Sunday, October 3, 2010

Art vs MMT


This will be unfair to Modern Monetary Theory, because I still don't have a good grasp of its basic views. But according to Bolo at The Agonist, MMT holds that

taxes do not pay for any federal government expenditures. Taxes are instead a form of private sector demand reduction.

MMT, then, would let the government print money and spend it without regard for debt or deficit. And MMT would have the government use tax increase as an inflation-fighting tool.

Doesn't sound very good, the way I put it. (I did say it would be unfair to MMT.)

To make a short story shorter, MMT wants to fund federal spending by printing money rather than by taxes. I bring this up in order to show how my views differ from MMT (or at least from my understanding of MMT).

I want to print money enough to correct the monetary imbalance, and keep a good balance but otherwise stick with the old economics, the economics that used to work.

In other words, the problem I see is the imbalance between money-in-circulation and credit-in-use. I think if we fix that problem, we solve the economic problem.

What is the right balance, exactly? Well I don't know, exactly. But I know we need to decrease our reliance on credit and decrease our debt, and at the same time increase our reliance on the dollar, on non-credit money, on fiat money if you will. In the 12 pages I suggested as targets (1) cutting our reliance on credit in half and (2) doubling our reliance on non-credit money.

I don't know what the right balance is. But surely we have too much debt now. Surely the balance is not good. And surely there is a limited range within which monetary balance will minimize monetary problems and maximize economic performance. We must design policy to find that range and keep us there.

In the past -- in the 1970s, as rumor has it -- we tried increasing the quantity of money at a rapid rate. The result we got was a really bad inflation because we failed to restrict the growth of credit

I want to substitute the use of inexpensive non-credit money for the more expensive credit. One result of this substitution is that we will reduce the cost of finance that is so thoroughly embedded in the economy. A second result is that we reduce our debt and find ourselves -- as if by magic -- with more spending money.

And that's gotta be good for the economy.

6 comments:

Vincent Cate said...

MMT is just a new name for a very old theory called Chartalism. The problem with most MMT people is they don't understand the danger of hyperinflation. To help with this I have explained hyperinflation in MMT terms (second link).

http://pair.offshore.ai/38yearcycle/#chartalism
http://pair.offshore.ai/38yearcycle/#mmthyperinflation
http://pair.offshore.ai/38yearcycle/#hyperinflation

The Arthurian said...

"A small thing could trigger the initial collapse in bond sales. For example, if Obama were seen reading a book on MMT that might be enough to start a collapse in bond sales."

Vincent -- I am two thirds of the way through your links, but the above made me laugh so hard I had to stop and reply to you. I do agree with your statement, even through the laughter.

Also, clicking your name got me to the top of your "38-year cycle" page. I found your summary of that cycle extraordinary and fascinating.

Thanks for making contact.
Art

Tschäff said...

I have a bit better of an understanding of MMT (been learning about it for a little over a year), so hopefully I can clear some things up.

"MMT wants to fund federal spending by printing money rather than by taxes. "

MMT can be broken down into two categories:
a) Descriptive MMT which just is the accounting and mechanics of the existing institutions.
b) Policy MMT which is aimed at achieving price stability and full (productive) employment.

Without going too deep, MMT says ALL money is credit/debt (they are two sides of the same coin). By doing the accounting you can see for every credit created there is a debt of equal value. When a bank creates money by making a loan, a deposit is created. The banks assets with interest is the same value as the borrower's debts. In accounting terms, the impact on the combined non-government sector is zero. This is unlike federal government spending where the financial assets of the private sector have no corresponding liabilities in the private sector. MMTers like to group the economy into three sectors, government (treasury+fed), private, and foreign. Private and foreign can be combined into non-government, so you can do analysis between the government and non-government sectors like I just did. Or you can zoom in and break it down to little bits, it won't change the validity of the zoomed out results, so it just depends on what you're trying to analyze. When government spends, it always does so by writing checks, which once cashed get deposited into private banks. This action increases reserve balances with the banks (minus cash withdrawals). When government taxes it decreases reseres at banks. That's what exists now. Government almost always spends more than it taxes (runs a deficit) which means banks get net-credited. This increase in reserves pushes down the fed funds rate unless something happens to reduce the excess reserves (for example an increase in bank lending, treasury sales, taxes, interest paid on reserves to name a few). Treasuries aren't issued to fund government spending as commonly believed but are used as a tool for managing the overnight rate. They can only be purchased with fed liabilities- reserves. Only unlike our personal debts, the government's never need to (or have been) be repaid. To do so would drain all the savings from the non-government sector, and create the worst imaginable depression. People would resort to barter which is the only form of non-credit money.

