What is Modern Monetary Theory?

[El_Machinae]

So are you saying that stocks, bonds and housing are going down the tubes? When and for how long? Or will it be permanent? Runaway inflation? What are you suggesting is actually going to happen?

They're not really going to go down, except as some type of correction that we all expect. Boomers will 'figure out' money printing, and either party is going to 'figure it out' as well. There will be corrections, but the money printing will prevent a proper revaluation of the false economy we're in. Boomers will retain their purchasing power as they convert their savings into dollars. Wealth will shuttle upwards, obviously, but Boomers will retain their purchasing power despite any drop in total productivity. The money printing will be sufficient to shuttle wealth upwards, but certainly not downwards.

Maybe Automation-Induced Unemployment changes all that, but that's at time horizons where we cannot even predict wars.

But if you look at all the sources of 'new borrowing' (governments, corporations, households), they're all completely incapable of paying off their debts with the current money supply. And no one has room to borrow unless there's a new source of dollars made available. The US has a big problem right now, the people who own the bonds are also the people who own the dollars. We will see if I'm right, but I've noticed that people seem to figure out economic ideas 'just in time'.

 

[Naskra]

It is really forbidden by law in the US

Yes and no, it gets complicated. The Treasury must balance its books through taxation and borrowing. The Fed has more leeway, and here it gets very complicated. (Not suitable for this forum.)

 

[El_Machinae]

It is really forbidden by law in the US ?

*waves at $5 trillion of QE so far*

 

[Naskra]

waves at $5 trillion of QE so far

This why Bernanke titled his book as he did. He broke the law, and needed to justify himself.

 

[Lexicus]

It is really forbidden by law in the US ?

From the Constitution, Article 1, Section 9:

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

There is a complicated lot of rules about how the Treasury and the Fed can interface but if you do the accounting it works out that the Treasury creates money in consequence of appropriations made by law (ie, spending bills passed by Congress).

 

[Birdjaguar]

They're not really going to go down, except as some type of correction that we all expect. Boomers will 'figure out' money printing, and either party is going to 'figure it out' as well. There will be corrections, but the money printing will prevent a proper revaluation of the false economy we're in. Boomers will retain their purchasing power as they convert their savings into dollars. Wealth will shuttle upwards, obviously, but Boomers will retain their purchasing power despite any drop in total productivity. The money printing will be sufficient to shuttle wealth upwards, but certainly not downwards.

Maybe Automation-Induced Unemployment changes all that, but that's at time horizons where we cannot even predict wars.

But if you look at all the sources of 'new borrowing' (governments, corporations, households), they're all completely incapable of paying off their debts with the current money supply. And no one has room to borrow unless there's a new source of dollars made available. The US has a big problem right now, the people who own the bonds are also the people who own the dollars. We will see if I'm right, but I've noticed that people seem to figure out economic ideas 'just in time'.

first I do not understand what I bolded. what do you mean by "figure out money printing"? That seems to imply inflation. And what does "false economy" mean? What is false and then what is the real economy? Are you suggesting that more borrowing will help?

 

[Naskra]

but if you do the accounting it works out that the Treasury creates money

That's not accounting, that's MMT again. There is no such thing as aggregate accounting, the mystical basis of MMT.

 

[Socrates99]

Not really. China cashing in their bonds would probably hurt them worse than it hurt us.

Didnt say it wouldn't hurt them. It's kinda like the economic version of MAD. They could wreck the US economy but since they're a major "shareholder" in the US economy they'd hurt their own investment as well. Selling T-bills for dollars while tanking the dollar probably wouldn't be the smartest play.

 

[El_Machinae]

first I do not understand what I bolded. what do you mean by "figure out money printing"? That seems to imply inflation. And what does "false economy" mean? What is false and then what is the real economy? Are you suggesting that more borrowing will help?

Money printing doesn't imply inflation, except in certain circumstances. $5 trillion was printed by the US during the GFC, and they had a heck of a time getting inflation even to target. Inflation is a function of available money to available productivity. Sometimes the available money goes down. If you don't just limit 'inflation' to 'consumer goods' but include "all assets available for purchase", then there's some incredible inflation, since the stock market has boomed. My ability to buy a loaf of bread with a saved dollar hasn't gone down. But my ability to buy a slice of future dividends surely has. (Phrased another way, if you were saving for retirement and buying food, would you rather have an extra $100 in 2012 or in 2016?)

