An Austrian Critique of MMT?

Economics Economics Questions
101

“So in some systems conditions vary from other systems, and therefore the laws in operation vary too. In a world without gravitational forces, the law of gravity doesn’t hold. It’s nothing but a theoretical statement. I’m not sure what point you think it is you’re making here.”

In a system with negative gravity you have different laws to go by.

"Statement or inter-relationships among economic factors that explains what may cause what, or what may happen under certain circumstances. Also called economic law.

This merely affects which laws are operant or not. Nothing else."

I guess you can say It that way but you can also say that the law changed, and the new law is not like the old one because It changed so much :slight_smile:

I can safely say that inter-relationships among economic factors are different in a fiat monetary system than they are in a currency board regime. I hope you agree. Not all of them of course.

Which laws of economics does the existence of a fiat monetary system obviate, exactly, and why?

Look at the privious answers.

"Besides that the so called economic laws that you are talking about are theoretical.

Indeed. What of it? What law isn’t theoretical, exactly?"

All of them.

"I’ll give you a good example. Most Austrians when they see CPI inflation they blame It on the money supply and the monetarists do too. (well for Austrians It’s monetary expansion anyway-that’s how they even define inflation). For me that law is nonsense.

That’s nice, but it’s purely your opinion."

Sure, my opinoion against yours.

"you cannot just look at the money supply and ignore what is going on in real economy. Just because there is correlation between growth in the money supply and inflation doesn’t mean that growth in money supply causes inflation.

Growth in the money supply is inflation. You’re talking about price increases. Correlations are neither here nor there. Austrians argue only an expansion of the money supply can occasion a general increase in the price of goods, because absent it money will simply be diverted from less valued goods to more highly valued goods which have grown more expensive, which will not occasion a general rise in the price of goods."

“Growth in the money supply is inflation” That’s your opinion, not mine. Mainstream doesn’t think so either.

“Austrians argue only an expansion of the money suplly can occasion a general increase in the price of goods” Again It’s their opinion. By the way It has a big error in It. Money supply can contract and there can be CPI inflation.

You cannot say anything about the causation here because money supply growth has not been targeted for 30 years now and CBs don’t control money supply. And there is not always even correlation.

“Of course there increases in the money supply are not always followed by a straightforward increase in prices across the board, because other things are not necessarily equal (e.g. productivity increases might lower the price of a good that is otherwise being chased by more money than before.) BTW, central banks definitely do control the Ms but not directly by printing money. Rather, they do so indirectly in the form of their dual mandate of maintaining price stability (low “Inflation”) and high employment, usually in the form of open market operations. They also influence capital and reserve requirements for banks and therefore the pace of credit expansion. It’d help to know what Austrian theory is before repudiating it.”

Again you have a big error in your reasoning. Central Bank like any monopolist cannot control both quantity and price. As we all know they set the price and the rest of the economy adjusts to that price. And you are wrong about the reserve requirements assumtion because we are not on gold standard. Bank lending is not constrained by reserves. Like I said before the price is set and they can borrow as much reserves at that price as they desire. The quantity is not limited by central bank. The reserve requirement has nothing to do with It yet you think It does because you are set on money multiplier myth. Canada has no reserve requirements how about that? The ability to create credit is unlimited and the money supply should end up hypersonic?

I have to give you that much credit as to whether different laws apply or It’s just how to apply the different laws to different systems.

I have a question for you: Ausrians repeat that you need to save to invest. Does that hold true in monetary economics on a macro level?

Thank you!

102

four words: Austrian Business Cycle Theory

103

So you reject the law of supply and demand? Because it is supply and demand that describes the relationship between borrowing of the government and the interest charged for it. This is the first time somebody is telling me supply and demand does not apply anymore, because some legal status has changed.

I have a question for you. Do you also think that if the government sets the price for a bottle of beer at half the price of the market price, that supply and demand also has been “deactivated” ?

