Money Printing

[Hygro]

luiz, your post strawmans MMT far less than Noah Smiths. That's pretty bad of Smith.

MMT is a brand built around making sure that economic theories involving money are grounded in causal, mechanistic reality.

The accounting matters. Simply, the money has to come from somewhere.

The accounting identity points to something real obvious: if you run a government surplus in a growing economy, you increase private sector leverage as bank money (loans, credit cards, and other underwritings) fills the gap.

The entirety of MMT is to slap people awake with all of the "well, duhs" because it's a brand meant for regular people to stop getting tripped on some basics. Deficits are money in, surpluses are money out. The government can't run out of money unless it's not their own currency (so foreign denominated borrowing matters a lot).

The economy is most financed via leveraged bank money and the government running a surplus is like an investor pulling out of a leveraged fund. The private sector must either issue more loans (further increasing leverage) or begin selling positions. The only buyers are the other private sector (which is trying to sell), the government (which is running a surplus so they ain't buying), and the foreign sector. No wonder the last times two private sector was in deficit to the public sector we had market collapses (Dot-Com, Housing).

 

[Princeps]

If a government abuses its printing press prerogatives, if lenders lose confidence that they will get the full value (only accountants care about pure numbers) of their loan back, demand for the government's bonds will fall.

On the contrary. The demand for government's bonds will only increase as the currency holder's only meaningful investment opportunity will be to purchase additional government bonds in the hopes of maintaining the value of their savings. As long as the government provides an interest rate higher than inflation, government bonds will remove liquidity as they are the safest possible investment one can make with the government's currency, and as the bonds remove liquidity from circulation, the value of the currency stabilizes.

Another measure the govt can take is to increase bank reserve requirements, among other unorthodox measures.

The government is perfectly capable of removing excess liquidity through such open market operations. The only reason for such policy to fail is purely political: either the government is too incompetent or corrupt, doesn't allow the currency to float, or war is destroying productive enterprises etc.

 

[luiz]

I don't know, a lot of this post seems to be the classic strawman that MMT'ers don't understand the difference between real and financial wealth. MMT'ers of course fully acknowledge that a government can mismanage its economy to the extent that its currency becomes worthless. The things is, they tend to notice that it takes a lot more than simply 'abusing the printing press' to cause people to lose confidence in a currency, and they also probably have some disagreements with you over what constitutes abuse of the printing press.
The entire point MMT is setting up by pointing out that the government cannot go broke is that the appropriate limits to spending are real, and not financial. I feel like you must not have very much exposure to actual MMT proponents if you are actually under the impression that they don't understand this.
I would also say MMT'ers understand that whether the government issues bonds or not matters. That's why they have positions on the matter...

As for the other stuff:
I would ask you to into more detail as to why governments can't always guarantee full employment (we'll leave "all the social services we can dream of" since that's...shall we say...a loaded phrase).
Meanwhile, re: future taxes finance the deficit - this is plainly false. In accounting terms, that just isn't true - which you've already conceded - and the future is not going to send us real resources to pay for our deficit spending today, so it is also not true in real terms. In any case if higher taxes are made necessary in the future by current deficit spending, I'd argue that's a good thing - it means we got to full employment and had to increase taxes to reduce inflation.

"Abusing the printing press" is indeed one way for people to lose confidence in a currency. If the link is broken between the expansion of the monetary base and the expansion of the real wealth in the economy, inflation will follow (with caveats and blablabla).

I don't think anyone disagrees that on accounting terms the government can't go broke. The point is that the consequences of this tautological statement are limited.

I'm not sure what MMTers believe or not deep down in their hearts. I can judge them by what they wrote. Mosler's "7 deadly sins", for instance, is full of economic mistakes of the type I described in my original post (Galbraith Jr. should be embarrassed of the foreword he wrote). I certainly haven't seen anything on their writings pointing to the obvious limits of financing deficit by money issue - because that would eliminate the whole point of MMT, and indeed make it identical to standard, old school Keynesianism!

As for future taxes financing the debt. Think as an economist and not as an accountant. As even a MMTer will admit, if the deficit rises too much at present, taxes will have to rise in the future to avoid bad consequences (even worse than taxes rising). This means that taxes will rise when they otherwise wouldn't have. This means that the new deficit being generated now is being backed -indeed, financed! - by rising taxes in the future. Of course resources don't travel back in time, but again, that doesn't matter. The point being that to finance a growing deficit now without incurring mass inflation, we will need at some point to transfer real resources to lenders, as they are transferring now to finance the deficit.

Also, you are aware that we can have both high inflation and unemployment, right? Look at Brazil right now. Taxes will have to rise, or spending fall (or both) to reduce the gvt. deficit, and it has nothing to do with unemployment. It has to do with maintaining trust in government bonds and the currency. Note that the debt is overwhelmingly in domestic currency (indeed Brazil has more foreign reserves than foreign debt), and the country is in full control of its printing press. On accounting terms, of course Brazil can never "go broke". On practical terms, we went pretty close to it, and the spending orgy of the last decade has severely constrained what the government can do at present. And now we see a massive transfer of real resources to lenders, and the government just approved a law that limits the growth of public expenses. No government likes writing a law that ties their own hands, but they just did it because they were constrained by the real limits of indebtedness.

 

[Princeps]

As even a MMTer will admit, if the deficit rises too much at present, taxes will have to rise in the future to avoid bad consequences (even worse than taxes rising).

No. If the government can control for excess liquidity through open market operations, taxation for this purpose is essentially obsolete. Taxation only ensures that there is an underlying, stable demand for the currency.

