Chartalism, Modern Monetary Theory (MMT)

[John Creighto]

What does everyone think about Modern Monetary theory:
http://en.wikipedia.org/wiki/Modern_Monetary_Theory

From my reading on Wikipedia I see nothing wrong with it but at the same time every-time I've scene it used on a blog I didn't see that it added anything useful to the discussion or how it helped make any relevant point.

Perhaps the criticism given in Wikipedia helps best describe it:

"New Keynesian Brad DeLong has suggested MMT is not a theory but rather a tautology.[23] Still others have said MMT "ignores the lessons of history" and is "fatally flawed.'[24]'"

"Tautology also means a series of self-reinforcing statements that cannot be disproved because the statements depend on the assumption that they are already correct."
http://en.wikipedia.org/wiki/Tautology

There are of course some absurd claims which proponents of the theory make but a lot of theories have been misused to make absurd claims.

 

[WhoWee]

Paul Krugman threw this topic onto the coffee tables last year when he wrote this article and sparked the debate that continues.
http://krugman.blogs.nytimes.com/20...hing-for-stimulus-but-i-wont-do-that-wonkish/

I think this summarizes our reality in 2011. my bold
http://www.marketoracle.co.uk/Article29601.html

"‘The US Government cannot default’:
Some advocates of the Modern Monetary Theory say that certain governments cannot default (in our modern fiat currency system). Stand-alone monetary systems (like the US one) – they say – imply that the government cannot default. They argue that there will always be a central bank to buy the government debt, and hence they can never default on their debt.

I have no problem with the premise; that is, that a Government has its central bank to buy its bonds. However, I have misgivings with the supposed implication. The reason is quite simple: Default on government debt is characterized by an inability to pay as well as a lack of willingness to pay.

Regardless of whether the US government has a potential buyer of new bonds or not, they might not want to pay. To say that – for example – the US will never default (insofar as the current fiat currency system persists), is to say that under all circumstances the US government will choose the printing press over outright default/restructuring."

 

[MarcoD]

If I look at it, and I admit I don't understand it fully, I think they got the role of the central bank right, but the role of the government wrong, and correspondingly the relation between.

I mean, of course a central bank can provide, or take away, liquidity or manipulate the inflation/deflation. Fine.

Looks to me that they overemphasize the role of the government. I mean, in financial terms, the government/bureaucracy is nothing but the largest corporation in an economy with a somewhat guaranteed income (taxes). Government bonds are nothing different than corporate bonds, so I don't see why MMT forces a relation between public saving, economic growth, the government and sovereign money.

The thing is that Europe has a long history of inflation in economies, or hyperinflation, even starting wars over that, and from that POV MMT just seems dead wrong.

(Apart from the German hyperinflation period, the Spanish cut exchange rates 20% a decade ago, the Greek bonds sold at 20% interest a decade ago with the drachma, and Italians have been printing money since they build the colosseum. All these economies had problems because of that, and I am pretty sure nobody from a southern country really feels like going back to that. The mistake in the last decade was that these countries got pegged against a 'gold' standard and maintained their normal fiscal policy.)

As far as Europeans are concerned, turning on the printing presses can't fix structural problems, always leads to hyperinflation, and always leads to an economy going down in flames.

Probably the quantitative easing rounds in the US only work because a) the US bond buyers are tolerant to 'small' amounts of printing, b) the US dollar is the world's currency and foreign money has nowhere else to go - certainly not with stocks going down. Low bond yields means that nothing is working fine anymore and quick QE fixes won't solve that.

Europeans unfortunately have seen the opposite effect too often. Given the historical differences, I am pretty sure that if the ECB turns on the printing presses, European money will flee the Eurozone and Europe will go up in smoke. (Personally, I think Europe is mostly doing fine. Germans are still hoarding cash like crazy, all northern european countries have austerity in place -I think they should have done more,- and the high interest rates on southern countries mean that banks there are recapitalizing and that deficits are cut.)

The worrying thing is that central banks/government always work themselves into a period of (hyper-)inflation because of two motivators: 1) fear of recession and 2) a need to finance defense. And the silly thing is that after the supercommittee unraveled, these were exactly the two sentiments stated in public press.