You don’t need to save monetary units to invest. You need to save real goods, which is true in all worlds. It is physically not possible in any other way. What you mean I think is in a fiat world it is thinkable that no person is using any of his monetary income whatsoever to save and invest it in new business, because theoretically all of this could be done by the government. It just writes onto itself a check (expands money supply which drains buying power of the people to the government) and then uses this buying power to invest. This means although all people use all their money to consume, they cannot consume all stuff that is produced, because government uses its newly created fiat funds to invest some of the goods that are produced. This would be some kind of forced saving. If a private person would borrow newly created funds it is similar except he cannot write the check onto himself which just means, he will have to save monetary units later to pay back his debt. This does not shake any of the Austrians claims. Real goods have to be saved to invest!

A bank needs to secure its ability to pay out money on demand of its customers. If it would not keep any reserve it would soon face a bank run. The reserve requirement is for one point a tool which the central bank could utilize to control the amount of fiat issued by private banks, and as a safety regulatory tool to avoid greedy bankers facing a bank run. But it’s not preventing instant hyperinflation. Where do you get such assertions from? Show me please where Mises Hayek Rothbard or whoever said, that the reserve requirement is the only thing that prevents instant hyperinflation in a fiat money regime?

What books have you already read of AE?

104

In a system with negative gravity you have different laws to go by.

And this does not change one whit that the law of gravity is still considered such in systems where it exists. See my point?

I guess you can say It that way but you can also say that the law changed, and the new law is not like the old one because It changed so much :slight_smile:

What would an example of this in economics be?

Look at the privious answers.

Indulge me.

All of them.

Then what’s gained by applying the term?

Sure, my opinoion against yours.

If you want to convince me, substantiate it.

you cannot just look at the money supply and ignore what is going on in real economy. Just because there is correlation between growth in the money supply and inflation doesn’t mean that growth in money supply causes inflation.

s/inflation/increase in the general price level. Who suggested the “real economy” should be ignored? I’m not arguing based on correlations here. If the amount of money in the economy increases and all else remains equal, inflation will result. That much not even mainstream economists question, whose opinion you seem to cherish.

That’s your opinion, not mine. Mainstream doesn’t think so either.

They’ll fall into trouble when trying to define inflation as an increase in the general price level, then, which is the phenomenon they’re trying to explain (because, if money supply remains constant and prices begin to increase, expenses will by force be diverted to more urgent goods from less urgent ones as the former grow in expense, occasioning a fall in the price level of the less urgent goods; ergo, there’s no across-the-board increase in the price level.) I don’t care whether “mainstream” economists disagree, by the way. Only their reasons for doing so matter.

Again It’s their opinion.

It’s actually an argument with premises and a conclusion, so either demonstrate where it’s wrong or hush.

By the way It has a big error in It. Money supply can contract and there can be CPI inflation.

…how is that an error in it? Where does it preclude the possibility of this? I’m getting the feeling you don’t have a very solid grasp of economics, mainstream or otherwise.

Central Bank like any monopolist cannot control both quantity and price. As we all know they set the price and the rest of the economy adjusts to that price.

Where are you getting this from? What in the theory of monopoly implies a monopolist cannot control both (and I mean the real thing here, not what the state defines as a monopoly)?

And you are wrong about the reserve requirements assumtion because we are not on gold standard. Bank lending is not constrained by reserves.

Actually, it is. The level of reserves a bank has with the Fed (or any other central bank) limits by how much it can expand credit in the form of loans. Now, whether this is enforced or whether there are loopholes that one may avail themselves of is another story.

Like I said before the price is set and they can borrow as much reserves at that price as they desire. The quantity is not limited by central bank. The reserve requirement has nothing to do with It yet you think It does because you are set on money multiplier myth. Canada has no reserve requirements how about that? The ability to create credit is unlimited and the money supply should end up hypersonic?

I’m not seeing your point. OK, some central banks allow private banks to go unhinged in credit expansion (and then ensure sufficient liquidity to shield them from bank runs.)

…so what? Are you trying to say this will have no consequences on the real economy, or that it changes the laws of economics, or what?

I have a question for you: Ausrians repeat that you need to save to invest. Does that hold true in monetary economics on a macro level?

“Need” to in what sense?

105

“So you reject the law of supply and demand? Because it is supply and demand that describes the relationship between borrowing of the government and the interest charged for it.”

