John Carney on MMT and Austrian Economics

Another well stated piece from John Carney on the CNBC website:

Modern Monetary Theory and Austrian Economics

By John Carney

Dec 27 (CNBC) — When I began blogging about Modern Monetary Theory, I knew I risked alienating or at least annoying some of my Austrian Economics friends. The Austrians are a combative lot, used to fighting on the fringes of economic thought for what they see as their overlooked and important insights into the workings of the economy.

Which is one of the things that makes them a lot like the MMT crowd.

There are many other things that Austrian Econ and MMT share. A recent post by Bob Wenzel at Economic Policy Journal, which is presented as a critique of my praise of some aspects of MMT, actually makes this point very well.

The MMTers believe that the modern monetary system—sovereign fiat money, unlinked to any commodity and unpegged to any other currency—that exists in the United States, Canada, Japan, the UK and Australia allows governments to operate without revenue constraints. They can never run out of money because they create the money they spend.

This is not to say that MMTers believe that governments can spend without limit. Governments can overspend in the MMT paradigm and this overspending leads to inflation. Government financial assets may be unlimited but real assets available for purchase—that is, goods and services the economy is capable of producing—are limited. The government can overspend by (a) taking too many goods and services out of the private sector, depriving the private sector of what it needs to satisfy the people, grow the economy and increase productivity or (b) increasing the supply of money in the economy so large that it drives up the prices of goods and services.

As Wenzel points out, Murray Rothbard—one of the most important Austrian Economists the United States has produced—takes exactly the same position. He says that governments take “control of the money supply” when they find that taxation doesn’t produce enough revenue to cover expenditures. In other words, fiat money is how governments escape revenue constraint.

Rothbard considers this counterfeiting, which is a moral judgment that depends on the prior conclusion that fiat money isn’t the moral equivalent of real money. Rothbard is entitled to this view—I probably even share it—but that doesn’t change the fact that in our economy today, this “counterfeiting” is the operational truth of our monetary system. We can decry it—but we might as well also try to understand what it means for us.

Rothbard worries that government control of the money supply will lead to “runaway inflation.” The MMTers tend to be more sanguine about the danger of inflation than Rothbard—although I do not believe they are entitled to this attitude. As I explained in my piece “Monetary Theory, Crony Capitalism and the Tea Party,” the MMTers tend to underestimate the influence of special interests—including government actors and central bankers themselves—on monetary policy. They have monetary policy prescriptions that would avoid runaway inflation but, it seems to me, there is little reason to expect these would ever be followed in the countries that are sovereign currency issuers. I think that on this point, many MMTers confuse analysis of the world as it is with the world as they would like it to be.

In short, the MMTers agree with Rothbard on the purpose and effect of government control of money: it means the government is no longer revenue constrained. They differ about the likelihood of runaway inflation , which is not a difference of principle but a divergence of political prediction.

This point of agreement sets both Austrians and MMTers outside of mainstream economics in precisely the same way. They appreciate that the modern monetary system is very, very different from older, commodity based monetary systems—in a way that many mainstream economists do not.

In MM, CC & TP, I briefly mentioned a few other positions on the economy MMTers tend to share. Wenzel writes that “there is nothing right about these views.”

I don’t think Wenzel actually agrees with himself here. Let’s run through these one by one.

1. The MMTers think the financial system tends toward crisis. Wenzel writes that the financial system doesn’t tend toward crisis. But a moment later he admits that the actual financial system we have does tend toward crisis. All Austrians believe this, as far as I can tell.

What has happened here is that Wenzel is now the one confusing the world as it is with the world as he wishes it would be. Perhaps under some version of the Austrian-optimum financial system—no central bank, gold coin as money, free banking or no fractional reserve banking—we wouldn’t tend toward crisis. But that is not the system we have.

The MMTers aren’t engaged with arguing about the Austrian-optimum financial system. They are engaged in describing the actual financial system we have—which tends toward crisis.

They even agree that the tendency toward crisis is largely caused by the same thing, credit expansions leading to irresponsible lending.

2. The MMTers say that “capitalist economies are not self-regulating.” Again, Wenzel dissents. But if we read “capitalist economies” as “modern economies with central banking and interventionist governments” then the point of disagreement vanishes.

Are we entitled to read “capitalist economies” in this way? I think we are. The MMTers are not, for the most part, attempting to argue with non-existent theoretical economies or describe the epic-era Icelandic political economy. They are dealing with the economy we have, which is usually called “capitalist.” Austrians can argue that this isn’t really capitalism—but this is a terminological quibble. When it comes down to the problem of self-regulation of our so-called capitalist system, the Austrians and MMTers are in agreement.

3. Next up is the MMT view (borrowed from an earlier economic school called “Functional Finance”) that fiscal policy should be judged by its economic effects. Wenzel asks if this means that this “supercedes private property that as long as something is good for the economy, it can be taxed away from the individual?”

Here is a genuine difference between the Austrians—especially those of the Rothbardian stripe—and the MMTers. The MMTers do indeed envision the government using taxes to accomplish what is good for the economy—which, for the most part, means combating inflation. They think that the government may need to use taxation to snuff out inflation at times. Alternatively, the government can also reduce its own spending to extinguish inflation.

Note that we’ve come across a gap between MMTers and Rothbardians that is far smaller than the chasm between either of them and mainstream economics, where taxation of private property and income is regularly seen as justified by the need to fund government operations. MMTers and Austrians both agree that under the current circumstances people in most developed countries are overtaxed.

4. Wenzel actually overlooks the larger gap between Austrians and MMTers, which has to do with the efficacy of government spending. Many MMTers believe that most governments in so-called capitalist economies are not spending enough. Most—if not all—Austrians think that these same government are spending too much.

The Austrian view is based on the idea that government spending tends to distort the economy, in part because—as the MMTers would agree—government spending in our age typically involves monetary expansion. The MMTers, I would argue, have a lot to learn from the Austrians on this point. I think that an MMT effort to more fully engage the Austrians on the topic of the structure of production would be well worth the effort.

5. Wenzel’s challenge to the idea of functional finance is untenable—and not particularly Austrian. He argues that the subjectivity of value means it is impossible for us to tell whether something is “good for the economy.” Humbug. We know that an economy that more fully reflects the aspirations and choices of the individuals it encompasses is better than one that does not. We know that high unemployment is worse than low unemployment. All other things being equal, a more productive economy is superior to a less productive economy, a wealthier economy is better than a more impoverished one.

Wenzel’s position amounts to nihilism. I think he is confusing the theory of subjective value with a deeper relativism. Subjectivism is merely the notion that the value of an economic good—that is, an object or a service—is not inherent to the thing but arises from within the individual’s needs and wants. This does not mean that we cannot say that some economic outcome is better or worse or that certain policy prescription are good for the economy and certain are worse.

It would be odd for any Austrian to adopt the nihilism of Wenzel. It’s pretty rare to ever encounter an Austrian who lacks normative views of the economy. These normative views depend on the view that some things are good for economy and some things are bad. I doubt that Wenzel himself really subscribes to the kind of nihilism he seems to advocate in his post.

Wenzel’s final critique of me is that I over-emphasize cronyism and underplay the deeper problems of centralized power. My reply is three-fold. First, cronyism is a more concrete political problem than centralization; tactically, it makes sense to fight cronyism. Second, cronyism is endemic to centralized government decisions, as the public choice economists have shown. They call it special interest rent-seeking, but that’s egg-head talk from cronyism. Third, I totally agree: centralization is a real problem because the “rationalization” involved necessarily downplays the kinds of unarticulated knowledge that are important to everyday life, prosperity and happiness.

At the level of theory, Austrians and MMTers have a lot in common. Tactically, an alliance makes sense. Intellectually, bringing together the descriptive view of modern monetary systems with Austrian views about the structure of production and limitations of economic planning (as well Rothbardian respect for individual property rights) should be a fruitful project.

So, as I said last time, let’s make it happen.

This entry was posted in Deficit, Employment, Government Spending, Inflation, Interest Rates. Bookmark the permalink.

144 Responses to John Carney on MMT and Austrian Economics

  1. Luigi says:

    MMT is getting famous also in Italy, in the blogosphere. Probably only three people understand what MMT is (because they have read the literature)! The others confuse MMT with some monetarism DIY, or worse with people similar to the various “italian Zarlenga”. And MMT is considered, in general, a sort of “the ultimate bullshit from the web”.

    Really sad (but amusing).

    Reply

  2. Talvez... says:

    OK, what am I to make of this?
    http://research.stlouisfed.org/fred2/series/M2
    http://research.stlouisfed.org/fred2/series/CPIAUCSL/

    So, does the increase of monetary aggregates leads or not to a rise in consumer prices?

    If I check M2 vs inflation, there is no correlation, but if I check M2 vs CPI there is?

    Reply

    beowulf Reply:

    @Talvez…,

    If I check M2…

    There’s your first problem. You should be checking MZM (“all money in M2 less the time deposits, plus all money market funds”).
    http://www.investopedia.com/terms/m/moneyzeromaturity.asp#ixzz1i8esCiR0

    As rsj pointed out, the correlation between MZM and ‘debt held by public’ is pretty interesting. (note, publicly held debt includes the $1.6T or so in Fed-held Treasuries).
    http://tinyurl.com/7e4pecs

    Reply

  3. Kristjan says:

    John Carney wrote: http://www.cnbc.com/id/45818274
    Can the Government Guarantee Everyone a Job?

