Answers from the MMTers

By Stephanie Kelton and Randall Wray. Originally published at New Economic Perspectives

A few days ago, Jared Bernstein posed some Questions for the MMTers in order to gain a “better understanding [of our] arguments.” We appreciate his interest in our ideas and, especially, his direct appeal for clarification of our views.  He raised four big questions, which our Australian counterpart, Bill Mitchell, has already answered in his own three-part series.  What follows is a response from two North American MMTers.

Jared: Overheating is possible, and taxing is a lousy mechanism for dealing with it.

We agree that relying on Congress to raise/lower taxes to fine-tune the economy will not succeed. We agree with Janet Yellen that stronger automatic stabilizers are needed to enhance cyclical stability, taking pressure off lawmakers (and the Fed) to be responsive to changing conditions in the economy. Having said that, we would note that our tax system is likely already too biased to pull in more revenue when the economy booms, as evidenced by the expansion-killing surplus during the Clinton years.

We would add, as Jamie Galbraith rightly argues, that overheating, while possible, hasn’t happened in at least two generations.  As Jamie says, “There hasn’t been inflation in the economy since the early 1980s. It collapsed with the end of the Soviet Union and with the rise of China as a supplier for consumer goods. So the Fed has been patting itself on the back for decades [of] holding back a phenomenon that doesn’t exist. [The Fed is like] the little Dutch boy with the finger in the dike who never troubles himself to look over the levy to see that the lake is dry.”  In other words, it’s been a couple of generations since the US economy experienced any significant inflation. Since then, inflation has become a highly global phenomenon.

We also note that neither mainstream academic economists nor the Fed itself have a robust theory of inflation. By contrast, the academic economists who created MMT have a long history of studying inflation and formulating policy to fight it should overheating ever become a problem. See, for example, Papdimitriou and Wray 1992, Bill Mitchell, and the new MMT textbook by Mitchell, Wray, and Watts.

In any case, relying on the Fed is the worst possible way to try to fight “overheating.” As the Bank of England has explained, central banks do not control the money supply nor do they have the tools to forcibly choke off an expansion of bank credit in order to fight inflation. The plain fact is that the Fed cannot “take money out of the economy”—as Jared presumes—like some kind of pickpocket rifling through our jeans in the dark of night. It relies on the overnight interbank lending rate (fed funds rate) as a policy instrument. It can take excess reserves out of banks (or put them into banks—e.g. via Quantitative Easing), but this does not work like a brake pedal or a gas pedal on bank lending—which is how money gets into the economy. No central banker today believes she can “take money out of the economy” as Jared puts it.

While we will not go into it in detail here, we recommend a public option—called the Job Guarantee—in the job market at a base wage to anchor the currency, helping to stabilize its domestic value against inflationary/deflationary pressure as well as stabilizing its exchange value against other currencies. MMT has devoted thousands of pages of research and over a quarter of century to analyzing and reporting of the results. Indeed, we have completed a major study using conventional modeling techniques that shows that a universal job guarantee program would provide true full employment while actually moderating inflation.

Finally, we remind Jared that contractionary fiscal policy (tax hikes or spending cuts) is presented in standard macro textbooks (of the Keynesian variety) as the appropriate way to deal with an overheating economy.  In other words, there is no daylight between Functional Finance/MMTers and conventional Keynesian theory when it comes to the idea of raising taxes to counter overheating.  Nowhere in the mainstream discussion of the Keynesian approach is there handwringing about the politics involved in getting a political body (Parliament, Congress, etc.) to carry out the fiscal tightening needed to curb inflationary pressure.  Hence, Jared is not really raising a critique of MMT at all—but rather is critiquing long-standing advocacy of use of fiscal policy that has appeared in every “Keynesian” macro textbook published since WWII.

Jared: What about the Fed? The central bank introduces another piece of the MMT framework about which I’m confused. Suppose, even if the economy is below potential, the Fed decides it doesn’t like all this money-printing and deficit spending advocated by MMTers.

First, let’s be clear: The Fed cannot ‘Just Say No’ to Congress. As Bernanke said, “We’ll do whatever Congress tells us to do.” And when it comes to deficit spending, the Fed works hand-in-glove with Treasury, coordinating operations to ensure a) payments always clear and b) bond auctions never fail. Its “independence” is actually limited to Congress’s willingness to let it set the overnight interest rate (which can be revoked if Congress decides to do so—as it did during both World Wars). See here for further elaboration. Neither the Fed nor any other country with control of its own central bank has ever bounced its own treasury’s check—and none of them will ever do so. Just listen to this panel of financial market experts, including Glen Hadden, former head of interest-rate trading at Morgan Stanley, if you doubt whether MMT has this right.

Yes, the Fed could decide to hike rates to fight against expansionary fiscal policy. But it would not do so in order to teach Congress a lesson. The Fed has a dual-mandate, and it will not raise rates sharply in the absence of credible evidence that inflation is poised to accelerate. All the money-financed deficit spending in the world won’t provoke the Fed if inflation is subdued. And the explicit goal of Functional Finance/MMT is to allow the budget deficit to fluctuate, as needed, to maintain full employment and price stability. Why would the Fed fight its own dual mandate?  Far better to sit back and take credit.

The bottom line is that the Fed does not have veto rights over Congress.  We rest assured by the twin facts that a) the Fed is a creature of Congress and can be brought to heel should that become necessary, and b) that the exigencies of providing a smoothly functioning payments system leaves no room for the Fed to veto the Congressionally-approved budget under which the Administration operates.

Jared: Krugman’s “finance-ability” point: Krugman argues that self-financing is more inflationary that bond issuance, but he’s not making the above points about MMTs flawed (IMO) assumption that tax cuts could handily deal with accelerating prices. He’s worried about currency debasing:

We can address this one very quickly.  The Krugman point you raise is from 2011. Scott Fullwiler addressed it back then.  But it hardly seems relevant any longer, given that Krugman has since recognized that it makes no difference, economically, whether deficits are bond-financed or money-financed.  And if it makes no difference, then either both risk debasement or neither does. As Kelton and Fullwiler explained in a Financial Times Alphaville blog, the only possible difference is political, and on that front money-financed deficit spending wins out because budget deficits no longer add to the national debt. With respect to “finance-ability” and the idea that investors could somehow prevent the government from accessing the bond market, except at a punishing premium, we refer you back to the link above, featuring Glen Hadden and Amar Reganti, former Deputy Director of the Office of Debt Management at Treasury or to remarks by former Undersecretary of the Treasury Secretary, Frank Newman.  It is not enough to hand-wave a conclusion that money-financed deficits will lead to currency debasement or risk a sharp rebuke from investors. You need to be able to demonstrate, operationally, why those might be legitimate risks.  Close study of the monetary operations, confirmed by experts in the field, suggests the MMTers have this right.

Jared: Timing issues re revenue raising vs. printing money: A theme of my work, to which MMTers often object, I think, is that we need to raise more revenues to pay for public goods. I recently wrote, for example, that, given our aging population, it will take something like 3% more of GDP to meet our obligations to Social Security and Medicare/Medicaid by 2035. MMTers push back that as long as we’re below potential, we can print the money to support government spending, so stop getting so wound up about “payfors.”

Even Alan Greenspan’s testimony about the long-run implications of an aging population rightly rejected any possibility that government might “run out of money.” Government can and will make all payments as they come due.