The point being that to finance a growing deficit now without incurring mass inflation, we will need at some point to transfer real resources to lenders, as they are transferring now to finance the deficit.

The government can set the interest rate and decide what is owed to the bondholders, more or less. Since the state is currency issuer, there is no scenario where the government cannot pay for its bonds unless the politicians decide against it.

There is no reason why a deficit has to result in a shortage of real resources. The deficit is not the objective measure of government overspending, since the government can control for the resulting liquidity.

Also, you are aware that we can have both high inflation and unemployment, right? Look at Brazil right now. Taxes will have to rise, or spending fall (or both) to reduce the gvt. deficit, and it has nothing to do with unemployment. It has to do with maintaining trust in government bonds and the currency. Note that the debt is overwhelmingly in domestic currency (indeed Brazil has more foreign reserves than foreign debt), and the country is in full control of its printing press. On accounting terms, of course Brazil can never "go broke". On practical terms, we went pretty close to it, and the spending orgy of the last decade has severely constrained what the government can do at present. And now we see a massive transfer of real resources to lenders.

There could be government overspending in Brazil, certainly the inflation is high. MMT has nothing to say against that per se. MMT, being a bunch of tautologies rather than an economic theory, says that inflation is the only real measure of government overspending (and even then, other influences need to be accounted for).

I don't think that past spending prevents the Brazilian government from running deficits today. What actually matters is how much of the real resources of the economy the government presently employs, and how. Brazil could solve its inflation problem while still having sky-high deficits: Brazil could have a libertarian minarchist government with a giant deficit. The deficit would be mostly a bunch on numbers on a computer somewhere, creating financial assets, rather than employing resources at a large scale. Conversely, Brazil could have a Soviet style stalinist dictatorship with almost no deficit whatsoever. Simply put, deficits alone are not a useful measure of government excesses.

Government finance is a bathtub, where overflow is like inflation. You have the faucet, which introduces liquidity, and the drain, which removes it. The government also has buckets (bonds) that it can use to scoop liquidity out of the bathtub should it overflow, and then reintroduce the liquidity slowly back in (bond repayments). It's hard to create an overflow (aka inflation) with a system like this, but it's still possible, and indeed some inflation is preferable to a dry bathtub.

 

[Hygro]

I don't think anyone disagrees that on accounting terms the government can't go broke. The point is that the consequences of this tautological statement are limited.

Those "limited" consequences are not well known to most people who think that surpluses are good for the economy and that the government can run out of money. You say "duh" but you yourself then

I'm not sure what MMTers believe or not deep down in their hearts. I can judge them by what they wrote. Mosler's "7 deadly sins", for instance, is full of economic mistakes of the type I described in my original post (Galbraith Jr. should be embarrassed of the foreword he wrote).

I didn't see you demonstrate any mistakes that Mosler wrote. Have you read his book?

I certainly haven't seen anything on their writings pointing to the obvious limits of financing deficit by money issue - because that would eliminate the whole point of MMT, and indeed make it identical to standard, old school Keynesianism!

That doesn't eliminate the "whole point" because most Keynesian economics is still interpreted by people using a gold-standard rooted intution. I'm not an MMTer because there's no point, not because they're particularly wrong about anything, but because the scope of MMT is to describe what money is and where it comes from, and there's more to economics than that. While the core of MMT touches at most half of macroeconomics, but it's a misunderstood half, hence the push.

As for future taxes financing the debt. Think as an economist and not as an accountant. As even a MMTer will admit, if the deficit rises too much at present, taxes will have to rise in the future to avoid bad consequences (even worse than taxes rising). This means that taxes will rise when they otherwise wouldn't have. This means that the new deficit being generated now is being backed -indeed, financed! - by rising taxes in the future. Of course resourced don't travel back in time, but again, that doesn't matter. The point being that to finance a growing deficit now without incurring mass inflation, we will need at some point to transfer real resources to lenders, as they are transferring now to finance the deficit.

In this example, future taxes will "rise" because of an overshoot of spending, which means that the money added will be subtracted, paying for itself. Thus the current spending is paying the future taxes. The amount that's not "too much" can still lead to a net positive of new money, i.e. a net deficit, without requiring future taxes to close out that currency. No real resources are necessarily transferred nor need to be. The bond buyers are trading cash savings for bond savings, which pays higher interest than cash (generally) and is more fully insured.

Also, you are aware that we can have both high inflation and unemployment, right? Look at Brazil right now. Taxes will have to rise, or spending fall (or both) to reduce the gvt. deficit, and it has nothing to do with unemployment. It has to do with maintaining trust in government bonds and the currency. Note that the debt is overwhelmingly in domestic currency (indeed Brazil has more foreign reserves than foreign debt), and the country is in full control of its printing press. On accounting terms, of course Brazil can never "go broke". On practical terms, we went pretty close to it, and the spending orgy of the last decade has severely constrained what the government can do at present. And now we see a massive transfer of real resources to lenders.

What real resources are the government transferring to bondholders?

 

[luiz]

@Princeps : why am I not surprised you're an MMTer now? You were an admirer of Marx, then Hugo Chávez, now Mosler and co. It'strong evidence MMT is crap and would bankrupt any country that followed its advises, much like your former gurus ideas's already ruined countries.

Those "limited" consequences are not well known to most people who think that surpluses are good for the economy and that the government can run out of money. You say "duh" but you yourself then

I don't think anyone disagrees that the government can print as much money as it wants, and that it can use that money to pay its debts. It can also refuse to pay debts, confiscate foreign assets in the country, and do all sorts of stuff that are not advisable just because they're possible.