    It’s massively inflationary. Australian economist and MMT proponent Bill Mitchell insists that no inflationary pressure arises from having the government buy labor that no one else wants. But he’s just wrong.

    While employing the unemployed may not create upward pressure on wages, it dramatically increases demand. The national income is increased by the amount the government pays those laboring in JG jobs.

    That income is entirely from newly created money, so the money supply is expanding.

    That additional demand is not matched by additional supply, however.

    The people working in JG jobs are not producing goods that the market needs. Their work product is largely waste. Which means that demand increases without the supply of desired goods increasing. The result: inflation.

    This is just mainstream story John. Why are those people working in this program in the first place? Having them working is a waste but having them doing nothing is not? I am sorry but IMO John doesn’t understand MMT more than just the fact that government cannot go bust.

    Reply

    Djp Reply:

    @Kristjan,

    Inflation may not a consequence, and maybe that is what you are objecting to. But I don’t think anyone could possibly know what kind of distortions it could create.

    What about Cullen Roche’s objections:
    http://pragcap.com/the-politics-of-mmt/comment-page-1#comment-90703

    My interpretation is that it boils down to the claim that economics isn’t a science, in that it is not possible to do controlled repeatable experiments. I would tend to agree.

    I tend to agree with Roche in the exchange with Fullwiler in the link above. I think anyone that insists there couldn’t be ANY risks with implementing such a program is either fooling themselves or trying to peddle something. I would however be in favor of a JG if I could run it, and just take 0.5% off the top…. that’s at least one problem with it.

    Reply

    Kristjan Reply:

    @Djp,
    They sent 17 million people into WW2 and those people didn’t create value in a sense that you could buy and tehere was no problem. I just don’t buy this inflation story. There is no demand created excess to supply if you look at this proposal carefully. You can send all these people unemployment checks right now to have them do nothing and that is not inflationary yet you cannot pay them to do something useful. Cullen has written some good articles about MMT and I have been a regular reader of pragcap but that doesn’t mean I agree with him on this one.
    It’s been done before and not only in Argentina. They did It in Sweden. Sweden came out of Great Depression first by the way. They had such a program in place and It was financed by deficit spending. You might have some other arguments against It but inflation is not one of them.

    Reply

    Unforgiven Reply:

    @Kristjan,

    An interesting discussion on other aspects of JG, etc. over here:

    http://heteconomist.com/?p=3401&cpage=1#comment-38559

    Thought you might enjoy it.

    Djp Reply:

    @Kristjan,

    (1) I started with “Inflation may not be a consequence” (except for my typo). So I think it’s a bit of strawman for you to respond at the beginning and end with making sound like I was talking about inflation. I’m not. I’ll say it again, that is NOT the grounds of my caution.

    (2) War is pretty unique. I whole-heartedly agree with Krugman on this one, and with probably any other rational person who’s thought about it for even a tiny bit. War will end unemployment immediately. Fighting for survival is a great way to focus your energies on something porductive (your survival) and not worry so much about other stuff.
    I’ll give you the benefit of the doubt that you’re not suggesting that we “draft” people into labor camps, that would also end unemployment. And the draft is part of the war…

    Kristjan Reply:

    @Djp,
    I don’t want to sound like I am doing some propaganda here but still want to post:

    http://www.netplaces.com/understanding-socialism/chapter-17/the-great-depression-and-swedens-first-social-democratic-government.htm

    Under the leadership of Per Albin Hansson (1885-1946), who served as premier four times between 1932 and 1946, SAP implemented a reform plan based on Wigforss’s program. With the informal support of the Agrarian Party, the SAP government transformed an existing system of relief work into a dynamic public works program. They began work immediately on any state and municipal public works that were already on the planning board for the future: schools, hospitals, railways, roads, harbor construction, and improvements in forestry and agriculture. The old relief system paid workers 15 percent less than the minimum wage an unskilled worker could earn in the open market. Men employed on the new public works program were paid a full market wage. The government borrowed money to fund the public works projects rather than raising the money through taxes, which would have neutralized the stimulus to the economy.

    At the same time, the government introduced new social security measures, which were designed both to provide an economic safety net for the poor and to increase their purchasing power: unemployment insurance, increased old-age pensions, and housing loans for large families. They also implemented guaranteed prices for agricultural goods, special grants for rebuilding farm buildings, and easier access to agricultural credit. (The same banks that were willing to lend Ivar Kreuger millions were less welcoming to small farmers.) Sweden paid for these services through a progressive income tax. All together, the Wigforss program reduced unemployment from 189,225 in 1933 to 9,600 in 1937.

    Reply

    WARREN MOSLER Reply:

    also recognize that in the first instance taxing creates unemployment- people suddenly looking for work that pays the suddenly needed unit of account.
    (there is no such thing as unemployment as we define it in a non monetary economy)

    and if the tax happens to create more unemployed than the govt wishes to employ, it guessed wrong on the tax and should lower it

    so the jg first hires the people the tax unemployed, and then, if the jg pool is deemed too large for desired price stability, taxes are cut accordingly.

    Reply

    Hugo Heden Reply:

    @Djp,

    I think anyone that insists there couldn’t be ANY risks with implementing such a program is either fooling themselves or trying to peddle something.

    Sounds like you’re not seeing the “risks” with maintaining the current system — using a buffer stock of unemployed rather than employed to maintain price stability?

    Mass unemployment results in huge permanent losses every day in foregone output and income. Add to that the depreciation of human capital, increasing family breakdowns, child abuse, crime, medical costs, skill loss, psychological harm, ill health, reduced life expectancy, loss of motivation, racial and gender inequality and loss of social values and responsibility. The personal, family and community losses are enormous and persist across generations.

    And yet, probably better to leave these people in unemployment, due to the “distortions” a JG could lead to?

    Seems to me it is the current system that is one humongous piece of distortion. There is nothing “natural” with unemployment. It’s distorted. Arguably, the natural order is zero involuntary unemployment. See Warren’s argument that unemployment is evidence that the economy is overtaxed.

    Reply

    WARREN MOSLER Reply:

    yes!

    Djp Reply:

    @Hugo Heden,

    @Warren too.

    No!

    I agree with Roche, who says rather reasonably that instituting a new program overnight that would “employ” all of the unemployed would be an enormous change, and could likely have unintended consequences. He then goes on to propose starting something on a smaller scale, which seems like a more reasonable approach.

    I agree we are overtaxed, and that lowering taxes would help. Perhaps that should be the primary focus, since we all agree that would help. Then smaller programs to entice people off of unemployment could be tried. For me it’s far, far too easy to see ways that JG could be a disaster far, far worse than the current system.

    WARREN MOSLER Reply:

    i’ve proposed we first allow all federal agencies to hire as many additional people as they wish who will work for the $8/hr wage with no prospects of advancement, and with those agencies being aware that these people will likely be hired away from them by the private sector over time because they can’t compete on a wage basis.

    After that, the program can be expanded to state and local govts with the federal govt picking up the $8 tab, and then further expanded to qualifying non profits, etc. as needed.

    At that point I’d suggest there will be very few people left for the last step of a designated jg job for
    for whoever is left over.

    WARREN MOSLER Reply:

    the author needs to read ‘full employment and price stability’ under ‘mandatory readings’ on this website

    The tax creates a ‘nominal demand’ for enough currency to pay taxes and satisfy any net savings desire.

    Unemployment is the evidence that spending isn’t sufficient to cover the net savings desires component created by the tax

    So at the macro level a ‘non disruptive’ JG wage is unlikely to add to aggregate demand, but instead increase ‘savings’ without increasing agg demand, though it is possible net savings desires could decrease as the result of a JG and aggregate demand would rise.

    The evidence of this would be the JG pool shrinking to a level deemed ‘too low’ to be an effective price anchor (maybe 3%?)
    at which point a tax increase and/or spending cut would be in order.

    However, a shrinking JG pool ‘automatically’ cuts govt spending and increases tax revenues (counter cyclically) so the above outcome
    would most likely not be the case.

    And, in any case, an employed labor buffer stock is necessarily a far superior price anchor to an unemployed labor buffer stock,
    so that with an expansion of employment ‘inflation’ is likely to be lower than otherwise.

    Reply

    Unforgiven Reply:

    @WARREN MOSLER,

    I’m going to have to take a few runs through that doc before I absorb it.

    In the meantime, it seems that (once a currency is established) taxes are a minor issue (and transparent for renters, in a hut tax context, payable to county gov’t), with the rest of expenses (and consumption opportunities) giving the currency it’s major raison detre. Savings desires would be somewhere down the line from “don’t kick me out of the trailer park” desires.

    Reply

    WARREN MOSLER Reply:

    top of the heap is the desire for govt provisioning

    Unforgiven Reply:

    @WARREN MOSLER,

    Hut tax was a bad choice; eventually transparent to hut renters, but not to hutlords.

    Reply

    Kristjan Reply:

    @WARREN MOSLER,
    that was Carney’s text that I pasted here

    unforgiven: thanks for the link

    Reply

    WARREN MOSLER Reply:

    right, sorry!!!
    just ‘adjusted’
    should have been obvious to me.
    many apologies!!!

    Kristjan Reply:

    @WARREN MOSLER,
    No problem,
    I started to translate your book to Estonian language in my blog
    http://money4nothingchicks4free.wordpress.com/2011/12/12/seitse-sumavalt-suutut-valet-majanduspoliitikas/
    I hope It’s ok with you?
    So the audience is worldwide!

