a brief overview: https://www.thenation.com/article/the-rock-star-appeal-of-mo...
A not so brief overview: http://neweconomicperspectives.org/2011/06/modern-money-theo...
.. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.
For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible?
Can you find some physics book that explain something that the engineers say it's not true?
My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative.
(1). https://www.bankofengland.co.uk/working-paper/2015/banks-are...
Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking.
Banks don’t create demand out of thin air by providing loans.
While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.
This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says.
See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed.
>>While banks can create loans "out of thin air" [..] they are limited by their reserves.
My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details.
Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves.
If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.
https://www.sciencedirect.com/science/article/pii/S105752191...
And
https://www.sciencedirect.com/science/article/pii/S105752191...
Economists at the Bank of England re-ran these tests in an attempt to disprove the above theory and found themselves reaffirming it:
https://www.bankofengland.co.uk/working-paper/2015/banks-are...
It has since been reaffirmed by other central banks, including the Bundesbank
https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentl...
On the other hand, MMT is deeply concerned with institutional arrangements in the banking system, and still elides central banks and governments in its explanations of how the system works because doing so avoids the inconvenience of explaining that the main reason budget deficits result in long term repayment obligations for governments under current institutional arrangements is because central banks fundamentally disagree with MMTers that systematically buying up all newly emitted government debt and pushing interest rates down to permanent zero is compatible with low inflation.
I think a lot of engineers would have issues with more arcane theoretical stuff like string theory too (and most physicists would have issue with engineers abstracting away certain details because the approximations they work with are good enough...)
I’m not sure what MMT books you’ve been reading...
I have been following this debate for a while and it's only now that we heard "well, of course, we knew it all the time".
>>because central banks fundamentally disagree with MMTers
Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.
An engineer using Newtonian physics is very aware that is a simplification. Here the situation is the opposite, the physics (the economists) are simplifying away what the engineer (the BOE people) see in the reality, so their theories work.
> Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.
Central banks being unable to lend to governments or purchase government debt directly is a total non-factor in them consistently declining to match government debt emission dollar for dollar with government bond purchases on the secondary market (no MMT economist would disagree either). They are free to complement fiscal expansions with monetary expansions (at least over periods longer than changeable monthly base interest rate targets) as MMT would prefer, or take the opposite approach, which they sometimes do. If central banks thought MMT was fundamentally right, we wouldn't have seen them ever pull money out of the system to push up interest rates...
I think I will be cavalier about that comment.
>"[..] what mainstream economists really believe [..]"
This is something that always puzzle me in this kind of discussion, maybe you can help me with that. What mainstream economists really believe?
I mean, here (1) is a review of what text-books say about money creation. In my opinion (and it seems yours too) this is not the same that we see in practice.
So, my question would be, do mainstream economist believe different things that what they write in the textbooks?
(1)- https://ac.els-cdn.com/S1057521915001477/1-s2.0-S10575219150...
And the reality of money creation is pretty fuzzy too and depends a lot on what you define as "money supply" and the "banking sector" (funnily enough, even pretty basic physics has a degree of this problem too, which is why you get concepts of waves and particles that both fit some of the facts, though you don't get anyone inside or outside the mainstream very strongly committed to arguing against wave-particle duality...).
Ultimately private banks both intermediate between deposits and savers and create credit borrowed from central banks. They're only permitted to do the latter because their role in doing the former makes the government unwilling to let them fail. The "credit creation" emphasisers are right to emphasise that the limits on individual bank credit creation are soft because the "bank capital" they are permitted to borrow against is not a fixed variable, the intermediation emphasisers are right to note that when the commercial banking system borrows more money, the central bank tends to pull money out of the rest of the economy in the very short term, and propose raising interest rates in the slightly less short term, and so the banking system is only really able to expand the money supply when the central bank is comfortable with it doing so.
More generally, it's possible to entirely agree with Werner and MMT on banks' present role being far better described as primarily one of credit creation and entirely disagree with their respective alternative preferred policy approaches to central banking (or vice versa for that matter). What mainstream economists are primarily concerned with is the principle that raising interest rates for a variety of reasons (including but not limited to its effect on demand for bank credit) somewhat reduces inflation (and demand) and lowering them somewhat increases demand (and inflation) which is pretty much the most theoretically and empirically sound conclusion ever reached in macroeconomics (despite a few edge cases where it might not be true).
