Oops, There Goes The Economic Tree Plant

Sung to the tune of “Oops there goes the rubber tree plant” (High Hopes).

What I learned from modeling the real world is that you always have to realize that a model is a simplification. If it were the real world, it wouldn’t be called a simplification. So, a simplification means you have left something out. If you left something out, and that something you left out becomes important, then you can expect your model to fail. So, you always have to ask yourself, what have I left out. When you have a good idea what you left out, you can always check it to see when it becomes important enough to invalidate your model.

When you have a balance between something worth investing and the amount of money available to invest (from the Fed), you can control the economy by changing either side of the balance a little and get large changes. When you have more money than there are things to invest in, then making more money is not going to help. You have to make more stuff worth investing. Or as Keynesians would put it, if there is not enough demand, you have to increase the demand. Or when you have a theory that works when there are two large forces roughly in balance, then you might not be surprised that the theory does not work so well when the forces are hugely unbalanced. This might be called a non-linear system like the ones that I spent 20 to 40 years modeling (depends on how you classify systems).

I have recently heard an explanation of the hyper inflation of the Weimar Republic that we are usually never told. If we use the very simple definition of too much money chasing too few goods, then what happened in the Weimar Republic was that the WWI reparations decimated industry so that it could not supply enough goods to match the supply of money.

You have to wonder what brilliant economist says that if there is too much money for the amount of goods we have, then the solution must be to make more money.

Sort of like the brilliant monetarists now who say that if there is nothing to invest in, then we have to make more money that has no place to be invested.

If it weren’t for the opportunities to outsource work to low wage countries, then there might have been inflation in wages. This is the inflation that the Fed is desperately trying to create, but cannot figure out why it is so tough to create. Of course, we did have huge real estate inflation for a while, but we know what happened to that.

The inflation in the stock market has been enough to suck up every bit of liquidity that the Fed has pumped into the system. However, putting money into stocks as the only possible investment does not employ enough people to create consumer demand. So, the only logical thing for the rich to do is to invest in more stock. Stock is the only thing that seems to make money.

We know how this movie turns out. We just don’t know what it is going to take to burst this bubble. Because of mark-to-market, so much wealth will be destroyed that I don’t know what is going to happen to all that liquidity the Fed has been wildly pumping into the system. That’s something I will have to spend a lot of time thinking about or researching to figure out what the MMT model says will happen.

The words “MMT Model” triggers the wisdom that a model is a simplification. It therefore must leave something out. When that something becomes important, then the model is likely to fail. What I think MMT leaves out is the effect of mark-to-market. OOPS!!!!

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