Ignored for Years, Modern Money Theory Is Gaining Converts
bloomberg.com
bloomberg.com
What matters is no longer allowing the banking system to engage in fraud by introducing multiple claims on the same currency unit in the same time period, which is to say that currency deposits must be duration matched with loans. No more borrowing short and lending long.
Of course, practically, MMT will be used to justify more government boondoggles, wars, and bail outs of the rich, rather than something that might actually be effective, like a citizens dividend, but that's politics, not economics.
Banks were given this privilege because they were highly regulated, essentially just extensions of the Federal Reserve itself. Of course over time they argued this was unfair and chipped away at the regulation, while still retaining the privileges.
Given how much is at stake, I don't see anything changing until it all falls apart. Easy creation of money directly supports the Federal Reserve's mission of overstimulating the economy through artificially forcing inflation. The proceeds aren't just skimmed by a countable corrupt cabal, they're funding the entirety of several industries!
Banks in total provide about 20% of the total credit in the U.S. Even if they were perfectly risk-free, you'd still have the other 80% to worry about.
If you're worried about fractional reserve banking, you're worrying about the wrong thing IMO.
Why? This is the essence of banking and has been for centuries.
Furthermore, if you try to apply this consistently, what do you do about commercial and consumer credit? Ban it entirely, including credit cards? No more car loans, just cash on the nail?
Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Credit cards are not counted against deposits and, therefore, stand outside this analysis, although I'm not sure I would allow banks involved in taking deposits to issue them, because the capital structure tends to become muddled.
If you think about it, you can have nearly as much loan-expansion as the current fractionally reserved system (maybe even more since there is no need for a reserve ratio), but there is no double counting of monetary units at a given point in time and, therefore, no possibility for a bank run.
I will admit that this is my own economic theory and that I am used to the crazy looks from people.
Think about that: you deposit your money in the bank; the bank lends it to me; I pay the car dealer — which means that money is no longer in your bank! What is in the bank is an IOU from me for that money, and of course that IOU itself has some value and could itself be sold/lent to someone else for some other purchase. There's no fraud, no double-counting, but it all makes perfect sense.
The money is no longer in the bank, but I can't demand it for five years, which is great, because the bank will get the loan paid back, with interest, in four.
And yes, I would expect a secondary market to develop for deposit receipts as people misjudge their time/money needs.
What am I to think about? Duration mismatch is the problem, eliminate it and you eliminate bank runs and, more importantly, lying. The fraud is when the bank, through slight of hand, tells more than one person they can have a given monetary unit at a given point in time. That's the double counting.
But perhaps I'm misunderstanding you.
Simply put: MMT completely ignores floating exchange rates.
The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money.
The long term problem is that too much inflation (or, more accurately, taxation) may drive people away from our currency, and MMT will be shown for the sham that it is.
I'm not sure where you're getting this from, but I learned the difference between fixed & floating exchange rates by reading MMT economists.
No, the only reason it hasn't been completely catastrophic is because there's basically no consequence to having this level of debt. Interest payments on our debt are close to the lowest they've been in decades. What's the catastrophe supposed to be, again?
MMT absolutely does take account of forex by recognising that a government has a large amount of power to dictate money flows within the country, but very little power to compel terms of trade overseas. And most countries need to continuously import certain things which cannot be substituted locally, especially fuel.
Expanding the money supply lets people buy more locally produced stuff, but not more imports. This even scales down to local token currencies ("Bristol pound") or Krugman's "babysitting tokens" thought example.
Right, so for most developed nations this would be disastrous.
There's a reason NAFTA has been so unpopular.
Isn't the petrodollar system precisely the historical exception that allows the USA to have a lot of power when it comes to "compel terms of trade overseas"?
edit: obviously the other side of that ability to "compel terms of trade overseas" being the US formidable military power that allows them to further twist other countries arms when they refuse to play by the petrodollar system rules (see Libya, Iraq, etc)
Horseshit.
>The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money.
Yeah, yeah, and the only reason it wasn't completely catastrophic for Japan is for some other completely different reason (aging population, people like to save - take your pick).
Be consistent at least about your excuses. Make sure they apply to the US and Japan.
Further, I don't see why you can't have two completely different reasons for the same effect.
