MMT redux

Miscellaneous General
1

Not sure why the original thread was deleted. At any rate I’m copying my last post here, by request:

I’ll reply with general principles. If you feel I left something out, forgot to respond to a particular point, let me know.

  1. The place to learn AE is not from my poor posts, but from the free books available here. Economics in One Lesson is a great place to start. It’s short, it’s clear, it’s important.

  2. I’m glad we agree that the govt operates by force and violence, and that therefore there is a huge moral and ethical issue here.

  3. I’m also glad we agree that I am describing things correctly when the economy is operating at full capacity. The thing is, I think I am right [IMHO] even when it is not.

This point lies at the heart of the difference between AE and Keynesian economics [in all its flavors]. Keynes starts with the economy in a recession. Plenty of unemployment, little buying, why did this happen? It’s animal spirts, replies Keynes, meaning people being perverse and stupid, suddenly not buying for no reason at all. But it doesn’t matter why, really, says Keynes. We have to do something about it. Gobble up what is in the factories, which will force them to make more, hire more people, and all will be well.

The Chicago school says the reason is not enough paper money in the system. Solution: print more.

But AE has a different answer to the question of how did this happen. In very broad strokes, the cause is money printing and low interest rates for a few good years BEFORE the recession. These combine to give people plenty of money to invest, and they invest it foolishly. Those factories operating below full capacity are doing so because they should not have been built in the first place. They are making things people never wanted in the first place. An example is the recent housing bubble. Too many houses were built, more than people can afford to buy. Or the dot.com bubble. Money and [therefor resources] was put into companies that could not turn a profit. Or take GM. They foolishly built cars people don’t want, those huge SUVs in times of rising gasoline prices.

That being the case, is the solution to make sure artificially that more houses and unsound companies and SUVs get built? To make sure the SUV factories are running at full capacity, to keep on making more and more undesired gas guzzlers? "Tis madness. Once we recognize the problem as being too many undesired things being made, the solution becomes obvious. Let GM go bankrupt, so that the fools who made the wrong decisions no longer are in charge, sell off their plants and machinery to someone who knows what he is doing, and have the factories make cars people want. Exactly the opposite of what MMT and all the other schools of thought suggest.

  1. We also seem to diagree about the power of accounting principles to enlighten. Do you agree or disagree with what I wrote earlier, and will copy here for you?

When the govt spends and gives the private sector paper money and takes away “what money can buy”, it shows up on the books as an accounting identity. But that accounting identity is an equation. It is saying two numbers are equal. The number written on the paper money, and the number on the price tags.

But no accounting identity in the world can claim, or does claim, that paper money has the same value and usefulness as “what money can buy”. The govt is printing up piles of useless paper and taking away our resources.

If you agree, then you will understand that accounting is a way of keeping tabs on what went where, but does not teach anything meaningful about the objects involved.

For example, if a company buys a lemon of a car and overpays for it, the books show that the car is worth what they paid for it. But it’s not.

To give an extreme example, let us say that the govt, instead of paying for what it buys with money, paid with piles of dung. The books would show that all the goods and services they took are equal to, and have been adequately compensated by, piles of dung. But of course an appeal to accounting in such a case hides what is going on, as opposed to shedding light on it.

Come to think of it, thats not so extreme an example.

If you disagree, please tell me why.

  1. A lot of your points stem from my not being precise in my use of the word money. When I say that the govt takes our money, for example, you reply that the govt spends by printing money, not taking ours. So replace “money” with “wealth” and you’ll have it. For example, printing money takes away our purchasing power. Always. By the law of supply and demand. This is true even if the economy is not “running at full capacity”. Which I have explained above is a mythical situation. What you call “not running at full capacity” I call “running at correct capacity”.

This will explain my statement “Where does the govt get the money to be so helpful? By taking it away from the people.” The more accurate statement would be: “At what cost to us is the govt so helpful? At the cost of taking away our purchasing power and/or resources, i.e. our wealth.”

  1. About taxes. Please explain to me what the govt does with the money it collects in taxes? Does it buy things with it? I assume the answer is yes. Once the govt takes away my money by taxing me, can I spend that money? I assume the answer is no. So basic accounting principles tell me that the govt, by taxing me, has taken away my purchasing power, and then takes away resources from the private sector. Thus taxes impoverish us all [except for the govt] in two ways.

I think I see what the OP meant when he said taxes reduce aggregate demand and the money supply. He meant they reduce it from the priavte sector. But that is a meaningless fact. Because when the govt goes to the store, it spends money just like everybody else. If we take all the people in California and rename them “outside the private sector”, then we can say that money spent by Californians is spent outside the private sector. But so what? it gives us no furthe understanding of what’s going on, in fact it creates misunderstanding.