In truth, budget deficits are always ex post (the difference between spending (G) and tax receipts (T) cannot be known until after that year’s spending and taxing has taken place). There are three sectoral balances: a domestic private sector, a government sector, and a foreign sector. While any one of these can run a deficit (or surplus), the sum of the balances must sum to zero—that is, they balance (for every deficit there is a surplus). In the US, the private sector almost always runs a surplus (“saves”) and the foreign sector has run persistent surpluses (the other side of the coin to our current account deficits) since the days of Reagan. That means—by simple identity—that our government sector runs deficits.

This actually has been the norm since the founding of the nation over 225 years ago. Government deficits will continue to occur so long as the sum of the private and foreign balances are positive. While almost universally feared, government deficits are actually the source of the positive net balances in our household and business sector. While our generation today cannot dictate or even influence what the government’s balance will look like 30 years down the road, we can safely predict that it will be in deficit. If critics of MMT would study the work of Wynne Godley they would understand this.

Given aging, we need to shift 3% more of GDP to elderly over the coming decades. However, this will be done at the time we want to achieve the shift and it will be done through a combination of taxes on those of working age and spending on those of retirement age. This has nothing to do with deficits in those years (it will need to occur whether or not there are budget deficits or surpluses then)—and neither deficits nor surpluses today will either enable or constrain those deficits in the future should they occur.

Only someone who is confused about simple aggregate accounting would think that it is proper to tighten the fiscal stance today in order to “keep the powder dry” for use later as the fuel to support deficits to deal with the problems of aging. The best way to prepare for an aging society is to start building the infrastructure, the care system, and the know-how we will need to take care of tomorrow’s seniors.

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  1. Jane

    This post seems to be an excellent example of the knots individuals must twist themselves into if they allow the dominant ideology to determine what reality is.

    The ONLY purpose of an economy is to ensure that all are clothed, housed, fed, have clear air and water, healthcare, education, etc. And less concretely, things like equality and fairness. If the economy as structured is not doing so, it is a failure and a poor, harmful ideology. There is no need to enage with any of the status quo’s arbitrary limits and restrictions which only help legitimize them.

    Anything else is a distraction from the real issues. Stalling by those few whom the system works for or theorizing by those lacking the creativity and vision to truly think “outside the box”. If such thinkers are experts in anything they are experts at allowing their reality to be artificially and arbitrarily dictated and limited.

    Our artificial constructs can either be used to enhance the well-being of all or they can be used to keep most subjugated and exploited.

    1. Synoia

      I believe you both correct and are discussing politics, not the equilibrium between three accounts, MMT.

    2. JTMcPhee

      Sez you, and other decent, hopeful people, that “The ONLY purpose of an economy is to ensure that all are clothed, housed, fed, have clear air and water, healthcare, education, etc. And less concretely, things like equality and fairness.” That’s a goal statement that I and so many others who are not-rich or not-yet-rich will endorse.

      But “the economy” is billions or trillions of bits of labor and transactions, most of which have come to be “about” GAIN and of course, in double entry bookkeeping world, LOSS on the other side of the ledger. And power politics, and ownership of property, and means of production, and so complete control of all the organs and institutions of “legitimization,” ensure that while there will be a zero balance in the account books, the excursions at the boundaries of losses to the general welfare (and carrying capacity of the planet) will grow ever yuuuger, while the conversion of those losses into yuuuger and more dysfunctional and dystopian excesses on the other side will likewise “balance out.” Except for toxicity and entropy, of course, which are not recognized entries in the accounting rules.

      And the “winners” don’t give a rat’s _€€ about the debits (or is it credits? I can never even get that straight.) and their impacts on the basic livings of Mopedom.

      There’s “how we mopes would like things to work,” illuminated by the MMT insights and understandings, and there’s “how the potentates (with lots of cooperation and assists from credentialed wannabes and sycophants and even the “temporarily embarrassed millionaires” among mopedom) operate the machinery of the political economy for their benefit.” Using, while decrying, the MMT tools and realities.

      Where are the levers that could be used to pry the grasping hands of the Few off the levers that operate the political economy, and the mechanisms that would keep yet another set of Robber Barons from getting another death grip on them?

      1. Chris

        Thank you JT, you are correct.

        The people in power know fully well that they could increase spending to reverse the decades of austerity, but they like things the way they are, same here in Australia. They despise the poor, the unwell, the unemployed and unemployable, those who use drugs, the homeless, the incarcerated. They want it all and will never acknowledge the truth.

        Here, I see another dimension. Both LNP and Labor, the two major political parties would hate to be in opposition when the government has unlimited spending capacity as the recipients of that, be it: raising unemployment, sickness or aged pension benefits; improved infrastructure; a UBI; or a Jobs program – well they would keep voting them in. So they both keep the lie going – that deficits are bad because they need to be funded by bond issuance, which has an ever increasing interest cost, which must be funded by taxes.

        They know taxes don’t fund anything, but it is a convenient lie and the public understands that budgets must be balanced.

        1. Inode_buddha

          Yes, they want it all. Its a sickness. But did you ever ask yourself what will they do when they finally have it all?

          1. animalogic

            “Yes, they want it all. Its a sickness. But did you ever ask yourself what will they do when they finally have it all?”
            They will never have “it all”. For most practical purposes Power is infinite.
            A person in the 00.1% who is still largely driven by “consumption” is an elite equivalent of the lumpen proletariat.

    3. Lambert Strether

      To me, this comment is equivalent to “Wouldn’t it be easier to cure infectious diseases if we stopped focusing on germ theory”?

      At the most basic political level, MMT is the answer to the bipartisan acceptance of austerity, which prevents so much justice from being done.

      1. Jane

        The underlying aspects/processes which germ theory describes are not artificial/human constructs.The processes/aspects when discussing/describing economics are essentially all (distilling down to the most basic, you can make a case that a few are not) artificial constructs.

        It doesn’t matter if no one believes in germ theory, the processes are still there, things still function the same. It DOES matter if no one believes in -economic idea here-, no belief, no existence.

        The example you provide, a belief in the need for austerity, is an artificial construct that requires belief in in order to have an effect on the world. Now of course it is good that MMT disputes this false belief. But if it does so using far too much complexity and/or uses (and thereby props up and legitimates) other artificial and arbitrary constructs accepted by the mainstream to do so as justification for its critique, it can in many instances be harmful, though maybe not as harmful as the ideology it seeks to debunk.

        A fair amount of my criticism hinges on the accessibility of the ideas and critiques as well as whether or not arbitrary/artificial constructs are treated as being the same as say, gravity. Too much complexity, too much specialize terminology, too much acceptance of the arbitrary and dominant ideology-dictated reality is a problem. Its simply trading one set of curtains behind which wizards can hide for another set.

        1. Jane

          Adding to above in hopes of clarifying further….

          Belief: “Condoms are bad. God doesn’t want you using them”

          Here is an example of an arbitrary, artificial construct which has real effects on the world if believed. Any attempt to debunk this belief along the lines of “No, condoms are OK. God actually doesn’t care one way or the other or god thinks they’re great” may work to deligitimize that particular, specific idea but in the process props up and thereby legitimizes the underlying foundations and assumptions.

          It may seem like good strategy and tactics to take this approach as it may increase short-term effectiveness. But over the longer-term does it make it more or less likely that more widespread necessary change will occur? Does it increase or decrease the timeline required for change? Does such an approach make it more or less acessible and comprehensible to a greater/lesser total number? Does such an approach make it more/less accessible/comprehensible to one population group while achieving the opposite to another?