I didn't see you demonstrate any mistakes that Mosler wrote. Have you read his book?

The 7 Deadly Innocent Frauds? Yeah. It's pretty short. Mosler is so obsessed about describing the cosmetic appearance of reality that he fails to acknowledge the "real" reality underneath it. In fact MMT can largely be described as that: correctly describing the cosmetic, mechanical working of some economic transactions while ignoring the way the system works. Money is a claim on real resources. Just because the "representation" of money in a fiat system can be created like points in a bowling match does not mean that real resources can be created. His example on parents giving kids coupons for completing chores (and demanding they pay 10 per week or face punishment) is a perfect example. The coupons may be created from thin air, but the completed chores are not. In fact, the coupons are completely irrelevant to the whole story. They're just a simple way of keeping tabs on how many chores were completed. The parents might as well have said "you must complete X chores per week or we will beat you up" and the result would be the same. It's the coercion that matters, not the coupons. If the parents start creating a lot more coupons, what does that change? Nothing, except the coupons would lose value (as in how many units of coercion they avoid). The number of chores the kids can complete is not affected at all by the creation or destruction of coupons.

Again, MMT is based on a tautology and MMTers derive bad conclusions from it. Consider this other piece of Mosler's book:

So I began my talk about how U.S. government checks don’t bounce, and after a few minutes, David’s hand shot up with the statement familiar to all modestly-advanced economic students: “If the interest rate on the debt is higher than the rate of growth of GDP, then the government’s debt is unsustainable.” This wasn’t even presented as a question, but stated as a fact. I then replied, “I’m an operations type of guy, David, so tell me, what do you mean by the word ‘unsustainable’? Do you mean that if the interest rate is very high, and that in 20 years from now the government debt has grown to a largeenough number, the government won’t be able to make its interest payments? And if it then writes a check to a pensioner, that that check will bounce?” David got very quiet, deep in thought, thinking it through. “You know, when I came here, I didn’t think I’d have to think through how the Reserve Bank’s check-clearing works,” he stated, in an attempt at humor. But no one in the room laughed or made a sound. They were totally focused on what his answer might be. It was a “showdown” on this issue. David finally said, “No, we’ll clear the check, but it will cause inflation and the currency will go down. That’s what people mean by unsustainable.” There was dead silence in the room. The long debate was over. Solvency is not an issue, even for a small, open economy. Bill and I instantly commanded an elevated level of respect, which took the usual outward form of “well of course, we always said that” from the former doubters and skeptics. I continued with David, “Well, I think most pensioners are concerned about whether the funds will be there when they retire, and whether the Australian government will be able to pay them.” To which David replied, “No, I think they are worried about inflation and the level of the Australian dollar.” Then Professor Martin Watts, head of the Economics Department at the University of Newcastle inserted, “The Hell they are, David!” At that, David very thoughtfully conceded, “Yes, I suppose you’re right.”

All I can say is that if the above description is correct, Prof. Martin Watts is an idiot, and David was entirely correct. Of course Australian pensioners are concerned about inflation and the level of the Australian dollar. The fact that the government can always guarantee that a nominal pension will be available to them means absolutely nothing. If rampant inflation and devaluation mean that your pension cannot even afford bread, then who cares that the government is still sending you a 2,000 AUD check every month? This is the clearest example of deriving completely wrong conclusions from the silly tautology that government checks don't bounce.

That doesn't eliminate the "whole point" because most Keynesian economics is still interpreted by people using a gold-standard rooted intution. I'm not an MMTer because there's no point, not because they're particularly wrong about anything, but because the scope of MMT is to describe what money is and where it comes from, and there's more to economics than that. While the core of MMT touches at most half of macroeconomics, but it's a misunderstood half, hence the push.

Sorry, that's not saying much. Can you say concretely in what an MMT policy recommendation would differ from an old Keynesian one?

In this example, future taxes will "rise" because of an overshoot of spending, which means that the money added will be subtracted, paying for itself. Thus the current spending is paying the future taxes. The amount that's not "too much" can still lead to a net positive of new money, i.e. a net deficit, without requiring future taxes to close out that currency. No real resources are necessarily transferred nor need to be. The bond buyers are trading cash savings for bond savings, which pays higher interest than cash (generally) and is more fully insured.

Everybody knows that if the government's debt raises slower than GDP, then the government can keep on running a deficit for a long time (as long as there are no major shocks or confidence crises) without having to raise taxes. Again, this has been known and written about much before MMT.
But if the debt starts growing faster than GDP, at some point the government will have to raise taxes where it otherwise wouldn't, so those future taxes are paying for present deficit.The mechanics of how this happens are completely irrelevant and only interest bean counters; in economic terms the future taxes pay for the present deficit.

What real resources are the government transferring to bondholders?

A lot. Let's be concrete. Many government spending programs were cancelled in order to make room for an increased fiscal effort (i.e., payment of debt). As an example, the government used to send tens of thousands of Brazilian college students to foreign universities for one year, every year, all expenses paid. That program was cancelled as part of the fiscal effort. The real resources that were paying for those kids to party in Europe are now being sent to bondholders.

 

[Lexicus]

In fact, the coupons are completely irrelevant to the whole story.

