MMT primer on the net
Posted by WARREN MOSLER on August 14th, 2012
This Could Change Everything
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MMT: Taxes function to regulate aggregate demand, and not to raise revenue per se.
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August 14th, 2012 at 4:25 pm
It is good but it would need a lot of detail for a newcomer. Who is the intended audience?
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chewitup Reply:
August 14th, 2012 at 6:11 pm
@Roger,
Agree. Assumes too much. Sectoral balance section needs a few more panels. Have to define the sectors.
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August 14th, 2012 at 5:13 pm
Just submitted this to hacker news. Maybe it will garner some lively debate. Sign up and up vote it there,if you have time. It’ll be good to spread the work in the hacker community.
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jcmccutcheon Reply:
August 14th, 2012 at 5:14 pm
@jcmccutcheon, news.ycombinator.com/new.
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August 14th, 2012 at 7:24 pm
Who gets upset about deficits and debt? Thieves, if they have any conscience at all. That’s because the alternative to debt, to owing something for what you took, conflicts with their desire to get something for nothing. Also, I suspect that for some people who have no skills or talents anyone else can use — i.e. nothing to trade or exchange — theft is the default mode of sustenance. Of course, if they’re not good at that and get caught, they eventually end up in jail where they are sustained for free.
It would probably be more efficient to just take care of incompetents to begin with.
Then too, the threat of deprivation is a source of some vicarious pleasure for a cadre of mean-spirited people who sublimate their predatory impulses. Why humans prey on their own kind has been a puzzlement ever since Cain dispatched Abel. Having them do it vicariously is probably less socially disruptive.
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August 15th, 2012 at 4:12 pm
Pretty good. CFAs could use a good MMT primer too.
13 – “The government neither has, nor doesn’t have dollars in an account somewhere” Huh?
15 – “private sector cannot create net financial assets” Mosler business cards, Buckaroos, etc. disprove this claim, don’t they? Unless they mean to imply sovereign-currency denominated NFAs.
18 – “Sacrificed control of interest rates” And/or forex reserves, and/or exchange rates. And in a crisis, all three.
22 – “Everything changed! Except the textbooks” Nice!
34 – “All sectors cannot spend more than they take in” If credit is expanding, can’t they? Just can’t do it indefinitely?
36 – On a side note, re “Minsky’s Financial Instability Hypothesis,” isn’t that moniker sort of like calling mechanical physics “hypothetical?” Financial leverage seems about as obvious as a simple lever or pulley.
46 – “Deficits do matter” Amen! Too many people associate MMT with Cheney’s reported claim (from Paul O’Neill’s memoirs?) that they don’t.
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John O'Connell Reply:
August 16th, 2012 at 10:02 pm
@Art,
Buckaroos (et al) are not NET financial assets for the private sector. The assets and liabilities offset each other, just like a bank loan does. Net effect = 0.
If you define a “teacher” sector and a “student” sector, and the teacher sector runs a deficit of Buckaroos, then the student sector net financial assets increase. But that is equivalent to a government sector and a private sector. The student sector, by itself, cannot create net Buckaroo financial assets.
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Art Patten Reply:
September 9th, 2012 at 12:07 pm
@John O’Connell,
John, thanks, I was simply pointing out that a ‘teacher’ sector, although analogous to the USG in the Buckaroo framework, is not the USG. Private sector entities can and do create equivalents or at least analogues to NFAs all the time. They’re like Warren’s ‘points on the scoreboard’ but without the far reaching utility of USDs, eg. Kind of hair splitting on my part, I admit.
Also not sure I agree that Buckaroo NFAs = 0…? Would seem to depend upon the nominal service requirements imposed by the faculty relative to Buckaroos outstanding?
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John O'Connell Reply:
August 16th, 2012 at 10:14 pm
@Art,
“All sectors cannot spend more than they take in” If credit is expanding, can’t they? Just can’t do it indefinitely?”
If by expansion of credit you mean net private sector borrowing from private sector banks, i.e., a private non-bank sector deficit, then either the government must be in surplus or there must be a current account surplus, or both. The net goods sold by the domestic private sector is the private sector income, and if the private sector spends in excess of that amount, then what goods are the other sectors buying from it, in excess of their incomes (what they sell to the domestic private sector)?
