The other Warren (Buffet) gets MMT?

Waiting for the day when he adds:

‘There for federal taxes function to regulate aggregate demand, and not to raise revenue per se.’

Warren Buffett: Failure to Raise Debt Limit Would Be ‘Most Asinine Act’ Ever By Congress

By Alex Crippen

April 30 (CNBC) — Warren Buffett says if Congress fails to raise the U.S. debt limit, it would be its “most asinine act” ever. But he told shareholders today there’s “no chance” lawmakers will fail to do so, despite “waste of time” debates on Capitol Hill.

While Buffett doesn’t want the nation to keep increasing its debt relative to GDP, he says there’s shouldn’t be a legislated debt limit to begin with, because circumstances change.

Buffett says the U.S. will not “have a debt crisis of any kind as long as we keep issuing our notes in our own currency.” Inflation resulting from a “printing press” approach, however, is a serious threat.

Charlie Munger’s view: the political parties are competing with each other to see who can be the most stupid, and they keep topping themselves.

If the debt limit is not raised, the government would run out of money, forcing a significant shutdown.

The current $14.3 trillion limit expires on May 16, although the administration has said it will be able to juggle some funds so that a shutdown would not happen immediately.

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20 Responses to The other Warren (Buffet) gets MMT?

  1. hamish says:

    I’m just guessing here, but could it be as simple as money creation causes economic growth, and investors will invest in a growing economy because that’s where there is money to be made?

    Reply

    Oliver Reply:

    The first part of your sentence is wrong, the second is correct.

    Money dose not cause economic growth, it can enable it to the extent that it can not take place without it, beyond which it causes inflation. Only growth itself is a cause for investor confidence. Inflation (i.e. growth in money supply without corresponding growth in real production / inflation adjusted incomes) on the other hand, especially changing rates of inflation, are not helpful in building confidence. To quote JMK:

    The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

    – J.M. Keyes, Open Letter to President Roosevelt, 1937

    Reply

    Ralph Musgrave Reply:

    Oliver, That quote from Keynes is from 1933, not 1937. See here:

    http://www.scribd.com/doc/33886843/Keynes-NYT-Dec-31-1933

    Also Keynes in this passage gets very near to a self-contradiction. He admits that “Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed.” But he then goes on to suggest that expanding the money supply will NOT expand GDP! It strikes me that if an economy has been “set back”, then extra money in consumers’ pockets WILL get it expanding again.

    Also he is right to say that the “volume of expenditure” is the crucial factor. But this volume is itself influenced by the money supply, isn’t it? All the evidence is that when households’ bank balances rise, they go out and spend some of it: hardly surprising!

    Of course TOO MUCH money printing leads to inflation. We all know that. I imagine Hamish above also knows that. That is, when Hamish said that money printing causes economic growth, I would imagine he is aware that this idea is valid only where unemployment is above NAIRU.

    Reply

    Oliver Reply:

    Ralph, I stole that quote from another website, which I trusted to be accurate.

    I think the difference between our respective opinions on this is semantic for all practical purposes. My point was to highlight that demand for money must come form the will to engage in productive endeavours in order to be growth rather than inflation enhancing. One can have asset price inflation and bottle necks in specific markets with an economy that is well below full output capacity after all, even if that isn’t the most pressing problem in the US at the moment. The belt in the US is too tight in general, to use the same metaphor as above. But, causation seems important to me for understanding MMT, demand side economics and endogenous money creation in general and getting a feel for the subsequent limits and inadequacies of both monetary and fiscal policy. Not every economic problem is one of insufficient aggregate demand.

    Reply

    Ralph Musgrave Reply:

    @Oliver,

    I agree there is a fair bit of semantics involved here.

    You say “demand for money must come from the will to engage in productive endeavours in order for there to be growth rather than inflation…” The points I made above in response to Mario are relevant here. That is, M3 money automatically expands as a result of “the will to engage in productive endeavours”. Plus I don’t see how the cause / effect relationship can be reversed: i.e. I don’t see how M3 can become excessive and cause inflation.

    Irrational exuberance often causes M3 to become excessive, and inflation ensues, but the fundamental problem is the irrational exuberance, not M3. Although having said that, there is much to be said for clamping down on the freedom that commercial banks have to create money (fractional reserve banking). Such a clamp down would help iron out booms and slumps.

    M0 (i.e. monetary base) is different: this is where printing presses and helicopter drops really come in. M0 should be expanded (and channelled to Main Street, not to Lloyd Bankfiend) when demand is inadequate. Obviously this can go too far and cause inflation. But I don’t think we’re at the point right now, with unemployment at very high levels, where demand is causing much inflation. I suspect that such so called inflation as there is, is largely caused by commodity price rises. So it’s a waste of time reining in demand right now because this will not influence world commodity prices.

    Mario Reply:

    interesting discussion here guys. But what about the fact that in those charts it is showing a positive relationship between M3 money supply and the value of the currency? In other words as M3 increases the currency gains in value.

    Isn’t that counter-intuitive to all that you’re discussing here? I.e. we’d expect the currency to drop in value, no?

    Reply

    Mario Reply:

    the recent huge rise in precious metals could account for the rise in Australia’s currency valuation since PM’s account for alot of AU value, however again the charts the gentlemen provides in his video go back 20 years so that also really doesn’t explain things either. What is going on there?