    Reply

    WARREN MOSLER Reply:

    thanks!

    and my grandparents were from Lithuania

    Kristjan Reply:

    @Warren,
    Put a wordv in It Warren, they all know you are rich, yet all they are waiting for is not money but support from you. I hope you understood.

    WARREN MOSLER Reply:

    put a word where, thanks

  4. James says:

    Re: “I see that Mr. Mosler is not just describing things, but he has come up with a number of proposals (and kudos to him for that). If so , then my statements did not “misrepresent” anything.”

    True enough. But again, the description is one thing, how a human being will wish to apply knowledge of the data is another.

    We have an interest in objective reality. To say that a description is adequate to an objective reality is both a meaningful statement and also useful, by definition.

    How you wish to apply MMT’s description of the system will depend on your philosophy and your politics.

    The internal consistency of the theory is not at issue. The issue is whether it is an adequate description of the objective reality (adquatio rei et intellectus!). If it is, that is all that is required of it.

    As Mike Norman has observed, MMT has been very successful at predicting. At the same time, MMT cannot be blamed for not predicting that a rational approach to a problem will be stymied by given political interests and by all kinds of irrationalities as well.

    Reply

  5. Matt Franko says:

    Monitoring CNBC XM: JC just mentioned MMT and recommended viewers to check it out while he was on air on the David Faber/Melissa Lee show on the CNBC Video Channel… mentioned the Economist Article.. and the accurate MMT track record this year…

    Resp,

    Reply

    Unforgiven Reply:

    @Matt Franko,

    Grüvven!

    Reply

    WARREN MOSLER Reply:

    Thanks! Maybe they will actually engage next time I’m on…

    Reply

    roger erickson Reply:

    @WARREN MOSLER,

    In your past news appearances, the interviewers have looked like currency-users caught in a currency-issuers headlights

    only longer duration will allow them to adjust to the ambient light-on-the-subject level

    maybe when their pupils no longer constrict? :)

    Reply

    Unforgiven Reply:

    @roger erickson,

    Maybe a requirement that they read 7DIF and then confer with Warren on how to get the biggest bang for the airtime?

  6. Nick Boyd says:

    @Ed Rombach
    Agreed.

    @Warren Mosler
    If MMT argues that the constraints on government spending are self-imposed in a fiat money system, that is a true descriptive statement. It follows, however, that there are no constraints because self-imposed constraints are illusory (just like an illusory promise is not a promise at all). However, just because there are no constraints (and no solvency issues) doesn’t mean that there are no economic problems caused by the absence of said constraints.

    @James
    “To describe a mechanism is one thing, to predict human intentions and initiatives regarding the purposes for which the mechanism will be used is quite another.”

    That’s fine. But what is the purpose of “describing”? Is it to address and solve some specific problems? I see that Mr. Mosler is not just describing things, but he has come up with a number of proposals (and kudos to him for that). If so , then my statements did not “misrepresent” anything.

    I am saying on a more broad and fundamental level that at least some of Mr. Mosler’s solutions will not work ab initio. As you said it yourself, describing a mechanism is not the same thing as proposing a solution to change a certain situation and to predict how that solution will work and what intended and unintended consequences the solution will have.

    To be specific, let’s take Mr. Mosler’s solution to the current crisis in the form of running much larger deficits. Because of the fundamental problems I point out with unconstrained government spending and with unaccounted-for subjectivity in aggregate demand, Mr. Mosler’s solution of running bigger deficits in the current economy will have unintended consequences and will not accomplish the objective of the greatest good for the greatest number. It is not necessarily because the solution is theoretically (in the abstract) flawed, but because there is no mechanism to apply it in the way intended and with its assumptions holding true in practice.

    I don’t want to get into much semantics, but suffice it to say that a model may be true within itself, but it is flawed/unworkable/useless if it does not account for certain variables that will necessarily “interfere” once the model is applied and implemented in practice. When people try to limit MMT to being descriptive and not normative, they are trying to say that the model is true and accurate (and flawless) within itself. That may be true (I don’t know) but that is irrelevant. If you are going to set forth proposals based on MMT (as this site does), you better pray that MMT is more than “descriptive.”

    Reply

    RJ Reply:

    @Nick Boyd,

    Larger deficits do not require more Govt spending. In fact spending could be reduced along with tax cuts.

    Reply

    Unforgiven Reply:

    @Nick Boyd,

    “I don’t want to get into much semantics, but suffice it to say that a model may be true within itself, but it is flawed/unworkable/useless if it does not account for certain variables that will necessarily “interfere” once the model is applied and implemented in practice. When people try to limit MMT to being descriptive and not normative, they are trying to say that the model is true and accurate (and flawless) within itself. That may be true (I don’t know) but that is irrelevant. If you are going to set forth proposals based on MMT (as this site does), you better pray that MMT is more than “descriptive.””

    Sounds like you’re saying that there’s no benefit to knowing how our currency works.

    BTW, Warren never said that there are no constraints to gov’t spending. Have you read 7DIF on this subject?

    Reply

    Nick Boyd Reply:

    @Unforgiven,

    Again, we are going in circles. Let me put it this way. A model may be defective if it does not account for all the variables in the system (or at least all material variables). Often, such a defect is not apparent until the model is implemented in the real world (objective reality). Then, new variables surface and unintended consequences are exposed.

    Human desire for (and value of) leisure is an example of a variable that is missing from many econ models. And other variables obviously do also exist.

    Reply

    Unforgiven Reply:

    @Nick Boyd,

    You might also want to peruse this for more info RE: MMT and Job Guarantee:

    http://mikenormaneconomics.blogspot.com/2011/12/dan-kervick-elucidates-mmt-and-jg.html

    Reply

    WARREN MOSLER Reply:

    agreed. the way i say it is no operational constraints

    Reply

  7. James says:

    @Nick Boyd

    I am no expert, but my understanding is that MMT is not a normative conceptual structure but a descriptive one. If this is true, it would seem that statements such as “This is why I have called MMT a utopia: just because government spending CAN result in the greatest good for the greatest number doesn’t mean that it WILL so result, EVER,” misrepresent matters. I don’t believe that MMT experts have ever said what you are saying. They present a description of a system and then say that the concrete application of the system is a matter of politics and public policy. To describe a mechanism is one thing, to predict human intentions and initiatives regarding the purposes for which the mechanism will be used is quite another.

    Reply

  8. Floccina says:

    Some Austrians e.g. George Selgin and Lawrence White who say that free banks do what MMTers would like to see government do. That is float currency in cases where demand falls sharply to make up for a lack of loans. They believe that this will keep NGDP level. Also see Scott Sumner on the same.

    Reply

    WARREN MOSLER Reply:

    what does ‘float currency’ mean in this context?

    Reply

    Art Reply:

    @Floccina,

    From what I’ve seen, they don’t distinguish between gross and net financial assets. If by floating currency or targeting nominal GDP they mean only a gross addition to financial assets (e.g., QE2 or traditional FOMC operations, bank credit expansion) as opposed to net (i.e., unencumbered by a corresponding liability in the non-govt sector, such as Fed purchases of mortgage assets, Treasury deficits, interest on reserves), then the comparisons are off. They’re only talking about influencing the mix of net outstanding govt liabilities and assuming that has the same effect as the level.

    If they incorporate this net-versus-gross concept into their frameworks, I think it would work fine for NGDP (Sumner, though I don’t get the whole fiscal phobia), but not so much for free banking I don’t think. It could work in theory, but e.g., how efficient will market competition be for enforcing acceptance? What social utility is there in having to diversify among privately-issued domestic currencies? Etc. I’m sure these are discussed out there (I read plenty of White’s work in years past), just pointing them out.

    Reply

  9. Nick Boyd says:

    I like this post. It raises some issues I’ve been wanting to bring up on this board.

    “The Austrian view is based on the idea that government spending tends to distort the economy, in part because—as the MMTers would agree—government spending in our age typically involves monetary expansion. The MMTers, I would argue, have a lot to learn from the Austrians on this point.”

    The first thing to learn is not to put words in other schools’ mouths. Regardless, I want to set aside labels for a moment and point out that the “Austrian” school (or any other school that starts with the nature of things and then deduces normative principles) would hold that government spending is an “evil” for an economy not because it involves “monetary expansion” per se, but because there is no mechanism to direct/force such government spending/expansion toward the productive sectors of the economy. Not all spending/expansion is equal.

    “I think that an MMT effort to more fully engage the Austrians on the topic of the structure of production would be well worth the effort.”

    Exactly. The questions to ask would be:
    Does leisure (the state of not being productive) have value to the individual? Are people productive in their natural state? Do most people’s hobbies automatically create wealth others can consume? Do you need either coercion or incentives to maximize the productivity of the individual? What systemic mechanisms can account for the subjectivity of value and subjectivity of need? Is there such a thing as benevolent coercion?
    Answers to these questions will point out many holes in the MMT (at least as expressed here). These are very loaded and foundational questions. You can write a whole book just on coercion vs. incentives alone.

    “Second, cronyism is endemic to centralized government decisions, as the public choice economists have shown. They call it special interest rent-seeking, but that’s egg-head talk from cronyism.”

    I disagree. Cronyism is a symptom of a sick underlying system: a system that allows for large concentrations of power. Concentration of power is primary, cronyism is secondary. Attacking the symptom (cronyism) rather than the cause (concentration of power) is never a good idea.