And while demographics are important, I wouldn't call it the primary effect, instead I'm with Haruhiko Murayama from the Bank of Kyoto: "[Japan deflation is caused by] a lack of demand, which in turn is attributable to the fact that emerging countries such as China, South Korea and Taiwan have come to manufacture inexpensive high-quality electrical products by introducing new equipment and by taking advantage of their cheap labor."
Because if you print your own currency, the risk of you running out of it (insolvency) is exactly zero.
Of course, when you thought you heard "major" what he probably said was "sovereign in the currency they borrow". Big difference (US is sovereign; Japan is sovereign; Greece is not; Zimbabwe was not).
"and could lean on their massive power/influence if they got stuck"
"Stuck"?
In that situation, our balance sheet would be ok, but our country would be in very bad straits. So we would be stuck in a real sense, if not in an economic sense.
His lecturer probably (naively) believes that America will be dominant for so long that we won't have to worry about pesky things like the threat of war from other countries on economic grounds.
Why? The US government could pay off all of its debts tomorrow by printing money but the hypothetical situation where it would 'need' to simply won't arise.
Same for Japan. Or the UK. Or anybody. Inflation is the only real problem most governments need to concern themselves with (and is inflation too high in the US or Japan?).
>His lecturer probably (naively) believes that America will be dominant for so long
And I suppose Japan has managed to remain solvent with ~220% debt/gdp by being a superpower as well?
His lecturer wasn't being naive. The austerian economists who predicted hyperinflation in Japan in the late 90s for the exact same reasons you're proposing were being naive.
It could arise pretty easily if international markets lost confidence in the USG's ability to repay. In terms of wealth, I mean. Of course the government can print money to pay in dollars, but from an investor's perspective there's no difference between a country that inflates its currency and a country that only pays a percentage of obligations in an uninflated currency.
Most US debt is short term. It has to be rolled over, and it has to be rolled over at very low interest rates. That was the real genius of QE - they found a way to print money and lower interest rates at the same time.
>And I suppose Japan has managed to remain solvent with ~220% debt/gdp by being a superpower as well?
Japan has remained solvent because that 220% number isn't real. If you subtract out interagency borrowing it's more like 130% (or it was, anyway, the last time I looked into it), which, while not ideal, doesn't exactly put the country in a league of its own.
Much older than that, MMT is based upon turn of the last century American socialist (specifically the Social Credit Party) economic theory, but the red scare nearly eliminated it from American discourse for most of a century. It's especially interesting in that it is especially cyclical with respect to depressions/recessions.
Edit to add: Not that there isn't important additional knowledge and theory that MMT brings to the table on top of the turn of the last century theory work, just that it's enough of a direct successor I'd draw the line of history longer.
Protip: Your critique of "status quo" (e.g. central banking) systems will be taken more seriously when you demonstrate thorough knowledge of the subject matter and don't rely on emotionally laden arguments involving "fraud" and "lies."
They've tried everything in Japan & Europe, getting governments trillions into debt, and now they want to go negative interest rates. Clearly what they did before didn't work, and now they are trying something else. They're shooting in the dark and unknowingly killing the economy. It doesn't take a genius to figure out people will just keep cash at home if you impose negative interest rates, and by keeping cash away from banks, reduce the reserves banks hold, and the money they can lend, reducing the money supply, exacerbating the deflation the NIRP was supposed to fight in the first place.[1]
There's no fraud and no lie, except for the fact central bankers operate on economic models detached from reality. The only lie is claiming to know more than they do.
The policies the Japanese central bank tried to impose to lower the value of the Yen in the past few months, only raised it. https://au.finance.yahoo.com/q/bc?s=USDJPY=X&t=3m&l=on&z=l&q...
"Central bank impotency" heading your way.
[1] http://www.wsj.com/articles/japanese-seeking-a-place-to-stas...
Erm no, they're trying the exact same thing even harder. The top of the economy is awash in capital with nowhere to go, while the bottom has to run ever faster on the debt treadmill. Creating even more debt that funnels wealth upwards is obviously the solution <g>.
Hence why the alleged benefits of a cashless economy are being pushed across the board at the moment.
Cue the "if you insist on holding cash, you must be a terrorist" rhetorics.
On the other hand, taxation is good because it reminds people there are costs to government services when they have to actually pay the tax, and in addition you can use a tax to inject a market signal about costs that would be normally externalized.
[1] Unfortunately, MMT implemented by any government will likely be "in addition to" rather than "instead of" existing tax mechanisms.