But of course, the coupons are not irrelevant to the whole story. And neither is money in the real world.
The fact that spending can (not automatically will, but CAN) result in the production of more real resources is rudimentary and yet you don't seem to grasp it. The entire point of MMT going through this basic stuff which you insist is trivial is that the fact that money is a social convention and stuff means it can facilitate the creation of new resources.
Essentially, the government demanding taxes and (As @El_Machinae explained it to me in a way that made a lasting impression) the deletion of bank money through the repayment of loans accomplishes the same thing: induces the population to engage in economically productive activity that creates real resources.
I mean, do you just deny that government deficit spending has the potential to boost real output? Do you deny that private investment can do this? What exactly is the disconnect here?

 

[luiz]

But of course, the coupons are not irrelevant to the whole story. And neither is money in the real world.
The fact that spending can (not automatically will, but CAN) result in the production of more real resources is rudimentary and yet you don't seem to grasp it. The entire point of MMT going through this basic stuff which you insist is trivial is that the fact that money is a social convention and stuff means it can facilitate the creation of new resources.
Essentially, the government demanding taxes and (As @El_Machinae explained it to me in a way that made a lasting impression) the deletion of bank money through the repayment of loans accomplishes the same thing: induces the population to engage in economically productive activity that creates real resources.
I mean, do you just deny that government deficit spending has the potential to boost real output? Do you deny that private investment can do this? What exactly is the disconnect here?

The coupons are indeed completely irrelevant to that story. It's the coercion that is making the kids complete the chores. In the real world, the government can also coerce people to engage in economically productive activities, either through taxes or through direct physical coercion. Of course, money and taxes are a vastly more convenient and efficient scheme.

Nobody disputes that government spending can boost real output, at least in the short term. So what? There are limits to how much the government can spend, and also there are limits to how much of the total resources available in the economy the government can appropriate without crippling the private sector, which in most cases makes better use of the available resources than the government.

It's funny that your post talks about incentives, when MMT is in fact notorious for ignoring micro-foundation and incentives (that's one of the main criticisms of their SFC models, the other being that they are so full of unidentified parameters they're essentially meaningless and only look accurate due to trivial overfitting).

Again, what is the big revelation of MMT? Mosler seems to think that people only care about nominal values, which is demonstrably BS. So the fact that the government can always guarantee a nominal value to pensioners is irrelevant. And here's the catch: governments cannot guarantee the real value of pensions if they're running large deficits. So what's the MMT policy recommendation? State it clearly so I can shoot it down. What should countries that overspent, where the debt grew much faster than GDP for a decade (such as Brazil) do according to MMT?

 

[Lexicus]

The coupons are indeed completely irrelevant to that story.

Of course, money and taxes are a vastly more convenient and efficient scheme.

You contradicted yourself

So the fact that the government can always guarantee a nominal value to pensioners is irrelevant. And here's the catch: governments cannot guarantee the real value of pensions if they're running large deficits.

Sometimes true, but as stated this is misleading and dangerous. If a large deficit can ensure a level of real output that allows the nominal pension to actually purchase a decent standard of living, then a large deficit is what's going to maintain the real value of the pension.

 

[Bootstoots]

I want both sides to explain this:

Japan has been running deficits well in excess of their GDP growth rate continuously since 1991. Their debt to GDP ratio is now 229%. Inflation is low and often negative, the current yield on their 10Y bonds is 0.06%, and there's no sign that this will change any time soon. If there are inherent limits to running deficits far above the GDP growth rate before serious consequences occur, they must be really far off.

Brazil ended up in a stagflationary depression. A commodity price shock made the situation worse, but their economy has suffered far more than any other Latin American economy save Venezuela. According to tradingeconomics, their deficit hovered at only about 3%/year for the period 2004-13, only growing larger after the economy started declining in 2014. Just eyeballing the GDP growth rate chart, it looks as if their deficits may even have been lower than their growth rate on average in 2004-13. In a purely fiscal sense, just looking at the numbers and ignoring the rampant corruption and whatnot, they were more "fiscally conservative" than Japan by a wide margin.

Why can some countries with their own currency run perpetual deficits in excess of their GDP growth rate and not see any negative consequences, while other countries doing this end up with stagflation or at least high inflation?

 

[Lexicus]

Why can some countries with their own currency run perpetual deficits in excess of their GDP growth rate and not see any negative consequences, while other countries doing this end up with stagflation or at least high inflation?

I don't know enough to give a good answer, but I'd guess that Japan has/makes stuff the rest of the world values a lot more than the stuff Brazil has/makes. There is also probably far less corruption, and thus far less unproductive spending, in Japan than in Brazil.

 

[Princeps]

The 7 Deadly Innocent Frauds? Yeah. It's pretty short. Mosler is so obsessed about describing the cosmetic appearance of reality that he fails to acknowledge the "real" reality underneath it. In fact MMT can largely be described as that: correctly describing the cosmetic, mechanical working of some economic transactions while ignoring the way the system works. Money is a claim on real resources. Just because the "representation" of money in a fiat system can be created like points in a bowling match does not mean that real resources can be created. His example on parents giving kids coupons for completing chores (and demanding they pay 10 per week or face punishment) is a perfect example. The coupons may be created from thin air, but the completed chores are not. In fact, the coupons are completely irrelevant to the whole story. They're just a simple way of keeping tabs on how many chores were completed. The parents might as well have said "you must complete X chores per week or we will beat you up" and the result would be the same. It's the coercion that matters, not the coupons. If the parents start creating a lot more coupons, what does that change? Nothing, except the coupons would lose value (as in how many units of coercion they avoid). The number of chores the kids can complete is not affected at all by the creation or destruction of coupons.

