14 ms·

Ignored for Years, Modern Money Theory Is Gaining Converts

31 points by ec109685 11y ago

hodwik 11y ago
Ignored for years? What? From what I can tell that's how we got into $19 trillion dollars of debt. The only reason it's now being defended as a systematic theory is that it's become embarrassing to still believe it in the face of all evidence. Simply put: MMT completely ignores floating exchange rates. The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money. The long term problem is that too much inflation (or, more accurately, taxation) may drive people away from our currency, and MMT will be shown for the sham that it is.
- kaonashi 11y ago
  > MMT completely ignores floating exchange rates I'm not sure where you're getting this from, but I learned the difference between fixed & floating exchange rates by reading MMT economists.
- pjc50 11y ago
  I don't think you can drive people away from the US dollar, simply because any such destabilising action will hit the real economy first. And the US has seen low consumer inflation for years now. MMT absolutely does take account of forex by recognising that a government has a large amount of power to dictate money flows within the country, but very little power to compel terms of trade overseas. And most countries need to continuously import certain things which cannot be substituted locally, especially fuel. Expanding the money supply lets people buy more locally produced stuff, but not more imports. This even scales down to local token currencies ("Bristol pound") or Krugman's "babysitting tokens" thought example.
  - rogersmith 11y ago
    " a government has a large amount of power to dictate money flows within the country, but very little power to compel terms of trade overseas." Isn't the petrodollar system precisely the historical exception that allows the USA to have a lot of power when it comes to "compel terms of trade overseas"? edit: obviously the other side of that ability to "compel terms of trade overseas" being the US formidable military power that allows them to further twist other countries arms when they refuse to play by the petrodollar system rules (see Libya, Iraq, etc)
  - hodwik 11y ago
    > "Expanding the money supply lets people buy more locally produced stuff, but not more imports." Right, so for most developed nations this would be disastrous.
    - kaonashi 11y ago
      The worst you can be imposed on you (outside an embargo situation) is balanced trade, paying for real imports with fx acquired through real exports.
      - hodwik 11y ago
        Which, for the US, would be a very serious downgrade from our current situation.
        kaonashi 11y ago
        Depends on your position in the current situation.
        hodwik 11y ago
        Well, then let's clarify: For almost all Americans -- who produce essentially nothing of value, yet consume a lot of very real, imported goods -- balanced trade would be a complete disaster.
        kaonashi 11y ago
        Trade deficits are definitely a net positive, but that lack of demand they cause actively harm a large swath of Americans. There's a reason NAFTA has been so unpopular.
- astazangasta 11y ago
  >The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money. No, the only reason it hasn't been completely catastrophic is because there's basically no consequence to having this level of debt. Interest payments on our debt are close to the lowest they've been in decades. What's the catastrophe supposed to be, again?
- crdoconnor 11y ago
  >Simply put: MMT completely ignores floating exchange rates. Horseshit. >The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money. Yeah, yeah, and the only reason it wasn't completely catastrophic for Japan is for some other completely different reason (aging population, people like to save - take your pick). Be consistent at least about your excuses. Make sure they apply to the US and Japan.
  - hodwik 11y ago