 

[John Creighto]

The funny thing about inflation is that there is no single rate of inflation for all groups of people. If you are a consumer, inflation is low say 2%. If you are a landlord your assets are losing value so to you there is deflation. If you are a purchaser of American treasuries, then to you there is inflation because it is more costly (in terms of the real interest rate and the ability of the government to pay) to hold American bonds than it once was.

People tend to focus mostly on consumer inflation (CPI) but consumer inflation is related to how the earnings of consumers match the growth of economic output. When there is high unemployment workers as a whole have a hard time demanding higher wages. This is reflected in the Phillips curve.

The wisest thing I heard from an advocate of MMT is that lost productive output due to unemployment is a much greater concern then inflation. Of course inflation is an issue but if it is partly driven by workers as a whole making more, while the money supply remains constant then I don’t think that is such a bad thing. It simply means that workers are taking home a greater share of the nation’s wealth.
MacoD writes:

“so I don't see why MMT forces a relation between public saving, economic growth, the government and sovereign money.”

There is an Identity I’ve seen which expresses the relationships between the savings of each sector. It simply reflects the fact that it is deflationary for everyone to save at the same time. This can of course be offset by changes to the money supply. Also the private sector is not one homogenous group of people. It is possible for the net savings to remain constant in a sector but for the leverage in the whole sector to increase. I recall though some of the definitions of MMT being odd because they define their terms in such a way to explain a way a lot of details and this is why Brad DeLong called it a tautology. (It is a bit like the No true Scotsman fallacy)

There are structural problems of course; banks are essentially being paid to hold American bonds because if they hold their capital in American bonds they have cheaper access to money. This subsidization of banks is necessary though so governments can borrow enough to pay for large governments.

Now inflation is a concern but until we get near full employment we won’t see the effects in the CPI. In my opinion changes to the money supply are inflation. It just so happens that this extra money is soaked up in government debt rather than say agricultural futures.

 

[MarcoD]

Well, nice that your responded. The whole of Europe is getting a fast-track course in economics at the moment, and I am still grappling with basic concepts. It's a black art to me, almost everything I think is opposite to how the markets seem to work. (I have the feeling most people in the US are born with a stock portfolio.)

The funny thing about inflation is that there is no single rate of inflation for all groups of people. If you are a consumer, inflation is low say 2%. If you are a landlord your assets are losing value so to you there is deflation. If you are a purchaser of American treasuries, then to you there is inflation because it is more costly (in terms of the real interest rate and the ability of the government to pay) to hold American bonds than it once was.

Hmm, if you have inflation, then doesn't it stand to reason that the value of the assets increase corresponding with the inflation (if market demand remains equal)?

You mean, if US bonds yield 1.5% and inflation is at 2% then you simply lose money, right? I thought about that given some recent events, of course German bonds don't sell at 1.8% or whatever, people only lose money on them. If I would have been the German government, I would have tried to sell an unlimited amount at these rates. And I found it rather silly Japanese are buying English bonds since inflation there is at 5% (which should translate to the exchange rate, I guess.) Maybe they expect to sell to the UK since now the UK must be floating in Yens?

People tend to focus mostly on consumer inflation (CPI) but consumer inflation is related to how the earnings of consumers match the growth of economic output. When there is high unemployment workers as a whole have a hard time demanding higher wages. This is reflected in the Phillips curve.

I can see that.

The wisest thing I heard from an advocate of MMT is that lost productive output due to unemployment is a much greater concern then inflation. Of course inflation is an issue but if it is partly driven by workers as a whole making more, while the money supply remains constant then I don’t think that is such a bad thing. It simply means that workers are taking home a greater share of the nation’s wealth.

You equate inflation to consumer spending which drives CPI I guess. So to you the UK's inflation (5%) is a good thing, and to me (European) it's a bad thing?

“so I don't see why MMT forces a relation between public saving, economic growth, the government and sovereign money.”

There is an Identity I’ve seen which expresses the relationships between the savings of each sector. It simply reflects the fact that it is deflationary for everyone to save at the same time. This can of course be offset by changes to the money supply. Also the private sector is not one homogenous group of people. It is possible for the net savings to remain constant in a sector but for the leverage in the whole sector to increase. I recall though some of the definitions of MMT being odd because they define their terms in such a way to explain a way a lot of details and this is why Brad DeLong called it a tautology. (It is a bit like the No true Scotsman fallacy)

Well, this is where it becomes really grey to me because it is impossible to really save money unless you really take it out of the system and put money into a mattress. If the government, the public, and the private sector start saving, then bank accounts fill up with the savings which will put the money back as cheap loans (okay, or they'll buy foreign assets). I would expect that saving might have a short term bad effect on an economy since money isn't being milled around, and products aren't bought, but I guess banks would dampen that effect again on the long term since they'll want to get rid off all that money.