I don’t reject the law of suplly and demand but supply and demand is not what describes the relationship between “borrowing” of the government and the intrerest rates. It’s not borrowing really and the monopolist sets the interest rate. I guess you could still say that It’s supply and demand, just the monopolist is altering supply but this is pointless. The monopolist sets the price.

“This is the first time somebody is telling me supply and demand does not apply anymore, because some legal status has changed.”

I didn’t tell you exactly that but loanable funds theory doesn’t apply. It is in every textbook out there. If government borrows the interest rates will go up…:slight_smile: No, they stay where the government wants them to stay. 0 rates forever are possible and 20% rate tommorrow is possible if the monopolist decides so.

"I have a question for you. Do you also think that if the government sets the price for a bottle of beer at a half the price of the market price, that supply and demand also has been “deactivated” ? "

I haven’t said that.

“You don’t need to save monetary units to invest.”

You might need them on personal level.

“You need to save real goods, which is true in all worlds.”

What do you mean by that? You start saving corn?

“What you mean I think is in a fiat world it is thinkable that no person is using any of his monetary income whatsoever to save and invest it in new business, because theoretically all of this could be done by the government.”

I have never said that. Just investment precedes savings in real world. And we are talking about monetary savings. When we speak of aggregate savings we are not talking about all the real assets that America has. No, we are talking about monetary savings. Loans create deposits. When money is loaned(created) and invested that’s how aggregate savings go up. When you start saving in your piggy bank then someone else in economy dissaves exactly the amount you are saving. Aggregate savings don’t increase. With the bank loan non government is not net saving because every financial asset created this way has a corresponding liability. When government deficit spends then non government net savings go up. I strongly suggest for you to come out of your idelogical bubble and learn how modern monetary system operates. As much as you hate It and as much as you love gold money, the gold money logic just doesn’t apply in a fiat system.

And sure the real resources have to be there to invest but you don’t have to warehouse them. This is just what people like you are suggesting right now-warehouse the unemployed. My suggestion for you is to read MMT. And yes I have read Austrian Business Cycle Theory

I didn’t say anything about Rothbard and you are totally wrong about the reserves. This guy too doesn’t understand monetary economics at all http://mises.org/daily/4499

Can’t leave a comment on that article.

Good luck!

106

“s/inflation/increase in the general price level. Who suggested the “real economy” should be ignored? I’m not arguing based on correlations here. If the amount of money in the economy increases and all else remains equal,”

Mainstream doesn’t define inflation as monetaru expansion. What do you mean all else remains equal, spending remains equal. :slight_smile:

107

So you say that price fixing when it is about money does deactivate supply and demand, but if it is done with bottles of beer it is not? And at the same time you even admit that I could call it supply and demand if it is about fiat. Although you say that this would be wrong because they set the price/interest rate not supply. It seems as if you do not understand how price and supply are connected.

Also a non-monopolistic manufacturer of beer does set the price and not supply. If he cannot sell his supply he will go down with the price, if he cannot satisfy demand at the price set with his supply he will increase the price. So he sets the price too and still it is called supply and demand there. There is nothing special in this regard about a monopolist. Just the monopolist of fiat money has no cost of producing supply! So he can set the price where ever he wants, because there will always be sufficient supply to match demand!

I think I made it already clear that I understand that it is not a fixed loanable funds market in a fiat regime, didn’t I? The government can alter the loanable funds at will. Nobody denied that they can push it to zero or to twenty percent. But such actions have consequences. It might lead to severe problems in the economy and at worst to a loss of trust in fiat money, and the mob with pitchfork and scythe might show up in the white house. So they are only theoretically free to do whatever they want.

This shows that you do not understand AE.. When Austrians say, you must save to invest. They never speak of mere paper with numbers on it, but of real goods (and also not only stored in a warehouse…). So yes I mean for example corn. If you want to expand the production of corn next year, you should save more corn then last year, otherwise you are not able to seed and harvest more.

You are switching the given task. First you speak of what Austrians say all the time (you must save…), then you speak of what “we”, I guess you, mean with aggregate savings. It is not easy to answer questions that change in content.

And this is just what I described above! Forced saving through creating loans out of thin air! :wink: What you are not noticing in your example is, only the nominal amount in savings increases when loans are created as compared to the example when I save in my piggy bank. The real resources that are going to be invested are not higher, because they cannot be created out of thin air. And it is the real goods that count.