          Nothing is of course perfect, trade-offs of course have to be made. Optimize for one aspect and you potentially influence another. However I personally think the acceptance and legitimization of much of mainstream ideology is the greater danger despite it’s potential for short term sucesss. When we do that we’re just arguing over which particular group will continue to be harmed by our artificial arbitrary constructs.

          Strike at the roots, destroy the core, rip out the heart, whatever imagery you’d like to use. If we really desire justice thats the way to go as far as I can tell.

          1. Summer

            The root of the problem is that it is a belief system that needs to be changed, not an economic system. The economic system sprouts from the belief system. For example, to think that financial wealth is a virtue is a belief system, then ta-da…along came an economic system that focuses on growing wealth…

          2. Summer

            And to go further to how we are where we are:

            “The economic system sprouts from the belief system. For example, to think that financial wealth is a virtue is a belief system, then ta-da…along came an economic system that focuses on growing wealth…”

            I’ll add to also think that poverty is equated with sin and sinners are punished, is part of the root of the belief system. Ta-da…along comes an economic system that punishes the “sinners’ as it is engineered to perpetually reward “virtue.”

        2. JerryB

          Jane I agree with the idea of your previous posts completely. I believe your posts describe critical thinking completely. However, humans going back centuries are prone to dogma, authority figures, religion, ideology, etc. I have never been one to subscribe to any dogma or ideology. The metaphor I use is there are multiple routes from ABC town to XYZ town. Most of those routes are sufficient to get from point A to point B, just get there. The goal should be as you say “The ONLY purpose of an economy is to ensure that all are clothed, housed, fed, have clear air and water, healthcare, education, etc. And less concretely, things like equality and fairness”

          Secondly I agree that while there are many things in the world that are complex, there are also many people who make things more complex than they need to be in order to hold on to their position, power, etc. Authoritarian and Autocratic governments and people use the idea of over complicating to hold on to power. Early history and probably some current patriarchy believed that women could not understand the complexities of business, government, politics, society, etc. With roughly 60% of bachelors and higher degrees being awarded to women and that the founder of this site, Yves, is a woman, I think that idea has been buried.

          The writer Walter Lippman believed that the world needed to be run by a group of experts as the masses were not capable of making informed decisions. Lippmann believed “the mass of the reading public is not interested in learning and assimilating the results of accurate investigation.” Citizens, he wrote, were too self-centered to care about public policy except as pertaining to pressing local issues. In fairness to Lipppman, he was not just advocating for experts but that unique human who was free from bias. Good luck with that.

          In my opinion in the last 50 years the US government, corporations, the media, etc. have played a major role in dumbing down the populace. And thanks to sites like NC and others, slowly the jig is up.

          I am early in my learning curve when it comes to MMT. I have a high regard for the economist Michael Hudson and he is an advocate of MMT, although being anti-authoritarian and not holding anyone or any ideology to deity status, I am going to do my own investigating. There is a film that was made in France called Tomorrow. I believe it is on Amazon or Netflix in English. It deals with economic, democracy, and climate change. One topic that the film discusses is the idea of local currency. The way it was described in the film seems to have potential. I am not sure if it is apples to oranges but if MMT is a larger version of local currency then that may be one route to the goal.

          While only reading Naked Capitalism for the last several months it is now my first in the morning read. I used to read CounterPunch, but it has become too much Left howling at the moon. I have found NC to be more intelligent and well researched. I am less married to Capitalism and MMT than Yves and Lambert are, but do not think central planning Socialism is necessarily the answer either and have high regard for “socialism from below” like the worker cooperative Mondragon. I have learned a lot about diagnosing capitalism from reading Marx, David Harvey, John Bellamy Foster, etc.

          Again great open minded posts!

          1. Yves Smith Post author


            Thanks for the general compliment about the site, but you seem to be under the wrong impression about our views. The site is out to promote critical thinking, as we clearly state. We aren’t ideological. We get painted as being leftist when it happens to be demonstrable that societies that have low levels of inequality score higher on every metric of social functioning: crime rates, longevity, birth rates among the underaged, etc.

            This site regularly takes positions that are not pro capitalist. A job guarantee is one. Single payer is another. The need for war-level mobilization and industrial planning to combat climate change is a third. Regulating banks like utilities is a fourth. Please don’t mischaracterize our views.

      2. Summer

        The bipartisan acceptance among politicians of austerity isn’t a love of ideas, it’s a love of political campaign donations from donors who provide them with the “acceptable” economists to listen to.
        Beltway politicians eyes probably glaze over at the math of economics, but they come to attention when they see a check.

    4. /lars

      “The ONLY purpose of an economy is to ensure that all are clothed, housed, fed, have clear air and water, healthcare, education, etc. “

      So it would be in the best of all possible worlds, but we don’t live in such a world. We live in a world where the seven deadly sins are rampant. The few post war decades of some economic democracy and fairness was probably only an outlier from the normal where state powers purpose have always been to benefit the few at the many’s expense. The only way for the many to reclaim that is to fight for it, and I can assure you the few wont let it happen again without serious bloodshed. Those progressive leftist economics that live in the hope that by reason “sanity” will return will have to wait for an eternity.

      1. ebbflows

        Yes antiquarian morality is a huge impediment, as much, as say demand pull by investors for high yielding cash flows based on control frauds, RE ownership based on getting in before the ship sails, and lastly crypto machinations.

        Just to point out an anecdotal observation WRT how some ideologues viewed income derived from RE inflation, only to surrender their mores when crypto inflation is considered earned income. due largely to money crankery.

        The shifting goal posts on migratory sands is a bit well done, yet, some still want to hawk their intellectual wares as being coherent.

    5. Jon Dhoe

      I think you are right. MMTers while light years ahead of their colleagues are still trying to make capitalism work on capitalist terms. It can not for the simple reason, as alluded by others, that politics protecting the capitalist status quo will always remain dominant unless MMTers and the public in general recognize the explicit need to subordinate private profit to the social good, otherwise Keynesianism would have solved our problems long ago.

  2. Henry Moon Pie

    I’m left a bit confused about the role of the Job Guarantee in MMT. The authors argue, citing Jamie Galbraith, that inflation is no longer a problem:

    So the Fed has been patting itself on the back for decades [of] holding back a phenomenon that doesn’t exist. [The Fed is like] the little Dutch boy with the finger in the dike who never troubles himself to look over the levy to see that the lake is dry.” In other words, it’s been a couple of generations since the US economy experienced any significant inflation.

    They then present the Job Guarantee as a way to ward off inflation:

    Indeed, we have completed a major study using conventional modeling techniques that shows that a universal job guarantee program would provide true full employment while actually moderating inflation.

    Why do we need to moderate something that isn’t an issue any longer for the U. S. economy?

    1. Synoia

      The Inflation of th ’70s, that people so fear was (deliberately?) categorized as “wage pull” inflation, due to Union contracts containing Cost of Living indexing.

      The true cause of the ’70s inflation was:

      1. The increased cost of Oil, that is the cost of energy, rippling through the economy of the world, with successive waves of increased energy, combined with
      2. The post Vietnam War Recession following decreased US military spending, and
      3. The revolution in Iran and the US’ reaction to losing its Iranian puppet, an embargo on Iran’s oil which did noting to help control the price of energy.

