8 ms·

The Problem with “Modern Monetary Theory” Is That It's True

59 points by oftenwrong 8y ago

dv_dt 8y ago
The problem with this article's accounting of the Fed, is that it's missing 4.5T in quantitative easing assets that were injected into banks, in crisis, outside the conventional theory of Fed management. https://www.thebalance.com/what-is-quantitative-easing-definition-and-explanation-3305881 https://www.thebalance.com/what-is-quantitative-easing-defin... The other contribution is that fractional reserve lending itself also creates inflationary currency. There is some 22T (IIRC) of private loans. I think the real objection to applying MMT more fundamentally is fear that allowing public programs to focus on good return on investment expenditures without worrying as much about cashflow against direct tax receipts, it takes out "capacity" for private lending to select it's desired investments.
- spiralx 8y ago
  Well, fractional reserve lending isn't a useful model for how money is created in the modern economy - bank loans are just a matter of adding an amount to the borrower's account balance and are constrained solely by the bank's judgement of the risk of a default and to a lesser extent reserve requirements imposed by law. The amount of money that is deposited in a bank has no effect on its ability to loan money. I'm also not impressed by th6 author's claims about the FED not being audited, which is a trope common amongst a particular subset of the right that to the point it's practically a dog whistle for conspiratorial anti-tax and government types.
  - dv_dt 7y ago
    The point is that “just adding an amount” to the balance, creates money, temporarily if the lone is repaid, but potentially inflationary as long as the loan is open, and the money is spent and circulating.
aetherson 8y ago
http://noahpinionblog.blogspot.com/2019/03/examining-mmt-model-in-detail.html http://noahpinionblog.blogspot.com/2019/03/examining-mmt-mod... Noah Smith talks about how MMT is a pretty slippery concept to pin down.
- tim333 8y ago
  Krugman has similar stuff to say https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wo...
jokull 8y ago
No, banks are not stuffed with reserves because they learned a lesson from 2008 and are being cautions like "before 1970". It’s because the Fed has been furiously swapping assets with the banks, buying their MBS’s for example. This is a balance sheet exercise which the Fed hopes prevents recession. It hasn't worked very well and that's why the MMT’s feel vindicated now that everyone's talking about how ineffective central banks have been since the recession.
manfredo 8y ago
Asking "can modern monetary theory work" is sort of like asking "can I recreationally use heroin and not get addicted". The answer to both of these questions is yes, in theory both are possible. But look at the realities of these situations. Historically governments that primarily paid for services by printing money (as opposed to taxes) have rarely, if ever, done so responsibly. In theory it's possible but MMT lacks the economic pushback caused by taxes. Traditionally, when government spending is too high people and businesses complain and the government sees the economy suffering. In MMT, the costs of government spending are essentially hidden. Or in another perspective, the cost of government spending comes in the form of inflation. To the everyday person, government spending is free because they don't see how much of their paycheck is being sent to the government. They only see the cost of government spending once their savings are wipes out by inflation. Could the government maintain restraint and not spend much money? In theory yes, but in practice I am very confident politicians would give in to the temptation to try and carry out utopian policies that are insanely expensive. Just look at what proponents of MMT are promising: a government job for everyone that wants one, free University education, and more. I trust politicians not to abuse MMT as much as I would trust myself to use heroin responsibly, which is to say not at all.
- andbberger 8y ago
  > Asking "can modern monetary theory work" is sort of like asking "can I recreationally use heroin and not get addicted". The answer to both of these questions is yes, in theory both are possible. But look at the realities of these situations. Sounds like the theory is wrong then
  - manfredo 8y ago
    The theory is correct it's just not feasible or reliable to apply. Lots of things have a correct underlying theory but are too difficult to apply. Nuclear powered aircraft is correct in theory. There's no reason why we couldn't use thermonuclear power to spin a turboprop to generate thrust. But in practice, there's no way to make a nuclear pressure vessel light enough to mount on an airplane. At least not with current technology. (Maybe we just have a semantics mismatch of what we refer to by "theory")
deleted 8y ago
[deleted]
munk-a 8y ago