I shouldn't have used the term 'false economy', it was sloppy. I mean merely that the current stock market isn't as valuable what people think it is. But, duh, we're in a late cycle. Boomers planning their retirement based off current valuations are in for a surprise. Now, any individual could convert their entire portfolio to USD tomorrow, but the entire market (right now) is based on the idea that the companies will earn more next year than they did this year. It could easily be true that they're all great companies, but the premise requires that there be more money next year than this year for people to spend. Where do those dollars come from? When I look at the charts, I don't know who's going to borrow next. Corporate borrowing is really high. Household borrowing is really high. Normally Fractional Reserve Banking could multiply the $5 trillion in printed dollars, but I'm waffling on thinking that households think they can borrow. That $5 trillion shuttled upwards awfully fast.

One solution to money supply going down is prices going down to follow. But the Boomers will freak out if their 401k valuations go down too far.

Your entire adult life, new dollars have come from increased borrowing coupled with the increased liquidity of dropping interest rates. If I'd properly budgeted to pay the 24% on my $1000 loan (pretend it's $20 per month in interest) and the interest rate drops to 12% (~$10 per month) then I can borrow (and spend) another $1k into the economy. That increase in dollars available to the economy means that there are more dollars available to create those predicted earnings reports.

Eventually there's no new borrowing available. At all points in time, there's more money owed than is available. Normally we hope that more is borrowed next year so that we can fight over the dollars. And, oh sure, there're some bankruptcies to help the economy as well. But sometimes there are going to be fewer dollars next year than this year, unless the government prints some again.

 

[Zardnaar]

Didnt say it wouldn't hurt them. It's kinda like the economic version of MAD. They could wreck the US economy but since they're a major "shareholder" in the US economy they'd hurt their own investment as well. Selling T-bills for dollars while tanking the dollar probably wouldn't be the smartest play.

That's assuming they are rational or under pressure from the USA. Basically you hurt me I hurt you back.

Explains things like Trump and Brexit.

 

[Socrates99]

Money printing doesn't imply inflation, except in certain circumstances. $5 trillion was printed by the US during the GFC, and they had a heck of a time getting inflation even to target. Inflation is a function of available money to available productivity. Sometimes the available money goes down. If you don't just limit 'inflation' to 'consumer goods' but include "all assets available for purchase", then there's some incredible inflation, since the stock market has boomed. My ability to buy a loaf of bread with a saved dollar hasn't gone down. But my ability to buy a slice of future dividends surely has. (Phrased another way, if you were saving for retirement and buying food, would you rather have an extra $100 in 2012 or in 2016?)

I shouldn't have used the term 'false economy', it was sloppy. I mean merely that the current stock market isn't as valuable what people think it is. But, duh, we're in a late cycle. Boomers planning their retirement based off current valuations are in for a surprise. Now, any individual could convert their entire portfolio to USD tomorrow, but the entire market (right now) is based on the idea that the companies will earn more next year than they did this year. It could easily be true that they're all great companies, but the premise requires that there be more money next year than this year for people to spend. Where do those dollars come from? When I look at the charts, I don't know who's going to borrow next. Corporate borrowing is really high. Household borrowing is really high. Normally Fractional Reserve Banking could multiply the $5 trillion in printed dollars, but I'm waffling on thinking that households think they can borrow. That $5 trillion shuttled upwards awfully fast.

One solution to money supply going down is prices going down to follow. But the Boomers will freak out if their 401k valuations go down too far.

Your entire adult life, new dollars have come from increased borrowing coupled with the increased liquidity of dropping interest rates. If I'd properly budgeted to pay the 24% on my $1000 loan (pretend it's $20 per month in interest) and the interest rate drops to 12% (~$10 per month) then I can borrow (and spend) another $1k into the economy. That increase in dollars available to the economy means that there are more dollars available to create those predicted earnings reports.

Eventually there's no new borrowing available. At all points in time, there's more money owed than is available. Normally we hope that more is borrowed next year so that we can fight over the dollars. And, oh sure, there're some bankruptcies to help the economy as well. But sometimes there are going to be fewer dollars next year than this year, unless the government prints some again.