    This is why I have called MMT a utopia: just because government spending CAN result in the greatest good for the greatest number doesn’t mean that it WILL so result, EVER. Again this exposes the root problem with the MMT, at least as it has been expressed on this board. The absence of revenue constraints on the government is itself a problem, an “evil.”

    A system of government that requires an “honest” leader with no personal interest at stake (e.g., an older individual who already has all material wealth needed for the rest of his life and has no ego trips to take by usurping power – Ron Paul?) to work, but that does not work if a “less honest” individual is at power is a failed system. A system that (to work properly) requires “selfless” individuals at power is a utopic system.

    Even in today’s U.S., the government has a separate system of health insurance, separate system of pensions, separate system of wage growth (55% vs 25% in the private sector over that last 10 years), etc. It’s a parasite on the economy and IT CANNOT BE ANY OTHER WAY. It is silly to blame a shark for being a shark. You have to deal with the nature of the shark.

    The only system I know of that comes close to putting a systemic safeguard on concentration of power is the constitutional republic. Even that system is far too imperfect as illustrated by the U.S. history through the present day.

    But to advocate a system (normatively) in which the government has no revenue constraints, and then to try to fish for solutions which will somehow avoid “crony” government spending when there are no revenue constraints in place is a utopia.

    It may be logical and working in theory, but it would be impossible to implement.

    Reply

    Ed Rombach Reply:

    @Nick Boyd,

    “Cronyism is a symptom of a sick underlying system: a system that allows for large concentrations of power. Concentration of power is primary, cronyism is secondary. Attacking the symptom (cronyism) rather than the cause (concentration of power) is never a good idea.”

    Cronyism is cut from the same cloth as corporatism and fascism. Benito Mussolini who arguably was an authority on fascism is alleged to have once stated that “Fascism should really be called corporatism because it is the merger of government and corporate power.”

    Reply

    MamMoTh Reply:

    @Nick Boyd,

    Excellent points. MMT and Austrian Economics are at odds at a fundamental level. MMT argues self-imposed constraints on government spending are a bug, and Austrians argue they are a feature and that there are not enough of them.

    Reply

    WARREN MOSLER Reply:

    mmt argues said constraints are self imposed

    Reply

    Djp Reply:

    @Nick Boyd,

    Agreed, good points. And thanks to Carney (and Warren for reposting!) for pushing to separate MMT from politics by emphasizing common grounds.

    You might find this post relevant to the discussion:
    http://pragcap.com/the-politics-of-mmt
    There is often a blurring of political views with what Roche labels the descriptive aspects of MMT. I agree with others here who believe that if the real goal is to educate people about the mechanics, it would be advantageous to separate them from the political views.

    If the right answer for today is to increase the deficit, then it’s fair game to correct those who want to balance the budget either through tax increases or reductions in spending. Likewise the descriptive aspect would not in itself favor increased gov spending or reduced taxes. There’s still plenty of room for the political choices!

    MMT also says nothing about what Mammoth may have meant by “real savings” desires. It just has something fundamental to say about aggregate savings in NFAs (net financial assets – essentially the fiat currency). But that doesn’t answer anything about human desires to save — in the sense of what a normal human would mean by saving. I suspect there’s an awful lot to be learned by understanding that last question, and how it relates to an aging society. One thing MMT can be good at is separating out the nonsense of certain monetary ideas from what really matters — real output, real consumption and perhaps real savings (which I might define as an hour of unskilled labor, or some measure of gold or perhaps water or food). That is, it’s good at it when you can separate the descriptive from the prescriptive.

    Reply

    WARREN MOSLER Reply:

    MMT only says that for a given level of govt spending, a political decision, there is a corresponding level of taxation that results in full employment, etc.

    i have also supported the notion that govt is for public infrastructure for public purpose

    Reply

    Djp Reply:

    @WARREN MOSLER,

    Sounds good.

    Comes down to defining public purpose. Seems like MMT is getting a lot of good press, which hopefully focuses the discussion on the real (political) differences – which would appear to be a big advance.

    Reply

    Art Reply:

    @Nick Boyd,

    “to advocate a system (normatively) in which the government has no revenue constraints, and then to try to fish for solutions which will somehow avoid “crony” government spending when there are no revenue constraints in place is a utopia.”

    Cronyism also exists in systems where governments *are* revenue constrained. That’s a red herring.

    Soft currency systems are not being advocated. They are 100% operational in most (all?) of the world. And although I haven’t done any analysis, I would bet that there is no correlation between the type of monetary system and the level of corruption. However, researchers have established that there’s an association between corruption levels and institutional arrangements/quality. The USD has been inconvertible since 1973. Has corruption increased?

    This isn’t about a utopian vision at all. It’s about optimizing monetary functions in the real world as it exists.

    Reply

    roger erickson Reply:

    @Nick Boyd,

    > But to advocate a system (normatively) in which the [bookkeeping
    > issuer] has no revenue constraints, and then to try to fish for
    > solutions which will somehow avoid “crony” government
    > [bookkeeping] when there are no revenue constraints in place is a utopia.

    Uh … every cell constitutes a system where local bookkeeping is fairly synonymous with real revenue. Perhaps you’ve never heard of multi-cellular species? Where real revenue to the bookkeeping “issuer” becomes progressively more distributed, until it’s fully fiat in massively multi-cellular systems?

    Ditto for human cultures & markets. In small groups, revenue is synonymous with “money”. In large, coordinated groups, bookkeeping diverges from real revenue, until the issuer issues purely fiat bookkeeping which local users utilize as an accurate proxy for local real-goods budgets.

    Semantics has to scale with system scale. If “perspective – context – audiences – grammar” don’t remain coherent, and scale in synchrony, then we can’t have an organized market.

    Reply

  10. Greg Marquez says:

    Warren:
    Question I’ve been wanting to post on for some time and maybe this is the right time.

    It seems to me that the difference between MMT and the monetarists isn’t really that great either. If the monetarists would accept that the “money supply” is only increased by government spending and decreased by government taxing, then it seems to me that they would be on substantially the same page as MMT.

    What say you, sensei?

    Reply

    WARREN MOSLER Reply:

    I think I agree. I did a paper once called ‘in search of M’ which discussed the search for a useful monetary aggregate re quantity theory.
    I proposed the right M for quantity theory is net financial assets.

    Reply

    Art Reply:

    @Greg Marquez,

    “It seems to me that the difference between MMT and the monetarists isn’t really that great either.”

    Milton Friedman’s commodity-standard paper and “k%” rule definitely overlap. They were essentially an exercise in designing a soft currency. As long as you get the intersectoral accounting right, understanding any kind of system becomes straightforward. With a soft currency you just switch the money producing function to a unified govt sector (eg, Treasury plus Fed) from the mining / metals industries. Modern macro seems to have developed out of ‘pure credit economy’ frameworks and ignored net financial assets, assuming that NFAs will just arrive periodically on schedule as needed. As a result, monetarists, like most macroeconomists, tend to assume that normal central bank open market operations perform a similar function to mining gold ore. They don’t, and Godley’s intersectoral approach, which most of them ignore, illuminates this shortcoming. (See Scott Fullwiler’s papers on SSRN for some good attempts to bring the field up to speed.)

    “If the monetarists would accept that the “money supply” is only increased by government spending and decreased by government taxing”

    Or central bank expanding its net liabilities, e.g., by buying non-USG securities or paying interest on reserves, etc. And this only applies to net financial assets (a/k/a Circuitists’ vertical money, old Austrians’ commodity money, etc). Credit expansion also expands various measures of MS, but not net (i.e., unencumbered) financial assets. Ditto for things like QE2 and the Fed’s normal open market operations. Hence Warren’s In Search of M paper (though it also sounds like a James Bond screenplay?).

    “then it seems to me that they would be on substantially the same page as MMT.”

    Certainly closer than most Austrians, but there are some fundamental differences. For whatever reason, they tend to like balanced or surplus fiscal budgets, tend to distrust govt (as if public monopolies are always more harmful than private ones), etc. Just read one or two of Alan Meltzer’s musings on fiscal policy and you’ll see the challenges. Still room for agreement though, even on policy issues. I think many or most MMT’ers would be OK with federal school vouchers, for example, an idea championed by the Friedmans.

    Reply

    roger erickson Reply:

    @Art,

    Wow. The last 3 comments/replies are a great summary of everything. The persistent discrepancies between the other fields & MMT seem to stem entirely from semantic drift. Where’s Socrates when we need him. (Assassinated by pre-Austrians/Monetarists? Those guys are Semantic Terrorists! :) )

    Reply

    roger erickson Reply:

    @roger erickson,

    Semantic Terrorist Deficiti = STDs :(

    and no, long DONGs solve nothing

  11. jaymaster says:

    As a former Austrian, now MMT’er, I agree there are a few areas of overlap in thinking. But IMO, the gap at the core of the two theories is too vast to over come.

    In my understanding, Austrian theories are appropriate for describing commodity based monetary systems (specie), be they fully backed or fractional. In the environment in which they were developed (based on observation, much as MMT), they surely made sense.

    But the Austrian’s fundamental assumptions upon which their theories are based go completely out the window with a full-fiat currency system. I.e., one where the currency is a fictional construct with no real value, and functions solely as a token medium for trade. And where, I should add, that is a feature, not a bug.

    In an Austrian system, the act of printing without an equal increase in the backing commodity does, by definition lead to devaluation (or inflation), because of the peg to the commodity. But this is not the case with a free floating, pure fiat currency. There is no real value to a unit of fiat currency.

