Search Results for : MMT

MODERN MONEY THEORY: How I came to MMT and what I include in MMT

New Economic Perspectives has this marvelous article MODERN MONEY THEORY: How I came to MMT and what I include in MMT by L. Randall Wray.

Of all the wonderful wisdom in the article, here is one quote that hits my hot button of agreement.

Monetary policy is weak and its impact is at best uncertain – it might even be mistaking the brake pedal for the gas pedal.

It is remarkable that an expert on the subject of MMT (sometimes mislabeled as Modern Monetary Theory) should emphasize this truth.

I think it is very important to understand that. From the Keynesian economics I learned from Samuelson’s book in 1he 1960s, the explanation is pretty clear. In other words, you can put on the brakes by taking money out of the economy – people cannot spend what isn’t there. Flooding the economy with money won’t make people spend it if there is not enough worthwhile things (investments) to spend that money on. Or as I say, “what part of no freakin’ customer do you not understand”? Hark back to the old analogy that you can drag something by pulling on its string, but you cannot push an object by pushing on its string. I just cannot fathom how Milton Friedman couldn’t get that simple concept. How could all the economists who were fooled by Friedman forget that basic truth?

In the current economic conditions, there is no additional productive capacity that is worth investing the trillions of dollars flowing into the hands of the rich from tax cuts and and Federal Reserve Bank “stimulative” monetary policy. A lot of that excess money is going into inflating the prices of stocks in the stock market. Companies are using what cash they can get their hands on to buy back stock. In essence the fewer and fewer shares there are, the higher their prices. It is also easier to raise dividends per share when shrinking the actual productive capacity of a company if there are fewer shares that get that dividend. People who own keep their shares in a company rather than selling them back to the company are getting a bigger and bigger piece of a smaller and smaller company. They think they are getting rich, but when the stock market finally crashes back to earth, they will find that they are not so rich after all.

Answers from the MMTers

New Economics Perspectives has the article Answers from the MMTers. In the article, they answer questions about Modern Money Theory raised by economist Jared Bernstein. Here is an excerpt from one of the answers that touches on one of my favorite misunderstandings about the Federal Reserve Bank.

The bottom line is that the Fed does not have veto rights over Congress. We rest assured by the twin facts that a) the Fed is a creature of Congress and can be brought to heel should that become necessary, and b) that the exigencies of providing a smoothly functioning payments system leaves no room for the Fed to veto the Congressionally-approved budget under which the Administration operates.

While I like most of the article, I did raise my favorite subtle gripe about MMT.

There is one issue that MMT tends to gloss over. The static accounting balances of the three sectors is true, but that does not necessarily constrain the economy in the short term. MMT has made the argument that with bank created money there is a debit for every credit. What they fail to talk about is that the debit to the private sector is the loan that must be paid back in the future, whereas the money given out in the loan is an immediate credit to the private sector. This time difference in the flow of money has a profound impact on the economy, but not on the accounting static balance. Ironically this very article does admit that Central Banks do not control the money supply.

I am not doubting the validity of MMT so much as I am asking MMTers to stop emphasizing the accounting static balance as an explanation. That is too easy to poke a hole in to try to use this to explain MMT to the unconvinced.

What Is Missing In Modern Money Theory (MMT)?

I think I have finally come to understand the key omission in Modern Monetary Theory (MMT). Close to the beginning of MMT Primer there is the chapter THE BASICS OF MACRO ACCOUNTING.

It is a fundamental principle of accounting that for every financial asset there is an equal and offsetting financial liability.

They using this accounting fact to justify later claims that banks making loans does not create net money. In this country, only the federal government is allowed to create money.

Accounting is essentially a static balance of assets and liabilities. An economy is not static, however.

When you get a loan from the bank, you make a promise to pay the money back later. However, you get the money to spend now. Your spending now stimulates the economy now, whereas the promise to pay back later will only have economic consequences later. The idea of spending now and paying later is promoted by business exactly because they know that you will be enticed to spend more money now if you don’t have to pay for it now.

During WWII, war bonds were not sold to finance the war. There was no need for the government to take back the money it had already created to finance the war, when it could just have created more money to finance the war. What the war bonds were for was to control inflation. With all of the country’s productive capacity going to the war effort, people immediately spending what they earned would have caused competition between too much money chasing too few goods. The government had to find a way to let you earn your income now, but get you to wait to spend it. So you gave the government back your money with the promise that they would return it to you later and add some interest to make it worth your while.