Again, MMT is based on a tautology and MMTers derive bad conclusions from it. Consider this other piece of Mosler's book:

Your arguments are pretty clueless, I have to say. You're again only assuming that the government can't control for excess liquidity. Obviously, creating more money without the corresponding goods results in inflation, but only if the money is consistently in circulation.

Money alone doesn't create inflation; it has to be moving around, purchasing goods and services.

The government can, through bonds and managing the banks, remove excessive liquidity before it becomes a problem. They can do this by offering an interest rate that exceeds inflation, if necessary.

MMT is not controversial --- there is a lot of cranks who wish to abuse its claims to advance bad economics -- but the basics of MMT just describe how the monetary system currently works in most countries with a free floating currency, like the US and the UK for example.

Venezuela isn't using a free floating currency, btw, which is behind many of its problems. They have exchange pegs, which I've expressed concern about since at least 2011. Turns out that they were much worse than I expected. I've never liked Venezuela's nationalizations of consumer goods providers, either.

All I can say is that if the above description is correct, Prof. Martin Watts is an idiot, and David was entirely correct. Of course Australian pensioners are concerned about inflation and the level of the Australian dollar. The fact that the government can always guarantee that a nominal pension will be available to them means absolutely nothing. If rampant inflation and devaluation mean that your pension cannot even afford bread, then who cares that the government is still sending you a 2,000 AUD check every month? This is the clearest example of deriving completely wrong conclusions from the silly tautology that government checks don't bounce.

Yes, certainly rampant inflation can destroy people on fixed incomes. I doubt that any of the MMT people are unaware of this.

But again, MMT shows how the government can control inflation in the first place, so your objection is nonsense.

Everybody knows that if the government's debt raises slower than GDP, then the government can keep on running a deficit for a long time (as long as there are no major shocks or confidence crises) without having to raise taxes. Again, this has been known and written about much before MMT.
But if the debt starts growing faster than GDP, at some point the government will have to raise taxes where it otherwise wouldn't, so those future taxes are paying for present deficit.The mechanics of how this happens are completely irrelevant and only interest bean counters; in economic terms the future taxes pay for the present deficit.

Or, the government can just monetize the debt, offer new bonds with interest higher than inflation, thus never allowing inflation to become a major problem nor letting the government default. There is no reason to assume higher taxes in the future when the govt can transfer resources from the private sector to the public sector without increasing nominal tax liabilities.

 

[luiz]

You contradicted yourself

No. In the coupons example, they are indeed completely irrelevant, which makes Mosler's choice of an example quite ironic as it contradicts his main point. In the real world, with all its complexities and multitude of actors, of course using taxes is different than using pure physical coercion. But my point remains: taxes are not the beginning nor the end of the story, as Mosler's example ironically demonstrates.

Sometimes true, but as stated this is misleading and dangerous. If a large deficit can ensure a level of real output that allows the nominal pension to actually purchase a decent standard of living, then a large deficit is what's going to maintain the real value of the pension.

If the large debt grows too much too fast for too long, the pension will be worthless. You don't need any deficit to pay pensions, but too big a deficit can wipe out their value.

I want both sides to explain this:

Japan has been running deficits well in excess of their GDP growth rate continuously since 1991. Their debt to GDP ratio is now 229%. Inflation is low and often negative, the current yield on their 10Y bonds is 0.06%, and there's no sign that this will change any time soon. If there are inherent limits to running deficits far above the GDP growth rate before serious consequences occur, they must be really far off.

Brazil ended up in a stagflationary depression. A commodity price shock made the situation worse, but their economy has suffered far more than any other Latin American economy save Venezuela. According to tradingeconomics, their deficit hovered at only about 3%/year for the period 2004-13, only growing larger after the economy started declining in 2014. Just eyeballing the GDP growth rate chart, it looks as if their deficits may even have been lower than their growth rate on average in 2004-13. In a purely fiscal sense, just looking at the numbers and ignoring the rampant corruption and whatnot, they were more "fiscally conservative" than Japan by a wide margin.

Why can some countries with their own currency run perpetual deficits in excess of their GDP growth rate and not see any negative consequences, while other countries doing this end up with stagflation or at least high inflation?

Well, firstly, you have to look at the cumulative change over the period and not the number of years where one was bigger than the other. Second, the speed of the deterioration matters when determining investors' reactions, as they see how fast things can go to hell in a country. In Brazil, total public debt went from 60% of GDP in 2013 to 76% in 2016.

Third, that's not the only thing you need to look at. If the deficit is growing but public expenditure as a proportion of GDP is stable or falling (and is at a relatively low level, and taxes are low), investors worry less as there's ample room for tax increases to bridge the gap. But if deficit is growing or even stable while government expenditure is booming and at a high level (and taxes are high), investors worry because there's not much hope that tax increases can bridge the gap, or that there's even room for tax increases without crippling the economy. Consider Brazil and Japan. Japan has some of the lowest tax burdens of the OECD, at 27% of GDP, while Brazil has pretty much the highest tax burden of any developing country, at 36%. What's more, in Brazil government spending as a % of GDP has pretty much not stopped rising since the new Constitution of 1988, which mandates a Scandinavian-style welfare state for a poor country. In Japan government spending has been at the same level since 2009, and at 42% of GDP that's actually a low number compared to Western Europe. If Japan were to raise the tax burden to the level seen in the likes of France, Belgium, Germany, Denmark and etc., it would start running surpluses and reducing the debt. In Brazil the room to increase taxes is much smaller.