Think of the realities of transactions that underlie the sectoral balance equation.
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Art Patten Reply:
September 9th, 2012 at 12:10 pm
@John O’Connell,
Thanks, I should have been clearer. By “not indefinitely” I meant assuming that the banking system is not capital constrained, i.e., not fully levered to regulatory limits. Make sense?
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WARREN MOSLER Reply:
September 9th, 2012 at 1:14 pm
not to forget i consider fed member banks public sector entities.
any bank could open buckaroo accounts and make loans/create deposits but they wouldn’t be acceptable for buck tax payments
and would not be issuer insured, etc.
August 16th, 2012 at 7:00 am
The primer is light on the one question that stops sophisticated mainstreamers accept MMT:
How can a central bank undertake to cap bond yields without this creating a worrying inflationary risk?
Answering “look at Japan” isn’t enough.
I think this needs to be met head-on, otherwise this kind of material will convert people, only for them to hit a brick wall on this point.
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WARREN MOSLER Reply:
August 16th, 2012 at 7:03 am
i see no theory or evidence that ‘inflation’ is a function of interest rates set by the govt. with floating fx policy
including all central bank research
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Anders Reply:
August 16th, 2012 at 9:57 am
@WARREN MOSLER, perhaps it’s more an article of faith then?
When I have tried to engage professional economists, many of them agree with most of MMT – it’s just this final hurdle that stops them.
MMT requires the authorities to give up on monetary policy, and put their faith in fiscal policy. This is a huge step psychologically.
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Neil Wilson Reply:
August 16th, 2012 at 10:06 pm
@Anders,
The way to deal with bond yields is not to issue them.
What I’ve never understood is why a central bank is held capable of setting a base interest rate for an entire economy, but incapable of setting an interest rate, credit limit and credit terms for the Treasury.
It strikes me that it is much better to put the central bank in the way. That way *it* controls how much the Treasury pays for money (notionally), and how much the private sector gets in interest income. And it can push those in opposite directions if required.
ISTM that the increasing bond yields that are occurring in the European market are pro-cyclical – directing government spending towards interest income that is saved rather than being directed towards people with a higher propensity to consume.
If you scrap bonds and stick the central bank in the way, then the central bank can stop the private sector getting interest income on excess savings – encouraging them as much as it can to spend those savings. (And vice versa in booms. It could even offer term accounts at a higher interest rate).
Yet at the same time it can advance to governments what it considers appropriate to fund the countercyclical spending – if necessary putting ‘covenants’ in place to make sure that spending is targeted in a systemically appropriate manner (if that is the control structure you want in the government sector).
I’d see that as a ‘monetary policy’ approach to an MMT system design
y Reply:
August 16th, 2012 at 9:59 am
Warren, you should have a debate with Nick Rowe about this specific issue. He’s convinced that you’re wrong, and claims the evidence is in his favour.
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Sergei Reply:
August 16th, 2012 at 1:05 pm
@y,
I think we clearly need to distinguish between developed and developing markets. For developed markets I would tend to agree with Warren that given current (neoliberal) policies inflation is an intrinsic feature of the economy and has little to do with the policy as such but rather reflects certain structure of economy and behavior of economic agents. I do not have anything to back it up but it is a strong feeling. Interest rates have generally very marginal effects in the cost structure of individual companies as well as industries.
Anders Reply:
August 16th, 2012 at 1:16 pm
@Sergei, don’t you agree that for MMT to win over mainstream professional economists, this is the case that needs to be made though?
I mean, one can be pessimistic and say that embarrassment alone will prevent Krugman etc ever publicly accepting MMT. But there are some – probably younger – professionals that could be won over.
Specifically, for MMT not to pose an issue in terms of the fashionable phrase “fiscal credibility”, the potential MMT side-effect of needing to keep interest rates low – and even monetise debt – needs to be explained not to be inflationary.
Since the 1970s it has been an article of faith that fiscal policy (ie rate of NFA injection) cannot control inflation. This is the precept I think MMT needs to target.
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Sergei Reply:
August 16th, 2012 at 2:09 pm
@Anders,
I do not think it is a/the case of/for MMT. Monetarism had a clear argument/mechanism about the origins of inflation. Mainstream does not it have this. How can you argue about something that does not even exist?