You keep saying "I" in your hypothetical scenarios throughout the thread while people try to explain that the budget of an individual is completely different from the budget of the government. The government can spend more than it brings in as long as it manages inflation. Taxation, T-bills, etc are ways to control inflation.

An individual has a finite income to run a budget with. Borrowed money has to come from that finite income. Governments with their own sovereign currency do not have finite incomes. Their limitation is the value of their currency. The U.S. can deficit spend for decades (it has) and still have a strong currency as long as people and other countries view it as valuable.

The shortest way to describe MMT is government spending is how newly printed money makes its way into the economy. Taxation is how you take money out of the economy to prevent its value from dropping. There is no way to correlate that with how your finances work because nobody values Machinae bucks but they do value USD, Euros, pounds, etc.

That's assuming they are rational or under pressure from the USA. Basically you hurt me I hurt you back.

Explains things like Trump and Brexit.

Trump and Brexit happened in democracies where uninformed people were able to throw metaphorical bombs at their own government because the knew they were getting the short end of the stick without really knowing why. China is a planned economy that the population has little control over. They're tolerating trump because they know his idiocy is a temporary thing. We'd have to be overly belligerent towards them a lot longer than a couple presidential terms for them to economically "nuke" us.

 

[Zardnaar]

People accepted the printing of money during gfc because they had to.

It's basically belief you have to believe the money is worth something.

If they print more money just because you will get inflation.

Spending your way out of a crisis is also fairly standard. How does a green new deal generate money and jobs?

 

[El_Machinae]

Here's the part where Lexicus and I yelled at each other for a page, because we didn't have the right words in place. We need words to distinguish "borrowed to increase the debt" from "spent more than it taxed". Both are deficits. Only one is debt. The other can be done with debt or with printed dollars. The US government has run deficits for decades, quite successfully. But I don't know how much of the deficit would 100%* be viewed as "newly printed (by the government) money". Given how interest rates have dropped, it's obvious that the Fed has just given printed dollars out the entire time.

* as in 'okay, everyone just sees how that's a printed dollar, no argument'. Keeping in mind that there is a certain portion of the transaction that could easily have been done without destroying a coin. If a government actually taxes a coin and then spends it on an outstanding bond, then that portion doesn't need to count as 'de novo created in that moment' since it works either way.

 

[Socrates99]

People accepted the printing of money during gfc because they had to.

It's basically belief you have to believe the money is worth something.

If they print more money just because you will get inflation.

Spending your way out of a crisis is also fairly standard. How does a green new deal generate money and jobs?

Money is just a way to transfer goods and services. Most of the USD in circulation isn't even printed, it's electronic funny money on bank statements.

The GND creates jobs the same way the weapons industry, infrastructure spending, the space race, creating national parks, building freeways, etc does/did. It creates an industry the generates tangible goods and services while creating jobs that can increase spending in other sectors.

 

[Birdjaguar]

Money printing doesn't imply inflation, except in certain circumstances. $5 trillion was printed by the US during the GFC, and they had a heck of a time getting inflation even to target. Inflation is a function of available money to available productivity. Sometimes the available money goes down. If you don't just limit 'inflation' to 'consumer goods' but include "all assets available for purchase", then there's some incredible inflation, since the stock market has boomed. My ability to buy a loaf of bread with a saved dollar hasn't gone down. But my ability to buy a slice of future dividends surely has. (Phrased another way, if you were saving for retirement and buying food, would you rather have an extra $100 in 2012 or in 2016?)

I shouldn't have used the term 'false economy', it was sloppy. I mean merely that the current stock market isn't as valuable what people think it is. But, duh, we're in a late cycle. Boomers planning their retirement based off current valuations are in for a surprise. Now, any individual could convert their entire portfolio to USD tomorrow, but the entire market (right now) is based on the idea that the companies will earn more next year than they did this year. It could easily be true that they're all great companies, but the premise requires that there be more money next year than this year for people to spend. Where do those dollars come from? When I look at the charts, I don't know who's going to borrow next. Corporate borrowing is really high. Household borrowing is really high. Normally Fractional Reserve Banking could multiply the $5 trillion in printed dollars, but I'm waffling on thinking that households think they can borrow. That $5 trillion shuttled upwards awfully fast.