Because he thinks that the notion that private banks create money as an account operation, and they search reserves after giving a credit, and not before, is too complicate for his readers.
Fair enough, but you have to recognize that, then, it's not so strange, and hardly their fault, that MMT economists end writing "straw men" posts (as you said before).
Any time an expert is writing for a non-expert audience, they are usually writing a simplification tailored for the audience and the purpose of the writing.
> Because he thinks that the notion that private banks create money as an account operation, and they search reserves after giving a credit, and not before, is too complicate for his readers.
Or because the general idea of a multiplier effect works either way, and his columns are unlikely to depend on the mechanics of the simplified computation of the multiplier as an estimator of the maximum level of the multiplier effect under the simplifying assumptions that apply to that calculation.
If you have a specific problematic column in mind, we could have a less abstract discussion about the problem you have with it.
Anyway, I don't think our discussion is going to arrive anywhere.
You ask for Krugman (who is a guy that I like by the way) opinions:
https://www.cnbc.com/id/46944145
For me, what he says there is in clear contradiction with (for instance):
https://www.sciencedirect.com/science/article/pii/S105752191...
It seems to me that whatever it is what they put in their textbooks, even more important is what they put in their models.
Here there is a good criticism of Krugman views: https://www.nakedcapitalism.com/2012/04/scott-fullwiler-krug...
But if they didn't solve it, we are not going to neither.
IME, the simplifying assumptions are often explicit, so they do.
Particularly, it's a tool for estimating a limit of an effect in a particular idealized policy circumstance and with other simplifying assumptions.
The simplifications don't represent real world conditions, so the computation is of little real-world relevance though the effect is.
Much of a first-year physics text will be simplifications that apply in idealized conditions that are broadly similar, IME.
So who defines who's an economist?
> the most fringe and unsound theories
According to ...?
> "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics
This sounds as if being comprehensive or radical is something bad. Keep in mind the earth not being flat and orbiting the sun was both radical (at that time) and comprehensive in terms of laws governing that movement.
I just gave a counterexample to the suggestion of GP that it's a positive indicator of bad ideas.
Basic observation: Government that issues debt (or money) in it's own currency can't go bankrupt. This is essentially correct and it even works in practice. Hyperinflation is a problem only if you have to pay foreign debt in foreign currency.
Where MMT differs from mainstream is that in their model this ability can be exploited freely. The fiscal-monetary conflict goes away. They also assume that the only feedback loop goes trough taxation–taxation is seen as the tool reducing the money supply. Other ways money creation affects the economy don't exist or don't matter.
You called it extreme and then largely agreed with it....?
True premise can lead to wrong conclusion.
Some models can work only within a some range.
If you accept only one-handed economists you get into trouble.
---
joke explainer: “Give me a one-handed Economist. All my economists say 'on hand...', then 'but on the other...” ― Harry Truman
Because when you declare a school of thought to be "extreme" it's kind of weird to agree with the core (and most controversial) concepts and only disagree on unspecified details.
On the one hand, it's like declaring that the Catholic Church is run by religious extremists because their wafers are exactly the wrong shade of pale off-white. On the other hand, it's exactly like that as well.
A few fringe Austrians (only one with academic credentials) have mentioned hyperinflation as a possibility. An additional few Austrians suggested a high possibility of something like 7-10% inflation, which was still controversial among Austrians. Of the Austrians actually active in academia (which is a higher number than many would guess), I can think of one assistant professor who predicted rising inflation.
I'd be interested in hearing about all of these academic Austrians who have argued that they are both to be full of shit.
Ron Paul is not an Austrian-school economist (or any other kind of economist.)
> as far as I'm aware the mises institute has agreed with him all of that time.
[Citation needed]
Also, Ron Paul usually doesn't predict hyperinflation, though I would agree that he's very hyperbolic.
Just because a government publishes a 1% inflation number (that may be derived from heavily manipulated statistics) doesn't real mean inflation isn't happening.
The biggest problem I have with economist is when it comes to discussing technology and economy. While they have no problem having opinions about the effect of technology most treat it as an externality and not something central to their models.