The point of this discussion is that the difference in time between when you get money and when you spend it or pay it back has a huge economic consequence.

The recognition of this difference may be implicit in some of the discussion of Modern Money Theory, but it ought to be more explicit. I’d hate to have our political leaders making economic decisions for our country solely based on the accounting balance idea only to figure out later that there is a time component that they needed to considered.

A Memo From MMT’s Legal Department

New Economic Perspectives has the post A Memo From MMT’s Legal Department. This post presents some interesting ways to interpret the insights of Modern Money Theory. Here is one example.

MMT’s determination that that a Job Guarantee is necessary because the state creates unemployment by imposing a non-reciprocal liability (i.e. a tax) that can only be satisfied by obtaining its tokens (i.e. tax credits), and thus owes individuals the ability to work for those tokens, is an argument about legal systems design. That is to say, the Job Guarantee is a legal remedy to the problem of legally-created unemployment. This framing echoes the legal arguments made by the British peasantry in response to the 18th century enclosure movement. When the state privatized farming and hunting lands previously considered part of the commons, peasants demanded compensation. Although the enclosure story focuses on the coercive creation of private property rights and the Job Guarantee story focuses on taxation , the underlying legal reasoning is the same: when the state prevents its subjects from subsisting independently from the state-controlled, monetarily driven, social provisioning process, it cannot exclude them from equitable participation in that process.

I had not seen the Job Guarantee in quite this light before. This is just one of the eye opening explanations in the post.

Explaining MMT and Debunking AMI: Positive Money

New Economic Perspectives has a post MMT and Debunking AMI: Positive Money . (Modern Money Theory, American Monetary Institute)

Steve Grumbine talks with NEP’s L. Randall Wray for Real Progressives LIVE. Topics include MMT and Debunking AMI: Positive Money and other important and relevant economic issues that affect the progressive agenda.

Here is the YouTube video of the conversation.

This is a wonderful interview that will introduce so many people about what Modern Money Theory is all about, and why it is so important for us all to understand it. That being said, let me go on to one suggestion for improvement that I have.

The one thing I think needed to be discussed and analyzed was the inflationary period from the end of LBJ’s term through Nixon, Ford, and Carter, and into the Reagan administration. To state that the last time we faced resource constraints was WW II might turn people off who remember the LBJ to Reagan period. I know MMT and Wray can explain it, so I think that omission needs to be fixed quickly.

Lead Story at Bloomberg Gives a Thumbs Up to MMT

Naked Capitalism has the article Mirabile Dictu: Lead Story at Bloomberg Gives a Thumbs Up to MMT.

Remember that Michael Bloomberg would have run for President against Bernie Sanders, he was that afraid of Bernie Sanders’ policies, it is a double miracle that a news outlet he owned would support an economic theory that justifies what Bernie Sanders wants to do.

Get ahead of the rest of the corporate media by reading what they will be telling us in a year or two.

The comments on the article are just great.

Here are some comments about the article.

March 14, 2016 at 8:33 am

If you had asked me 15 years ago what might break the educated classes obsession with inflation, I would have thought certainly bringing interest rates to zero and beyond and having multiple central banks flood banks with liquidity would certainly dispel the myth. Yet I still find it utterly mind boggling: after ZIRP, NIRP and repeated QEs did in fact bring this to fruition, the first thing that always gets mentioned when presenting MMT is: Zimbabwe and Venezuela (although the Bloomberg article for some reason forgets to mention Weimar Germany). After years of expanding the monetary base and lowering interest rates Europe is in a deflationary spiral, and they still trot out the inflation bogeyman (looking at you Janet Yellen).

This marvelous ability to hang on to a discredited theory in the face of all evidence is a blaring testament to the effectiveness of the education/propaganda system.

March 14, 2016 at 10:23 am

As Jesse over at his Cafe Americain continues to point out, its the credibility trap they are caught in that makes them refuse to see reality: if monetary stimulus doesn’t work, then what have they been doing for the past 8 years? And if fiscal stimulus is the only way to generate demand in a massively over-indebted private sector, then all the talking up of the economy for the past 7 of those 8 years has been a lot of distortions and lies.

The green shoots must’ve amounted to something by now or they were wrong all along and are not just incompetent, but lying thieves who saved their friends in finance while letting the 99% slowly and painfully die… and now, lucky us, we get fascism.