It is far from obvious that there is a clear causal link between interest rates and inflation in any developed economy within any reasonable range of interest rates. I think that any developed economy is far more flexible to respond and accommodate demand shocks on its own and pretty much does not need monetary policy for that. That is demand shocks of 5%-10% should be relatively easily accommodated by even existing manufacturing capacity, i.e. without any urgent new investments to expand capacity.
What monetary policy probably tries to control is not inflation as such but rather animal spirits so that animal spirits remain within controllable bounds and therefore allow automatic stabilizers to do their true inflationary/deflationary work. The whole expectations machinery is probably supposed to do nothing else but control these animal spirits a-la Keynes.
Sergei Reply:
August 16th, 2012 at 2:10 pm
@Anders,
I mean expectations machinery of modern monetary policy
Anders Reply:
August 16th, 2012 at 3:02 pm
@Sergei,
When I say “mainstream”, I have a UK slant, so I include monetarism anyway.
Another way of saying what you are saying is that standard monetary policy tries to control inflation via animal spirits, or confidence, as central bankers would call it.
“any developed economy is…flexible to respond and accommodate demand shocks on its own…by even existing manufacturing capacity”
Won’t any given monetary authority see rising inflation as a symptom of inadequate productive capacity, meaning that existing capacity cannot be relied upon to respond to inflationary shocks?
I think politically – because the politics are important – any authority needs to be seen to do _something_ if inflation starts ticking up. Even in your scenario, there has to be a point at which, say inflation hits 10%, you start to deploy some policies to control inflation.
Sergei Reply:
August 16th, 2012 at 3:57 pm
@Anders,
Anders, no, that is not what I meant. I meant that monetary policy tries to control de-stabilizing animal spirits while economy goes on its own with its “natural” inflation rate. This rate is defined by culture, financial architecture, industrial structure and so on. These things do change (though very slowly) and there are all types of inefficiencies and small shocks which lead to volatility of inflation but (!) inflation is mean reverting.
Of course any reaction of real economy to demand shocks suffers from lags. But this is equally true for a 0.1% GDP shock as well as 5% GDP shock. However companies run inventories which can cushion quite significant volumes of demand before additional production can/should be kicked in. And before one gets to theoretical price rationing arguments one has to deal with all types of time-rationing arguments which are real life. So I tend to think that in a developed economy inventories plus additional (overtime if you will) production can on a reasonably short notice be pushed high enough to satisfy any *realistic* demand shock. Those stories about really huge and sudden shocks that push demand beyond existing production capacity just do not exist in a developed economy.
So I tend to think that, again in a developed economy and within a standard range of interest rates, inflation is *never* a monetary phenomenon. While monetary policy tries to control *de-stabilizing* animal spirits via its expectation channel, fiscal policy does its boring but slow inflationary/deflationary work (via automatic stabilizers) and therefore mean-revert current inflation to its “natural” level given the factors mentioned above. Central banks can hardly control inflation because monetary policy can hardly influence those factors.
Anders Reply:
August 16th, 2012 at 6:15 pm
@Sergei, I’m inclined to agree with you that inflation is probably mean-reverting. And I’m sufficiently anti-rentier to think that if there is good reason to believe that an uptick of inflation to 6% will come back down again, then that’s fine and nothing to worry about.
But what if inflation reaches a level where you’re not comfortable of that? How can you just take a view that inflation will always mean-revert, with literally _zero_ weapons in your armoury?? Or rather, how can you expect the authorities to take such a view?
Neil Wilson Reply:
August 16th, 2012 at 10:31 pm
@Anders,
“But what if inflation reaches a level where you’re not comfortable of that?”
That begs the question why aren’t you comfortable with it?
AFAICT the only entities in the economy that are really badly affected by inflation are those issuing the loans – the savers. Everybody else appears to win – particularly with appropriate government policies in place such as earnings related pensions, and good union representation that reduce individual’s requirement to create their own buffer stock of savings against future uncertainty.
ISTM that it is the rate of change of inflation that is problematic rather than the absolute level of it. I recall hearing absolute inflation rates less than 10% are indistinguishable economically.