In the 1970's there were real attempts to hit monetary aggregate targets in the US and UK. The monetarists at the central banks didn't understand that bank lending isn't reserve constrained since they can always get reserves from the interbank markets or fed. Failure to provide (defensively) banks with enough reserves means the fed funds rate would raise (theoretically infinitely) and not necessarily curb bank lending. For reasons I won't go into here, bank lending increased, monetary aggregate targets failed to be hit, and the experiment was abandoned.

Tschäff said...

The inflation at the time was mostly due to the arab oil embargo, raising the costs of nearly transaction in our oil-dependent economy. The Fed's aim was to engineer a recession (by making credit so expensive that demand for it would fall) that would reduce aggregate demand in the economy. We got stagflation, which ended when a combination of things happened, the oil embargo ended, power plants switched to (cheaper) natural gas and aggregate demand (due to the recession) dropped. I'm not an expert on the 1970's so take it for what it's worth.

I think the problem you're seeing with government bonds is that interest payments can be a large part of the national budget, especially if the fed chooses to raise interest rates. There is also the problem of compound interest (ever read the rice on the chess board story?) This is a valid concern. It would be potentially much less inflationary if the government spent without issuing treasuries. Issuing treasuries $-for-$ of deficit spending is a self-imposed constraint. What happens is reserves are swapped for tsy secs that earn higher interest. It benefits savers of tsy secs, and was the main tool of maintaining the fed funds rate before they started paying interest on reserves, but it doesn't finance government spending as commonly believed.

"I want to substitute the use of inexpensive non-credit money for the more expensive credit. One result of this substitution is that we will reduce the cost of finance that is so thoroughly embedded in the economy. A second result is that we reduce our debt and find ourselves -- as if by magic -- with more spending money."


MMT thinks along those same lines. Most proponents want to allow the treasury to spend by running an overdraft at the fed. Or by issuing debt only as long as 3 months and leaving interest rates at near zero. Both have the effect of being interest free money, which most people think of as debt-free money because it never must be repaid and interest payments on it are essentially nothing.

As for your argument Vince, MMTers spent a LOT of time studying financial instability and inflation. Their star is shining brightly for correctly predicting the huge housing bubble and subsequent financial collapse. They are much more than chartalists, although they do incorporate good insights regardless of their authors.

They see inflation as the limit to government spending, not some arbitrary debt/gdp ratio. Here they address hyperinflation of zimbabwe:
http://bilbo.economicoutlook.net/blog/?p=3773

It's a good start, if you'd like I can show where they analyze Wiemer Germany and the '98 Ruble crisis.

"Some economists say the economy's too complicated for the rest of us to understand. It seems to me it's the economists who don't understand it. They complicate things, because they have the story wrong. Because they have the story wrong, they have no good answers. I invite you to consider my story and my answers."

I 100% agree. They do have the story wrong. But it is complicated as hell. :)

The Arthurian said...

Hello, Tschäff. I remember seeing your name before (in comments elsewhere, I think, though I don't remember where)...

First of all, if the story is complicated, then either you can't understand it, or I can't understand you -- I can't say which. But I'm firmly committed to the simple version.

You say, "Without going too deep, MMT says ALL money is credit/debt."

I shudder, because it's bad enough when economists equate credit and money; but you equate three terms! I'm firmly committed to the simple version.

"In accounting terms, the impact on the combined non-government sector is zero."