Yes I will read MMT, but you also clearly lack understanding of AE. You should give it another more serious shot. Of course only the others are trapped in an ideological bubble, right? :wink:

Good luck too! Cheers.

108

Mainstream doesn’t define inflation as monetaru expansion.

Duh. They can call it whatever they like. The underelying phenomenon that remains in need of explanation is an increase in the general level of prices. Moreover, if you think of it… how exactly does a ratio (which is what a price is) “inflate”? If you want to argue semantics, inflation is far more applicable to a stock concept like the money supply than ratios like prices.

What do you mean all else remains equal, spending remains equal. :slight_smile:

Supply of and demand for money.

I have never said that. Just investment precedes savings in real world. And we are talking about monetary savings. When we speak of aggregate savings we are not talking about all the real assets that America has. No, we are talking about monetary savings. Loans create deposits. When money is loaned(created) and invested that’s how aggregate savings go up. When you start saving in your piggy bank then someone else in economy dissaves exactly the amount you are saving. Aggregate savings don’t increase. With the bank loan non government is not net saving because every financial asset created this way has a corresponding liability. When government deficit spends then non government net savings go up. I strongly suggest for you to come out of your idelogical bubble and learn how modern monetary system operates. As much as you hate It and as much as you love gold money, the gold money logic just doesn’t apply in a fiat system.

Our enthusiasm for “gold” (or any free market currency) is borne out of how the current system operates, not in spite of it. You seem entirely ignorant of AE, to be honest. If you think the Fed can indefinitenly maintain interest rates at 0 and inflate merrily away, read this.

109

OK, since you brought up Bob Murphie’s article I am going to point out some errors in It, because I know guys like Warren Mosler, Bill Mitchell and Randall Wray are not even going to bother with It. Murphy doesn’t understand what is going on.

“Austrian economists know that the Fed’s creation of new money can distort markets by pushing interest rates below their natural market level.”

And what is that? There is no such thing in a wordl with central banks. This is some theoretical construct that doesn’t apply.

"This is a subtle point that most commentators ignore. Instead, the thing that has more and more people worrying at night is the potential for runaway price inflation.

Specifically, there are currently about $1.2 trillion in “excess reserves” in the banking system. Loosely speaking, the banks have this much money on deposit with the Fed, above and beyond their reserve requirements (needed to “back up” their existing customer checking account balances and the like), and they are free to lend it out to their own customers."

They are always free to create loans at a given price level. They are not “more free” now after the fed has pumped reserves. Bank lending is not constrained by reserves. In fact the reserves are electonic numbers. Banks have a reserve account at the fed. Me and you cannot use those reserves to go shopping, banks are not lending those reserves to me and you, they stay at the fed. Banks need those reserves to settle payments with other banks and wit the government. Those reserves are a fiction to the real economy and the reserves cannot cause inflation.

“Because of the fractional-reserve banking system, the $1.2 trillion in excess reserves could ultimately translate into almost $11 trillion in new money created by the banks, as they pyramid new loans on top of the base money Bernanke has injected.”

He doesn’t understand that bank lending is not constrained by reserves but he is not the only one.

“So far, we haven’t seen such massive price inflation, because the banks are reluctant to advance new loans. But at some point — because their balance sheets have sufficiently healed, or because creditworthy borrowers begin offering higher interest rates — the commercial banks will begin taking their excess reserves (currently parked at the Fed) and making new loans to their customers.”

The same mistake again, they could always get the reserves from the fed. Fed doesn’t need to pump the reserves in advance for the lending to start happening. In reality banks lend first and worry about the reserves later. The fed has no choice but to provide them with the needed reserves.

“Now suppose (either because of rising price inflation or because of a healthy recovery) that theprime rate — what commercial banks charge their best clients — rises from its current level (3.25 percent) to, say, 10 percent. (This isn’t farfetched; the prime rate was higher than 10 percent in the late 1980s.)”

The reason this happened is not magic.

The fed funds rate was set by fed. Prime rate doesn’t set the fed funds rate. Prime rate comes down when fed funds rate goes down.