    Japan's QE was in response to deflationary pressures. That's a far cry away from QE while inflation is already happening. Further, I don't see why you can't have two completely different reasons for the same effect. And while demographics are important, I wouldn't call it the primary effect, instead I'm with Haruhiko Murayama from the Bank of Kyoto: "[Japan deflation is caused by] a lack of demand, which in turn is attributable to the fact that emerging countries such as China, South Korea and Taiwan have come to manufacture inexpensive high-quality electrical products by introducing new equipment and by taking advantage of their cheap labor."
WorldMaker 11y ago
«The 20-something-year-old doctrine» Much older than that, MMT is based upon turn of the last century American socialist (specifically the Social Credit Party) economic theory, but the red scare nearly eliminated it from American discourse for most of a century. It's especially interesting in that it is especially cyclical with respect to depressions/recessions. Edit to add: Not that there isn't important additional knowledge and theory that MMT brings to the table on top of the turn of the last century theory work, just that it's enough of a direct successor I'd draw the line of history longer.
carsongross 11y ago
Here is what I now believe: MMT doesn't really matter that much. How base money is produced doesn't really matter that much. A metal standard, fiat via government coercion, rocks at the bottom of the ocean, wampum, whatever. As long as it isn't insane and chaotic, it will probably work. What matters is no longer allowing the banking system to engage in fraud by introducing multiple claims on the same currency unit in the same time period, which is to say that currency deposits must be duration matched with loans. No more borrowing short and lending long. Of course, practically, MMT will be used to justify more government boondoggles, wars, and bail outs of the rich, rather than something that might actually be effective, like a citizens dividend, but that's politics, not economics.
- pjc50 11y ago
  currency deposits must be duration matched with loans Why? This is the essence of banking and has been for centuries. Furthermore, if you try to apply this consistently, what do you do about commercial and consumer credit? Ban it entirely, including credit cards? No more car loans, just cash on the nail?
  - carsongross 11y ago
    It is the essence of banking, and that's the problem. The greatest trick the devil ever pulled... Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Credit cards are not counted against deposits and, therefore, stand outside this analysis, although I'm not sure I would allow banks involved in taking deposits to issue them, because the capital structure tends to become muddled. If you think about it, you can have nearly as much loan-expansion as the current fractionally reserved system (maybe even more since there is no need for a reserve ratio), but there is no double counting of monetary units at a given point in time and, therefore, no possibility for a bank run. I will admit that this is my own economic theory and that I am used to the crazy looks from people.
    - 11y ago
evolve2k 11y ago
I had an economics lecturer spouting this crap about how major countries never need worry to repay their debts and could lean on their massive power/influence if they got stuck. Fast forward to a post GFC world and suddenly it's like the story of the group of friends where everyone owes money to everyone else and it's all good until one new friend doesn't owe anyone and suddenly turns around and tells everyone it's time to pay up. Party stopped pretty quick after that.
- astazangasta 11y ago
  The problems happened because people demanded austerity instead of allowing people to expand their debt balances, as MMT says should happen in a recession. The US did the latter and did much better than Europe did, consistent with MMT.
- crdoconnor 11y ago
