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For anyone looking for a cohesive macroeconomic theory drawing from the economists mentioned here (e.g. Minsky, Godley, and others at the Levy Institute), I hig

For anyone looking for a cohesive macroeconomic theory drawing from the economists mentioned here (e.g. Minsky, Godley, and others at the Levy Institute), I highly recommended taking a gander at Modern Monetary Theory a brief overview: https://www.thenation.com/article/the-rock-star-appeal-of-modern-monetary-theory/ https://www.thenation.com/article/the-rock-star-appeal-of-mo... A not so brief overview: http://neweconomicperspectives.org/2011/06/modern-money-theory-primer-on.html http://neweconomicperspectives.org/2011/06/modern-money-theo...

nonidentified 8y ago
TL;DR: MMT starts by saying that governments that manage their own currencies have unlimited spending ability – they can simply create money when they need it. And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite). Then, building on that premise, MMT basically claims that nobody needs to get hurt when governments create money out of thin air. The explanations for this are pretty wonky and hard to follow, but they amount to saying that the theory generally predicts no harmful inflation of the currency. Analysis: Hasn't mankind already concluded that governments can't just create and spend money boundlessly without harming the economy and the people who constitute it? I'm looking at Argentina, Venezuela and Zimbabwe right now, where the governments have each created money to finance their spending, and people are truly suffering as a result. And those are just some contemporary examples – human history offers many more, and they're quite consistent. If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect. Radical alternative theory: Governments should be fiscally responsible, practicing balanced budgets and promoting currency stability. Outlandish, true. But it turns out that historically this has been a very winning formula. More efficient economies, less corrupt governments, fewer innocent people getting hurt.
- RobertoG 8y ago
  >>" If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect." That is not at all what MMT says and I don't understand how an honest reader of the MMT literature would arrive to that conclusion. What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending. >> And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite) In the MMT framework, there is always demand for the currency in what taxes have to be payed. That's obviously true. That doesn't mean that inflation is not a factor. By the way, most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock (http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773).
  - simula67 8y ago
    > What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending. I heard this story in a debate between an MMT economist and an Austrian economist Imagine a husband and wife having the following conversation : Husband : Let's go and buy a new mansion, a Lamborghini and a private jet Wife : Are you sure we have enough money to do all that ? Husband : Well, if we don't, I can always pick up my shotgun and hold up the nearby bank Wife : Are you crazy ? You could go to prison. Or get shot by the police Husband : Well, I know that. But I just wanted to point out that not having enough money was irrelevant. Going to jail or getting shot was the most important constraint from spending all that money.
    - RobertoG 8y ago
      I'm not sure that your metaphor illuminates the issue at hand.
    - hn0 8y ago
      This misses THE central point of MMT, the fundamental difference between currency issuer (souvereign authority) and currency user (households, firms, regional governments, etc).
  - nonidentified 8y ago
    > public debt and public deficits are irrelevant Translation: Countries can incur as much debt as they want, because they can "print" their way out of it without harmful consequences. > inflation is the most important constraint in public spending Translation: People's economic suffering is the most important constraint in government spending. > most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock Translation: Most cases of hyperinflation in history were due to economic crisis. Hyperinflation is due to creating far too much new money. Enough to foster price increases of at least 50% per month. Economic crisis does not necessitate doing that. By the way, in the case of Zimbabwe, it was the government economic mismanagement that created the economic crisis that you blame for the monetary mismanagement. From your article: "From an economic perspective though the [government] farm take over and collapse of food production was catastrophic." Then the government chose to try "printing" its way out of the problem. Hyperinflation wasn't mandatory, it was a consequence of reckless behavior. > how an honest reader of the MMT literature would arrive to that conclusion The only substantial concession to inflation risk I've seen in the MMT literature is in conditions of "full employment." Feel free to set me straight if that's not correct. Empirically speaking, inflation follows injecting money into an economy, and inflation is quite harmful. It seems MMT resists at least the first conclusion, if not both. While we're on the topic of honesty, doesn't MMT feel like an economic "get rich quick" scheme to you?
- wallace_f 8y ago
  What I dislike about my training in econ is that there is no way to experiment. I think you are right that it is a terrible idea, but who knows?
- tim333 8y ago
  Both ideas mentioned are bad: - spend money boundlessly or - balanced budgets What governments should do is spend appropriately to maximize the welfare of their people which includes not having runaway inflation and also borrowing and spending during economic slumps.
  - digi_owl 8y ago
    And that is what MMT actually suggests, when one do not leave out half their argument. Their argument is that taxation can be used to take money out of the economy while government spending puts it in. Balance the two and you also control inflation. His however hinges on the economy being largely self-sufficient, or has tight controls on imports. Across history, the nations that has gotten into trouble over "money printing" have actually run a massive current account deficit, meaning that they are importing way more than they are exporting.
    - AnimalMuppet 8y ago