    Of course, there are valid debates as to which type of system is more desirable politically and socially. But those debates shouldn’t muddy the waters of economic understanding.

    Bottom line, for better or worse, the countries mentioned in the article are not currently functioning with commodity based currency systems. And it is a fundamental mistake to apply monetary theories which were developed to describe commodity backed currencies to such free floating systems.

    Reply

    WARREN MOSLER Reply:

    so that makes Austrian a ‘special case’ of MMT, as MMT describes/recognizes fixed fx regimes as well?

    Reply

    ESM Reply:

    @jaymaster,

    “But the Austrian’s fundamental assumptions upon which their theories are based go completely out the window with a full-fiat currency system. I.e., one where the currency is a fictional construct with no real value, and functions solely as a token medium for trade.”

    First, a fiat currency is NOT a fictional construct, it DOES have real value, and it does NOT solely function as a medium of exchange. It is a credit against the government which can be used to extinguish a tax liability and hence forestall the forcible taking of your real property or your liberty. It is real, and it is valuable, which is not to say that it’s not at risk of losing substantially all of its value in the future (which is true for absolutely anything).

    Second, and I hope I’m not being too pedantic here, there is little fundamental difference between the system we have now in the US and the one we used to have under a gold standard.
    Right now, we have a system where the government tries to keep the value of the currency stable relative to a basket of consumer goods. Under a gold standard, the government tries to keep the value of the currency stable relative to gold. There are some slight differences in that under a gold standard a government will try harder to keep the price of gold precisely fixed, which means that it will allow interest rates to move in a wider range, and the economy to undergo a more severe contraction before succumbing to devaluation pressures. But ultimately the same recourse is available to a sovereign government under a gold standard as one under fiat. FDR proved this in 1934, and Nixon did so again in 1971.

    Ultimately, I see little difference between credit risk and devalution risk. You can say that a US Treasury is going down in value against gold because the probability of default has gone up (under a gold standard), or you can say that a US Treasury is going down in value against gold because the dollar is depreciating (under a fiat system).

    I think the only real difference between a gold standard and our current system is that in our current system, we aren’t trying to peg the value of the dollar to something stupid.

    Reply

    Greg Reply:

    @ESM,

    “I think the only real difference between a gold standard and our current system is that in our current system, we aren’t trying to peg the value of the dollar to something stupid.”

    Very. Well. Said

    Reply

    roger erickson Reply:

    @jaymaster,
    > with a full-fiat currency system. .. the currency is a fictional
    > construct with no real value, and functions solely as a
    > token medium for trade.

    Fiat currency obviously has value. It’s just that that value floats, as any system-bookkeeping does, throughout biology/chem/physics. Fiat is backed by the distributed power of public initiative, not the presumed yoke of public initiative to a commodity token such as gold.

    Reply

  12. ahoi says:

    Hi all,

    what impact will Japan’s and China’s decision not to use US dollar in their trade have to US economy and US dollar (looking from MMT perspective)?

    Thank you for comments.

    Reply

    WARREN MOSLER Reply:

    not much if any

    Reply

  13. Ken says:

    I agree with a lot of the commentary above … but it seems to me there is one point of agreement between MMT and Austrians that the author overlooks … mainly both deny that there should be such a thing as “Monetary Policy”. Austrians tie money to gold and believe it self regulates. MMT supplies liquidity to the banking system as needed at some anchored rate of interest, maybe zero. In neither case is there a need for some entity to continuously make monetary policy … the only policy of concern is fiscal. So both could support “ending the Fed” … just a question of what they replace it with.

    Reply

    RJ Reply:

    @Ken,

    Both could not support ending the Fed.

    Read this

    http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/

    Look at the Euro countries. These countries have given up their most valuable asset. And as people age this becomes even more valuable.

    Without a central bank it is almost impossible for everyone to save

    Reply

    MamMoTh Reply:

    @RJ,

    Without a central bank it is almost impossible for everyone to save

    It might be impossible for everyone to increase their nominal savings without a CB creating new NFAs, but it is possible for everyone to increase their real savings if prices fall.

    Reply

    WARREN MOSLER Reply:

    it’s about Congress spending more than it taxes, not so much the Central Bank that clears the checks

    MamMoTh Reply:

    OK, but the main point is that government injection of NFAs is neither necessary nor sufficient in order to increase real savings.

    WARREN MOSLER Reply:

    right, real savings is deferred real consumption

    Neil Wilson Reply:

    @MamMoTh,

    Real savings are just an accounting construct that pop into existence as a balancing item when somebody capitalises an expenditure.

    For example government training programmes would never increase the current measure of real investment or real savings because training and education is not classified as investment.

    Demand is what causes somebody to transform stuff into real investment, even if it was classified as consumption (or even waste) previously.

    Capital congregates around demand.

    WARREN MOSLER Reply:

    right, in general what’s called savings is the accounting record of investment

    and real savings is the accounting for of real investment

    MamMoTh Reply:

    Real savings are just the purchasing power of nominal savings.

    WARREN MOSLER Reply:

    i don’t see it that way? you could have high nominal savings with no real savings, which is the accounting record of real investment.

    Neil Wilson Reply:

    @MamMoTh,

    No they’re not.

    MamMoTh Reply:

    Of course they are, I defined them.

    Anyway that is a side issue, the important one being that injection of government NFAs is neither necessary nor sufficient in order to increase real savings if the price level falls.

    Derryl Hermanutz Reply:

    Real savings will increase if prices fall, which makes your current holdings of money more valuable in terms of power to purchase goods and real assets. But falling prices turns producer profits into producer losses, as you invest your money at higher prices and sell your outputs at falling prices. So with producer losses and bankruptcies there would soon be nothing left to buy with your ‘valuable’ money. This is why any fixed quantity money like gold is incompatible with a profit seeking capitalist economy.

    Business profit in aggregate requires either mercantilist export of outputs to capture foreign money (i.e. you export your production and import their money), or inflation of the domestic money supply to provide additional purchasing power beyond the earned incomes that producers pay out as their costs. One of the most effective strategies of monopolists (who are backed by banksters who enjoy the power of creating and allocating credit money) is to suppress prices until your competitors are bankrupted, then take their market share and jack prices back up to profitable levels. Deflation benefits people who already have a multi generational supply of money. Deflation kills productive businesses.

    WARREN MOSLER Reply:

    i would stop paying interest on reserves, let fed funds be permanently at 0, and let the Fed concentrate on regulation.

    nominal savings comes from congress deficit spending

    Reply

    Unforgiven Reply:

    @WARREN MOSLER,

    And toss the FICA cap too?

    WARREN MOSLER Reply:

    lost the context, sorry.

    suspend FICA entirely to restore aggregate demand of people working for a living and largely from the bottom up.

    Unforgiven Reply:

    @WARREN MOSLER,

    Sorry, had payroll taxes on my mind. Should have been FDIC cap.

    LetsGetItDone Reply:

    @WARREN MOSLER, Beautifully simple!

    WARREN MOSLER Reply:

    thanks!

  14. Neil Wilson says:

    For a fairly comprehensive demolition of the myths of Austrian Economics from a Post-Keynesian perspective see the blogger Lord Keynes site:

    Reply

  15. Dan Kervick says:

    “Wenzel’s challenge to the idea of functional finance is untenable—and not particularly Austrian. He argues that the subjectivity of value means it is impossible for us to tell whether something is “good for the economy.” Humbug.”

    This part of Carney’s discussion is quite good actually.

    If the subjectivity of value made it impossible to tell whether some public spending initiative is good for the economy, it would equally well make it impossible for a CEO to tell whether some corporate spending plan is good for the corporation. But people are able to make such decisions all the time. They are not infallible; but they are also not blind shots in the dark.

    Reply

  16. RJ says:

    Why will Govt deficits cause inflation if Govt issue bonds at the required interest rate. I think the inflation argument is largely nonsense.

    And the reason for me why Govts should run much larger deficits (preferable by tax cuts) is for pension savings.

    The only way people can save for retirement is if the Govt runs deficits. And currently savings for retirement are low and need to be increased.

    For example if Govt run deficits to fund retirement savings

    -An average of $100,000 = 30 trillion
    -An average of $200,000 = 60 trillion

    The US needs a lot more Govt debt

    Reply

    beowulf Reply:

    @RJ,
    I mentioned above that Tsy should issue CDs instead of bonds, but there’s one sort of bond that would be helpful.
    Perpetual bonds that never mature (what the British call consols). Peg the consol’s interest rate to CPI and let quantity float instead of current practice of setting quantity and letting interest rate float. No maturity and 0 real interest, call them Double Aught Consols. :o)

    Tsy could continue selling T-bills and buying back existing Treasuries (or even newly issued consols) as required. Oh, and the debt ceiling wouldn’t apply to consols.
    The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than…

    Tsy defines face value (or face amount) as the principal it promises to repay lender at maturity. When a bond is stripped after issuance, the zero coupon strip gets the principal at maturity and the interest-only strip gets the interest until maturity (a later subsection of the statute includes zero coupons in the debt limit). So T-Bonds whose principal and interest are guaranteed by Tsy are within debt limit, but because an interest-only perpetual annuity has no promise to repay principal, there’s no face amount that can be included in debt limit.