Yet any economist worth their salt should do exactly that as technology has a bigger impact on the economy than what you can find in behavioral economics.
So the problem isn't the economist themselves but the power they have on public policy and that should be critiqued for the nonfactual base it is.
This is not true at all.
I think you are confusing talking heads and pundits in TV with academic economics. Productivity, technology and economic growth
Technology and it's relation to economics is included in growth theories and it's important subject that it subject of active study. It's in the A in Solow–Swan model. The model predicts that in the absence of continuing improvements in technology, growth per worker must ultimately cease. More modern theories take the technology even more seriously.
There are a few people like Tyler Cowen who take it seriously but most models used by governments (Like the Danish DREAM model) aren't even close to factoring those things in. And they are the ones who the politicians end up listening to.
Analysis: Hasn't mankind already concluded that governments can't just create and spend money boundlessly without harming the economy and the people who constitute it? I'm looking at Argentina, Venezuela and Zimbabwe right now, where the governments have each created money to finance their spending, and people are truly suffering as a result. And those are just some contemporary examples – human history offers many more, and they're quite consistent. If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect.
Radical alternative theory: Governments should be fiscally responsible, practicing balanced budgets and promoting currency stability. Outlandish, true. But it turns out that historically this has been a very winning formula. More efficient economies, less corrupt governments, fewer innocent people getting hurt.
That is not at all what MMT says and I don't understand how an honest reader of the MMT literature would arrive to that conclusion.
What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending.
>> And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite)
In the MMT framework, there is always demand for the currency in what taxes have to be payed. That's obviously true. That doesn't mean that inflation is not a factor.
By the way, most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock (http://bilbo.economicoutlook.net/blog/?p=3773).
I heard this story in a debate between an MMT economist and an Austrian economist
Imagine a husband and wife having the following conversation :
Husband : Let's go and buy a new mansion, a Lamborghini and a private jet
Wife : Are you sure we have enough money to do all that ?
Husband : Well, if we don't, I can always pick up my shotgun and hold up the nearby bank
Wife : Are you crazy ? You could go to prison. Or get shot by the police
Husband : Well, I know that. But I just wanted to point out that not having enough money was irrelevant. Going to jail or getting shot was the most important constraint from spending all that money.
Translation: Countries can incur as much debt as they want, because they can "print" their way out of it without harmful consequences.
> inflation is the most important constraint in public spending
Translation: People's economic suffering is the most important constraint in government spending.
> most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock
Translation: Most cases of hyperinflation in history were due to economic crisis.
Hyperinflation is due to creating far too much new money. Enough to foster price increases of at least 50% per month. Economic crisis does not necessitate doing that.
By the way, in the case of Zimbabwe, it was the government economic mismanagement that created the economic crisis that you blame for the monetary mismanagement. From your article: "From an economic perspective though the [government] farm take over and collapse of food production was catastrophic." Then the government chose to try "printing" its way out of the problem. Hyperinflation wasn't mandatory, it was a consequence of reckless behavior.
> how an honest reader of the MMT literature would arrive to that conclusion
The only substantial concession to inflation risk I've seen in the MMT literature is in conditions of "full employment." Feel free to set me straight if that's not correct.
Empirically speaking, inflation follows injecting money into an economy, and inflation is quite harmful. It seems MMT resists at least the first conclusion, if not both.
While we're on the topic of honesty, doesn't MMT feel like an economic "get rich quick" scheme to you?
I think you are right that it is a terrible idea, but who knows?
- spend money boundlessly
or - balanced budgets
What governments should do is spend appropriately to maximize the welfare of their people which includes not having runaway inflation and also borrowing and spending during economic slumps.
Their argument is that taxation can be used to take money out of the economy while government spending puts it in. Balance the two and you also control inflation.
His however hinges on the economy being largely self-sufficient, or has tight controls on imports.
Across history, the nations that has gotten into trouble over "money printing" have actually run a massive current account deficit, meaning that they are importing way more than they are exporting.
So, not actually applicable to the US. (Unless you're going to argue that the US's imports aren't enough to matter. If you want to try to make that argument, go ahead, but it's clearly an additional step that's needed before you can argue that we should actually try to apply MMT.)
Are you suggesting that people aren't capable of spending appropriately to maximize their own welfare, and that the government would do a better job of it (after taking a cut of the money)?