  "I had an economics lecturer spouting this crap about how major countries never need worry to repay their debts" Because if you print your own currency, the risk of you running out of it (insolvency) is exactly zero. Of course, when you thought you heard "major" what he probably said was "sovereign in the currency they borrow". Big difference (US is sovereign; Japan is sovereign; Greece is not; Zimbabwe was not). "and could lean on their massive power/influence if they got stuck" "Stuck"?
  - ohnomrbill 11y ago
    Consider a hypothetical situation where we have to print a lot of currency to repay our debts. Foreign debt-holders realize that they are effectively getting robbed by our monetary policy and complain to their governments. Those governments decide to threaten with military power, to convince us to change our monetary policy or to take some of our assets. In that situation, our balance sheet would be ok, but our country would be in very bad straits. So we would be stuck in a real sense, if not in an economic sense. His lecturer probably (naively) believes that America will be dominant for so long that we won't have to worry about pesky things like the threat of war from other countries on economic grounds.
tryitnow 11y ago
Wow. I don't know where to start with some of these comments. There's just a real lack of understanding of central banking. Protip: Your critique of "status quo" (e.g. central banking) systems will be taken more seriously when you demonstrate thorough knowledge of the subject matter and don't rely on emotionally laden arguments involving "fraud" and "lies."
- meric 11y ago
  Whether the critics are aware of how central banking works, central banks are losing credibility. They've tried everything in Japan & Europe, getting governments trillions into debt, and now they want to go negative interest rates. Clearly what they did before didn't work, and now they are trying something else. They're shooting in the dark and unknowingly killing the economy. It doesn't take a genius to figure out people will just keep cash at home if you impose negative interest rates, and by keeping cash away from banks, reduce the reserves banks hold, and the money they can lend, reducing the money supply, exacerbating the deflation the NIRP was supposed to fight in the first place.[1] There's no fraud and no lie, except for the fact central bankers operate on economic models detached from reality. The only lie is claiming to know more than they do. The policies the Japanese central bank tried to impose to lower the value of the Yen in the past few months, only raised it. https://au.finance.yahoo.com/q/bc?s=USDJPY=X&t=3m&l=on&z=l&q=l&c= https://au.finance.yahoo.com/q/bc?s=USDJPY=X&t=3m&l=on&z=l&q... "Central bank impotency" heading your way. [1] http://www.wsj.com/articles/japanese-seeking-a-place-to-stash-cash-start-snapping-up-safes-1456136223 http://www.wsj.com/articles/japanese-seeking-a-place-to-stas...
  - mindslight 11y ago
    > Clearly what they did before didn't work, and now they are trying something else Erm no, they're trying the exact same thing even harder. The top of the economy is awash in capital with nowhere to go, while the bottom has to run ever faster on the debt treadmill. Creating even more debt that funnels wealth upwards is obviously the solution <g>.
  - rogersmith 11y ago
    "It doesn't take a genius to figure out people will just keep cash at home if you impose negative interest rates..." Hence why the alleged benefits of a cashless economy are being pushed across the board at the moment. Cue the "if you insist on holding cash, you must be a terrorist" rhetorics.
csense 11y ago
On the one hand, printing money instead of [1] taxing is good because you can get rid of whole government departments (saving real resources) and tax collection no longer has to invade people's privacy by forcing them to give the government extensive records of their economic activity. On the other hand, taxation is good because it reminds people there are costs to government services when they have to actually pay the tax, and in addition you can use a tax to inject a market signal about costs that would be normally externalized. [1] Unfortunately, MMT implemented by any government will likely be "in addition to" rather than "instead of" existing tax mechanisms.