Do you see the pattern?

“Faced with earning a completely safe 0.25 percent by keeping their money parked at the Fed, versus earning a very (but not perfectly) safe 10 percent by lending to their most stable customers, many banks would begin drawing down their excess reserves, thus starting the inflationary spiral. To check this, the Fed could also bump up the yield it pays, to (say) 7.25 percent. By maintaining the spread between the two rates, the Fed could bribe the bankers to keep their money locked up at the Fed.”

First you Austrians seem to be critisising the fed for central planning and setting the rates and now Bob Murphy seems to be assuming that fed is not setting the rates and the markets are. Do you see the error?

And the following is also upside down. There is no reason for panic.

He needs to read MMT.

110

@ Kristjan

So lets say the FED sets the interest at 5%:

1: Example: Reserve Requirement 10%

This means a reserve of $100 needs deposited at the FED to lend out up to $1000, which generates (interest of 10% set by the private bank) an income of $100 per year. And the bank has to pay $5 to the FED. This makes a maximum profitmargin in case of full utilization of the reserve requirement of 95%.

2: Example: Reserve Requirement 100%

This means only $100 lend out so only $10 income and $5 costs to pay to the FED. Only 50% profit! Don’t you think that makes huge difference for the bank? A bank is therefore always interested to lend out as much as possible (constrained by the supply of creditworthy customers depending on the interest rate set by the FED). Sure it can whenever it wants increase the reserve to $1000 at the FED, so it also can lend out $1000. But still only 50% profitmargin!

A profitmargin of 95% gives you much more room for lending to even less creditworthy customers as a 50% profitmargin is doing. Isn’t it? So if the FED leaves the interest rate at 5% and inceases its reserve requirement from 10 to 100% then banks are forced to increase the reserves held at the FED, but banks with marginal profits would be bankrupted through the additional costs to pay to the FED and are forced to liquidate their marginal loans instead. Doesn’t sound like it would not affect the amount banks would lend…

BTW: Some questions I am interested in getting your opinion about it: Would you be so nice and could tell me your view of how the economic situation will contineu within the next 5 years in the US?:

1: CPI Price inflation: Will stay below 5%, below 10%, below 20%, might get even higher ?
2: Heavy deflation might set in?
3: US deficit will not get out of control and the creditworthyness remains and a major sell off of US bonds will not occur?
4: A break down of the fiat regime is unthinkable. Commodities won’t be used to back them again?
5: Will there be a QE3? Would you be in favor for it?
6: Why do central banks still own gold? Would they sell all of it if they knew MMT?
7: What do you think will happen to the Gold/Silver price? Will it go down to levels before 2008 or much higher?

Thanks in advance

111

OK, since you brought up Bob Murphie’s article I am going to point out some errors in It, because I know guys like Warren Mosler, Bill Mitchell and Randall Wray are not even going to bother with It. Murphy doesn’t understand what is going on.

I see no reason why anyone would bother with them, so tu quoque I guess.

And what is that? There is no such thing in a wordl with central banks. This is some theoretical construct that doesn’t apply.

Which you have repeatedly failed to prove. Outline your theory of how real wealth is created.

They are always free to create loans at a given price level. They are not “more free” now after the fed has pumped reserves. Bank lending is not constrained by reserves. In fact the reserves are electonic numbers. Banks have a reserve account at the fed. Me and you cannot use those reserves to go shopping, banks are not lending those reserves to me and you, they stay at the fed. Banks need those reserves to settle payments with other banks and wit the government.

You’ve asserted this a number of times. Do you have any money supply figures showing that bank credit is out of tune with reserve requirements? Now let’s suppose it is. What does this prove? That the banks are even more unhinged than the Fed would like? Well, whoop-dee-doo?

Those reserves are a fiction to the real economy and the reserves cannot cause inflation.

The reserves the banks have on board with the Fed? Indeed. The credit the banks extend and pile on top of these reserves? Hell no.

He doesn’t understand that bank lending is not constrained by reserves but he is not the only one.