I think this article is very misleading and would've been more clear if it had started from the angle that currencies are constantly accumulating trust and confidence - where that trust can be spent to reduce the debt of the issuer. This article seemed to fall victim to the clickbait temptation in making the premise of the article "Modern Monetary Theory is somewhat accurate" in favor of just hyperbolic-ly stating that it's true. In actuality currencies are a sort of stock issued as part of the value of an economy, if that economy does better or worse then the value of that currency does better or worse - it is much more resistant to change since it is far more liquid (imagine that apple said, you will always be able to exchange stocks for a new iPhone at this rate which is pretty steady but will adjust slightly over time). In this analogy printing more money is equivalent to the act of the company issuing more stock (and not equivalent to the act of an owner selling some of their stock) everyone's proportional stake in the company will go down, but as long as you don't issue too quickly then people won't mind, if a company does start over-issuing stock then that stock becomes diluted _and_ rational actors further devalue the stock by jumping ship and trying to convert their partial ownership into a currency they have greater faith in.
- evrydayhustling 8y ago
  What the article alludes to is that while the demand to spend money is relatively liquid because it is linked to the whole economy, the demand to hold it, loan it, or commit to prices over time are a speculative bet on how it will be issued. And because it is speculative, it can move disproportionate to the economic size of the actions involved. Right now the speculators' trust is rooted in the apparent independence of Fed from Treasury. If the US were to seek trust to self-manage from Treasury alone, how would it earn or argue for that trust from the community of speculators?
jey 8y ago
I really liked this article, but I also notice that I seem to be suffering from a severe case of the Gell-Mann amnesia effect[1]. Not sure if it's related. 1. https://en.wikipedia.org/wiki/Gell-Mann_amnesia_effect https://en.wikipedia.org/wiki/Gell-Mann_amnesia_effect
bjourne 8y ago
Interested parties should really watch this short talk by Richard Wolff: https://www.youtube.com/watch?v=DGZ7nJCzlW4 https://www.youtube.com/watch?v=DGZ7nJCzlW4 If you are really impatient (really, spare five minutes and watch it in full) skip to 4:20 for his conclusions. Wolff is a Professor Emeritus of Economy in Massachusetts. No wonder MMT is shunned by so called "legitimate" economists!
spinchange 8y ago
I've said it before and I'll say it again: Modern Monetary Theory is kind of just giving a name and theoretical application to something that is essentially contemporary, defacto monetary practice.
arisAlexis 8y ago
Chancellor on brink of second bailout for banks - Genesis block of Bitcoin
dnautics 8y ago
The problem with this article, is that as a supply sider, the author has no compassion for the lower classes, who are hurting the most through these policies. It should be no surprise that the divergence between labor productivity and real compensation began diverging immediately after the collapse of bretton woods (and the concomitant widening of the gap between the rich and poor); after all, inflation is basically the means by which the government steals from the poor to give to the rich, in a compounding fashion (slow though the time constant may be)
- zzzzzzzza 8y ago
  wait what... The poor have debt, inflation eases debt burdens. I would agree that the mechanism the fed uses to control inflation (interest rate which acts more or less as a proxy for housing prices/mortgages), does end up gouging the poor through the housing market, but this is only because the government allows real estate monopolists/speculators to harvest land rent since we don't have a land value tax.
  - dnautics 8y ago
    many poor are not in debt at all (no access to banking services, period), and it is totally insane to think the rich are not in debt. They may not be in debt directly, but most if not all complex investment and risk mitigation strategies are strictly dependent on a lending entity that distributes debt at low interest rates (shorts, options, futures, etc) Even when the poor are in debt, the debt is usually short-term, and high interest rate, which is practically not eased by inflation. The easing of the debt burden by inflation implicitly assumes that wages keep track with inflation, which they do not, empirically, but arguably by design as well: https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-inflation/ https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi... "Even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts." Keynesian (and presumably MMT, I'm not sure) depends on the concept that the Phillips curve is a thing. But the mechanism for the Phillips curve to be a thing depends on wages not keeping track with inflation. In other words, you cannot claim that inflation reduces unemployment without also implicitly accepting that inflation is designed to cheat the poor out of their wages.
dools 8y ago
Never have I seen so much middle brow dismissal from a bunch of people who understand so little about a topic. Sad.