      1. nonsense factory

        If that is so, then the defeat of inflation was due to the deal struck with Saudi Arabia in the mid-1970s, in which the House of Saud would price its oil strictly in dollars, and furthermore, would reinvest those dollars in the American economy, both in the form of large arms purchases and Wall Street investments. This system of petrodollar recycling is what has propped up the value of the US dollar from c.1980 onwards.

        In this view, one primary reason for the invasion of Iraq and the removal of Saddam was the Iraqi decision to dump all its dollar reserves for euros, and price its oil in euros. This move was ridiculed by economists at the time it was announced – but then, in 2001 I believe, the euro rose 30% against the dollar and Saddam made a large windfall. This could have threatened the entire stability of the petrodollar system, particularly if Iran followed suit.

        Now if this is true, it seems that MMT only works inside the USA as long as the dollar’s value is protected by military and financial leverage; hence the $700 billion a year military budget.

        1. Susan the other

          Galbraith says inflation is a highly globalized phenomenon now. Indicating that the entire world is chasing the same resources so it seems that if all currencies are debasing at once there can be no particular burden on any particular currency. No? Not that we should ignore scarcity – we should focus our efforts on conservation and recycling and all the other environmental solutions asap. It’s kinda like inflation was the great fear of every little kingdom in history because they had no defense against the vigilantes. Today that is dangerously reactionary. It’s suicidal to slam the economy into misery and austerity for no good reason except mythology. Yellen is right, we do need stronger stabilizers. Stronger and more preemptive than fumbling around with interest rates. What good does that do when today’s supply can solve demand so quickly? And MMT’s vision of a Job Guarantee program is just such a stabilizing thing. I hope somebody sends this post to our dear leader Paul Ryan. So very glad he is retiring.

          1. ebbflows

            JG puts a stake in the heart of NAIRU, Labour as an inflation hedge w/ the added bonus fear based domestication.

          2. animalogic

            I have always had trouble understanding the relationship between MMT & foreign trade.
            MMT makes perfect sense with a country like the US which is wealthy & can supply much of its resources internally. But how does MMT work where a nation is heavily reliant on importing critical resources without being able to generate healthy foreign reserves via exports ?
            Can a poorer country use MMT generated currency to buy needed foreign reserves to purchase imports ? Isn’t there a danger of a deep dive in the value of the local MMT currency (leading to import generated inflation)?
            Did the National Socialists under Schact [?] at the German central bank deal with this exact issue ?

            1. UserFriendly

              A sovereign country can only buy what is on offer in its own currency without ramifications. Zimbabwe’s hyperinflation was because they turned on the printing presses without having the real resources domestically. This is probably way too deep of a dive for you, but Kalecki did a great layout of how an underdeveloped economy should go about industrialization while avoiding inflation. Kalecki is a key influence for MMT and almost everything he says is MMT consistent even if it isn’t explicitly spelled out.

              By M. KALECKI 1963

              In a similar vein; here he destroys the concept that Foreign Direct Investment (FDI) has any benefit towards developing economies and lays out more helpful methods.

              Forms of Foreign Aid: An economic analysis
              Michal Kalecki and Ignacy Sachs 1966

              Or if you want a much more readable summary that is more focused on more developed countries.

              Kalecki 1946.


              Kalecki 1943.

              links should work for 30 days. DM me on twitter if you want these or any of 50 or so Kalecki articles I have.


        2. JohnnyGL

          Around the time of the Iraq war I thought this was an issue too. I don’t think the currency that a commodity is ‘priced’ in really matters. I’ve heard Mark Blyth says as much, too.

          If you’re Saudi Arabia, you’ve gotta find something to do with your oil revenues. You can…

          1) spend it on something (often causes inflation, especially if spent domestically). But worth pointing out, they’ve spent fortunes on infrastructure and other building projects over decades.
          2) find a place to park until later. US capital markets are the largest, deepest in the world. There’s few options to be able to get your money in/out as easily as the USA. China and Japan don’t want your cash. It pushes up their currency and hurts their competitiveness.

          Regarding the EUR rise back then, Germany gets very antsy very quickly with a rising currency as they won’t dare take any risks that might harm their precious exporters….much like China and Japan.

      2. JohnnyGL

        Yes, thank you very much for mentioning that 1970s inflation was mostly about oil and Vietnam War.

        I find it frustrating when people (usually economists) act like we HAD to completely scrap the way our economy worked from the 1940s through the 1970s arguing that inflation discredited that whole post-war Bretton Woods model and that it proves we can’t pursue full employment because NAIRU and the like.

        It’s really ridiculous and if you talk to people who recall living during that time, it’s hardly like they’re scarred from the period. No one talks about life in the 1970s being horrible like people talked about life in the 1930s.

        The only people who talk about the 1970s being horrible are employed by, or owners of, banks or had large holdings of bonds, especially treasury bonds, and their money managers. That bunch will talk about post-war “financial repression” like they were dealing with some form of Jim Crow!

        Not so many other people had a rough time of it. I feel like even the gasoline rationing didn’t bother people as much as we’re led to believe.

          1. Wukchumni

            I was a newly minted hellion on wheels when the 1979 oil crisis hit, and the longest line I was in was over 3/4’s of a mile long, and the maddening thing was all that stopping and starting the engine while waiting, probably used up a few gallons, hurrying up and waiting.

    2. Detroit Dan

      Responding to Henry Moon Pie– Just because inflation hasn’t been a problem in recent decades doesn’t mean that it can never be a problem. In fact, a core tenet of MMT is that inflation can be a problem and is the primary constraint with regard to government spending. So the argument is that a universal job guarantee, implying considerable additional government spending, will not necessarily cause inflation to rise to dangerous levels.

      In other words, inflation is possible, but the reality is we have for more government spending. Plus, a job guarantee may have other effects such as reducing the need for dealing with societal problems which arise from extensive unemployment.

        1. ebbflows

          JG = democratic administration and rights to productivity.

          UBI = undermining democratic principles and claims to a fair share of productivity for a stipend. Sorta like selling the homestead in a boom, at the end of the day your right back in the market.

          1. Henry Moon Pie

            My view is different:

            JG = Government-enforced wage slavery

            UBI = Freedom to drop out of this Capitalist nightmare

            1. Paul Boisvert

              Hi, Henry,
              You’re certainly entitled to your opinions on JG vs. UBI. MMT disagrees with your about their relative value (as do I, but I’ll note that employing some “both/and” thinking may reduce the disagreement.)

              But the main reason MMT supports JG is not to moderate inflation. That is merely a “bonus”, a by-product. The main reason they support JG is that they strongly value full employment. Yes, JG is prima facie less inflationary than UBI, but that is again only a minor reason (as UBI could be combined with other, anti-inflation measures if desired.)

              It is an interesting issue why MMT’s focus (regarding things that they advocate for other reasons) often includes an elaborate discussion of inflation–especially since it has indeed largely abated for two decades. The reason is that there is virtually no ideology stronger than that opposing inflation, which is so intensely promulgated by defenders of (the ideology of) capitalism that even critics of the latter seem forced to adopt it.

              A moment’s critical thinking demonstrates that reasonable demand-pull inflation is not a problem–prices are higher, but there is more money (demand) to pay them with. It’s largely a wash. [Hyper-inflation is not reasonable demand-pull inflation, but rather an acute societal breakdown whose sympton (not cause) is the ludicrous cash-printing.] Pro-capitalists adopt anti-inflation ideology to combat the real thing they fear when demand strengthens and full employment threatens–the share of income going to labor will increase as the labor market tightens.