Watch Out, MMT’s About, As Bernie Sanders Hires Stephanie Kelton 1

Forbes has what I think is an unintentionally funny article, Watch Out, MMT’s About, As Bernie Sanders Hires Stephanie Kelton, by Tim Worstall.

Worstall spends most of the article giving a cursory description of MMT (Modern Money Theory) in which he begrudgingly admits that the theory is probably correct about what it describes. Then he finally gets to what bothers him about it. The emphasis below is added by me to show the part of MMT that Worstall still does not get. Or maybe that is the part, I do not agree with. In my mind, the evidence shows that the way he differentiates base money from banking system money has no basis in reality. Think dot com bubble. This was not created by the Fed, but it was created by the private sector and its stock market.

And their basic outline about money creation is true as far as I can see. If you’re a country with your own central bank you can print as much money as you like. And sure, you could indeed finance government just by printing more money. Print money, spend it, hey presto, you’ve financed government. Standard monetary theory also recognises this: we know that the Fed makes a pretty profit each year from printing Benjamins (20 cents of paper and 3 cents of ink really is worth $100 these days) and that’s worth perhaps $20 billion a year to the US government in seignorage. We really don’t complain about it either. That standard monetary theory then also says that doing too much of this (in more detail, printing or creating lots of base money, rather than the creation of credit in the manner that the banking system does) will be highly inflationary. Standard theory points to Wiemar Germany, post WWII Hungary and modern Zimbabwe as examples (that last so fun that the end series of banknotes were only printed on one side as they didn’t have enough “real money” left to buy ink).

At which point the MMT crowd say ah, but yes, that’s what taxes are for. Print the money, spend it, thereby injecting it into the economy, and if inflation rises then taxes are what sucks that money back out of the economy and thus kills off the inflation. And it’s that bit that absolutely terrifies me. The effect that idea has on the incentives for politicians.

I have to agree that worrying about what politicians will do to pervert an idea is always something that needs worrying about. But that horse is already out of the barn. The politicians are basically using MMT to enrich the rich. The real worry is that the public will find out what the rich already know. They will realize that there is no need to “balance the budget” on the backs of the poor. Furthermore the public will be mighty angry that they have accepted unnecessary suffering because the rich, who knew it wasn’t true, made them think that there was a good governance reason to accept the rigging of the economy to transfer middle-class wealth to the rich.

What truly frightens the rich is that Bernie Sanders understands the scam and he is trying to explain it to the rest of us. He has hired an expert in the theory, Stephanie Kelton, to be his economist for the minority on the Senate Banking Committee. Imagine what will happen if 2016 brings that minority into the majority, and they still have Stephanie Kelton as the chief economist.

The Mark-To-Market Flaw in MMT?

This is just a conjecture about whether or not using the mark-to-market method on any asset that you want to know the value of needs to be taken into account in MMT (Modern Money Theory).

My most recent post about MMT that was posted before I started thinking about this possible flaw was When Will the White House and OMB Ever Learn About Sector Financial Balances?

I haven’t figured out yet how to pose this question to MMT experts. Following the above link to learn what mark-to-market is, I am reminded that the issue is far broader than the example I am going to use to show the problem.

MMT has a nice theory that depends on their definition of what is and what isn’t external money and internal money. MMTers then describe how people and the economy must behave, based on these obvious definitions. The issue is not whether or not the definitions are logically consistent or not. The issue is how people and markets actually behave. The issue of stock value and mark-to-market, is that whether or not you, as an MMTer, believe the value of one’s stock holdings represents a fair account of real money or not, people and the economy to some extent behave as if it were real money.

The goal we are trying to achieve is not to come up with a logically consistent definition of money. That may or may not be a path to understanding how people, markets, and economies behave. Describing and understanding that behavior is the real goal. Intermediate achievements are only important if they get us to the ultimate goal.

My most recent posts that show what started me thinking along these lines are

A Critique of Modern Monetary Theory (MMT) and At INET Conference, Warren Adds Two Pieces to Her Financial Reform Framework.

Older posts that show that I have always had an interest in the ramifications of mark-to-market are Musings on Mark-To-Market and A Replacement For Mark-To-Market.

A Critique of Modern Monetary Theory (MMT)

Pragmatic Capitalism has the paper A Critique of Modern Monetary Theory (MMT).  The introduction states the following:

Neochartalism, also known as Modern Monetary Theory (MMT) is an interesting and relatively new arm of Post+Keynesian Economics (PKE) that has developed in recent decades and has become quite popular in the last few years largely on the internet.  As an arm of PKE there is much that is correct within MMT, but there are also some newer contributions made by the “neochartalists” that render the theory flawed and inapplicable to the modern monetary system.  Although I find that MMT is incomplete, it is important to note that their description of the monetary system is, in my view, superior to the neoclassical models that tend to dominate modern economic discourse.  I hope this critique will be viewed as a constructive criticism and not an attack on MMT.