One solution to money supply going down is prices going down to follow. But the Boomers will freak out if their 401k valuations go down too far.

Your entire adult life, new dollars have come from increased borrowing coupled with the increased liquidity of dropping interest rates. If I'd properly budgeted to pay the 24% on my $1000 loan (pretend it's $20 per month in interest) and the interest rate drops to 12% (~$10 per month) then I can borrow (and spend) another $1k into the economy. That increase in dollars available to the economy means that there are more dollars available to create those predicted earnings reports.

Eventually there's no new borrowing available. At all points in time, there's more money owed than is available. Normally we hope that more is borrowed next year so that we can fight over the dollars. And, oh sure, there're some bankruptcies to help the economy as well. But sometimes there are going to be fewer dollars next year than this year, unless the government prints some again.

Thanks. I believe there is another source of money: money from outside the US that comes into our economy. when I go do some work in China and they pay me $25,000, that is new money to the US economy. Exports of US goods and services that are paid for by companies not in the US, enables the US to grow its economy. Our economy is not closed. The S&P can grow in value through globalization.

BTW, the current stock market is exactly as valuable today as it is priced. Tomorrow it could go down. If your time horizon is short, it is riskier than if your time horizon is long.

 

[Hygro]

I've never seen anyone but progressives embrace MMT.

"Deficits don't matter" -Dick Cheney.

Cheney was probably talking about elections, but had discussed the issue with Mosler a few years before, but had the experience and opportunity to look deeper under Reagan when the big deficits started.

It's a theory, personally I don't think it will work. It's the left wing equivalent of voodoonomics IMHO.

This coming from someone who thinks some form of Keynesian economics is needed over the neo liberal version.

There are limits in what you can borrow and print. Put up taxes works up to a point.

The limits being inflation and meaningful increases in output. I see you agree with MMT while stating you don't. There are many of you.

What real world economic activity or events does MMT explain better than more traditional theory? Is it predictive? Are there any real world examples of its predictive value?

Yes, because part of it is predicated on Minsky's instability hypothesis which informed us that any such "great moderation"—which was supposed to go on forever—was a harbinger for a major crash. Oh dear. Additionally, that the 90s surplus would lead into a soon-to-be-had recession. Oh dear.

There's a lot of moments when MMT predicted correctly. The Eurozone's trouble with recession is another. That QE 2 and QE 3 were insignificant to inflation was another.

Again, despite their claims otherwise, it's pretty close to traditional theory, as it is post-keynesian, which is only a few (important) steps away from neo (50s-70s) and new (80s/90s-10s) keynesian.


Or, go back to my first post and read point 1. Traditional economics thinks that banks are the final atomic entity (and ignores bailouts) and therefore cannot predict that a bank manager would organize a policy of liars-loans because the later losses would be economically irrational. And certainly wouldn't predict the start of an unspoken collusion among C-level officers in the industry. But because MMT is a theory of modern money it includes criminology in its analysis which goes to the final agent of a single person. Aka, "the best way to rob a bank is to own one".

Sure, they don't need to, I get that. But they do. There's no better word for the process.

You and Lexicus can have that conversation, but what can we do to include Cutlass in such a discussion?

What I'd like to see MMT explain is how much a government can get away with printing money and why. How much is too much?

The official MMT position is an equation between unemployment and inflation, which is a familiar and non-novel macro economics perspective. If you're printing money into inflation then you're wasting your money printing on pissing people off by changing prices for no gains. But if you have unemployment of people and capital, then you are losing potential economic output at that time, forever. You can't save labor for later.

But I also know the basics of economics, probably better than anyone currently posting on OT.

Tell me more about what you mean by "basics". You have informed OT at an economics level equal to that of introductory-intermediate undergraduate macroeconomics. I have informed OT to a level of intermediate-advanced undergraduate macroeconomics. I then moved on to a deeper discussion involving the nature of money.

http://www.igmchicago.org/surveys/modern-monetary-theory

This is a very strong consensus against. It is, in fact, greater than a 99% consensus against.