  1. The advantage of a gold standard is not that eliminates fractional reserve banking. The chance of a run on a bank is the same whether they have to keep reserves of paper money or of gold.

The advantage is that the govt cannot print all the money it wants. because every single pice of paper they print is a promise to give someone gold. If they print too much paper, more than the gold they have, they will run into trouble, obviously. Which is exactly why all govts hate the gold standard. It restricts how much they can spend.

  1. As for the use of the word “credit” in an accounting sense. Are you agreeing that the sentence "“Govt deficit spending credits the private sector” can be accurately and truthfully restated as “Govt spending gobbles up resources from the private sector and gives the private sector paper money”?

There is a propaganda difference between the two. The first makes it sound like the private sector got something worthwhile. The second tell us what is really going on. Which is the kind of error made over and over by the MMT analysis. It thinks accounting teaches us something. I explained this earlier.

An Austrian Critique of MMT?
Domino effect of failing banks, role of inflation, and critique of Austrian economics
A critique of Modern Monetary Theory?
Critiquing Post-Keynesian
Private sector surplus = government deficit
The Great Krugman vs. MMT Debate
An Austrian Critique of MMT?
2

I’m not sure either - there is no note of it in the mod forum and nobody posted in it before it was deleted as to why they were going to delete it. Generally, I believe that stupidity should not be banned, but apparently some mod-vigilante decided to take matters into his own hands in this case.

3

I have the same question also, but at this point . . . I don’t care anymore.

4

Krazy Kaju,

That’s an unfair assessment. I responded to your comments in that thread. I didn’t think what I said why stupid. I’d honestly appreciate you point out why what I said is wrong and/or why I am stupid.

Edit: BTW I have some of my replies typed up. Just a bit busy at the moment. I’ll just and have them posted ASAP.

5

This post is in reply to the other thread which was closed.

Edit: For a great overview of MMT I’d suggest the following http://pragcap.com/mmt-and-the-operational-realities-of-the-monetary-system

If there are any questions or criticisms please ask me and I’ll do my best to answer them. BTW I haven’t forgotten the rpelies from the other thread. I will do my best to have that done as soon as possible.

One point that I wish to clarify about MMT is the following:

You can separate MMT into two groups:

The first is a description of how the economy works at an operational level. This is where stock flow consistent modeling comes into play*

The second part is the normative part, where MMT proposes policies based off on the operational realities.

It is perfectly valid to accept the first part but reject the second part.

What I wish to discuss is only the first part. So I’d like to focus discussion on how our monetary system actually works, rather than how it should work. I think this is an important foundation that must be understood before we can move onto how we think the system should work. As I am currently learning and I am searching far and wide for critiques on MMT and MMT is only a recent school of thought, I don’t believe I can move onto the next step without exploring and looking at counter arguments to MMT.

Another point: where I wrote government deficits equal the non-government savings, that should read: government deficits equal the non-government NET savings.

*I’m not sure what the official MMT position is, but at some level, you do need to rely on presuppositions when interpreting identities. For instance, who is to say that an identity is an ex post identity or an ex ante constraint? An example would be related to the Government Budget constraint and Money multiplier.

Johnny doe,

You questions are important, but to be honest I don’t see how they relate to the topic at hand. You are raising questions about how I think the system should work. If you read what I wrote above that largely deals with my thoughts on the topic.

As to your last question of the first paragraph, yes, the government can constrain its spending. It can peg its liabilities to another currency or commodity. Though I’m not too sure what you mean by, ‘the fruits of the citizens labor’. If you mean, that labour needs to produce something before it can be purchased, then this is trivially true, but the government could also just purchase the labour itself and put that labour to work. Whether or not it should do this is a separate question.

Isaac,

Sorry if I wasn’t clear.

The general way to categorise economic schools of thought is by classifying them either an orthodox school or heterodox school (obviously this isn’t foolproof, and the situation isn’t as a black and white as this). An orthodox school is a research program that shares a number of the generally accepted/mainstream assumption, methodology and presuppositions. An easy way to think of it, is what is learnt in the textbook, of course, it’s not as simple as some in the orthodoxy would reject parts of what is taught in textbooks. The term heterodox refers to the minority of economists who belong to non-mainstream schools. They are more united by their rejection of mainstream assumptions, methodology and presuppositions, though this does vary from school to school. An example of a heterodox school would be Marxist, French Regulationist, Post Keynesian and sometimes the Austrian school.