Is inflation just an Orwellian ‘perpetual war’?
Sergei Reply:
August 17th, 2012 at 2:04 am
@Anders,
I made my qualifiers. Of course there are weapons and many. With sufficient determination any system can be de-stabilized. But why should any *serious* government do that?
Besides, as Neil said above, “comfortable” is a definition from the domain of politics. It does not have an objective answer.
Anders Reply:
August 17th, 2012 at 5:38 pm
@Neil,
I agree that inflation is basically just a distributional issue, and that maybe our tolerance for higher rates should increase. I can imagine getting comfortable that rates will fall again after hitting 20%.
But what about 30%? 40%? Surely there comes a point where even non-rentiers get nervous about ‘escape velocity’ – leading to hyperinflation, and ultimately currency demise – which no one should want?
Sergei, “comfortable” surely should be construed as self-correcting – ie a situation where centripetal forces are sufficiently strong.
I thought MMT (and post-Keynesianism in general) agreed that inflation could be a concern and that fiscal policy was the right answer. You seem to be saying it isn’t!
MamMoTh Reply:
August 17th, 2012 at 6:13 pm
@Anders,
Instead of trying to argue how little damaging inflation really is, someone should be trying to explain what’s good about it.
Tom Hickey Reply:
August 17th, 2012 at 6:38 pm
@MamMoTh,
First, I’d say that “inflation” needs to be specified objectively and scientifically. Inflation is not directly observable and therefore it is selectively defined. “Price level” is not an objective scientific concept and cannot be used as one in objective argument. It’s a figment of neoclassical junk economics based on 19th century physics, along with natural order. See Neoclassical economic theory by Robert Nadeau
MamMoTh Reply:
August 17th, 2012 at 10:06 pm
@Anders,
Inflation as the loss of value of a currency, or the general and continuous rise of prices is a very objective concept even though it cannot be measured accurately.
You people need to live through a 100% monthly inflation for a while, and do less philosophy.
Tom Hickey Reply:
August 17th, 2012 at 10:57 pm
@MamMoTh,
I was quite happy to go to T-bills when Volcker inverted the yield curve, AND that says nothing about measuring inflation. You are avoiding the question.
Neil Wilson Reply:
August 18th, 2012 at 2:24 am
@Anders,
“I thought MMT (and post-Keynesianism in general) agreed that inflation could be a concern and that fiscal policy was the right answer. You seem to be saying it isn’t!”
I’m not, hence the mention of the 10% level in the OP.
Similarly the usual excluded middle fallacy arguments about 100% inflation a month are nonsense. There is a million miles between worrying about whether inflation is 2.4% or 2.5% per annum and 100% a month.
Essentially it is the same as saying we need to drive the car at 2mph with a man with a red flag in front because if we drive it at 100mph we will surely crash. The appropriate speed limit is no more 2mph than it is 100mph.
Inflation is a rate of change. It is like driving a car at a constant speed. You don’t feel you’re moving unless you look out the window, but your location is constantly changing.
My argument is that maybe the problem happens when the speed is constantly changing. In other words it is like a driver that is always accelerating and braking rather than driving smoothly. It makes you feel sick.
As to fiscal policy it appears that my design works then – since that *was* fiscal policy dressed up in monetary policy clothes. Have a look at the man behind the curtain ;-)
MamMoTh Reply:
August 18th, 2012 at 9:14 am
Tom: I am the one who asked the question: what can be good about inflation for the economy as a whole?
Neil: no fallacy, sorry. if 100% monthly inflation is a concern and not a figment of neoclassical junk, then you’ve got to come up with an explanation of the level at which inflation stops being such a figment.
Tom Hickey Reply:
August 18th, 2012 at 12:06 pm
@MamMoTh,
And I am jus’ sayin’ that “inflation” is a bogus concept with inadequate meaning to be useful. It’s a distraction at best and a negative influence at worst. Scientists and mathematicians need to come up with something satisfactory, or best to just can the idea. A cb running a command system to “control inflation” when they don’t know what it actually is or how to compute the rates (first and second derivative) scientifically, is beyond ridiculous. It’s estimating,” that is, guessing, and then relying on “influencing expectations,” with no causal transmission specified as a tool. Magical thinking at best, voodoo at worst. Is this the best that the so-called best of the best can do? Or is this the Middle Ages?