That's not a consensus against MMT because those aren't MMT principles. MMT people agree with the consensus in that survey because the survey asks absurd questions that aren't MMT positions.

There is no such thing as aggregate accounting, the mystical basis of MMT.

Y=C+I+G-T+NX

That was easy.

 

[Lexicus]

Money is just a way to transfer goods and services.

The way I like to think of it is, money represents a claim on goods and services and that claim is basically backed by the soft and hard power of the state that issued the money.

The shortest way to describe MMT is government spending is how newly printed money makes its way into the economy. Taxation is how you take money out of the economy to prevent its value from dropping.

And it should be noted specifically that this is what remains when you cancel out the constant churn of bank money being created by loan origination and destroyed by loan repayment. In the long term it's the government that is spending money into the economy, because while banks create money too and in fact create most of the money in circulation at any given time, that money is destroyed as loans are repaid.

when I go do some work in China and they pay me $25,000, that is new money to the US economy.

No. This is mistaking the individual for the aggregate. In aggregate every dollar the Chinese have they got from the US at some point. In that sense it's not "new" money, it's our own money coming back to us.

Exports of US goods and services that are paid for by companies not in the US, enables the US to grow its economy. Our economy is not closed. The S&P can grow in value through globalization.

It's true that the open economy changes the analysis somewhat. It adds a third term to the macro accounting identity. It's also true that a country could pursue a strategy of a balanced government budget (or even surplus) and a large trade surplus to allow its private sector to accumulate net financial claims on the foreign sector - this is, in fact, what Germany has been able to do because of the Euro. The problem with such a strategy is that it relies on other nations being perpetual debtor/deficit nations. In the long term it is probably better to rely on your own democratic government, rather than the foreign sector, as the engine of your national economy's financial wealth.

The US runs a massive trade deficit, as we all know, which is commonly framed as a "problem" but of course what this represents is US consumption of output produced by other people - basically, in real terms, free stuff for us! But the other side of us getting that free stuff is that the rest of the world accumulates financial claims on the US private sector. This cannot continue indefinitely. It's why Bill Clinton's budget surplus, which also drained net financial wealth from the private sector, caused a recession. What MMT tells us is that if we want the private sector to accumulate net financial wealth (which we do, generally speaking) the federal budget needs to, at least, run a deficit large enough to offset the trade deficit, plus a little extra to accommodate population/economic growth.

There is no such thing as aggregate accounting,

My god, has there been any more magnificent example in all of recorded history?

Money printing doesn't imply inflation, except in certain circumstances.

And keep in mind that all spending that grows faster than the real economy is inflationary, not just government spending.

 

[El_Machinae]

Thanks. I believe there is another source of money: money from outside the US that comes into our economy. when I go do some work in China and they pay me $25,000, that is new money to the US economy. Exports of US goods and services that are paid for by companies not in the US, enables the US to grow its economy. Our economy is not closed. The S&P can grow in value through globalization.

Remember, we are talking about the creation of new money. The 25k that the Chinese own in your example was already borrowed into existence. For somebody to have that 25k, an entity must own more than $25,000. But yeah, I guess outside entities could borrow in u.s. dollars using their assets as leverage.

It's part of the reason why the United States has so much seigniorage on its US dollar. Countries were forced to acquire dollars in order to purchase oil in international markets. So to have US dollars in your International savings account means that somebody else, or you, is in debt for US dollars.

I could be wrong. Maybe the source of new dollars for the US economy comes from outside entities borrowing US dollars instead of their Sovereign currency

 

[Hygro]

Central banks certainly create money to buy and sell each other's money. One of my favorite examples was the laws governing the euro. The ECB needed more euros during the crisis, so they created euros to buy dollars which the Fed printed on demand so that they could turn around and buy euros with those dollars, so as to have more euros. It was literally illegal for them to simply add more euros, but not illegal to print euros to buy dollars, even if those dollars were literally printed so that they could print euros.

 

[El_Machinae]

And how did those entities get the currency into the real Market? Did the Fed go on to purchase assets that were denominated in euros?

I think my favorite story, one that I use to help people that are economically conservative understand, is the Swiss printing francs so that they could purchase ownership of non Swiss stock