You have to look at the whole picture instead of just a ratio.

But there are limits to what Japan can do, even if it has more room of maneuver than Brazil. If government spending went to levels much above what we see in other developed countries, bondholders would start freaking out.

Your arguments are pretty clueless, I have to say. You're again only assuming that the government can't control for excess liquidity. Obviously, creating more money without the corresponding goods results in inflation, but only if the money is consistently in circulation.

Right. You wholeheartedly supported Hugo Chávez, who turned an upper middle income country into a starving hell-hole where people clean their butts with leaves, and I'm clueless on economics. You defend MMT, a marginal sect which is rejected by all main economists and economic departments of the world, while I argue for mainstream common-sense, and I'm clueless.

Money alone doesn't create inflation; it has to be moving around, purchasing goods and services.

No sh!t, Sherlock. When the government uses money to finance its deficit, what do you think happens?
Money alone is just pieces of paper or numbers on a computer screen.

The government can, through bonds and managing the banks, remove excessive liquidity before it becomes a problem. They can do this by offering an interest rate that exceeds inflation, if necessary.

And I'm clueless?
What if bondholders lost faith in the government and are not interested in bonds? What if inflation is accelerating at insane levels?
If you think this can't happen, I'll tell you that it happened in my country during my lifetime, as a result of the government following policies favored by the likes of you.

MMT is not controversial --- there is a lot of cranks who wish to abuse its claims to advance bad economics -- but the basics of MMT just describe how the monetary system currently works in most countries with a free floating currency, like the US and the UK for example.

MMT is extremely controversial in its conclusions, and extremely irrelevant in its mechanistic and tiresome description of how the beans move from one pot to another.

Venezuela isn't using a free floating currency, btw, which is behind many of its problems. They have exchange pegs, which I've expressed concern about since at least 2011. Turns out that they were much worse than I expected. I've never liked Venezuela's nationalizations of consumer goods providers, either.

Really, no self-criticism at all for supporting Chávez like the second coming of Jeses Christ? You think Venezuela's problems derive from exchange pegs alone, and not the whole "socialism" thing which destroyed all national private enterprise?
The country of your late idol is starving and that's all you've got?

Let me be very clear: I was entirely right about what Chavismo would do to Venezuela, and you were entirely wrong. Again, I was right, you were wrong. You. Were. Wrong.
You are clueless on elementary economics and following your ideas leads to Venezuela.

I despise pampered Americans and Western Europeans who from the comfort of their capitalistic, professionally-managed economies "bravely" endorse radical unorthodox solutions for us southern savages. In a just word Noam Chomsky, Oliver Stone, Sean Penn and like-minded individuals would have to answer for their words and deeds in front of an angry starving mob at Caracas.

Yes, certainly rampant inflation can destroy people on fixed incomes. I doubt that any of the MMT people are unaware of this.

Mosler clearly thinks people don't care about that, as he textually stated in the text I quoted.

But again, MMT shows how the government can control inflation in the first place, so your objection is nonsense.

MMT described nothing that was not already known. Everything that is correct on MMT is old, and all that is new on MMT is wrong.

Or, the government can just monetize the debt, offer new bonds with interest higher than inflation, thus never allowing inflation to become a major problem nor letting the government default. There is no reason to assume higher taxes in the future when the govt can transfer resources from the private sector to the public sector without increasing nominal tax liabilities.

Again, if people lose confidence in the government they won't buy any bonds...

 

[FriendlyFire]

Is there any solution besides austerity for stagflation, such as the developed world on the eve of the Volcker shock or Brazil today? If you were Paul Volcker in 1979-82, what would you have done?

Do what the Germans did ? NO WAIT !

The idea of even using Gold standard is silly as the value of Gold as an actual useful mineral is overpriced, Unlike say Uranium, I'd imagine that large bars of Unranium encased in lead wouldnt make for such good currency / coins
So for the moment government issued paper currency is probably the best solution at this time. The rubes are just angry that no one went to gaol over the finacial crash, all the US Bankers involved all fled overseas taking with them what can be rightly called outright theft of tanking corporations funds transfered overseas. Obama extracted a few record fines but no heads on platters.

 

[Bootstoots]

Well, firstly, you have to look at the cumulative change over the period and not the number of years where one was bigger than the other. Second, the speed of the deterioration matters when determining investors' reactions, as they see how fast things can go to hell in a country. In Brazil, total public debt went from 60% of GDP in 2013 to 76% in 2016.

Third, that's not the only thing you need to look at. If the deficit is growing but public expenditure as a proportion of GDP is stable or falling (and is at a relatively low level, and taxes are low), investors worry less as there's ample room for tax increases to bridge the gap. But if deficit is growing or even stable while government expenditure is booming and at a high level (and taxes are high), investors worry because there's not much hope that tax increases can bridge the gap, or that there's even room for tax increases without crippling the economy. Consider Brazil and Japan. Japan has some of the lowest tax burdens of the OECD, at 27% of GDP, while Brazil has pretty much the highest tax burden of any developing country, at 36%. What's more, in Brazil government spending as a % of GDP has pretty much not stopped rising since the new Constitution of 1988, which mandates a Scandinavian-style welfare state for a poor country. In Japan government spending has been at the same level since 2009, and at 42% of GDP that's actually a low number compared to Western Europe. If Japan were to raise the tax burden to the level seen in the likes of France, Belgium, Germany, Denmark and etc., it would start running surpluses and reducing the debt. In Brazil the room to increase taxes is much smaller.