Most Keynesian schools, the original Keynesians (neoclassical synthesis), neo-keynesians and new Keynesians, have all enjoyed some level of belonging to the orthodox, though this has varied at times. Post Keynesians on the other hand haven’t ever truly belonged to the mainstream, though it will be interesting to see what happens in the next few years, as a lot of what is in the New monetary consensus (central banks target an interest rate, the money supply is therefore endogenous, and to more recent comments, such as, the money multiplier isn’t the main channel of money creation) have a lot in common with Post Keynesians, minus any form of recognition.

BTW read what Esuric said in the previous post. I don’t agree with his assessment of Post Keynesians, but he nonetheless shows that the labeling of Post Keynesian as Keynesian isn’t entirely correct.

Hope that helps.

6

Not sure what will happen to this thread, but the previous thread (moved to “Deleted Posts”) is here:

[url]https://forum.freecapitalists.org/t/modern-monetary-theory-mmt/17287]

7

But we already understand how the monetary system works. You’re merely redefining terms, such as money, for example, in order to support your untenable hypothesis, which is fundamentally flawed. MMT may claim to be modern, but it’s merely the regurgitation of older economic fallacies, which have already been thoroughly refuted. Mises obliterates Knapp in the Theory of Money and Credit. The burden of proof is on you to demonstrate why Mises’ arguments, which are now part of the orthodoxy, are incorrect. You can’t just say, “times have changed.” This is not a coherent argument.

This is anything but “trivial.” In order to consume you must produce.

Of course the government could purchase labor and “put it to work,” but this begs the question. Where does the government get the resources to do so, and what are the effects of such a policy?

Either way, the facts remain:

  1. People don’t demand money because the government expropriates a portion of their annual income; they demand money because they wish to engage in exchange and avoid the problems associated with barter.
  2. There is no relationship between the average tax rate and the demand for money and the supply of money, though budget deficits do create a political incentive to inflate. Likewise, there is no relationship between average tax rates and the general price level.
  3. The government does not create money solely because it engages in deficit spending. The government can create money, and often has created money, even when it runs budget surpluses.
  4. The government does not control the entire supply of money. It only directly controls the supply of base money. The vast majority of money is created endogenously through the banking system.
  5. The fact that base money is created by the state does not mean that money is inherently a statist institution/instrument, unless we choose to define money as such.
  6. The idea that fixed exchange rates and monetary nationalism creates financial stability is debatable.

MMT is merely one giant non sequitur.

8

I never got a chance to respond, as the thread was deleted, but your response was downright ludicrous. The government does not spend money into existence, instead, the Federal Reserve regulates the supply of money by purchasing and selling assets, mainly government bonds. But the Fed could just as easily control the supply of money by buying/selling other assets, such as gold, silver, or foreign currencies. In fact, many central banks, including the Fed, already use foreign currencies, private debt, and gold to a significant degree in order to regulate the money supply. Thus, if the federal government were to retire its entire $14 trillion debt someday in the future (and this would be a long, long process), the supply of money would not be hampered at all.

As for the comment along the lines of “government debt is an asset for the private sector,” well, so is private debt. And the fact of the matter is that government debt forces private debt out of the picture, by gobbling up the available credit, thus pushing interest rates up. This is a very, very bad situation, as this means that private investment is crowded out in favor of unproductive (or should I say anti-productive?) government spending. If the federal government began paying off its $14 trillion debt (through a balanced budget, not by monetizing the debt), investors would get their cash back and they would be interested in seeking alternative investments in the private sector. Thus, it’s not as if government deficits are by nature good for the private financial sector and government surpluses evil. It’s the other way around.

BTW, why do you have multiple accounts? This is against forum rules. Was your previous account banned? Again, there is no note of this in the mod forum…

9

I have no idea why such hostility is being directed at me. I haven’t abused anyone or called anyone stupid.

Esuric,

The definition of money being used is that money is a financial asset with a matching liability. Do you deny that money is financial asset with a matching liability, and more importantly do you deny that it is a balance sheet item?

The key proposition of Knapp was that the government can make the unit of account whatever it wants, by setting that as ‘that which is necessary to pay taxes’. Mises somehow assumes that what Knapp said that the state can set the unit of account solely by declaring it legal tender.

Your claim that it is merely regurgitation of old fallacies is baseless. Yes there are some similarities and ideas based of off Knapp’s ideas, but the MMT is only a recent school which has gone under considerable development in the last two decades.

I don’t follow what you’re trying to say. My point of saying that something needs to be produced to be consumed as being trivial, is that it doesn’t need to be stated, it should be common knowledge. For something to exist it must be created first.