              All prominent MMT advocates know this, but can’t stop pretending we must fear inflation (and that MMT is therefore OK by “solving” it) because, if they stop the pretense, they will not be taken seriously by the ideologues (the entire mainstream, pro-capitalist economics establishment) who create the pretense.

            2. ebbflows


              “JG = Government-enforced wage slavery”

              Sorry if I don’t agree with your chip on the shoulder. I have to say in a respectful manner that opinion has all the hallmarks of a well known ideology that any long time reader of this blog would be well acquainted with.

              The trigger world parings like government and slavery in the same sentence for instance. This is in denial of whom government is currently beholden too. I did say regional and local administration and not some think tank ring fenced enclave. Consumers aka citizens can actually deal with democratically elected public servants with face time rather than angry e-mails or signing petitions, did I mention rights to productivity.

              “UBI = Freedom to drop out of this Capitalist nightmare”

              Again the use of trigger words, which are to be honest, ill defined and loaded does not make a sound argument. I really don’t understand the concept about freedom when giving away rights and how that enables anyone to escape the nightmare of neoliberalistic capitalism. As I have mention your right back in the market place, with the added bonus of diminished rights.

              I would strongly suggest that you use this blogs archives in examining the currant position you hold, as well, as examining how – we – got to this peculiar place in time.

      1. animalogic

        Contrary to the general tenor of comments here I thought inflation WAS still a problem…. The statistical shenanigans of its measurement (ie many important items not counted, incorrect weightings of items substitution (steak goes up, people eat hamburger etc) & quality improvement adjustments all help distort inflation lower. Whenever I read something like a “burrito index” price inflation seems well above official stat’s….

        1. Yves Smith Post author

          1. People tend to overestimate inflation when food costs go up. Food is something we buy all the time. Food is about 13% of the typical household’s budget.

          2. A problem (not that the official statistics are set up to deal with this) is parsing out price increases due to monopoly/oligopoly abuses (your cable bill, drug prices) versus inflation resulting from too much demand in the economy. We have a fair bit of the former, and the usual remedies like raising interest rates or cutting deficits will do nada to slow that sort of thing down.

          1. ebbflows

            That does not even begin to cover it YS, major food retailers, as you know, don’t sell product, they provide a market space for others to hawk their wares. The shelves are only RE at eyeball level to establish price dynamics, of course this means market share dictates the funds to occupy prime eyeball space.

            This has transformed due market dynamics and consolidation of product, by both cramming down suppliers and re-marketing supplier product as home brand to increase equity price.

            1. Clive

              It is way more complicated than that. To reduce the business model of a supermarket down to merely a collection of shelves from which to sell space to 3rd party product providers is a complete misrepresentation.

              For one thing, own brand (products which may well be manufactured by the big brand suppliers themselves, but offered to the supermarket chains on a marginal cost of production basis) are a dynamic all of their own. In the UK market these are huge — and they are not especially a big factor factor in the US (Neilson estimated 20%).

              And they are a complex ecosystem all of their own — sometimes supermarkets will produce poorer quality products at rock bottom prices aimed at budget conscious shoppers. But sometimes — and Whole Foods is an example — they will attempt to encroach on the premium product segments. You can’t just treat own label in such as simplistic way as to imply it is merely another item on the shelf. What a supermarket offers as own label, in what product quality niche, with what prominence vs. an equivalent big brand — or even if the supermarket decides to not compete with an own label at all — has a vast number of decision points for the supermarket to make.

              And not all grocery retailing is from branded goods. Fresh fruit, vegetables and meats are not branded when sold in supermarkets, or only in a minor way (such as for specific geographic area specialties).

              Then you have local market factors such as available competition (Wal*Mart can dominate smaller communities in the US but it can’t get away with that in big metropolitan areas, and in Europe, due to higher average population densities, Wal*Mart has pretty much flopped wherever it has tried to run itself as if it is operating in the US market).

              Finally, you have store formats. Convenience stores have a totally different product mixing and pricing structure to larger store units and “hypermarkets” (to use the European term, c. 80-100,000 sq ft. sized stores in the US) are subtly different. And, again, to give a proper international view, in some markets convenience is a niche format, but in others, Japan and a lot of other east Asian countries, there are very, very few what a US resident would consider to be a supermarket; convenience format stores dominates — with the consequent knock-on effect in SKUs inventoried, brands offered and prices.

              It doesn’t serve anyone well to boil down one of the most fragmented, complex and multifaceted markets (grocery retailing) in narrow and misleading framing.

            2. Yves Smith Post author

              That is considerably overstated. For a few goods, like soda, the stores do cede control of the shelf space to vendors that stock them.

              I am now going to Alabama regularly to visit my mother. I shop at Publix, the major chain in the South, probably 5X a week because I come from a family of daily shoppers (I too have that habit). The overwhelming majority of shelf space is stocked and manned by staff: frozen meats, the dairy, the fish section, the bakery, the fruit and veg section, the aisles with stuff like coffee, oils, baking products, cookies, crackers, the organic section…I can go on. I know that because:

              1. I see store employees stocking these shelves

              2. When I can’t find stuff I want, they run into the back for literally almost everything to see if they have more in the back, and if not, say, “We are getting a delivery [usually tomorrow or the next day], check back then.” This would not be the behavior if an outside vendor were managing the shelves.

              3. Publix regularly reorganizes what sits where within and across aisles. This means moving where brands are located.

              4. Some of the types of foods seeing the biggest increases, like eggs, do not have distributors or suppliers stocking shelves.

            3. ebbflows


              Amends, but market share dictates outcomes and not some vague notion of price mechanics.

              Case in point, an old acquaintance was the the second gen of a distributional affair that based its price point on the middle ground regardless of input costs They completely understood the relationship e.g. price point to market share and how that translated to equilibrium – e.g. don’t cut the grass to short.

    3. Summer

      What exactly (items by name) are they trying to increase the price of or in other cases decrease the price of?
      I’d rather hear that than generic “inflation” metrics.

    4. Neil Wilson

      The Job Guarantee is rather more than an inflation anchor. It is an anchor in several directions, and most importantly a very strong spend side stabiliser that is instant, automatic and spatial in nature. So it removes politicians *and* wonks in the central bank from the process of stabilisation and maintaining maximum output, and it firmly disciplines the private sector so it can’t create any crap underpaid jobs.

      See my responses to Wren-Lewis here:

    5. Steven Greenberg

      Inflation is not a problem in the USA economy at this time. MMT never says that inflation could not happen in the future. To be a complete theory, MMT needs to have a plan of what to do if inflation ever does become a problem. If you ignore the history of self created inflation from the Vietnam War, the oil price shocks of 1974 seem to be a problem of supply push inflation. The links in the article lead to discussions of what to do in the case of supply push inflation. The solution requires fiscal austerity to cut demand plus the Job Guarantee to lessen the pain. In the actual history of the Reagan response to the inflation, he used austerity to cut demand, but nothing to ease the pain of the subsequent high unemployment.

  3. voteforno6

    To me, one of the most interesting aspects of MMT is discussed in the Alphaville article:

    In other words,because there is no difference between bond- and money-financed government deficits in any of the three cases presented above, there is no reason for the government to sell bonds at all. We can stop today. No further increases in the debt and no unnecessary and counterproductive debt ceiling drama.

    If the so-called deficit hawks were really serious about eliminating government debt, maybe we should call their bluff and modify the Federal Reserve Act, and see how serious they are about the debt.