I have tried an hypothesis that the US debt growing equates to the US buying lots of assets abroad, but I am not sure it is buying assets, consumption, or whether it even makes sense...

There are structural problems of course; banks are essentially being paid to hold American bonds because if they hold their capital in American bonds they have cheaper access to money.

Why? I mean, if a bank wants money it deposits assets at a central bank and gets an equal amount of money back, right? At least, that's how I thought it works. Is it because government bonds are more easily accepted?

This subsidization of banks is necessary though so governments can borrow enough to pay for large governments.

I thought it was the reverse. We pay tax, the banks make some profit on bonds (offset by inflation in the end, maybe bond yield=inflation long term?), and they find bonds convenient since they own guaranteed assets they can use to swap around with other banks. As far as I know, it's just convenient to have 50-60% GDP debt so that banks can operate. Apart from that, I don't see a reason why the government couldn't be able to function without debt.

Now inflation is a concern but until we get near full employment we won’t see the effects in the CPI. In my opinion changes to the money supply are inflation. It just so happens that this extra money is soaked up in government debt rather than say agricultural futures.

Hmm, I thought changes to the money supply (expanding it), should necessitate inflation since the amount of money grows with respect to the amount of assets. I can see that there are other factors in place though.

As far as the soaking goes, isn't it the reverse? The US has a large debt, the FED buys part of that debt (essentially by creating money out of thin air, i.e. printing it), now -roughly- the debt is now gone from all the books (if you see the FED and US government as one system), but money was injected into the economy, therefor you should see some inflation?

(Another hypothesis: In a developed economy the debt to GDP ratio should be higher since there are more assets?)

 

[John Creighto]

Reply to:
https://www.physicsforums.com/member.php?u=224653

Well, nice that your responded. The whole of Europe is getting a fast-track course in economics at the moment, and I am still grappling with basic concepts. It's a black art to me, almost everything I think is opposite to how the markets seem to work. (I have the feeling most people in the US are born with a stock portfolio.)

"Originally Posted by John Creighto
The funny thing about inflation is that there is no single rate of inflation for all groups of people. If you are a consumer, inflation is low say 2%. If you are a landlord your assets are losing value so to you there is deflation. If you are a purchaser of American treasuries, then to you there is inflation because it is more costly (in terms of the real interest rate and the ability of the government to pay) to hold American bonds than it once was."

Hmm, if you have inflation, then doesn't it stand to reason that the value of the assets increase corresponding with the inflation (if market demand remains equal)?

Not everything increases and decreases in price at the same rate.

You mean, if US bonds yield 1.5% and inflation is at 2% then you simply lose money, right?

Not if you can borrow money at cheaper then 1.5%. Banks don’t pay much interest on deposits or on money they borrow from the central bank.

I thought about that given some recent events, of course German bonds don't sell at 1.8% or whatever, people only lose money on them. If I would have been the German government, I would have tried to sell an unlimited amount at these rates.

Here are the yields on German debt:
http://www.bloomberg.com/markets/rates-bonds/government-bonds/germany/

It isn’t until you look at about three year bonds or longer that the sum of the yield and coupon exeeds the 2% target inflation rate for the EU.

And I found it rather silly Japanese are buying English bonds since inflation there is at 5% (which should translate to the exchange rate, I guess.) Maybe they expect to sell to the UK since now the UK must be floating in Yens?

I presume the Japanese still print a lot of money. That money has to go somewhere. As long as they lose less on English bonds then they’d loose on Japanese money it is still a better for the Japanese to hold British debt then Japanese currency. The British would then spend that money on Japanese goods because there probably isn’t a lot of incentive to hold Japanese currency.
”People tend to focus mostly on consumer inflation (CPI) but consumer inflation is related to how the earnings of consumers match the growth of economic output. When there is high unemployment workers as a whole have a hard time demanding higher wages. This is reflected in the Phillips curve.”

I can see that.