Actually, it is. Else banks would suffer bank runs and depositors would not put their money in the bank out of solvency concerns. Under the current banking system, they enjoy a degree of immunity from this mechanism due to government guarantees and the central bank’s ability to “print up” money. If your argument is that the banks need not abide by reserve requirements, first you need to prove this and secondly, you need to realise it does not alter Austrian theory one iota.

The fed funds rate was set by fed. Prime rate doesn’t set the fed funds rate. Prime rate comes down when fed funds rate goes down.

Got us there, Sherlock. I’m not sure what the significance of this point is. No one said the Fed controls it directly.

First you Austrians seem to be critisising the fed for central planning and setting the rates and now Bob Murphy seems to be assuming that fed is not setting the rates and the markets are. Do you see the error?

The Fed does not set the prime rate directly, that is true. Yet it does try to influence the market both by setting reserve requirements (if you say it doesn’t, prove it; even if it does not, it is the mechanism that allows banks to flood the system with credit) and OMO. Austrians criticise it for distorting market rates. Part of the Austrian theory is that eventually market rates will re-assert themselves. So what is the ‘error’ here?

He needs to read MMT.

And you need to learn Economics.

112

MMT is entirely consistent with any ‘laws of economics’ such as ‘supply and demand’ which further recognizes differences between perfect and imperfect competition

113

Well good that it can tell the difference between a made up “theoretical” construct and competition in the real world, I guess…

114

“So you say that price fixing when it is about money does deactivate supply and demand, but if it is done with bottles of beer it is not? And at the same time you even admit that I could call it supply and demand if it is about fiat. Although you say that this would be wrong because they set the price/interest rate not supply. It seems as if you do not understand how price and supply are connected.”

Specifically, with the US dollar, which is a construct and not a physical commodity, the ‘laws’ of supply and demand do prevail.

And in this case, the US govt directly controls the (notional) supply (via govt spending and/or lending).

And it also controls the minimum notional demand (certain types of tax liabilities)

And there is no cost of production/no limit on the available supply.

That is, nominal spending is not constrained by revenues.

As often stated, ‘the govt priints the money’

‘Value theory’ also applies- how dollars exchange for themselves and other goods and services.

In this case, where there is a monopoly supplier, it’s easy.

The monopolist is necessarily price setter.

115

this applies to a fixed exchange rate like a gold standard, where lending is necessarily/continuously reserve constrained.

but it does not apply to our current non convertible currency where lending isn’t reserve constrained.

it’s a case of the ‘laws of economics’ as they interact with various bits of institutional structure and not different ‘laws of economics.’

116

it’s the difference between being the issuer of something and the user of it.

think of bus tokens.

Assume a city issued/offered for sale bus tokens at $1 each

Isn’t the city’s ability to make payments in tokens different from a household’s ability to make payments in tokens?

Please limit this discussion over the difference between issuer and user to the narrow point about ability to make a nominal payment, thanks.

117

How about I treat it like a household with a monopoly on counterfeiting instead?

118

in my book i use the example of parents who give their children coupons for doing chores.

it’s a quick read:

http://www.moslereconomics.com/?p=8662/

119

Thanks Mr Mosler. This is what I wanted to hear. Also thanks for the link I am currently reading it.

As far as I read you are well aware of the fact that a government can only technically fund itself unlimited. Do you see the USA and the EU already near a point where they risk wrecking the economy entirely by excessive government spending? If not yet what would be a sure sign that they are?

120

everyone seems to forget the ‘demand leakages’ which means income that goes unspent

the biggest source is pension fund contributions, which are tax advantaged (you contribute with pre tax money, and income in the funds compounds tax free)

yes, this is ‘man made’, ‘institutional structure’, ‘govt. interference’ etc. etc. but it’s real.

all this unspent income means some other entity has to spend that much more than its income or the output doesn’t get sold and the result is an output gap/unemployment.

it’s all based on the mistaken notion that with today’s non convertible dollar you need savings to have money for investmnet. again, that’s gold standard stuff, inapplicable with today’s institutional structure.

and not to confuse real savings with real investment. this is about dollars only for purposes of this discussion

unspent dollar income will not result in real savings- in fact in most cases the opposite is true. with low spending real investment suffers because to a large extent dollar sales drive real investment. why invest in real capital goods if you can’t sell the products?

this is in the book, tool