      > His however hinges on the economy being largely self-sufficient, or has tight controls on imports. So, not actually applicable to the US. (Unless you're going to argue that the US's imports aren't enough to matter. If you want to try to make that argument, go ahead, but it's clearly an additional step that's needed before you can argue that we should actually try to apply MMT.)
  - nonidentified 8y ago
    > What governments should do is spend appropriately to maximize the welfare of their people Are you suggesting that people aren't capable of spending appropriately to maximize their own welfare, and that the government would do a better job of it (after taking a cut of the money)? > What governments should do is ... borrowing and spending during economic slumps Even if this were true, and I think global economic malaise since the financial crisis is evidence it's not, it omits the corollary that governments should then repay debt and save during economic booms. You can't responsibly have one without the other, can you? > balanced budgets [are a bad idea] So debt is a good idea? We should finance current spending at the cost of future spending? That's a pretty radical statement. The burden of proof is on you.
- digi_owl 8y ago
  This leaves out the taxation side of things. In MMT, taxation acts as the ultimate sink. It is the combination of taxation and government spending that acts to "balance" the national economy. This flip the normal budget worries on the head, as taxation comes after spending rather than before. Note though that unlike your example, MMT requires a nation that is internally self-sufficient when it comes to basic supplies. The problem for both Venezuela and Zimbabwe (i am not up to speed on Argentina) is the amount of imports needed to sustain the population. When imports overtake exports, the exchange rate suffers, and exchange rates can't be fixed by printing more money. Venezuela got into the predicament it is in because the government thought they could use oil exports, that were at the time an all time high, to counterbalance the imports used to help the poor. But then the oil price tanked. And Venezuelan oil is a particularly expensive oil to process, so it was the first to go when refineries cut back on production.
  - nonidentified 8y ago
    > MMT requires a nation that is internally self-sufficient when it comes to basic supplies To be fair, isn't this a lot like saying, "MMT requires conditions that don't generally exist"? What modern economy isn't shopping internationally for the best prices on basic supplies? Ultimately this condition seems to imply that MMT requires either 1) a subject economy to be the most efficient producer of all basic supplies (probably impossible, and if achieved then impossible for any other economy) or 2) a prohibition on the import of basic supplies (despotic and economically dysfunctional). Is this correct? This is making me think of Import Substitution Industrialization (ISI) in Latin America. It was a strategy to become economically self-sufficient, but it didn't work out well.
- stephen_g 8y ago
  Governments have not historically kept balanced budgets more often than not, and when they have it's not a winning formula. Some of the worst economic crises have occurred after some of the most successful runs of 'responsible' Government balanced or surplus budgets, because it saps net financial assets from the private sector, with the only way for growth to happen being private debt (which eventually leads to deleveraging when the private sector can't take on more debt, which pretty much always results in recession). The only way run a Government surplus and avoid this is to run a big trade surplus (like Germany) - but that's a zero sum game so not everyone can. Argentina, Venezuela and Zimbabwe aren't in any way representative of the results of "printing money". They are much more complicated than that, and MMT actually has much more explanatory power to explain what went wrong (variously - huge supply shocks leading to massive unemployment, attempting to maintain a peg to a foreign currency, and having debt denominated in a foreign currency, etc.). One of the leading MMT researchers, Prof. Bill Mitchell is especially interested in inflation, and they have actually generated a pretty strong theoretical framework for how it happens that again has better explanatory power than competing theories (i.e. Austrian economics that predicted hyperinflation due to QE, monetarism that can't explain why inflation is so sluggish with such low interest rates, etc.). He publishes a lot of info on this his blog nearly every weekday, it's definitely worth a read.
  - WalterBright 8y ago
    Any theory of money needs to explain how the US went from subsistence farming in 1800 to superpower in WW1 on the gold standard (which more or less means balanced budgets).
    - dragonwriter 8y ago
      > Any theory of money needs to explain how the US went from subsistence farming in 1800 to superpower in WW1 on the gold standard No, it doesn't. Especially since the the US was on a bimetallic standard, not the gold standard, for much of that time. > which more or less means balanced budgets No, it doesn't. Either in theory or US practice.
      - 8y ago
- crdoconnor 8y ago
  >If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect. Provided the money created is spent, it does predict inflation.
nabla9 8y ago
Non-economists have tendency to look down economists when they go astray .. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.
- RobertoG 8y ago
  We look down mainstream economists (macro) because their level of knowledge is more similar to alchemy than to physics, and because they never change their theories never mind what happens in the real world. For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible? Can you find some physics book that explain something that the engineers say it's not true? My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative. (1). https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters https://www.bankofengland.co.uk/working-paper/2015/banks-are...
  - nabla9 8y ago
    I'm well aware of that paper. Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking. Banks don’t create demand out of thin air by providing loans. While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.
    - RobertoG 8y ago
      >>Banks don’t create demand out of thin air by providing loans. This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says. See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed. >>While banks can create loans "out of thin air" [..] they are limited by their reserves. My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details. Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves. If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.