> What governments should do is ... borrowing and spending during economic slumps
Even if this were true, and I think global economic malaise since the financial crisis is evidence it's not, it omits the corollary that governments should then repay debt and save during economic booms. You can't responsibly have one without the other, can you?
> balanced budgets [are a bad idea]
So debt is a good idea? We should finance current spending at the cost of future spending? That's a pretty radical statement. The burden of proof is on you.
In MMT, taxation acts as the ultimate sink. It is the combination of taxation and government spending that acts to "balance" the national economy.
This flip the normal budget worries on the head, as taxation comes after spending rather than before.
Note though that unlike your example, MMT requires a nation that is internally self-sufficient when it comes to basic supplies. The problem for both Venezuela and Zimbabwe (i am not up to speed on Argentina) is the amount of imports needed to sustain the population.
When imports overtake exports, the exchange rate suffers, and exchange rates can't be fixed by printing more money.
Venezuela got into the predicament it is in because the government thought they could use oil exports, that were at the time an all time high, to counterbalance the imports used to help the poor. But then the oil price tanked. And Venezuelan oil is a particularly expensive oil to process, so it was the first to go when refineries cut back on production.
To be fair, isn't this a lot like saying, "MMT requires conditions that don't generally exist"? What modern economy isn't shopping internationally for the best prices on basic supplies?
Ultimately this condition seems to imply that MMT requires either 1) a subject economy to be the most efficient producer of all basic supplies (probably impossible, and if achieved then impossible for any other economy) or 2) a prohibition on the import of basic supplies (despotic and economically dysfunctional). Is this correct?
This is making me think of Import Substitution Industrialization (ISI) in Latin America. It was a strategy to become economically self-sufficient, but it didn't work out well.
Argentina, Venezuela and Zimbabwe aren't in any way representative of the results of "printing money". They are much more complicated than that, and MMT actually has much more explanatory power to explain what went wrong (variously - huge supply shocks leading to massive unemployment, attempting to maintain a peg to a foreign currency, and having debt denominated in a foreign currency, etc.).
One of the leading MMT researchers, Prof. Bill Mitchell is especially interested in inflation, and they have actually generated a pretty strong theoretical framework for how it happens that again has better explanatory power than competing theories (i.e. Austrian economics that predicted hyperinflation due to QE, monetarism that can't explain why inflation is so sluggish with such low interest rates, etc.). He publishes a lot of info on this his blog nearly every weekday, it's definitely worth a read.
No, it doesn't. Especially since the the US was on a bimetallic standard, not the gold standard, for much of that time.
> which more or less means balanced budgets
No, it doesn't. Either in theory or US practice.
Sort of, but the point is it was not fiat money. There was no net inflation from 1800-1914.
> No, it doesn't.
Since the government at the time did pay off the national debt, that means balanced budgets.
There was a brief period in the early half of the 19th Century where it paid off the debt, but the it ramped up beforen the secession crisis, went sky high during the civil war, and was never paid off after that, so, no, in net budgets weren't balanced in the Revolution to WWI period.
Also, other problem with your scenario is that the US didn't start as a subsistence farming economy (which would have made it near worthless as a set of colonies.)
According to this, they were:
https://www.usgovernmentspending.com/debt_deficit_history
> US didn't start as a subsistence farming economy
Yes, it did. A consistent food surplus did not appear until around 1800. Bone evidence from the colonists showed repeated episodes of starvation.
If you look at the CPI history, it was largely deflationary (which is good if you do like recessions and depressions), but also times where inflation reached 27% [2]. The gold standard can't stop price inflation, and when inflation takes off it makes currency pegs impossible to hold, which is why pretty much every commodity convertible currency has eventually failed.
1. https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit... 2. https://www.minneapolisfed.org/community/financial-and-econo...
As for the panics etc. in the 19th century, yes they happened, and were usually the result of government monkey business with the economy. Note that with fiat money we've still had panics, depressions, and recessions, including the Mother Of All Depressions.
The last one was just 10 years ago.
> The gold standard can't stop price inflation
If it doesn't, then you don't actually have a gold standard. You have pegging a currency to gold, which is something quite different.
Provided the money created is spent, it does predict inflation.