59 points by oftenwrong 8y ago

The problem with this article's accounting of the Fed, is that it's missing 4.5T in quantitative easing assets that were injected into banks, in crisis, outside the conventional theory of Fed management. https://www.thebalance.com/what-is-quantitative-easing-definition-and-explanation-3305881 https://www.thebalance.com/what-is-quantitative-easing-defin... The other contribution is that fractional reserve lending itself also creates inflationary currency. There is some 22T (IIRC) of private loans. I think the real objection to applying MMT more fundamentally is fear that allowing public programs to focus on good return on investment expenditures without worrying as much about cashflow against direct tax receipts, it takes out "capacity" for private lending to select it's desired investments.

spiralx 8y ago
Well, fractional reserve lending isn't a useful model for how money is created in the modern economy - bank loans are just a matter of adding an amount to the borrower's account balance and are constrained solely by the bank's judgement of the risk of a default and to a lesser extent reserve requirements imposed by law. The amount of money that is deposited in a bank has no effect on its ability to loan money. I'm also not impressed by th6 author's claims about the FED not being audited, which is a trope common amongst a particular subset of the right that to the point it's practically a dog whistle for conspiratorial anti-tax and government types.
- dv_dt 7y ago
  The point is that “just adding an amount” to the balance, creates money, temporarily if the lone is repaid, but potentially inflationary as long as the loan is open, and the money is spent and circulating.

aetherson 8y ago

http://noahpinionblog.blogspot.com/2019/03/examining-mmt-model-in-detail.html http://noahpinionblog.blogspot.com/2019/03/examining-mmt-mod... Noah Smith talks about how MMT is a pretty slippery concept to pin down.

tim333 8y ago
Krugman has similar stuff to say https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wo...

jokull 8y ago

No, banks are not stuffed with reserves because they learned a lesson from 2008 and are being cautions like "before 1970". It’s because the Fed has been furiously swapping assets with the banks, buying their MBS’s for example. This is a balance sheet exercise which the Fed hopes prevents recession. It hasn't worked very well and that's why the MMT’s feel vindicated now that everyone's talking about how ineffective central banks have been since the recession.

manfredo 8y ago

Asking "can modern monetary theory work" is sort of like asking "can I recreationally use heroin and not get addicted". The answer to both of these questions is yes, in theory both are possible. But look at the realities of these situations. Historically governments that primarily paid for services by printing money (as opposed to taxes) have rarely, if ever, done so responsibly. In theory it's possible but MMT lacks the economic pushback caused by taxes. Traditionally, when government spending is too high people and businesses complain and the government sees the economy suffering. In MMT, the costs of government spending are essentially hidden. Or in another perspective, the cost of government spending comes in the form of inflation. To the everyday person, government spending is free because they don't see how much of their paycheck is being sent to the government. They only see the cost of government spending once their savings are wipes out by inflation. Could the government maintain restraint and not spend much money? In theory yes, but in practice I am very confident politicians would give in to the temptation to try and carry out utopian policies that are insanely expensive. Just look at what proponents of MMT are promising: a government job for everyone that wants one, free University education, and more. I trust politicians not to abuse MMT as much as I would trust myself to use heroin responsibly, which is to say not at all.

andbberger 8y ago
> Asking "can modern monetary theory work" is sort of like asking "can I recreationally use heroin and not get addicted". The answer to both of these questions is yes, in theory both are possible. But look at the realities of these situations. Sounds like the theory is wrong then
- manfredo 8y ago
  The theory is correct it's just not feasible or reliable to apply. Lots of things have a correct underlying theory but are too difficult to apply. Nuclear powered aircraft is correct in theory. There's no reason why we couldn't use thermonuclear power to spin a turboprop to generate thrust. But in practice, there's no way to make a nuclear pressure vessel light enough to mount on an airplane. At least not with current technology. (Maybe we just have a semantics mismatch of what we refer to by "theory")

deleted 8y ago

[deleted]