    1. JohnnyGL

      There were calls by some to ‘cancel’ the debt that the Fed bought as part of the QE program, since it is effectively the Treasury making payments to the Fed, who returned it back to the Treasury. Round and round we go!

      Seems perfectly logical to most people….Fed found it to be crazy talk.

      1. JTMcPhee

        Cui bono from the turning of the merry-go-round? All those good paying jobs in the Fed and at Treasury and Big Banks and related evils?

        And for a million billion dollars, the cure is

  4. jerry

    “government deficits are actually the source of the positive net balances in our household and business sector”

    Along with whatever outstanding bank credit that has been extended and not collected yet. Perhaps a citizen movement to max out all credit cards and then declare bankruptcy is the best hope we have for fiscal stimulus at this moment, though I’m not sure how much room is left in that barrel as credit card debt has now broken record levels reached before the GFC.

    I’ve always been confused on one thing with “MMT” although really its just a question about how central bank operations work. When you say that all the Fed can do is add or remove excess reserves in order to curtail or promote bank lending, what exactly are excess reserves in function? They are not part of the greater money supply? They are just held at the Fed and act to fill the reserve ratio for banks to determine how much they can lend out? Why can reserves not be used as regular money by the banks or make it into the “real” economy? I believe this leads to a whole accounting nightmare of which I am frightfully ignorant, but if someone were to break it down in idiots terms I would greatly appreciate it.

    1. JTMcPhee

      I’ll keep rooting for all the student-loan sufferers to do the end-game you offer for “consumer debt” of the credit card usury type:



    2. Adam1

      In a nutshell all financial institutions (FI) have accounts at the FED. Throughout the day these same FIs are clearing payments between each other. Rarely do these transactions net to zero, so some FI is left needing to pay the other FI the difference. This final settling of the transaction(s) is done by moving money, reserve balances, from one FIs account at the FED to the other FIs account at the FED (and matching those transactions on their own balance sheets).

      If an FI does not have sufficient reserves on deposit with the FED they need to source those reserves before the close of business or the FED will net their account to zero for them and charge them a penalty rate – the FED discount rate. A bank has several options for acquiring more reserve balances but the fastest and easiest is to borrow reserves from another FI who is in surplus. Borrowing here is known as the Federal Funds Market and the price to borrow is the Federal Funds Rate (FFR).

      The FEDs traditional interest rate target is the FFR. As demand for reserves increases there are fewer FIs in surplus and the market rate will rise signaling the FED to add reserves by buying, traditionally, Treasury Bonds. When demand slacks off and rates fall the reverse is done drain reserves.

      Absent the FED paying interest on reserve balances no bank will be happy ending their day with more reserves on deposit than is regulatoraly required because it means they are holding a financial asset that is not generating them any income. (In fact, Canada does not have any reserve balance requirement and banks (absent quantitative easing (QE)) end their day with zero reserve balances.) Banks only ever have any meaningful amount of reserves greater than their regulatoraly required amounts when the FED performs QE which forces more reserves into the system than there are offsetting financial assets to buy with them – note the only things you can buy with reserve balances are US Treasuries, currency and coin. Any other transactions or attempt to buy something with those excess reserves is really a clearing and settling transaction.

      It should also be noted, that it is a fallacy that reserve balances are lent out to anyone beyond another FI. Any and all need for more reserves is ALWAYS provided by the FED. The only question is what is the cost of those needed reserves. Therefore the FED cannot impact a bank’s ability to lend by adjusting rates or reserve levels. If a bank has a credit worthy customer in front of them willing to pay the going rate, there is nothing that can be done to stop the lending. The bank & the customer agree to the terms of the loan and the payment system ensures the transaction is completed – because the FED will insure there is sufficient reserves to clear and settle all payments each and every day.

      Long story short… reserve balances can only be used for the following transactions (note, lending to people and businesses is not one of them):
      1) Clear and settle payments between FIs
      2) Be lent to other FIs in need of reserves
      3) Buy US Treasuries
      4) Buy US currency and coin

    3. Steven Greenberg

      Excess reserves is money that the banks could lend. They are reserves in excess of what a bank is legally required to have. If the bank manages to lend out more money, the excess adjective goes away. The reserves do not actually limit what the bank can lend. The bank lends whatever it wants to lend, then acquires the reserves it needs by borrowing from the Fed or by other means. (Or by having less reserve coverage of what has been lent.)

  5. nonsense factory

    MMT seems to be a rather provincial domestic view on economics; it seemingly neglects the many ‘external’ factors that the most powerful nation-states use to defend their currency from being devalued. The one question I’ve never seen MMT advocates even try to answer is why fiat currency devaluation in countries like Venezuela and Argentina has been a problem. For example, Venezuela’s problems seem tied to the collapse in the price of oil; they were apparently financing ‘public goods’ like education and health care in the expectation that oil prices would stay near $100 a barrel; when it collapsed to $40 a barrel, so did their economic programs. So, how does MMT deal with this situation? MMT arguments always seem to focus on the United States, which is something of a special case, as US currency is protected by numerous mechanisms that other countries don’t have access to (military invasions, financial leverage, etc.).

    Likewise, what if (as seems to be the case) China stops buying US Treasury bonds? Would this cause a run on the dollar, eventually, leading to high inflation (which, in international economics, seems to be called currency devaluation?) – and would MMT then fall apart?

    MMT seems to work only so long as the international value of the dollar is propped up, in other words. Is that incorrect?

    1. Wukchumni

      Being the world’s reserve currency allows you to get away with financial murder, but as we’re pushing the world away, why would they want us to continue to lead?

    2. Detroit Dan

      nonsense factory–

      These are good questions, ones that we in the MMT commentariat have been discussing for many years. So my opinion is that these questions have been addressed and are perfectly consistent with the MMT perspective. A few specifics:

      1 With regard to Venezuela, the obvious response is that MMT is not a magic bullet for solving all problems. As you note, the oil price is a separate factor, as are political disagreements within the country and with other nations.

      2. US Treasury bonds are more similar to money than to private debt. More and more people are coming to the realization that US Treasury bonds play much of the same role in today’s economy that gold played in days of yore. Countries hold Treasuries as reserves to protect their currencies. Of course, this is a double-edge sword, but not because we need China to buy our bonds. As noted, the government can buy stuff with reserves (demand deposits) instead of with debt, and has been effectively doing so via central bank quantitative easing.

      Gotta run to a meeting…

      1. JTMcPhee

        And “buying” a couple of trillion in armaments and destabilization every year, and sort of paying for the miseries the “policy” dumps on the Imperial Troops, their families, and their communities. And a bit of blood money, and lots of bribes and tribute (“Not one cent for tribute,” our Forefather bragged, his progeny now sending another $10 billion off to Israel, $7 billion or was it $15 to Egypt, and so forth). Somehow, apparently, not inflationary and “those deficits don’t matter.”

    3. nonsense factory

      Ah, just noticed that someone gave a pretty good response to this very question I asked before; it seems that developing countries that hold large debts in foreign currency (such as USD) are unable to go the MMT route, and should basically avoid taking on such debts:

      No doubt an MMT prescription for Argentina would advice them to lay off the $ denominated debt and stick to pesos as much as possible. I’d imagine Stephanie Kelton or any of the UMKC crew would advise curtailing imports or doing some import substitution in order to take pressure off balance of payments issues. They’d also take a look at what was driving inflation domestically and try to find ways to relieve it with a targeted approach, instead of risking recession and unemployment. Neoliberal/Washington Consensus type economists would say hike interest rates, cut government spending in order to curtail demand. They’d argue that the private sector will make the best decisions about where to reign in spending to reduce inflation.