    In a legal sense, a consol would be a constructively stripped bond with Tsy retaining the principal-only zero coupon (Tsy-held obligations are exempt from debt ceiling) and the interest-only annuity issued to the public. With no limitations on quantity, consols are the very definition of a scalable product. :o)

    Reply

    Neil Wilson Reply:

    @beowulf,

    Isn’t a ‘principal only, zero coupon Treasury perpetual bond’ also known as a dollar?

    Reply

    Ed Rombach Reply:

    @Neil Wilson,

    A Tsy bond is really nothing more than a portfolio of zero coupon bonds of different maturities.

    beowulf Reply:

    Neil,
    Except that dollars are principal only, 0 maturity obligations since you can trade them at par value immediately. A Zero coupon bond has a maturity date in the future, so they sell at a discount (obviously the farther out the maturity date, the greater the discount).
    An annuity pays interest (say, to annual increase in CPI index) until maturity date. A consol bond would be (and of course in the UK, is) an annuity with no maturity.

    Warren,
    My point is that consol bond has no maturity and thus no face amount that counts against the public debt ceiling.
    Since a 3-month T-bill matures in 91 days, it does add to public debt. And yes, Congress could fix this tomorrow by eliminating the debt ceiling, but I don’t expect that to happen until at least President Tebow is elected, if then.
    :o)

    WARREN MOSLER Reply:

    ok, got it!

    I proposed a 50 year 0 coupon bond by tsy for pension funds who all currently need heaps of duration.

    It would sell at a relatively low rate due to it’s positive convexity, and both sides would be happy,
    and it would give the tsy enough duration to keep new issuance to 3 mo bills, in a kind of barbell strategy

    beowulf Reply:

    @Warren Mosler,
    That would make a lot of sense but for the same face amount/principal problem as ESM’s 1000 yr bonds (i.e. the debt ceiling). I suppose the Fed could open its TDF facility to pension funds and offer a 50 year 0 coupon CD.
    :o)

    WARREN MOSLER Reply:

    ironically many of the same guys who want ‘free markets’ also want govt. securities to somehow promote ‘market functioning’, as came out back when a surplus was forecast.

    WARREN MOSLER Reply:

    why bother with anything longer than/other than 3 mo bills if deficit spending can’t just be left as reserve balances?

    Reply

    ESM Reply:

    @beowulf,

    An interesting idea. It reminds me of a Euro-denominated bond (Bloomberg ticker DANGAS) issued by the govt owned Danish utility Dansk Olie og NaturGas (known as DONG) in June 2005 which matures in June 3005.

    The coupon is currently fixed at 5.5% but floats at 3mth Euribor + 320bp after June 2015, but only until June 2505, at which point it steps up to 3mth Euribor + 420bp for the remaining 500 years.

    Not sure of what the point of the 100bps step-up was, but maybe DONG’s financial advisors realized the Euro might not survive until 3005.

    Of course the bond issue proceeds were used to finance an extension of DONG into the North Sea where deep drilling was required. Presumably that was the driving force behind the issuance of such an extremely long DONG.

    Reply

    Geoff Reply:

    @ESM,

    Nothing against long dongs, but that bond sounds more like a so-called fixed/floater that is callable on the step up dates. The large step up is an incentive to redeem. These type of structures are a way around the capital rules as they are treated as equity by the regulator but as debt by the market. The rules will be tightened under basel 3, at least for financial companies. Step ups will be banned, i.e. there will no longer be any incentive to redeem on the float date.

    beowulf Reply:

    @ESM,
    Curiously enough, a 1000 year bond term isn’t long enough since the obligation to repay principal (albeit 10 centuries from now) creates a face amount subject to debt limit.

    RJ Reply:

    @beowulf,

    Agree.

    Even if it did apply to the debt ceiling. The key is education. That Govt debt is really for pension savings.

    Far too many focus on Govt debt (an irrelevant liability created and funded by journal entries) and forget about the more important interest bearing asset held by another party.

    Reply

    WARREN MOSLER Reply:

    my take is that issuing bonds is about interest rate support, not inflation, see ‘soft currency economics’ and other writings on this website.

    Reply

  17. Dan Kervick says:

    On point 1, MMTers who think that the financial system tends toward crisis – the Minskyan strain in MTT – have a vastly different reason for thinking so than do Austrians who think the present system is crisis prone. Minsky thought that a tendency toward financial fragility was inherent in the very nature of capitalist finance. Robust financial systems contain the seeds of their own future fragility, as they evolve naturally, through free market financial activity alone, into speculative and then Ponzi financial systems. So the point is that finance needs to be very well regulated to keep these natural tendencies in check. It’s like a garden that will quickly become overgrown and infested and choke itself to death unless we keep pulling the weeds, trimming the plants, getting rid of pests, etc.

    Austrians believe, on the other hand, that when a financial system is left in the hands of laissez faire natural processes, it regulates itself and preserves its own overall stability. They think that the problems come from governments regulating and interfering with natural processes, and generally mucking up the invisible hand genius of economic nature.

    A completely opposite view.

    Carney is suggesting that MMTers and Austrians just have two different ways of looking at the same facts, and two different ways of judging them morally. But I don’t think that’s right. They have radically different views of the nature of economic facts and processes, prior to any further disagreements they might have about the normative assessment of these processes. they have fundamentally different understandings of the causes of financial instability.

    Reply

    wh10 Reply:

    @Dan Kervick,

    Yeah, I agree. I appreciate his attempt, but Carney is really reaching here.

    Nevertheless, perhaps there exists a more sophisticated middle ground between the two views.

    Reply

    Dan Kervick Reply:

    @wh10, Edward Harrison has done a better job, I think, in attempting to find some middle ground.

    Reply

    geerussell Reply:

    @wh10,

    The middle ground seems to be cognitive dissonance. Simultaneously in agreement on sectoral balances and MMT operational descriptions and yet still ideologically opposed to most specific uses of expansionary fiscal policy.

    Reply

    Dan Kervick Reply:

    @Dan Kervick, “But if we read “capitalist economies” as “modern economies with central banking and interventionist governments” then the point of disagreement vanishes….Are we entitled to read “capitalist economies” in this way? I think we are.”

    I’m sorry, but we are not entitled to interpret people in ways that fly in the face of the plain sense of their writings. Find me an MMT writer who has suggested that the source of the instability of modern capitalist economies lies in “interventionist governments.”

    Reply

    Carney Reply:

    @Dan Kervick,

    They all write, as Minsky I did, in context of actual economies, rather than anarcho-capitalist theory. That’s my point. What Minsky and many MMTers regard as free markets, Rothbardians consider a market rigged by govt intervention. In any case, both MMT and Austrian Econ believe our current, actually existing financial system is unfair and tends toward crisis.

    Reply

    WARREN MOSLER Reply:

    the way I say it is under current institutional arrangements the private sector is necessarily pro cyclical

    Dan Kervick Reply:

    @Carney

    John, Minsky was no doubt lead to formulate his financial instability hypothesis as a result of empirical observation of actually existing present-day economies. But I think if you look at his theoretical model of what generates financial instability, you will see that it applies to any capitalist economy with expensive financial assets and complicated financial systems, and does not depend in any way on the existence of exogenous perturbations coming from government. The hypothesis builds on the work of Fisher, Kalecki and Keynes. The existence of banks as profit-seeking enterprises with a desire to innovate, profound uncertainty about the future of the kind Keynes emphasized, and some facts about human nature, such as the tendency of business-people to hold exaggerated expectations of profits, are all you need. These things are there in any complex capitalist economy whether a government is intervening or not.

    Minsky says:

    “The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the
    economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.”

    The anarcho-capitalists and Austrians believe that truly free markets (which we can all agree don’t exist) would tend toward equilibrium and long-run stability through the information processing of the price mechanism. But I believe Minsky’s notion is that such a system, if it ever did exist, would be wildly unstable, because it would possess all of the inherently destabilizing elements of a capitalist economy, but without the stabilizing damping of government regulation. Government regulation plays a role in giving us “the actual business cycles of history”. But I believe Minsky’s position is that these cycles are not nearly as chaotic as they would be without the regulation.

    That isn’t to say that Minsky or anyone else wouldn’t recognize the obvious fact that there can be all kinds of government interventions in a capitalist economy, from sober regulatory management to outright graft and corruption. Certain kinds of intervention – not sound regulatory interventions, but ad hoc crony bailouts of privileged players, and the passive regulatory negligence that tolerates the growth of systemically dangerous institutions – could create even more dangers than than those already inherent in complex capitalist financial systems.

    But I think it is important to recognize that the Austrian prescription for stabilizing the financial sector – get the government out of the regulatory business and let competition and the price mechanism heal the system naturally – is not an approach Minsky would have endorsed. His view of economic behavior seems to be that self-seeking human beings and the markets and financial instruments they create, left to do what they will without institutions of government regulating that behavior in light of broader public purposes, contain the seeds of their own chaotic self-destruction.

    jown Reply:

    @Dan Kervick,

    This feels dirty and off but I am going to toss it in … It is not “the” source but it is “some” sources …

    Minsky points to (suggests) the LOLR actions of the CB as being a source of instability (inflation).^ Also think about “mis-calculated” government spending (including welfare) that is realized in the markup (price level, again, instability).^

    I shall hang my head in shame for this … after I take a scalding hot shower … just trying to keep us tough though; who knows what will be thrown in the future.

    Dan, loving your pieces over at NEP. So looking forward to the rest and more of your work to come.

    ^Stabilizing An Unstable Economy, 1986

    Reply

    WARREN MOSLER Reply:

    thanks, didn’t know that about Minsky. need to read him one day.