  2. Mario says:

    In this video link below at 13 minutes and onwards, the gentlemen shows how there seems to be a relationship between an increase in the money and STRENGTHENING in the currency in Australia. Now who knows if this holds true for the US as well, but this relationship is interesting it seems to me to say the least. This positive relationship seems to have been playing out for at least 20 years now (20 years!) in Australia. I highly suspect the same is true for the US but I have no figures currently.

    Can you guys think of any fundamental reason as to WHY and HOW this relationship exists? This relationship seems to clearly fly in the face of most economic theories which state that an increase in the money supply causes a DECREASE in the currency’s value. It would be nothing short of revolutionary I’d say to figure out how such a presumption is not necessarily accurate. I was thinking it could be b/c of a balance sheet recession coupled with positive fiscal policy however this relationship seems to be functioning for over 20 years now…

    Your thoughts would be greatly appreciated and honored. Here’s the video link…again he starts talking about it at 13 minutes and onwards.

    http://emini-watch.com/emini-trading-update-friday-29-apr-2011/3641/

    Reply

    Ralph Musgrave Reply:

    Mario, Congratulations on digging up that video. I can HALF explain the relationship, i.e. I can see why there should be no relationship at all between a rapidly expanding Aussie M3 and the relative value of the Aussie versus US dollar. Here goes.

    Changes in M3 (or “horizontal money”) are the RESULT of an expanding economy, not the cause of anything. M0 (monetary base) is different: expanding that too fast CAN cause inflation. So if the Aussie economy is expanding e.g. because of rapid population or productivity growth, I would not necessarily expect a decline in the Aussie dollar relative to the US dollar. Thought that depends in the tendency of an expanding Aussie economy to suck in imports compared to the tendency to suck in investment money, as pointed out by Hamish below.

    As to the POSITIVE relationship that seems to exist between an expanding Aussie M3 and the relative value of the Aussie dollar and US dollar, that’s more puzzling. All I can suggest is that the first half of the graph is noise or coincidence, while the second half is explained by surging demand from China for Aussie raw materials.

    Reply

  3. Max says:

    Ramanan, most people (and most economists) confuse balance sheet policy with monetary policy. Unless you treat them as seperate matters you are doomed to talk nonsense.

    This is the part of MMT which is *not* an economic theory. It’s just thinking clearly.

    Reply

    Ramanan Reply:

    What is balance sheet policy ?

    Reply

    Max Reply:

    Type and quantity of government liabilities (bank reserves and treasury bonds of various maturities) determined by the combined operations of the Treasury and Fed.

    Reply

    Ramanan Reply:

    And how does this policy work ?

  4. Ramanan says:

    I definitely have a different opinion about Warren Buffet and people who hold similar views – which is most people in the financial industry ?

    I think these people and mainstream think that whilst “printing money” can be used to prevent a government default but can cause inflationary consequences.

    Because NAFA = DEF, for the private sector, the Net Accumulation of Financial Assets is equal to the budget deficit. This identity is true whether the government can take a draft at the central bank or if it finances its deficit by issuance of G-Secs.

    Now, mainstream economists think that the government deficit can be financed by a deciding on the proportions of the deficit financed by “printing money” and borrowing from the other sectors.

    It seems to me that they think that the former increases the financial assets of the private sector but the latter does not. And the former is useless in the long run since it is supposed to cause inflation in this story.

    Some recognize bonds as wealth but go into Ricardian equivalence and others go into arguing that future tax liabilities offset the bond issuance and some such thing.

    So it seems to me that they seem to appreciate the fact that the government is different but somehow mess things up.

    Reply

  5. Max says:

    Buffett worries about inflation (and the trade balance), but he’s not a hard money guy. He thinks increasing debt is fine but not increasing debt/GDP. So pretty mainstream but minus the idiocy of worrying about default.

    Reply

  6. I was at the meeting and sent an email to Warren (Mosler) immediately. The last part was added by the author, not Buffet.

    Lets. . . I didn’t hear Buffet call for fiscal discipline, at least now (maybe he has in other settings, though). He did say, though, that he didn’t like to see big increases in the debt ratio, so that’s obviously out of paradigm.

    I was shocked, though, hearing all these things come out of his mouth that are so consistent with MMT. Not reported here is that he also said that European countries had surrendered the right to issue debt in their own currencies, and that changes everything.

    Reply

    WARREN MOSLER Reply:

    michael will be adding your email comments, thanks!

    Reply

    LetsGetItDone Reply:

    Hi Scott, In other places, at other times his position on the debt and the deficit has been a bit to the right of Paul, the K. He’s not a Peterson/David Walker nut case; but he’s also not telling his Moody’s to issue statements acknowledging that the US cannot be forced to default, and that what all the ratings agencies should be doing is screaming at Congress for proposing the violate section 4 of the 14th Amendment to the Constitution of the United States.

    Reply

  7. Warren Mosler understandss MMT. Warren Buffet does not. If he did he wouldn’t be calling for fiscal discipline.

    Reply

  8. Matt Franko says:

    I dont like the CNBC writer here: “If the debt limit is not raised, the government would run out of money,”

    Should say something like “surrender it’s own spending authority”. resp,

    Reply

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