      1. Wukchumni

        The Argentine Peso was tied to the US Dollar on a 1-1 basis for many years, and then the roof caved in and it’s now worth a bit more than a nickel.

        1. ebbflows

          The political history around that has more value that currency comparisons IMO, especially considering the propensity to use such locations as test beds. On the other hand some are known to make packet on the way up and down.

      2. JohnnyGL

        Thanks for reading my rantings! :) I’m flattered. :)

        Regarding USD debts, I’d suggest reading up on the Asian crisis of 1997-8 and see how things turn out when you bury yourself in USD debt. Thailand was 1st to devaule, then Malaysia, S. Korea, Indonesia, Hong Kong, Taiwan, Russia (defaulted), and then later Brazil, and then Argentina all got hammered to varying degrees. I think even Eastern Europe got banged up, too.

        It was probably the height of the IMF’s influence in the world. They’ve been fading into irrelevance ever since then.

        For the next decade after that, most developing countries stockpiled tons of USD reserves to make sure it NEVER HAPPENED AGAIN!!!

        1. JTMcPhee

          It’s too bad “policies” have been locked down in ways that deter and/or devastate efforts to re-industrialize by co-ops and workers-as-owners. Has something to do with the demise of all those small makers of useful stuff? Supplanted by crapified “products” made by Work-serfs in Asia and other “developing” places? Feeding “manufactured demand” for the instruments of oppression (TV and debt and stuff?)

    4. John k

      What ‘protects’ the dollar, makes it the reserve currency, and drives the trade deficit is the demand of foreigners of dollars for their mattress. It has nothing to do with our military, or pricing a fungible material in dollars, could be any tradeable currency. Turns out most of the worlds savers don’t want to save in yuan or rubles, both of which are major nuclear powers, probably because the dollar has been around for centuries.
      Turns out there is a demand for Swiss francs, driving up the currency and threatening Swiss exports, which pissed off the Swiss exporters who pushed their gov to print massive amounts, which they sold for dollars and euros, satisfying foreign demand for francs while massively adding to their 4x reserves.

      China did recently dump nearly a trillion us bonds, so what? They sold for dollars, which is what they had before buying the bonds in the first place, and did this so they could defend their yuan, which was falling. Selling us bonds for dollars just swaps an interest bearing security nor a non interest bearing one, so some of the dollars spent buying yuan just circled back into treasuries, who wants to hold non interest bearing cash?

      Our trade deficit costs mfg jobs, bad, but gives most us residents a higher standard of living than otherwise, good. Trade deals don’t matter much, they just shift source of imports a little, foreign demand for dollars drives the trade deficit unless and until we use the Swiss solution.
      The best fix for the loss of blue collar jobs is IMO a massive infra program, fixing and building stuff long overdue. My feeling is that block grants to states, based on pop, and automatically adjusting for an accurate measure of unemployment that includes participation rate, is both better and more politically palatable than a jobs program.

      Main thing about inflation is it always and ever begins with shortages, not money printing.
      60’s modest tech wage inflation came from Vietnam and moonshot induced shortages.
      70’s inflation from massive 4x increase in oil price and embargo. I used to think Volker killed inflation with high rates and recession, now seems likely the oil price had anyway mostly worked itself thru the system by 1980.

      1. ebbflows

        “better and more politically palatable than a jobs program.”

        Here in lies the rub, the polity is currently ideologically captured by neoliberalism where everything is grounded in the private market place. My concerns are premised on the propensity for the currant system to engage in corruption and looting for the benefit of a few, w/o any democratic means to redress this epidemic.

        A JG is premised on democratic administration at a regional or local level which diminishes the long lines of information and with it accountability.

      2. Steven Greenberg

        The oil price problem worked itself through because Reagan so severely cut back the USA economy that the demand for oil dropped. Of course the Reagan policy caused massive unemployment – well that’s one of the reasons the demand for oil dropped.

    5. Summer

      The global economic picture is also a belief system issue.
      Monetary theory and economic formulas followed the belief system that is summed up in another article I viewed.

      The industrialized world developed economically in the way it has because of belief systems. This yet another musing on the “meaning of Trump,” but this part about Woodrow Wilson gives you an idea of the type of belief system as more of the world began to industrialize:
      “He (Woodrow Wilson) believed that individuals qualified for political self-rule through personal self-rule, demonstrating that they could use virtue and reason to regulate passion and impulse. “Government as ours is a form of conduct,” he said, “and its only stable foundation is character.” Along with his predecessors and contemporaries, Wilson associated the virtue of self-regulation with white skin, contrasting property-possessing, self-commanding sovereigns with their opposites: unself-governable people of color. They imagined—in fantasies that fishtailed wildly between nostalgia and wrath—that African Americans, Native Americans, Mexican Americans, and Mexicans were immature, childlike in their emotions and unable to distinguish between true liberty and licentiousness, between the pursuit of happiness and lust.”

      So we have an economic system that is not at all at odds with that type of belief system.
      Woodrow Wilson signed the Federal Reserve Act and was big on spreading values (as stated aboved) around the world.

    6. /lars

      US is a special case they can operate globally in its own fiat-currency. Some other developed countries can operate with relatively persistent current account deficits. MMT use to say that current account deficit is foreigners accept to hold claims on the nation in question in its currency. That’s so for US and maybe a few others, for the rest they must borrow “hard” foreign currency to buy more than they export. Global trade is mainly in USD under international law. No export company will write a contract in Venezuelan bolivar or Tunisian Dinars under respectively countries jurisdiction. A free-falling currency will cause problem, you can’t domestically substitute all what is needed in a modern economy, cars, computers, medicina etc, etc.

      Economics and greed is a strange thing. Wall Street and corporate America in their greed to flog American workers have filled Chinas pockets with US deficit dollars created out of thin air. USD that is good as gold on the global market. China shop around the word, building railroads in Africa, even a transcontinental, and allover Eurasia. While the “mighty” EU economic engine Germany can’t even maintain its basic infrastructure, repair vital bridges and keep their trains in order under EU/German neoliberal Chicago boy’s economic ideology.

  6. Plenue

    What are the odds Bernstein will accept these answers? Or will he just continue on with the orthodoxy.

  7. JohnnyGL

    For me, the craziest thing was his continued, absurd faith in the success of monetary policy as the best policy tool for economic management, he nearly blows off fiscal policy entirely.

    It’s like the guy hit his head in the late 90s and just woke up a few minutes ago? Did he learn nothing from the financial crisis?

    Central banks, and the entire economics profession around the world failed miserably, catastrophically. Even the Queen of England took notice….

    Imagine if the weather guys screwed up like this….

    Meteorologist: “nope, no snow coming here, sunny skies ahead!”

    Meteorologist: “Just a few flurries, nothing to worry about”

    Meteorologist: “We should really prepare for something like this next time. Anyway, let’s keep doing what we were doing before. It’s probably the best way to do things.”

  8. Jim Haygood

    Only someone who is confused about simple aggregate accounting would think that it is proper to tighten the fiscal stance today in order to “keep the powder dry” for use later as the fuel to support deficits

    Fortunately, that ain’t happening.