You have to look at the whole picture instead of just a ratio.

But there are limits to what Japan can do, even if it has more room of maneuver than Brazil. If government spending went to levels much above what we see in other developed countries, bondholders would start freaking out.

Every country that ends up in a recession sees a sharp increase in deficits and consequently their debt to GDP ratio. Tax revenues fall and social spending increases automatically, helping to mitigate the recession a la Keynes. I'm mostly looking at Brazil's data up to 2014 for that reason: I expect it to have to start running a much higher deficit once its depression starts given the severity of its economic downturn. I'm interested in its behavior before its recession started.

In the period from 2003-2014, Brazil's debt to GDP ratio fell while those of virtually all developed countries rose substantially. Looking at the IMF data here, the gross debt-to-GDP ratio peaks at 79% in 2003 and then falls more or less steadily to 61% in 2014, before rising rapidly in 2015 and 2016 due to the depression. On the other hand, Tradingeconomics has it level at about 55% through the period 2006-2014, but doesn't have data before 2006.

In that same period, Japan's debt-to-GDP ratio increases from 170 to 249% (IMF) or from 160 to 226% (Tradingeconomics). Since 1991, it has increased steadily from about 65% to the current astronomical values. If that's not cumulative change over a long period, I don't know what is. The US shows a similar pattern but smaller in magnitude, with a period of debt-to-GDP decline between 1995 and 2002, and with a sharper increase in 2007-2012, including four years of deficits ranging from 6.8 to 9.8% of GDP.

Side note: the IMF data I'm finding has a "gross debt" and a "net debt", and Tradingeconomics mostly comes out in between the two. I don't know the details of why they disagree, but the overall trends are usually similar.

Brazilian government spending as a percentage of total GDP does shoot way up from 1985 to 1990, but then stays roughly constant at 19% of GDP from 1995 all the way to 2015 (World Bank; couldn't find this on tradingeconomics, and this WB stat uses a different methodology, listing Japan at 20.4%). That's high for a developing country but not outrageously so, and it doesn't look like anything really changed in that metric from when Cardoso took office through the first Rousseff term.

As for Japan's ability to tax: sure, it does have room for maneuver there that Brazil doesn't have, but what's interesting is that it just chose not to raise taxes. Instead it chose to run a deficit well beyond the (anemic) GDP growth rate for 25 years with no end in sight, with no negative consequences whatsoever. Other developed countries such as the US do the same thing if a little less consistently, with no consequences there either. I think this presents a serious challenge to the way you and the rightward half of mainstream economics thinks about government debt. There are undoubtedly still limits: I'm sure if Abenomics had involved pushing deficits to 20% of GDP or something, then things would actually go wrong.

No matter how I look at it, I can't come up with a narrative where Brazil is more irresponsible purely in terms of its macroeconomic indicators than most developed countries. The spending is undoubtedly far less efficient at producing economic growth because of the high amount of corruption and general mismanagement, which is definitely a big part of the story although I'm not sure exactly how it fits in.

There seems to be a fundamental split here between developed and developing countries. In developed countries (excluding individual Eurozone members), deficits exceeding GDP growth can be run indefinitely provided they're not totally extreme, and nothing really happens to bond yields or the inflation rate. In developing countries, running a deficit for a long period of time does cause inflation and high bond yields in real terms, leading to crises with debt-to-GDP ratios that are low by Western standards (like 60 or 70%). What's going on here?

 

[Farm Boy]

The rubes are just angry that no one went to gaol over the finacial crash, all the US Bankers involved all fled overseas taking with them what can be rightly called outright theft of tanking corporations funds transfered overseas. Obama extracted a few record fines but no heads on platters.

And that's a problem. Rubes were punished if they took out loans they could not pay. They were punished, as communities, by the recession even if it was their peers that bore responsibility for taking out loans unwisely. Depending on where you live, we still are. The heads on platters, or at least the appearance of the institutions that theoretically represent and protect you (ie the government, not the banks) seeking those heads, is integral to faith in those institutions. Americans already run high levels of distrust in government, this did not help. It showed the the government actively holds them in contempt, as far as this goes, and in terms almost impossible to ignore. When foreclosures run up and down your street and you lose neighbors, it's hard to pretend you don't see it.

 

[uppi]

The entirety of MMT is to slap people awake with all of the "well, duhs" because it's a brand meant for regular people to stop getting tripped on some basics. Deficits are money in, surpluses are money out. The government can't run out of money unless it's not their own currency (so foreign denominated borrowing matters a lot).

Foreign denominated borrowing is one thing, but what MMT seems to neglect is foreign spending. This creates a money supply the government cannot take away with taxes and is expected to be paid back in real goods or services. If a government prints too much money, the money will flow out of the country and create an effective debt in goods. It can default on that debt by devaluing its currency, but at one point the currency will be refused and the government and private entities are unable to buy the goods that are required for investments or even daily operations. If a government arrives at this point, it is effectively broke, even if it is nominally solvent.

 

[EnglishEdward]

There seems to be a fundamental split here between developed and developing countries.

Yes

In developed countries (excluding individual Eurozone members), deficits exceeding GDP growth can be run indefinitely provided they're not totally extreme, and nothing really happens to bond yields or the inflation rate. In developing countries, running a deficit for a long period of time does cause inflation and high bond yields in real terms, leading to crises with debt-to-GDP ratios that are low by Western standards (like 60 or 70%). What's going on here?

An interesting question. I endeavour to provide my answer.