    Ed Rombach Reply:

    @jown,

    Warren – Minsky had the run up to the credit crisis nailed…Dead On! The proliferation of Toggle Bonds and Option ARMs fit right into Minksy’s paradigm.

    Dan Kervick Reply:

    @jown

    Thanks Jown!

    jown Reply:

    @jown,

    NB: LOLR, “our economy,” instability, and financial regulation.

    You are right Dan, all part of Minsky’s bigger picture assessment …

    “A lender of last resort is necessary because our economy has inherent and inescapable flaws that lead to intermittent financial instability.” (Minsky, 1986, Stabilizing …, p. 44)

    “If the financial system does become disruptive, then the Federal Reserve … must be prepared to intervene and correct the situation by furnishing liquidity or absorbing potential losses. However, this refinancing and socialization of potential losses imposes costs as well as benefits on the economy, for it affects the behavior of the economy after the lender-of-last-resort operations have been carried out.” (Minsky, 1986, Stabilizing …, p. 45)

    “However, the absence of deep depressions does not mean an absence of adverse consequences; the lender-of-last-resort actions that were undertaken have, in effect, set the stage for subsequent inflationary bursts.” (Minsky, 1986, Stabilizing …, p. 45)

    “Federal Reserve lender-of-last-resort actions, directly or indirectly, set floors under the prices of assets or ceilings on financing terms, thus socializing some of the risks involved in speculative finance. But such socialization of risks in financial markets encourages risk-taking in financing positions in capital assets, which, in turn increases the potential for instability when carried out for an extended period.” (Minsky, 1986, Stabilizing …, p. 49)

    WARREN MOSLER Reply:

    the currency itself, as defined by the tax liability, is a coercive intervention for the further public purpose of provisioning the govt.

    Reply

    WARREN MOSLER Reply:

    First, Minsky isn’t mmt per se.

    Second, once it’s recognized that the currency is a (simple) public monopoly astute Austrians, pk’s, and others incorporate that fact into their models.

    Reply

    jown Reply:

    @WARREN MOSLER,

    Yeah, you are right re Minsky not being MMT per se. Totally agree.

    I only mentioned Minsky to point to the fact that, like Keynes, when the capital development and resource creation of an economy are “ill-done” there are perverse effects. This is one of the reasons why Minsky worked for a Job Guarantee program that “bubbles up” and not “trickles down.”

    In Minsky’s later work the “Fiscal Posture” of the Government takes a greater importance in his analysis. Almost appears as if he was going to “blink” re Fiscal action, deficits. Think it just goes to show that our fiscal house should be in order and it bothered him that it wasn’t.

    We need to AGREE on maybe three big issues and “front-load” 15 years of sovereign (citizen declared) investment. We either come to this by democratic process or we get fascism (call it Kleptocracy or Plutocracy) or War Socialism after fascism or maybe just big bombs that we have to clean up.

    Sorry for getting all grim-like. I’m obviously in favor of peaceable investment for the future of Man and Earth. Economics is to help make me a better humanitarian.

    Love y’all …

    Reply

    pebird Reply:

    @Dan Kervick, Dan, absolutely right. Carney is trying to force a political bond between MMT and Austrians that would be doomed to fail.

    I dont have a problem trying to have discussions with Austrains that can be influenced, but there are so many fundamental issues to overcome: role of government, gold, nature of fiat currency.

    Also, kind of an anti-scientific bias, not in all.

    Having said that, most who align themselves as “Austrian” are not deep into the theory, they embrace the natural US libertarian strain and need a foundation for critique. Austrain has better or longer branding for those personal values, so to speak.

    Reply

    LetsGetItDone Reply:

    @Dan Kervick, Right, and while both views may be false, there’s plenty of evidence to suggest that the Austrians were long ago refuted.

    Reply

  18. Dan Kervick says:

    “Rothbard considers this counterfeiting, which is a moral judgment that depends on the prior conclusion that fiat money isn’t the moral equivalent of real money. Rothbard is entitled to this view—I probably even share it—but that doesn’t change the fact that in our economy today, this “counterfeiting” is the operational truth of our monetary system. We can decry it—but we might as well also try to understand what it means for us.”

    No matter what one thinks about the proper role of government in the monetary system, I cannot find any meaningful or intellectually honest sense at all in which the government issuance of fiat money could be regarded as counterfeiting.

    To counterfeit something is to produce a facsimile of that thing, and then the deceive people about the difference between the facsimile and the real thing. But everyone in the world knows that the public’s money is issued by the government. It’s written all over the damn money, along with pictures of past government officials and federal buildings! Do the Austrians need a dictionary as well, to go along with some economics book written some time after 1900?

    There is also nothing written on the dollar bills in my pocket about gold. The money issued by the government doesn’t present itself as being anything other than it is. People are willing to accept it in exchange for stuff, because they know that other people are also likely to accept it in exchange for stuff. And they also know that the fact that the government requires people to accept the public’s money for the settlement of debts, and requires people to pay taxes in the money, makes it even *more* likely the the money you accept in exchange will continue to be used in exchange.

    In modern economies money is the creature of a government, and its creation and regulation subject to the laws of that government. Under a democratic government, the power to create and regulate money belongs to the public. The public, working through its government, can’t be the counterfeiter of its own legally ordained money. The Austrians might not like using government money, but they shouldn’t be able to get away with lying about it.

    Nor should they be indulged in their born yesterday routine. They come off like they’re the last people in the universe to discover the basic facts of life about money, but they think they have uncovered some vast evil conspiracy:

    “Panic … the government’s money is fake money that isn’t backed by gold!” “Did you know that banks don’t just save deposits, but they lend them too!?”

    Reply

    RJ Reply:

    @Dan Kervick,

    Banks do not lend deposits. Deposits are a bank financial LIABILITY. Liabilities can not be lent.

    But the counterfeiter comment really is nonsense. Money is created by a journal entry

    The banks create new money by

    Debit Bank loan
    Credit Customer bank account

    And when Govts spend

    Debit Fed reserves
    Credit Customer bank account

    What’s the big difference.

    Overall isn’t this article quite poor. And IMHO completely misses the point re MMT. At least I hope it does.

    Reply

    beowulf Reply:

    @RJ,
    “Deposits are a bank financial LIABILITY.”

    Tsy should stop issuing bonds and start issuing Certificates of Deposits ranging from 1 month to 30 years. “National deposits” sounds nicer than “national debt”. :o)

    Reply

    WARREN MOSLER Reply:

    yes, but why anything longer than 3 months?

    Ed Rombach Reply:

    @beowulf,

    Yes, but better still how about “National Savings Deposits”?

    beowulf Reply:

    Warren,
    True enough. My point was that Tsy CDs and T-bonds are six of one, half a dozen of the other.
    And Ed is right, National Savings Deposits sounds like something Congress should endeavor to create more of.
    However the Fed is step ahead of us (and perhaps the law) here. Its created a Term Deposit Facility; cleverly working around its inability to issue bonds by instead selling by auction Fed CDs to banks.

    Under existing law, Tsy could exchange platinum coins for Fed’s TDF proceeds or if Congress removed restrictions on US Notes, Tsy could fund appropriations by directly issuing US Notes into TGA and then leaving it to the Fed worry about draining excess reserves by paying IOR and/or selling TDF CDs. Debt service cost would still be on Tsy by the reduction in the Fed earnings rebate but of course Fed liabilities don’t increase the public debt.
    November’s 1-month CD auction cleared at 0.263%, no surprise since banks are already getting 0.25% IOR. If TDF auctions were open to public, the rate would fall to 1 month T-bill rate of 0.00%.
    http://www.federalreserve.gov/newsevents/press/monetary/20111115a.htm

    WARREN MOSLER Reply:

    so why not just issue 3 mo bills?

    LetsGetItDone Reply:

    @beowulf, Technically, would these Certificates of Deposit count against the debt limit? Also, Treasury isn’t a bank, so how can it issue Certificates of Deposit?

    On the other hand, PPCS could certainly be used the way you suggest above. But, why bother, why not just force the Fed to credit the platinum coin face value directly, and “sweep” the seigniorage into the TGA?

    RJ Reply:

    @letgetitdoen,

    I don’t agree with creative accounting.

    If it means a valid Govt liability is being posted to revenue. When the opposite party holds an asset.

    This might be fine for dodgy accountants but should not be promoted by MMT.

    beowulf Reply:

    @bletsgetitdone,
    “Technically, would these Certificates of Deposit count against the debt limit? Also, Treasury isn’t a bank, so how can it issue Certificates of Deposit?”

    “As long as they’re operationally structured to comply with legislative authority to issue bills, notes and bonds, Tsy can call its obligations whatever it wants; its not like the Federal Trade Commission is going to get on their case for false advertising. But I’d leave the sale of time deposit CDs (which would be subject to debt ceiling) to the Federal Reserve (exempt from debt ceiling).

    And certainly Tsy could (and should) use coinage to avoid all sorts of headaches. But since people like to make things difficult, I’m just suggesting that Fed CDs and Tsy consols are two other ways to sidestep the debt ceiling under current law.

    roger erickson Reply:

    @beowulf,

    You know, I’ve often wondered WHY the Platinum Coin legislation was introduced, and which lobby pushed it. This finally suggests a plausible reason. If US politics reduces to a catfight between a Big Finance (Dem) lobby and a Big Oil (GOP) lobby, then it would have been the Big Oil lobby that got the Platinum Coin legislation introduced, as an ace-in-the-hole defense against the banksters.