31 points by ec109685 11y ago

Ignored for years? What? From what I can tell that's how we got into $19 trillion dollars of debt. The only reason it's now being defended as a systematic theory is that it's become embarrassing to still believe it in the face of all evidence. Simply put: MMT completely ignores floating exchange rates. The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money. The long term problem is that too much inflation (or, more accurately, taxation) may drive people away from our currency, and MMT will be shown for the sham that it is.

kaonashi 11y ago
> MMT completely ignores floating exchange rates I'm not sure where you're getting this from, but I learned the difference between fixed & floating exchange rates by reading MMT economists.
pjc50 11y ago
I don't think you can drive people away from the US dollar, simply because any such destabilising action will hit the real economy first. And the US has seen low consumer inflation for years now. MMT absolutely does take account of forex by recognising that a government has a large amount of power to dictate money flows within the country, but very little power to compel terms of trade overseas. And most countries need to continuously import certain things which cannot be substituted locally, especially fuel. Expanding the money supply lets people buy more locally produced stuff, but not more imports. This even scales down to local token currencies ("Bristol pound") or Krugman's "babysitting tokens" thought example.
- rogersmith 11y ago
  " a government has a large amount of power to dictate money flows within the country, but very little power to compel terms of trade overseas." Isn't the petrodollar system precisely the historical exception that allows the USA to have a lot of power when it comes to "compel terms of trade overseas"? edit: obviously the other side of that ability to "compel terms of trade overseas" being the US formidable military power that allows them to further twist other countries arms when they refuse to play by the petrodollar system rules (see Libya, Iraq, etc)
- hodwik 11y ago
  > "Expanding the money supply lets people buy more locally produced stuff, but not more imports." Right, so for most developed nations this would be disastrous.
  - kaonashi 11y ago
    The worst you can be imposed on you (outside an embargo situation) is balanced trade, paying for real imports with fx acquired through real exports.
    - hodwik 11y ago
      Which, for the US, would be a very serious downgrade from our current situation.
      - kaonashi 11y ago
        Depends on your position in the current situation.
        hodwik 11y ago
        Well, then let's clarify: For almost all Americans -- who produce essentially nothing of value, yet consume a lot of very real, imported goods -- balanced trade would be a complete disaster.
        kaonashi 11y ago
        Trade deficits are definitely a net positive, but that lack of demand they cause actively harm a large swath of Americans. There's a reason NAFTA has been so unpopular.
astazangasta 11y ago
>The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money. No, the only reason it hasn't been completely catastrophic is because there's basically no consequence to having this level of debt. Interest payments on our debt are close to the lowest they've been in decades. What's the catastrophe supposed to be, again?
crdoconnor 11y ago
>Simply put: MMT completely ignores floating exchange rates. Horseshit. >The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money. Yeah, yeah, and the only reason it wasn't completely catastrophic for Japan is for some other completely different reason (aging population, people like to save - take your pick). Be consistent at least about your excuses. Make sure they apply to the US and Japan.
- hodwik 11y ago
  Japan's QE was in response to deflationary pressures. That's a far cry away from QE while inflation is already happening. Further, I don't see why you can't have two completely different reasons for the same effect. And while demographics are important, I wouldn't call it the primary effect, instead I'm with Haruhiko Murayama from the Bank of Kyoto: "[Japan deflation is caused by] a lack of demand, which in turn is attributable to the fact that emerging countries such as China, South Korea and Taiwan have come to manufacture inexpensive high-quality electrical products by introducing new equipment and by taking advantage of their cheap labor."

WorldMaker 11y ago

«The 20-something-year-old doctrine» Much older than that, MMT is based upon turn of the last century American socialist (specifically the Social Credit Party) economic theory, but the red scare nearly eliminated it from American discourse for most of a century. It's especially interesting in that it is especially cyclical with respect to depressions/recessions. Edit to add: Not that there isn't important additional knowledge and theory that MMT brings to the table on top of the turn of the last century theory work, just that it's enough of a direct successor I'd draw the line of history longer.

carsongross 11y ago

Here is what I now believe: MMT doesn't really matter that much. How base money is produced doesn't really matter that much. A metal standard, fiat via government coercion, rocks at the bottom of the ocean, wampum, whatever. As long as it isn't insane and chaotic, it will probably work. What matters is no longer allowing the banking system to engage in fraud by introducing multiple claims on the same currency unit in the same time period, which is to say that currency deposits must be duration matched with loans. No more borrowing short and lending long. Of course, practically, MMT will be used to justify more government boondoggles, wars, and bail outs of the rich, rather than something that might actually be effective, like a citizens dividend, but that's politics, not economics.

pjc50 11y ago
currency deposits must be duration matched with loans Why? This is the essence of banking and has been for centuries. Furthermore, if you try to apply this consistently, what do you do about commercial and consumer credit? Ban it entirely, including credit cards? No more car loans, just cash on the nail?
- carsongross 11y ago
  It is the essence of banking, and that's the problem. The greatest trick the devil ever pulled... Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Credit cards are not counted against deposits and, therefore, stand outside this analysis, although I'm not sure I would allow banks involved in taking deposits to issue them, because the capital structure tends to become muddled. If you think about it, you can have nearly as much loan-expansion as the current fractionally reserved system (maybe even more since there is no need for a reserve ratio), but there is no double counting of monetary units at a given point in time and, therefore, no possibility for a bank run. I will admit that this is my own economic theory and that I am used to the crazy looks from people.
  - 11y ago

evolve2k 11y ago

I had an economics lecturer spouting this crap about how major countries never need worry to repay their debts and could lean on their massive power/influence if they got stuck. Fast forward to a post GFC world and suddenly it's like the story of the group of friends where everyone owes money to everyone else and it's all good until one new friend doesn't owe anyone and suddenly turns around and tells everyone it's time to pay up. Party stopped pretty quick after that.