A key consequence of high inflation is that holders of capital become afraid
and wish to move their money to what they perceive as a stronger currency.

If a developing country (Argentina, Zimbabwe) has high inflation; they want to switch
to using dollars or euros or yen as these are perceived as much less likely to lose their value.

If a developing country has high inflation, the same should occur, but it does not occur to the same extent.

This is most likely due to several reasons: cultural prejudice, confidence in banking systems, confidence, arising from
size (e.g. the USA), history (e.g. Switzerland) and the respective rule of laws in particular regarding foreign depositors.

In particular countries that have not confiscated capital or defaulted within living memory can behave badly (i.e. run large
deficits) merely because of past creditibility. The specific example I would quote is that of my own, the United Kingdom.

 

[Lexicus]

There seems to be a fundamental split here between developed and developing countries. In developed countries (excluding individual Eurozone members), deficits exceeding GDP growth can be run indefinitely provided they're not totally extreme, and nothing really happens to bond yields or the inflation rate. In developing countries, running a deficit for a long period of time does cause inflation and high bond yields in real terms, leading to crises with debt-to-GDP ratios that are low by Western standards (like 60 or 70%). What's going on here?

In a word, politics. What do you think is going on here? Might it have something to do with the fact that the developing world was rapaciously looted by the developed world for a period of time measured in centuries? I think it might.

 

[luiz]

Every country that ends up in a recession sees a sharp increase in deficits and consequently their debt to GDP ratio. Tax revenues fall and social spending increases automatically, helping to mitigate the recession a la Keynes. I'm mostly looking at Brazil's data up to 2014 for that reason: I expect it to have to start running a much higher deficit once its depression starts given the severity of its economic downturn. I'm interested in its behavior before its recession started.

In the period from 2003-2014, Brazil's debt to GDP ratio fell while those of virtually all developed countries rose substantially. Looking at the IMF data here, the gross debt-to-GDP ratio peaks at 79% in 2003 and then falls more or less steadily to 61% in 2014, before rising rapidly in 2015 and 2016 due to the depression. On the other hand, Tradingeconomics has it level at about 55% through the period 2006-2014, but doesn't have data before 2006.

In that same period, Japan's debt-to-GDP ratio increases from 170 to 249% (IMF) or from 160 to 226% (Tradingeconomics). Since 1991, it has increased steadily from about 65% to the current astronomical values. If that's not cumulative change over a long period, I don't know what is. The US shows a similar pattern but smaller in magnitude, with a period of debt-to-GDP decline between 1995 and 2002, and with a sharper increase in 2007-2012, including four years of deficits ranging from 6.8 to 9.8% of GDP.

Side note: the IMF data I'm finding has a "gross debt" and a "net debt", and Tradingeconomics mostly comes out in between the two. I don't know the details of why they disagree, but the overall trends are usually similar.

Brazilian government spending as a percentage of total GDP does shoot way up from 1985 to 1990, but then stays roughly constant at 19% of GDP from 1995 all the way to 2015 (World Bank; couldn't find this on tradingeconomics, and this WB stat uses a different methodology, listing Japan at 20.4%). That's high for a developing country but not outrageously so, and it doesn't look like anything really changed in that metric from when Cardoso took office through the first Rousseff term.

As for Japan's ability to tax: sure, it does have room for maneuver there that Brazil doesn't have, but what's interesting is that it just chose not to raise taxes. Instead it chose to run a deficit well beyond the (anemic) GDP growth rate for 25 years with no end in sight, with no negative consequences whatsoever. Other developed countries such as the US do the same thing if a little less consistently, with no consequences there either. I think this presents a serious challenge to the way you and the rightward half of mainstream economics thinks about government debt. There are undoubtedly still limits: I'm sure if Abenomics had involved pushing deficits to 20% of GDP or something, then things would actually go wrong.

No matter how I look at it, I can't come up with a narrative where Brazil is more irresponsible purely in terms of its macroeconomic indicators than most developed countries. The spending is undoubtedly far less efficient at producing economic growth because of the high amount of corruption and general mismanagement, which is definitely a big part of the story although I'm not sure exactly how it fits in.

There seems to be a fundamental split here between developed and developing countries. In developed countries (excluding individual Eurozone members), deficits exceeding GDP growth can be run indefinitely provided they're not totally extreme, and nothing really happens to bond yields or the inflation rate. In developing countries, running a deficit for a long period of time does cause inflation and high bond yields in real terms, leading to crises with debt-to-GDP ratios that are low by Western standards (like 60 or 70%). What's going on here?

You're using wrong numbers for Brazil, or rather, the World Bank numbers you quoted probably refer only to central government spending. The total government expenditure in Brazil is actually 39.1% of GDP (and the total tax burden is 36% of GDP as I mentioned earlier). This is indeed an "outrageous" level for a developing economy. Contrast to 23.9% in China, 26,6% in Mexico and 23.2% in Chile. You can check the whole list here.

So the story is pretty much what I said. Japan has a much higher debt, but it also has a much lower tax burden and government spending. It has thus enormous room to raise taxes and run surpluses. Brazil OTOH has one of the highest tax burdens and government spending of the developing world, and much of that spending is constitutionally mandated. There is thus very little room to raise taxes or run surpluses. So from the POV of bondholders, despite its much larger debt, Japan is much safer than Brazil.

BTW, bond yields can jump for developed countries when they run unsustainable deficits as well, just ask Greece or Portugal. There's no need to resort to third-worldist BS to explain what basic economics explains just fine. It's all about ability to repay to the debt.