nonidentified 8y ago

TL;DR: MMT starts by saying that governments that manage their own currencies have unlimited spending ability – they can simply create money when they need it. And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite). Then, building on that premise, MMT basically claims that nobody needs to get hurt when governments create money out of thin air. The explanations for this are pretty wonky and hard to follow, but they amount to saying that the theory generally predicts no harmful inflation of the currency. Analysis: Hasn't mankind already concluded that governments can't just create and spend money boundlessly without harming the economy and the people who constitute it? I'm looking at Argentina, Venezuela and Zimbabwe right now, where the governments have each created money to finance their spending, and people are truly suffering as a result. And those are just some contemporary examples – human history offers many more, and they're quite consistent. If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect. Radical alternative theory: Governments should be fiscally responsible, practicing balanced budgets and promoting currency stability. Outlandish, true. But it turns out that historically this has been a very winning formula. More efficient economies, less corrupt governments, fewer innocent people getting hurt.

RobertoG 8y ago
>>" If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect." That is not at all what MMT says and I don't understand how an honest reader of the MMT literature would arrive to that conclusion. What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending. >> And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite) In the MMT framework, there is always demand for the currency in what taxes have to be payed. That's obviously true. That doesn't mean that inflation is not a factor. By the way, most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock (http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773).
- simula67 8y ago
  > What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending. I heard this story in a debate between an MMT economist and an Austrian economist Imagine a husband and wife having the following conversation : Husband : Let's go and buy a new mansion, a Lamborghini and a private jet Wife : Are you sure we have enough money to do all that ? Husband : Well, if we don't, I can always pick up my shotgun and hold up the nearby bank Wife : Are you crazy ? You could go to prison. Or get shot by the police Husband : Well, I know that. But I just wanted to point out that not having enough money was irrelevant. Going to jail or getting shot was the most important constraint from spending all that money.
  - RobertoG 8y ago
    I'm not sure that your metaphor illuminates the issue at hand.
  - hn0 8y ago
    This misses THE central point of MMT, the fundamental difference between currency issuer (souvereign authority) and currency user (households, firms, regional governments, etc).
- nonidentified 8y ago
  > public debt and public deficits are irrelevant Translation: Countries can incur as much debt as they want, because they can "print" their way out of it without harmful consequences. > inflation is the most important constraint in public spending Translation: People's economic suffering is the most important constraint in government spending. > most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock Translation: Most cases of hyperinflation in history were due to economic crisis. Hyperinflation is due to creating far too much new money. Enough to foster price increases of at least 50% per month. Economic crisis does not necessitate doing that. By the way, in the case of Zimbabwe, it was the government economic mismanagement that created the economic crisis that you blame for the monetary mismanagement. From your article: "From an economic perspective though the [government] farm take over and collapse of food production was catastrophic." Then the government chose to try "printing" its way out of the problem. Hyperinflation wasn't mandatory, it was a consequence of reckless behavior. > how an honest reader of the MMT literature would arrive to that conclusion The only substantial concession to inflation risk I've seen in the MMT literature is in conditions of "full employment." Feel free to set me straight if that's not correct. Empirically speaking, inflation follows injecting money into an economy, and inflation is quite harmful. It seems MMT resists at least the first conclusion, if not both. While we're on the topic of honesty, doesn't MMT feel like an economic "get rich quick" scheme to you?
wallace_f 8y ago
What I dislike about my training in econ is that there is no way to experiment. I think you are right that it is a terrible idea, but who knows?
tim333 8y ago
Both ideas mentioned are bad: - spend money boundlessly or - balanced budgets What governments should do is spend appropriately to maximize the welfare of their people which includes not having runaway inflation and also borrowing and spending during economic slumps.
- digi_owl 8y ago
  And that is what MMT actually suggests, when one do not leave out half their argument. Their argument is that taxation can be used to take money out of the economy while government spending puts it in. Balance the two and you also control inflation. His however hinges on the economy being largely self-sufficient, or has tight controls on imports. Across history, the nations that has gotten into trouble over "money printing" have actually run a massive current account deficit, meaning that they are importing way more than they are exporting.
  - AnimalMuppet 8y ago
    > His however hinges on the economy being largely self-sufficient, or has tight controls on imports. So, not actually applicable to the US. (Unless you're going to argue that the US's imports aren't enough to matter. If you want to try to make that argument, go ahead, but it's clearly an additional step that's needed before you can argue that we should actually try to apply MMT.)
- nonidentified 8y ago