A Google search will find you this definition of chartalism.

Chartalism is a term derived from the Latin word ‘charta’ meaning a ticket or token. Chartal money is the token for value, while metallist money is the thing of value itself. Precious Metal Viewed as Money.

I have only read 11 of the 73 pages of A Critique of Modern Monetary Theory (MMT).  I am not sure of what I make of it yet, but other readers of this blog might want to have their own go at it.

I stumbled upon this paper as I contemplated the possible wealth effects mentioned in the article of my previous post Nobel Prize Winner Robert Merton Slams Fed for “Negative Wealth Effect” Policies.  I am nowhere near settling the issue, but I will try to describe what that issue is.

My epiphany on the wealth effect came about when considering how the Fed can get out of its low interest policy regime. If it raises interest rates, then the economy collapses. If it keeps interest rates low the economy is no longer being stimulated by a policy that has lost its effectiveness. My first thought is that a massive government stimulus spending plan will have to take place at the same time the Fed raises interest rates. Then I started to think about what is really being taken out of and put back into the private sector by the combination of these policies.

I got to thinking about the current state of inflated assets (stock market) and the impact of deflating that bubble. The bubble exists only because people value their stocks at mark-to-market prices. The wealth doesn’t really exist, but people think it does and they behave accordingly. If the stock market collapses and assumed wealth disappears, the government hasn’t actually taken anything out of the private sector pot and put it into its own pot. And yet, there are huge effects on the economy. So it is true that the accounting of “outside money” is not the whole story. “Inside money” is important, too.

The MMT assumes that “inside money” is less powerful than “outside money” because each creation of “inside money” creates a balancing debt on someone’s books.  The trouble with mark-to-market accounting of the value of your stock holdings is the creation and destruction of notional money without any balancing debt creation or destruction.  I am using notional money to mean money that you assume you have because of mark-to-market accounting, but this money only exists if you could sell all your stock instantly at the current market price.  For small  investors this might almost be true sometimes.  If large investors or if many small investors make a similar buy or sell decision, then the mark-to-market price means nothing.  The act of changing your stock into actual money changes the market price. You will only get the amount of money for your stock as you will find a willing buyer will give you.

What I am trying to research is what all this means in practical and in theoretical terms.  This issue has been argued for thousands of years and is the subject of many PhD theses, books, articles, and Nobel Prizes.  So it’s not that I expect to come up with a definitive answer.  The point is to come to a better understanding from just looking into the question.

April 22, 2015

Now that I have read some more of the critique, I see a pattern developing. The author, Cullen Roche, seems to read into MMT extreme positions that I don’t think the proponents of MMT have ever taken, and then he criticizes those imaginary positions. There may be a few valid criticisms in what I have read so far, but most of it is knocking down a strawman that is the sole creation of Cullen Roche.

I think I will have to search elsewhere for what I am seeking. I am going to try to look at the composition of our money supply to see how much is outside money and how much is inside money.

Is It Time for MMT To Become Mainstream to Save Us from the Second Global Financial Crisis of the Millennium?

Apropos of my previous post, New Economic Perspectives has the article Is It Time for MMT To Become Mainstream to Save Us from the Second Global Financial Crisis of the Millennium? by L. Randall Wray.

In the New Economic Perspectives article, Wray is commenting on a Vox article Bernie Sanders opens a new front in the battle for the future of the Democratic Party by Dylan Matthews.

As Dylan says: “For years, the main disagreement between Democratic and Republican budget negotiators was about how to balance the budget — what to cut, what to tax, how fast to implement it — but not whether to balance it. Even most liberal economists agree that, in the medium-run, it’s better to have less government debt rather than more. Kelton denies that premise. She thinks that, in many cases, government surpluses are actively destructive and balancing the budget is very dangerous. For example, Kelton thinks the Clinton surpluses are nothing to brag about and they actually inflicted economic damage lasting over a decade.”

Yeah, Bernie Sanders.  Now if Bernie and Stephanie can turn Elizabeth Warren into an MMTer, we’ll know we are really making progress.  As a constituent of Warren’s, I have tried to use what little influence I have to get Warren thinking about MMT.