Yeah..... Glass of water on the kitchen table: Potential energy = MAX. Glass of water spilled on the kitchen floor: Potential energy = MIN. But in accounting terms, the impact on the combined kitchen sector is zero. Think the wife'll buy that?

But your point is that the accounting is different in public than in private sector. I am willing to believe government debt is a lot more like money than private debt is; but I'm not sure that is your point.

"Treasuries aren't issued to fund government spending as commonly believed but are used as a tool for managing the overnight rate."

I can easily believe that the economy has changed... that treasuries once were issued to fund government spending... but now that is (perhaps?) not necessary... But the first part of your sentence deals with government behavior, and the second part deals with central bank behavior. So I am confused and cannot evaluate your remark.

"...unlike our personal debts, the government's never need to (or have been) be repaid..."

So you know where I'm coming from.

"I think the problem you're seeing with government bonds is that interest payments can be a large part of the national budget, especially if the fed chooses to raise interest rates. There is also the problem of compound interest (ever read the rice on the chess board story?) This is a valid concern."

I don't remember seeing a problem with government bonds. (It is private-sector debt that holds our economy down.) Rice, yeah.

"It would be potentially much less inflationary if the government spent without issuing treasuries."

I know precisely what you mean. And I know the difficulty in getting the idea across. Back in the '80s -- (good grief!) -- I tried to explain my more money, less debt idea to the comptroller at work. I got out the "more money" half of it, and he interrupted me with a laugh and called me an "Argentine economist!"

Tschäff, I would be happy to go back-and-forth with you on this, if you think it worth the effort.

Art

Tschäff said...

Maybe, you seem to be curious and intelligent, I'd say there is a good chance this will can be productive. I'm not really the best at explaining this stuff though but I'll try.

The reason I brought up those sector balances is because there is an accounting identity that holds:

Government Debt = Private Sector Surplus + Current Account Deficit.

But it doesn't say anything about causality unless you understand the operational realities.

Here is the way my friend Daniel Conceicao explained it in an e-mail to me "Simply put, every asset comes with a debt of equal value. Banks create money by expanding their liabilities (deposits) in order to expand their assets. With interests, the bank's assets get augmented by the same value as the debtor's liabilities. Since these are all non-government agents, the net impact in sectoral wealth is zero. No way for it to be different. Just like a poker game... So the only way for the non-government sector to enjoy net gain is for the government to suffer a net loss. For the economy as a whole, it is still zero sum. The good news is that the government's debt is not something that gets paid. It is already paid because we use government debt (well, really the Fed's) to make final payments in our economy because our debts are denominated in terms of nominal claims on the Fed. Well, not exactly, but it is pretty much this. Therefore, as you said it so well, whether held as a Tbond or as reserves, government deficits cannot but add to the non-government sector's financial wealth. "

His poker reference was about an analogy he made up where the government is the monopoly issuer of poker chips. The players at the table can not increase or decrease the total amount of chips at the table. They can win and lose chips to each other. They can even lend out chips (your yin yang analogy) but the total number of chips doesn't change unless the casino takes them away or adds some.

Right, during the gold standard treasuries were necessary for funding government spending when there was a fixed quantity of savings. In this scenario a government was a currency user, which makes it necessary to acquire funding before it can spend. Similarly to you and I, a US state or EMU country. But unlike currency issuing governments with a floating exchange rate like the UK, Japan, Canada, the US etc... Leaving the gold standard was much more significant than economists realize.

http://bit.ly/9Trnq0 Here you can see the US debt never does get repaid. Ever. Doing that would take away all the poker chips from the players, and you can imagine how hard it is to play poker without chips. It won't automatically cause less games to be played if people with chips lent them out to people who don't have chips / the savings rate of chip holders fall. But it won't last, once it is time to repay debts, borrowers will not be able to acquire chips. It's easy to simulate Irving Fischer's debt deflation theory in this framework. You'll notice that every time the economy goes into recession the deficit jumps. This is because tax revenues drop and social spending jumps. Automatic stabilizers at work. Once the economy is out of the recession the reverse happens and the debt/gdp ratio everyone seems obsessed with falls.

Hopefully this was a little bit more clearer than my last attempt.