What resources are you referring to? Let’s say the government wants to hire workers to do star jumps for 8 hours a day. The only resources it needs is labour. The effect of such a policy will depend upon whether or not the economy is at full capacity. If it is at full capacity, this will divert resources away from private sector uses, with possible price adjustments. If the economy is not at full capacity, then there are idle resources and these will not be diverted away from some other use. If the government is operating in our current monetary system, then, it will simply spend its liabilities into existence. Which will result in net financial assets for the private sector.

When did anyone say otherwise. The key MMT point is that anyone can create money, the issue is getting your liabilities accepted. The government gets its liabilities accepted by declaring that these are necessary to pay taxes in.

I’m not sure where you got this from, but the point that MMT states is that taxation reduces reserves from the private sector, all else equal. Deficits add reserves to the private sector. Do we agree on these points?

Yes it is true that whenever the government spends money is created. This is a key point of MMT, hence the phrase: the government spends by either crediting private sector bank accounts, or issuing a cheque upon itself.

The point is about net changes. Assume a closed economy for convenience. If the government runs a surplus, then the private sector is running a deficit, as a matter of accounting, money is destroyed by the amount equal to the surplus. Assuming that the government does not engage in any operations to offset the reserve effect.

If a government is running a deficit, then the private sector is running a surplus. Then the net result is that money has been created.

I’m sorry but when has it ever been stated that the government controls the money supply? There is nothing in the MMT literature that suggests otherwise. The MMT and Post Keynesian point is that the monetary base is endogenous, and bank credit is endogenous.

Atleast we can agree on the latter, that bank credit is endogenous.BTW if it is endogenous, then the banking sector is setting a price.

Lets break this down a bit. The central bank is the monopoly issuer of reserves. Because of this it can either set the price, and defend that price or set the quantity. In other words, if it decides to control the monetary base, then the price at which reserves are obtainable must fluctuate. The reserve effect of treasury operations will cause the price to be extremely volatile. Not to mention that central banks everywhere will always allow banks to obtain the necessary reserves. In countries with reserve requirements, the accounting for reserve requirements is usually a lagged system and the central bank will always allow banks to obtain the necessary amount of reserves.

Anyway, we know that central banks everywhere have a target price. The monetarist experiments of the 1980s were a disaster. But you can read that this is what central banks do from their own publications, e.g. RBA, NYFED, and BoC. You will usually read something along the line of ‘the central bank accommodates the demand for reserves in order to maintain its target rate’. So if the bank is setting the price, and it is allowing the quantity to float (it is supply the necessary amount of reserves to maintain its target rate), then the monetary base is endogenous determined.

The bank credit as we agree is endogenous determined. Few quick points: the banking sector cannot create reserves, the banking sector cannot destroy reserves, it can only shuffle them around. Do we agree with this?

Banks do not care about their reserve position when making a loan. They care about the price. Banks are constrained by their amount of capital (in shorter periods) and by credit worthy customers.

When a bank creates a loan, a deposit is simultaneous created. Do we agree with this?

Where reserve requirements are in effect, banks engage in a number of operations, such as attracting deposits and liability management.

All MMT is saying is that the state can decide that which is necessary to pay taxes. This ability to do so creates demand for whatever the state has set as money. MMT continue from this point and argue that there is a hierarchy of money, with state money at the top, bank credit below, and more private forms of credit. State money serves as the clearing mechanism of the banking sector, and bank credit is the clearing mechanism of the non-bank private sector.

I have absolutely NO IDEA where this has come from. NO ONE, I mean NO ONE in the MMT camp has suggested that we go back to fixed exchange rate system. MMT prefer our system, as our monetary system changes the operational requirements of the state and eliminate its financial constraints, though it does have real resource constraints (hence the issue of full capacity).

That is questionable considering that a number of your points were made up or misinterpreted by you. The best example is the last point. No one who is familiar with MMT or who has bothered to read what has been written in this post or the other could make such a claim.

I haven’t forgotten the rest of the posts. I will try and reply as soon as possible. I’ve just been busy.

Krazy kaju, I did have an account here ages ago. I’m on a new computer now, and I couldn’t remember the account name and login details (my browser always logged me in automatically). Sorry if I broke any forum rules.

10

The thread was deleted because it was a monster.

I started the thread to ask for a decent, thorough, Austrian critique of MMT, and what ensued was a mud fest full of people who have no idea what MMT is.

I do not agree that MMT ought to be, but much of their description is an accurate telling of how the monetary system works.

Integrating the revelations of classical theory with MMT, pointing out what effects it could have on the production structure especially, would be the focus.

