit or surplus positions of the private sector (foreign and domestic) and the government sector must equal zero. As it is usually the desire of the private sector to net save, and as they are incapable of running a deficit for any sustained period of time (in contrast to the government), the government usually runs a deficit (I believe I posted a graph of US fiscal positions since 1945 in a previous posts, which shows only a few years of surpluses).
Running a deficit means that the government creates more money by spending than it extinguishes through taxation. This means that commercial banks will end up with excess central bank money on their central bank accounts (Note that government spends by crediting commercial bank accounts at the FED with central bank money (also called 'reserves'), which in turn credits the government vendor on the account the vendor owns at the commercial bank). The commercial bank will then go looking for an interest bearing alternative for this money. Usually, it will find another commercial bank that is in need for reserves to either (1) satisfy their minimum reserve requirements for the loans they have issued or (2) to execute transfers of money, which in the US are always cleared through the central bank system. This other commercial bank will sell the bank treasuries in exchange for the reserves.
But what if government continually runs deficits? The excess of reserves will become greater and greater, while the supply of interest bearing alternatives for these reserves remain the same. The result will be that the price of the US treasuries will rise until their return if held to maturity is zero. In other words, uninterrupted, this process will lead to a zero interbank lending rate. As the FED usually targets a positive interest rate, it will intervene in the interbank lending market by selling its supply of treasuries in order to drain the excess reserves caused by the government deficits.

Rereading what I just wrote, I'm not sure I did a very good job of putting it in simple terms. Unfortunately, in contrast to some other MMT topics, I cannot really find a blog post that would explain it better. I hope it is at least somewhat understandable.

Finally, to your point of whether this implies that the natural rate is less than zero, my guess is that you are referring to the inflation adjusted or real rate of interest. The answer is yes, without FED intervention, the excess central bank money owned by commercial banks will, over time, lose value due to inflation.

 

This topic makes my head hurt. I am not an economist. But the thing that bothers me about this theory is what happens when we do hit a period of high or hyper-inflation? So, you print up a couple of trillion extra dollars and put them in the economy. If there is inflationary pressure, then what? The obvious answer under the theory is that you raise taxes to pull that money back out of the economy. However, you won’t find a politician alive who would raise taxes in a period like the late 70s.

 

Quite a few than me, in many areas.

 

Yes, I am all for the current actions. I am talking more generally. Outside of the emergency context, I fear there may be people who think we can simply print money for anything and any program.

 

You may not have noticed, but we actually have printed up a couple trillion extra dollars in the last 10 years.

 

The point it kicks in is when the money starts bidding up limited resources. You can give everyone $100,000, but everyone can't buy a Tesla with it because there's a limit to how much lithium we can mine. So Tesla will raise their price and people will say "we need higher wages to get the Tesla" and that's how you get 1970's inflation.

But it shouldn't be a problem to print money to keep people living in the apartments they are living in now for the duration of the pandemic.

 

Suscribed. 20 years since i Had my macro classes. So thank you all very much!

Dont mean to Go Off topic, but i am concerned about Marshall Plan 3.0/4.0.

I def do not see this virus going away within a year, so i therefore expect, at a Minimum, two more bailouts (induced comas) before election day. The other alternative (Cost) is we allow 65 year olds to lose 1.5 years of life on AVERAGE (BIG wild spitball estimate. And big Savings to social Security)

Given the reasonable assumption that international Major state holders of (e.g.China) US debt know that their Bonds will have big X$ Less value and assuming Marshall Plan 3.0/4.0, is IT not reasonable to expect a Dollar collapse, given the amount of assumed failed Industries (Banks, housing (2008),health Care payments/private bankrupcy etc.) And catastrophic Loss of taxable income?

World trade has stopped and will continue for the forseeable future. Assuming, the total debt to Rise, 2x/3x4x (value of Dollar/Interest rate), is this not a perfect oppurtunity for Nation States to drop the $ and Trump, creating a new world alignment in a Vacuum?

I feel like we are playing hysteric checkers in a 50 year old chess Game.

Thanks in advance for any anwsers.

 

The problem is, what is the other option? Everyone is in the same boat, although slightly different sections of it.

I'm less concerned with the long term than I am with the immediate problems of people suffering right now. You need to "respect the threat", as they say.

 

This is why short term spending or short term printing to lend to banks is important.

You need to be able to remove the cash inflow when/if inflation kicks in.



So if you print money to build 'bridges to no where' and inflation skyrockets, then you stop building bridges.

Or you stop QE.



This is much harder to accomplish with permanent spending programs, that is what many lefty people want to do, use MMT to set up long term "permanent" social spending programs, those programs would be very difficult to cut if the economy hyper inflates.


Then again, maybe it is smart because if your government is spending lots of money in programs that the voters like and do not want to cut, how do we balance our spending? Tax raises.

 

Market value is not money.

Then again, you do use cash to buy stocks, maybe there is where the inflation has been hiding.

 

The problem with "temporary" government crisis spending.

https://www.economist.com/briefing/...radical-economic-policies-to-counter-covid-19

 

But that's not necessarily a bad thing. We put in place many measures during the Great Depression, and most of those stuck around, and they are great. This may be a problem, but it also may be an opportunity.

 

Cross linked article'
Excellent modeling article:
https://medium.com/@wpegden/a-call-to-honesty-in-pandemic-modeling-5c156686a64b