  > What governments should do is spend appropriately to maximize the welfare of their people Are you suggesting that people aren't capable of spending appropriately to maximize their own welfare, and that the government would do a better job of it (after taking a cut of the money)? > What governments should do is ... borrowing and spending during economic slumps Even if this were true, and I think global economic malaise since the financial crisis is evidence it's not, it omits the corollary that governments should then repay debt and save during economic booms. You can't responsibly have one without the other, can you? > balanced budgets [are a bad idea] So debt is a good idea? We should finance current spending at the cost of future spending? That's a pretty radical statement. The burden of proof is on you.
digi_owl 8y ago
This leaves out the taxation side of things. In MMT, taxation acts as the ultimate sink. It is the combination of taxation and government spending that acts to "balance" the national economy. This flip the normal budget worries on the head, as taxation comes after spending rather than before. Note though that unlike your example, MMT requires a nation that is internally self-sufficient when it comes to basic supplies. The problem for both Venezuela and Zimbabwe (i am not up to speed on Argentina) is the amount of imports needed to sustain the population. When imports overtake exports, the exchange rate suffers, and exchange rates can't be fixed by printing more money. Venezuela got into the predicament it is in because the government thought they could use oil exports, that were at the time an all time high, to counterbalance the imports used to help the poor. But then the oil price tanked. And Venezuelan oil is a particularly expensive oil to process, so it was the first to go when refineries cut back on production.
- nonidentified 8y ago
  > MMT requires a nation that is internally self-sufficient when it comes to basic supplies To be fair, isn't this a lot like saying, "MMT requires conditions that don't generally exist"? What modern economy isn't shopping internationally for the best prices on basic supplies? Ultimately this condition seems to imply that MMT requires either 1) a subject economy to be the most efficient producer of all basic supplies (probably impossible, and if achieved then impossible for any other economy) or 2) a prohibition on the import of basic supplies (despotic and economically dysfunctional). Is this correct? This is making me think of Import Substitution Industrialization (ISI) in Latin America. It was a strategy to become economically self-sufficient, but it didn't work out well.
stephen_g 8y ago
Governments have not historically kept balanced budgets more often than not, and when they have it's not a winning formula. Some of the worst economic crises have occurred after some of the most successful runs of 'responsible' Government balanced or surplus budgets, because it saps net financial assets from the private sector, with the only way for growth to happen being private debt (which eventually leads to deleveraging when the private sector can't take on more debt, which pretty much always results in recession). The only way run a Government surplus and avoid this is to run a big trade surplus (like Germany) - but that's a zero sum game so not everyone can. Argentina, Venezuela and Zimbabwe aren't in any way representative of the results of "printing money". They are much more complicated than that, and MMT actually has much more explanatory power to explain what went wrong (variously - huge supply shocks leading to massive unemployment, attempting to maintain a peg to a foreign currency, and having debt denominated in a foreign currency, etc.). One of the leading MMT researchers, Prof. Bill Mitchell is especially interested in inflation, and they have actually generated a pretty strong theoretical framework for how it happens that again has better explanatory power than competing theories (i.e. Austrian economics that predicted hyperinflation due to QE, monetarism that can't explain why inflation is so sluggish with such low interest rates, etc.). He publishes a lot of info on this his blog nearly every weekday, it's definitely worth a read.
- WalterBright 8y ago
  Any theory of money needs to explain how the US went from subsistence farming in 1800 to superpower in WW1 on the gold standard (which more or less means balanced budgets).
  - dragonwriter 8y ago
    > Any theory of money needs to explain how the US went from subsistence farming in 1800 to superpower in WW1 on the gold standard No, it doesn't. Especially since the the US was on a bimetallic standard, not the gold standard, for much of that time. > which more or less means balanced budgets No, it doesn't. Either in theory or US practice.
    - 8y ago
crdoconnor 8y ago
>If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect. Provided the money created is spent, it does predict inflation.

nabla9 8y ago

Non-economists have tendency to look down economists when they go astray .. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.

RobertoG 8y ago
We look down mainstream economists (macro) because their level of knowledge is more similar to alchemy than to physics, and because they never change their theories never mind what happens in the real world. For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible? Can you find some physics book that explain something that the engineers say it's not true? My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative. (1). https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters https://www.bankofengland.co.uk/working-paper/2015/banks-are...
- nabla9 8y ago
  I'm well aware of that paper. Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking. Banks don’t create demand out of thin air by providing loans. While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.
  - RobertoG 8y ago
    >>Banks don’t create demand out of thin air by providing loans. This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says. See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed. >>While banks can create loans "out of thin air" [..] they are limited by their reserves. My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details. Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves. If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.