”The wisest thing I heard from an advocate of MMT is that lost productive output due to unemployment is a much greater concern then inflation. Of course inflation is an issue but if it is partly driven by workers as a whole making more, while the money supply remains constant then I don’t think that is such a bad thing. It simply means that workers are taking home a greater share of the nation’s wealth.“

You equate inflation to consumer spending which drives CPI I guess. So to you the UK's inflation (5%) is a good thing, and to me (European) it's a bad thing?

If inflation is due to consumers having more money than there will be a shortage which will drive up prices which will encourage more production. If inflation is due to other increases in the cost of production then producers will cut back production so they can demand a higher price for their goods.

If inflation isn’t too high and wages keep pace with it, then aside from the unfair advantage it gives people with cheap access to money it isn’t a major concern. Whether what is driving inflation is positive or negative is an entirely different question.

”There is an Identity I’ve seen which expresses the relationships between the savings of each sector. It simply reflects the fact that it is deflationary for everyone to save at the same time. This can of course be offset by changes to the money supply. Also the private sector is not one homogenous group of people. It is possible for the net savings to remain constant in a sector but for the leverage in the whole sector to increase. I recall though some of the definitions of MMT being odd because they define their terms in such a way to explain a way a lot of details and this is why Brad DeLong called it a tautology. (It is a bit like the No true Scotsman fallacy)”

Well, this is where it becomes really grey to me because it is impossible to really save money unless you really take it out of the system and put money into a mattress. If the government, the public, and the private sector start saving, then bank accounts fill up with the savings which will put the money back as cheap loans (okay, or they'll buy foreign assets).

Banks can also deposit their money at the central bank or buy up government debt. Given the Federal Reserve holds a lot of government bonds, I am sure if bank reserves were too large, the Federal Reserve would sell the banks some of these bonds, to soak up their extra cash.

I would expect that saving might have a short term bad effect on an economy since money isn't being milled around, and products aren't bought, but I guess banks would dampen that effect again on the long term since they'll want to get rid off all that money.

If everyone was saving how would the banks be able to sell good quality loans? They would have to do something with the money even if it is just by up physical assets like say gold.

”There are structural problems of course; banks are essentially being paid to hold American bonds because if they hold their capital in American bonds they have cheaper access to money.“

Why? I mean, if a bank wants money it deposits assets at a central bank and gets an equal amount of money back, right? At least, that's how I thought it works. Is it because government bonds are more easily accepted?

The central banks will by bonds to influence the interest rate. This is called open market action. What makes this a subsidy is that government debt (at least short term) is considered risk free so if banks hold government debt then they can leverage at higher rates and still have the federal government guarantee their depositors.

“This subsidization of banks is necessary though so governments can borrow enough to pay for large governments.“

I thought it was the reverse. We pay tax, the banks make some profit on bonds (offset by inflation in the end, maybe bond yield=inflation long term?), and they find bonds convenient since they own guaranteed assets they can use to swap around with other banks. As far as I know, it's just convenient to have 50-60% GDP debt so that banks can operate. Apart from that, I don't see a reason why the government couldn't be able to function without debt.

The question is why should the government guarantee any of the assets the banks hold? Yes banks make money off bonds but these yields wouldn’t be attractive to banks if they couldn’t borrow so cheaply.

“Now inflation is a concern but until we get near full employment we won’t see the effects in the CPI. In my opinion changes to the money supply are inflation. It just so happens that this extra money is soaked up in government debt rather than say agricultural futures.“

Hmm, I thought changes to the money supply (expanding it), should necessitate inflation since the amount of money grows with respect to the amount of assets. I can see that there are other factors in place though.

The two drivers of inflation are either stockpiling the inputs to production or when growth in demand exceeds that of supply. If money is coming into the economy and it is only being spent on government debt then this money will only make it into the hands of consumers through government spending. However, the increases in government spending though borrowing could be offset by payments on debts.

As far as the soaking goes, isn't it the reverse? The US has a large debt, the FED buys part of that debt (essentially by creating money out of thin air, i.e. printing it), now -roughly- the debt is now gone from all the books (if you see the FED and US government as one system), but money was injected into the economy, therefor you should see some inflation?

(Another hypothesis: In a developed economy the debt to GDP ratio should be higher since there are more assets?)

The money supply grows and expands based on the differential between borrowing and government spending. Government debt plays a part of it in that the central bank can only loan out money based on the amount of assets it has. Central banks just happen to favor government to hold their assets in which makes it cheap for governments to borrow.