I did not want a bunch of people saying “gold is better because…” “MMT is for insane people…” “MMTers believe in a free lunch…” etc.

Basically, a bunch of people were talking not knowing what about and it was annoying so I requested it deleted.

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Thanks for the info.

12

This one is starting to go the same way, it is becoming an info session for people to learn about MMT when all they need to do is go read about it themselves. Why don’t people just go read about MMT and then bring better critiques to the table instead of accusing MMTers of believing things that most of them have never claimed to think?

13

What hostility?

This, even if true, is an entirely unessential characteristic of money. Money is defined as the commonly employed medium of exchange; it is an economic good with perfect liquidity used to facilitate exchange. The fact that money shows up as an asset on a firms balance sheet, or a liability on the FED’s balance sheet (though the FED doesn’t really have liabilities), is entirely immaterial.

All transactions are ultimately settled with real tangible economic goods. Individual’s don’t truly work for money; they work for the goods and services that can be purchased with money. In order to employ those laborers the government needs to first expropriate resources from the real economy, or it can borrow and inflate (which amounts to expropriating resources from the real economy but also yields general and relative price inflation).

Inflation is always and everywhere a monetary phenomenon. Cost-push and demand-pull theories of inflation are theoretically untenable. There is no causal relationship between the utilization of resources and the general price level. We had a decade of simultaneous “underutilization” and general price inflation here in the U.S. and in the U.K. There have been hyper-inflationary depressions throughout history (e.g., Yugoslavia and the Soviet Union). Inflation is merely an expansion in the supply of money (in the broader sense) beyond the demand for cash holdings.

People do not pay taxes with government liabilities. There is a demand for government liabilities (treasury bonds, bills, and notes) because they pay interest and they are seen as the safest financial asset. Again, you’re entire argument rests on a rather spurious notion of money and its function.

Not at all. Again, there is no relationship between the average tax rate and the general price level. Taxation neither reduces nor increases reserves in the banking system, which is entirely determined by the whims of the FOMC. Deficits don’t directly add to the reserves either; they only indirectly do so when the FED engages in open market purchases. Borrowing resources from the real economy, and them monetizing your debt, doesn’t make society any wealthier.

This is not true at all. I don’t know how you reach this conclusion. Money is created either by the banking system through fractional reserve banking, or it is created by the Federal reserve system via open market purchases. The Federal reserve, just recently in fact, expanded the supply of base money by buying private securities (MBS). The Federal Reserve system could theoretically triple the supply of money even if the federal government reduced spending to zero.

This is also incorrect. The price of money is its purchasing power; It is determined by the demand for money in the broader sense, and the supply of money in the broader sense. Since the Federal government only directly controls a small portion of the total supply of money, then it can only influence the price of money, but it does not determine the price of money (the purchasing power of money). Again, the monetary base is merely one small, but important, component of the entire money supply. The only way that you can reach this conclusion, namely that the federal government directly controls the price of money (its purchasing power) is if you assume that velocity is absolutely fixed.

But only the market decides what is and what isn’t money. Kings, throughout history, attempted to supplant the gold standard with other forms of money, including paper fiat money, but Gresham’s law would take hold (in the case of arbitrary exchange ratios set between different forms of money), or society would flatly reject the king’s fiat money. The king did not force society to employ gold as money; society forced the king to accept gold.

Exactly, but there are those who would argue that a fixed exchange rate regime is relatively desirable. Thus, the belief that floating exchange ratio’s create financial stability, as MMT asserts, is controversial/debatable…

14

You’re right; I don’t understand MMT at all. It’s entirely incoherent. For example,

This is incorrect, but even if it were correct, it would be one giant non sequitur. Also, MMT is starting to sound a lot like the RBD (real bills doctrine).

15

I’m pasting this post here from the other thread that was closed. This is for reference purposes, and if anyone wishes to respond.

16

Thinkblue,

Don’t worry, I will responding to all the questions raised in the other thread.

Just got a few things to work on (Posting here has turned it into a last minute job )

17

No problem Operational. Take your time. I’m interested in alternative points of view.

18

There is no such thing as critiquing or refuting MMT since it is only a description of the way the monetary system actually works. You can’t refute it because to do so is to admit that you don’t understand how the monetary system actually works.

The only theory is in its application and unfortunately a handful of Keynesians dominate the MMT headlines and promote job guarantees and other such nonsensical Keynesian ideas.

19

FWIW, I posted a refutation of the Forstater Mosler paper here: https://forum.freecapitalists.org/t/an-austrian-critique-of-mmt/17182/6

20

As an expert on MMT I can assure you that Dave has no idea what he is talking about. He should be ignored as a reliable source.