    For probably the first time ever, MMT and the Republican party are totally aligned, as the new tax bill cranks the deficit to 5.5% of GDP in FY 2019 during the late stage of an economic expansion.

    Let’s see how this hobnailed boot stomping the fiscal accelerator pedal works out. Sounds inflationary to my hard money ears. Hundred dollar a barrel crude, anyone? I’d be grateful if UMKC could print me some propane. :-)

    1. marku52

      Nope. cause all that money will stay in the hands of the .1%. Not even their jets can buy that much oil.

  9. ebbflows

    Mr Haygood…

    When do we get to the point where both proponents of hard commodity QTM [underwritten by law aka fiat with a physical anchor point] and MMT [fiat with a taxation anchor point] and the political economy during the period in question. Seems there is this burning question about how both can be manipulated for ideological reasons [sins and such things] vs a more robust economic theory based on cohesive society that is adaptive to environmental challenges and can incorporate new information that challenges unmovable stakes in the ground.

  10. ebbflows

    In retrospect I would only state this is why I have occasioned this blog for so long, thought provoking post accentuated by comment, even if it is above the grasp of those conditioned by neoliberalism.

    It has to start somewhere.

  11. Jfree

    I really struggle with MMT. In part because as I’ve gotten older I’ve come to believe more and more that the way we treat land is the real underlying source of most uncorrecting market failures/distortions. Which if fixed would itself resolve a whole bunch of the issues that now fall to ‘govt’ to fix. And MMT seems to make the same mistake as everything else in post-marginalist economics – by ignoring land and just trying to have govt fix the problems that come up – via money that is actually based on collateralizing land even though it is called ‘government’ and the ‘land’ in question is called the nation-state-border – and no one seems to care what those taxes will be based on or whether those future taxes will just fall on a future generation which receives no benefit from the money that was spent – because they don’t get to decide how it’s spent in either the market or politics.

    It all just seems like yet more stuff about how experts and technocrats can fix stuff so trust us. Well I don’t.

    Unfortunately nothing about this post really answered my questions. But hey – I do find the site interesting.

      1. Jfree

        Homelessness is a problem. Renters are getting squeezed by inflation (and we DO have inflation if ‘rent’ is weighted at more than 9% of the CPI basket). Millennials are still living with their parents. The market doesn’t price CO2 and other resource externalities so there is climate change and environmental degradation. The countries (or places in the US) that depend heavily on resources are NOT just the same as everywhere else. 70% of the private debt (read money) in the US is mortgages and our need to keep house/asset prices propped up via distorted capital costs is why we aren’t letting the markets correct which means inequalities aren’t correcting either.

        Sorry I disagree with you. Land as an economic factor still exists and will as long as the earth exists. And it’s quite different from both capital and labor. Which is why I have come to believe that our main problem is that we should stop trying to ignore it and treating it like it is just capital

        1. johnnygl

          Hi there Jfree,

          I think you’ve got a point about land being underappreciated in a number of ways. The distribution of land ownership and how land gets treated should certainly get more attention. However, it seems you are missing the point about the implications of MMT.

          MMT has its origins in taking observations of how money and banking actually work in the real world and then reverse-engineering a theory based on that reality.

          What they’ve learned is that here are a bunch of constraints we’re told exist that don’t actually exist in a lot of cases. That frees us up to look at REAL resource constraints, like land, which you’ve pointed out.

          MMT doesn’t give you magic solutions to problems, it’s telling you there’s a set of problems that just aren’t real problems and we should stop acting like we have to solve problems that don’t exist.

          1. Jfree

            So is there any MMT stuff which is focusing on the stuff that is really constrained? Because I kind of get what I think you’re saying – which is that financial capital isn’t really constrained. I get that because its not actually economic capital at all either – just as macroeconomics isn’t economics it’s accounting. Yeah – loans might not get paid back but that’s cuz the lender screwed up not because money is constrained. I think I could even learn to love chartalist fiat – but not if the solution is simply to transfer money creation from banks/Fed (monetary policy) to Treasury (fiscal policy) and back while keeping it in the form of debt cuz I also know that fiscal-side bureaucrats can also screw up and not give a rip and leave political ‘undesirables’ holding the bag.

            At this point I think I almost prefer a blockchain-like non-debt money that is TRULY decentralized – every citizen gets a mining node to create their own money simply because they are citizens thus forcing both banks and govt from the unconstrained-but-monopolized trough — and the experts and know-it-alls and govts get to create their own creation/demurrage/tax/security protocols and the blockchains get to compete and see which ones actually survive – as money.

            Course that doesn’t actually solve any economic problem either – but at least it creates an actual free market in money not just a rotating monopoly of coercive intermediaries.

            1. ebbflows

              I suggest you bone up on the free banking period during the 1800s.

              To keep it simple, I would state that we have at its roots a sociological dilemma acerbated notions of achieving equilibrium e.g. non agency vs agency outcomes. I find this curious because no matter how you cut it agency is the driver of events regardless of meta optics or preference.

  12. Rodger Malcolm Mitchell

    Missing from the article, which focuses on inflation, is the cause of inflation. Without identifying the cause, arguing about the cure seems pointless.

    There seems to be the implicit assumption that inflation is caused by federal “money printing,” when in fact, that hasn’t been true for many years, if ever.

    Inflations and hyperinflations are caused by shortages. Postwar (WWII) the shortage has been oil. During the war, the shortage was virtually everything. Zimbabwe, Germany, Argentina, Brazil — all the notorious hyperinflations — had experienced shortages, usually of food, sometimes of gold.

    The solutions being offered are money-related solutions, while the problem is a goods/services problem, perhaps because economists are trained to think in terms of dollars rather than food.

    We have minimal inflation now because oil is in plentiful supply. This has nothing to do with the Fed or with money “printing.” No shortage = no inflation. Period.

    In summary, there is no single prevention or cure for inflation, the strange belief in a useless Jobs Guarantee notwithstanding.

    Inflation is specific and must be cured by addressing the specific cause.

    1. Outis Philalithopoulos

      The claim that the authors implicitly assume that “inflation is caused by federal ‘money printing'” does not hold water. MMTers are typically accused of not caring about the possibility that printing money could cause inflation. They are at opposite poles from those adhering to the slogan “inflation is always and everywhere a monetary phenomenon.”

      There is for this reason a fair amount of discussion in the post of why MMTers are not worried about this possibility under current conditions.

  13. Tuan

    As an aside, Krugman is not a Nobel laureate. No economist has ever won the Nobel prize, or should be called a Nobel laureate. Economists have been awarded the Sveriges Riksbank Prize in Economics Sciences in Memory of Alfred Nobel, which was created in 1969, seventy years after Nobel’s death, by a bank, the Bank of Sweden, which had infringed on the trademarked name of Nobel. Two thirds of the Bank’s prizes in economics have gone to US economists of the Chicago School who created mathematical models to speculate in stock markets and options.

    So Paul Krugman is really a shill for banks and financiers, the same for Milton Friedman.

  14. Oregoncharles

    I raised this under the Nomi Prins article, but it occurs to me it belongs here. Being lazy, I’ll just C&P it:

    An issue with MMT just occurred to me: it means that sovereign spending is limited only by real resources; but how do you know when you’re reaching that limit? Seems to me it would always be after the fact: “oops, that was too much.” It’s happened before. And some claim that there hasn’t been real economic growth in the US for quite a long time; hence the bubbles. If we’re limited out, then it goes back to a zero sum game. One sign would be that real incomes are stagnant or falling.

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