munk-a 8y ago

I think this article is very misleading and would've been more clear if it had started from the angle that currencies are constantly accumulating trust and confidence - where that trust can be spent to reduce the debt of the issuer. This article seemed to fall victim to the clickbait temptation in making the premise of the article "Modern Monetary Theory is somewhat accurate" in favor of just hyperbolic-ly stating that it's true. In actuality currencies are a sort of stock issued as part of the value of an economy, if that economy does better or worse then the value of that currency does better or worse - it is much more resistant to change since it is far more liquid (imagine that apple said, you will always be able to exchange stocks for a new iPhone at this rate which is pretty steady but will adjust slightly over time). In this analogy printing more money is equivalent to the act of the company issuing more stock (and not equivalent to the act of an owner selling some of their stock) everyone's proportional stake in the company will go down, but as long as you don't issue too quickly then people won't mind, if a company does start over-issuing stock then that stock becomes diluted _and_ rational actors further devalue the stock by jumping ship and trying to convert their partial ownership into a currency they have greater faith in.

evrydayhustling 8y ago
What the article alludes to is that while the demand to spend money is relatively liquid because it is linked to the whole economy, the demand to hold it, loan it, or commit to prices over time are a speculative bet on how it will be issued. And because it is speculative, it can move disproportionate to the economic size of the actions involved. Right now the speculators' trust is rooted in the apparent independence of Fed from Treasury. If the US were to seek trust to self-manage from Treasury alone, how would it earn or argue for that trust from the community of speculators?

jey 8y ago

I really liked this article, but I also notice that I seem to be suffering from a severe case of the Gell-Mann amnesia effect[1]. Not sure if it's related. 1. https://en.wikipedia.org/wiki/Gell-Mann_amnesia_effect https://en.wikipedia.org/wiki/Gell-Mann_amnesia_effect

bjourne 8y ago

Interested parties should really watch this short talk by Richard Wolff: https://www.youtube.com/watch?v=DGZ7nJCzlW4 https://www.youtube.com/watch?v=DGZ7nJCzlW4 If you are really impatient (really, spare five minutes and watch it in full) skip to 4:20 for his conclusions. Wolff is a Professor Emeritus of Economy in Massachusetts. No wonder MMT is shunned by so called "legitimate" economists!

spinchange 8y ago

I've said it before and I'll say it again: Modern Monetary Theory is kind of just giving a name and theoretical application to something that is essentially contemporary, defacto monetary practice.

arisAlexis 8y ago

Chancellor on brink of second bailout for banks - Genesis block of Bitcoin

dnautics 8y ago

The problem with this article, is that as a supply sider, the author has no compassion for the lower classes, who are hurting the most through these policies. It should be no surprise that the divergence between labor productivity and real compensation began diverging immediately after the collapse of bretton woods (and the concomitant widening of the gap between the rich and poor); after all, inflation is basically the means by which the government steals from the poor to give to the rich, in a compounding fashion (slow though the time constant may be)

zzzzzzzza 8y ago
wait what... The poor have debt, inflation eases debt burdens. I would agree that the mechanism the fed uses to control inflation (interest rate which acts more or less as a proxy for housing prices/mortgages), does end up gouging the poor through the housing market, but this is only because the government allows real estate monopolists/speculators to harvest land rent since we don't have a land value tax.
- dnautics 8y ago
  many poor are not in debt at all (no access to banking services, period), and it is totally insane to think the rich are not in debt. They may not be in debt directly, but most if not all complex investment and risk mitigation strategies are strictly dependent on a lending entity that distributes debt at low interest rates (shorts, options, futures, etc) Even when the poor are in debt, the debt is usually short-term, and high interest rate, which is practically not eased by inflation. The easing of the debt burden by inflation implicitly assumes that wages keep track with inflation, which they do not, empirically, but arguably by design as well: https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-inflation/ https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi... "Even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts." Keynesian (and presumably MMT, I'm not sure) depends on the concept that the Phillips curve is a thing. But the mechanism for the Phillips curve to be a thing depends on wages not keeping track with inflation. In other words, you cannot claim that inflation reduces unemployment without also implicitly accepting that inflation is designed to cheat the poor out of their wages.

dools 8y ago

Never have I seen so much middle brow dismissal from a bunch of people who understand so little about a topic. Sad.