MamMoTh Reply:
August 18th, 2012 at 2:03 pm
@Anders,
inflation is not a bogus concept. what’s bogus about the loss of value of a currency? it might be difficult or impossible to measure accurately, but most of the things we measure everyday are not measured accurately, so what?
inflation, its causes and transmission mechanism, is a lot more complex than what people tend to think, but that shouldn’t stop anyone who considers it can be positive to explain why.
Tom Hickey Reply:
August 18th, 2012 at 2:33 pm
@MamMoTh,
If we can’t accurately define it, its rates, or the causation, how can one say it is good or bad?
Is stable prices domestically but changing fx indicative of price instability. Many people think it is. Does the cb consider whether the cause of inflation is aggregate demand from an excess of “money” running ahead of the capacity of the economy to expand near full employment, or from supply shortages of vital resources that get passed through. Are the means of treating these the same. In the case of demand pull is the supposed increase in price level of finished goods due to excessive govt money or private credit. What about asset price increases. should they be treated always as price appreciation and never as “inflation”?
This whole mess is a can of worms, such that treating it using the measures that the cb does is equivalent to medieval blood-letting.
MamMoTh Reply:
August 18th, 2012 at 2:59 pm
is that supposed to be an answer about what’s good about inflation?
Tom Hickey Reply:
August 18th, 2012 at 4:27 pm
@MamMoTh,
I was not the one making that claim.
I am claiming that “inflation” is so ambiguous as to be useless. It’s become a bogeyman, monsters under the bed, and voodoo doll all rolled into one. Let’s get specific about the technical definitions and how they function in a model that purports to be representative of the actual economic and financial system. Otherwise, it’s just a lot of gas. And when we get into the operational definitions in use presently, they are pretty ridiculous as the basis for scientific concepts.
Anders Reply:
August 18th, 2012 at 4:45 pm
@Neil,
I’m not sure why you’re referring to the law of excluded middle, and the approach that says “Over 2%? Next stop 100%, then hyperinflation!” I agree this is a silly view.
You may be right that it’s the second derivative of prices that should be examined as a warning sign for currency crisis, and not inflation itself.
It’s hard to argue in favour of your “price acceleration” view, contra the conventional approach, without having both (1) some non-monetary tools which the authorities can deploy in case the second derivative starts to tick up, and (2) some theory on how inflation works (eg how being at 100% implies no greater risk of imminent asymtotic price increases than say 5% per annum).
“As to fiscal policy it appears that my design works then – since that *was* fiscal policy dressed up in monetary policy clothes”
Sorry what were you referring to with “my design”?
Art Patten Reply:
August 16th, 2012 at 4:21 pm
@Anders,
“How can a central bank undertake to cap bond yields without this creating a worrying inflationary risk?”
I think it’s caused by the fact that the profession accepted Knut Wicksell’s formulation, which (as far as I can tell) ‘works’ in context of a gold standard or other exogenously-driven system, but has yet to think through the effects when a sovereign govt (fiscal + central bank) assumes the role that gold mines once played, or that external authorities play for a country with fixed exchange rates and/or external debt.
As the presentation linked put it, “Everything changed, except the textbooks.”
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Anders Reply:
August 16th, 2012 at 6:21 pm
@Art Patten, are you arguing for complete defeatism with respect to inflation – ie the view that it will be what it will be and nothing the authorities can do can effectively control it? I haven’t heard this view argued for, but it may well be right.
But assuming this isn’t your argument, then I have to believe that politically the authorities need some button to press in case inflation gets too high. This has – since the late 1970s – been interest rates. I’m fully on board with ditching monetary policy – but wouldn’t one need to reinstate fiscal policy as an effective anti-inflation tool as a replacement?
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WARREN MOSLER Reply:
August 16th, 2012 at 7:11 pm
if it’s from excess demand. but if it’s from indexation, vat hikes, etc. the govt. would have to alter that policy
August 16th, 2012 at 10:17 pm
On slide 48, what is CFP?
Can this be made into a short utube video? Maybe starring the deficit owl, and featuring a young owlet student?
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