    All this after we THOUGHT we defeated the Big Gold lobby.

    Where’s the Big Logic lobby? (seduced by illogical passion?)

    In the end, you have to wonder if these supposedly opposing lobbies are all under contract to Don King.
    If they change their names to Smokin-Joe Newt & Muhammad Obama you’ll know the promoter’s getting lazy.

    Djp Reply:

    @Dan Kervick,

    “””
    No matter what one thinks about the proper role of government in the monetary system, I cannot find any meaningful or intellectually honest sense at all in which the government issuance of fiat money could be regarded as counterfeiting.
    “””

    I think it’s pretty simple. MMT proponents have no trouble telling people that the vast majority of people don’t understand fiat currency. Seems they should be able to translate rational fears/angers about money.

    How about an analogy? A bunch of public employees are clamoring that I’m about to “steal” their pensions because I’m going to alter the terms of their pension plan before they retire. What a bunch of idiots those public employees are, didn’t they read their employment contract, can’t they see that right there in black and white it says the terms can be altered? Geesh. (Of course, in the private sector this happens with much less fanfare).

    When they say the gov is counterfeiting, I believe it’s pretty obvious that they are arguing that the gov is reneging on an implied promise — stability of the dollar, the ability to have meaningful purchasing power tomorrow from a dollar saved today. And it’s pretty hard to argue that this isn’t an implied promise since it’s right there in the Fed’s mandate.

    Now, once you’ve extracted the rational and reasonable interpretation of “counterfeiting” being used you can go on to argue the MMT view that right now inflation isn’t the main fear… etc., etc.

    Reply

    LetsGetItDone Reply:

    @Djp, The Fed’s mandate and its results are two different things. It also mandated to create full employment; but when has it done that since Humphrey-Hawkins was passed. There is no implied promise from the Government that there will be price stability. It’s just a BS story the Austrians also advance.

    In any event, the new money created isn’t counterfeit in that it is a “facsimile” that looks like Government money. It is Government money and has the same nominal value as the old Government money. No promises about “real” economic value are ever made. It’s just people who have money trying to lay a non-existent obligation on the have-nots.

    Reply

    Djp Reply:

    @LetsGetItDone,

    The average man in the street would vehemently disagree with you. I assume by “people who have money” you include any person about to retire living off of some small pension and private savings. That’s the person in this country that believes there is some implied promise. The very wealthy know it’s not true, and the very poor don’t care.

    Do you really think any politician advocating your views would have any chance of being elected — unless he was at the same time MAKING the implied promise that he would somehow maintain price stability.

    ESM Reply:

    @LetsGetItDone,

    There is clearly an implicit promise to maintain price stability, just as there is an explicit promise under a gold standard to maintain convertibility at a fixed ratio.

    But when it comes to a sovereign government, there isn’t much fundamental difference between an implicit promise and an explicit promise. Explicit promises (i.e. laws) are broken all the time as long as it’s politically feasible to do so. Likewise, implicit promises can be sacrosanct, if they are politically expedient. The government backing of Fannie and Freddie debt was based on an implicit promise, for example.

    So just as the Gold Reserve Act in 1934 devalued gold certificates (even purely private sector ones), so too the government can devalue the dollar at any time. And it may maximize utility to do so. But it is always going to be a matter of the advantages outweighing very significant disadvantages (e.g. loss of credibility, substantial risk premia, inefficient consumption and investment).

    WARREN MOSLER Reply:

    the fed’s mandate is for price stability, full employment, and low long term rates, or something like that.

    is there something else?

    LetsGetItDone Reply:

    @Djp, This is really funny folks. The idea of an implicit promise is nonsense. You can’t take it to court or to the bank, or deduce it from what’s explicit on the dollar bill or on a debt instrument.

    As far as the man in the street is concerned, when I tell that man that I’m going to pay off the national debt using the coin seigniorage from a $60 T coin, and use the remaining $42-43 T in the TGA to do things like double his SS payment, provide full coverage Medicare for All with no co-pays, provide free college educations for his Grandchildren, and strengthen every aspect of the Social Safety net while creating full employment in 6 Months (I’m being conservative here, since Warren says it will take 90 days), take over the big banks and either break them up or nationalize them and make credit freely available to small business and consumers at a few points over prime, while mandating a maximum credit card interest rates at 5 points over prime, putting an end to the International gambling casino in derivatives, jailing the Wall Street fraudsters and Banksters, and writing down their mortgage principals consistent with what the crash did to the market value of their houses, then you’re damned right I think I’ll get elected by the average man, if there really is such a thing, that is!

    Reply

    ESM Reply:

    @LetsGetItDone,

    “then you’re damned right I think I’ll get elected …”

    I think you’re far more likely to get committed (sectioned, for our UK friends).

  19. wh10 says:

    I honestly don’t know how I feel about this.

    I really have very little respect for Austrian economics. It’s always come off as very simple-minded and extremist. I like thought that allows for nuance. It’s like a religion for people who hate government. In fact, it seems like that was the motivation for the theory, rather than simply seeking the truth.

    As far as inflation, the fact of the matter is that in the past century, when has there ever been a case of over the top demand-pull inflation generated by excessive government spending? The Austrians like to pretend we’re always on the verge since it appears to justify their hatred of govt, but the fact of the matter is that it rarely ever happens. Even today, with 1T+ deficits and massive QE. Doesn’t mean one shouldn’t be vigilant, but the Austrians blow it way out of proportion and have no idea when it is a real threat.

    Reply

    wh10 Reply:

    @wh10,

    “Rothbard worries that government control of the money supply will lead to “runaway inflation.” The MMTers tend to be more sanguine about the danger of inflation than Rothbard—although I do not believe they are entitled to this attitude. As I explained in my piece “Monetary Theory, Crony Capitalism and the Tea Party,” the MMTers tend to underestimate the influence of special interests—including government actors and central bankers themselves—on monetary policy. They have monetary policy prescriptions that would avoid runaway inflation but, it seems to me, there is little reason to expect these would ever be followed in the countries that are sovereign currency issuers. I think that on this point, many MMTers confuse analysis of the world as it is with the world as they would like it to be.

    In short, the MMTers agree with Rothbard on the purpose and effect of government control of money: it means the government is no longer revenue constrained. They differ about the likelihood of runaway inflation , which is not a difference of principle but a divergence of political prediction.”

    I think it really is a difference of principle and economic fundamentals. Austrians tend to have a very misguided and myopic view of inflation in that they focus too singularly on money supply measures (thus the whole ‘counterfeit’ thing and their fear of inflation from QE, for example).

    Secondly, as far as MMTers being sanguine and difference in political prediction, I refer to my post above. Who’s predictions on inflation have been more accurate these days? The Austrians (hyperinflation) or the MMTers (level headed)? That’s fine if Carney thinks inflation vigilance warrants Austrian-like overzealous-ness, but I think it reveals ignorance of real-world workings. As wasteful and distortionary as Carney and Austrians view govt spending, it still hasn’t managed to manifest in runaway inflation in the US experience.

    And dear G-d I pray someone doesn’t bring up Zimbabwe right now.

    Reply

    wh10 Reply:

    @wh10,

    In any case, I appreciate these posts by Carney, and I do not deny outright that something can’t be learned from the Austrians that could potentially add more nuance to MMT. Just throwing in my knee-jerk two cents.

    Reply

    wh10 Reply:

    @wh10,

    Also, in critique of that quote, MMTers’ prescriptions for controlling inflation are more fiscal policy than monetary policy. Unclear if Carney understands this. I can give him some benefit of the doubt since he seems pretty knowledgeable, though his Austrian roots may be pushing him towards the, IMO misguided, ‘monetary policy’ view of inflation.

    WARREN MOSLER Reply:

    and some define inflation as an increase in the money supply, whether prices change or not
    so always best to check definitions before responding.

    Reply

    Art Reply:

    @WARREN MOSLER,

    “and some define inflation as an increase in the money supply”

    Which means that a gold standard is inherently ‘inflationary,’ unless gold mining is banned (or supplies of unmined and other non-monetary gold are exhausted).

    LetsGetItDone Reply:

    @WARREN MOSLER, One can define terms any way one wants to; but that doesn’t mean that definition makes sense or is in accord with common usage. The Austrians define things to create tautologies, which is one reason why their stuff rarely make contact with the real world.

    jonf Reply:

    @wh10, So he says we have crossed the gap. Sorry, not me. I will stand on the this side until you really figure out how you feel about counterfeit money, inflation, deficits and the like. And please do so in the context of twenty million unemployed for three years. Sounds like the scorpion and the frog and I’m the frog here. Let Wentzel cross this gap, please. Meanwhile, did I miss what these folks are doing in Europe or is this something else, a kinder, more genler Austrian economics.I guess that is really just politics, nothing to see here, eh?

    Reply

    Ed Rombach Reply:

    @jonf,

    “Meanwhile, did I miss what these folks are doing in Europe or is this something else, a kinder, more genler Austrian economics.I guess that is really just politics, nothing to see here, eh?”

    What’s going on in Europe is fascism.

    Reply

    Art Reply:

    @jonf,

    “a kinder, more genler Austrian economics.”

    Once upon a long time ago, “Austrian” economics was primarily about marginalism and optimal capital allocation. It became politicized under Mises and a few others, and then sublimely ridiculous under Rothbard et al.

    Reply

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