astazangasta 11y ago
The problems happened because people demanded austerity instead of allowing people to expand their debt balances, as MMT says should happen in a recession. The US did the latter and did much better than Europe did, consistent with MMT.
crdoconnor 11y ago
"I had an economics lecturer spouting this crap about how major countries never need worry to repay their debts" Because if you print your own currency, the risk of you running out of it (insolvency) is exactly zero. Of course, when you thought you heard "major" what he probably said was "sovereign in the currency they borrow". Big difference (US is sovereign; Japan is sovereign; Greece is not; Zimbabwe was not). "and could lean on their massive power/influence if they got stuck" "Stuck"?
- ohnomrbill 11y ago
  Consider a hypothetical situation where we have to print a lot of currency to repay our debts. Foreign debt-holders realize that they are effectively getting robbed by our monetary policy and complain to their governments. Those governments decide to threaten with military power, to convince us to change our monetary policy or to take some of our assets. In that situation, our balance sheet would be ok, but our country would be in very bad straits. So we would be stuck in a real sense, if not in an economic sense. His lecturer probably (naively) believes that America will be dominant for so long that we won't have to worry about pesky things like the threat of war from other countries on economic grounds.

tryitnow 11y ago

Wow. I don't know where to start with some of these comments. There's just a real lack of understanding of central banking. Protip: Your critique of "status quo" (e.g. central banking) systems will be taken more seriously when you demonstrate thorough knowledge of the subject matter and don't rely on emotionally laden arguments involving "fraud" and "lies."

meric 11y ago
Whether the critics are aware of how central banking works, central banks are losing credibility. They've tried everything in Japan & Europe, getting governments trillions into debt, and now they want to go negative interest rates. Clearly what they did before didn't work, and now they are trying something else. They're shooting in the dark and unknowingly killing the economy. It doesn't take a genius to figure out people will just keep cash at home if you impose negative interest rates, and by keeping cash away from banks, reduce the reserves banks hold, and the money they can lend, reducing the money supply, exacerbating the deflation the NIRP was supposed to fight in the first place.[1] There's no fraud and no lie, except for the fact central bankers operate on economic models detached from reality. The only lie is claiming to know more than they do. The policies the Japanese central bank tried to impose to lower the value of the Yen in the past few months, only raised it. https://au.finance.yahoo.com/q/bc?s=USDJPY=X&t=3m&l=on&z=l&q=l&c= https://au.finance.yahoo.com/q/bc?s=USDJPY=X&t=3m&l=on&z=l&q... "Central bank impotency" heading your way. [1] http://www.wsj.com/articles/japanese-seeking-a-place-to-stash-cash-start-snapping-up-safes-1456136223 http://www.wsj.com/articles/japanese-seeking-a-place-to-stas...
- mindslight 11y ago
  > Clearly what they did before didn't work, and now they are trying something else Erm no, they're trying the exact same thing even harder. The top of the economy is awash in capital with nowhere to go, while the bottom has to run ever faster on the debt treadmill. Creating even more debt that funnels wealth upwards is obviously the solution <g>.
- rogersmith 11y ago
  "It doesn't take a genius to figure out people will just keep cash at home if you impose negative interest rates..." Hence why the alleged benefits of a cashless economy are being pushed across the board at the moment. Cue the "if you insist on holding cash, you must be a terrorist" rhetorics.

csense 11y ago

On the one hand, printing money instead of [1] taxing is good because you can get rid of whole government departments (saving real resources) and tax collection no longer has to invade people's privacy by forcing them to give the government extensive records of their economic activity. On the other hand, taxation is good because it reminds people there are costs to government services when they have to actually pay the tax, and in addition you can use a tax to inject a market signal about costs that would be normally externalized. [1] Unfortunately, MMT implemented by any government will likely be "in addition to" rather than "instead of" existing tax mechanisms.