Clarification of Spending/Inflation Constraints According to Modern Monetary Theory

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Yves here. I very rarely put up posts that consist substantially of tweets, but this short exchange helps clarify a misunderstanding about Modern Monetary Theory that I may have been guilty of helping to promote. Now that Modern Monetary Theory has come out of the wilderness, at a time when the US government has broken with its post Volcker-Reagan pattern of being obsessed with balanced budgets and strict inflation containment by throwing boatloads of money at Covid-related stimulus.1

Modern Monetary Theory describes how government spending operates in a fiat currency system. It posits that the constraint on government spending is real resources, as in as long as there is slack in the economy, it can tolerate and in fact needs more net spending (what laypeople would call deficit spending). Modern Monetary Theory scholars contend that taxation in a fiat currency system serves to create incentives and disincentives, redistribute income, and drain demand (as in control inflation).

Many recap this argument as the constraint on Modern Monetary Theory-prescribed spending is inflation, and the government needs to raise taxes when that takes place. Needless to say, there are many ways to skin this cat. One is for government programs to have a large dose of countercyclical spending. That would be consistent with a heavy focus on social safety nets. When times are bad, spending rises automagically. When the economy picks up and more people are working, the expenditures fall. Germany provides generous unemployment support. Germany was accordingly mystified when the US hectored them after the 2098 crisis that they weren’t spending enough. The US was unaware of how much spending would kick in as the economy fell, and accordingly, less discretionary spending was necessary.2

Many orthodox economist are wringing their hands that Biden’s spending plans could produce too much inflation. This concern has gotten so far into the mainstream that my Alabama physical therapist last week expressed his concern that the Biden infrastructure plan was too big and needed to be delayed in light of his Covid stimulus.

Never mind that weak labor bargaining rights create a high bar to generating what is called “cost push” inflation. That was a, arguably the, driver of 1970s stagflation, not just the impact of the oil shock but also the amplification that occurred though formal and informal mechanisms to increase pay in response to price increases.

Rohan Grey points out below that taxation isn’t the only way to constrain excessive demand, which is mechanism that could create inflation with a spending overshoot. Not that the US now would go this route, but in World War II the US had massive deficit spending, low interest rates, and yet did not generate inflation due to rationing and price controls. Some economists contend that the much-ridiculed early 1970s “Whip Inflation Now” program of price controls and wage increase limits were starting to work when the Administration lost its nerve and cancelled the program.

Not that I want to rain on the Modern Monetary Theory parade, since the level of discouraged and involuntary part time workers say we are likely to be much further away from any risk of inflation than the deficit-scolds would have you believe. However, expecting discretionary “demand offsets” to be implemented on a timely basis is a stretch. It’s going to rain on some parties, and the hosts will push back hard. Modern Monetary Theory advocates need to press not just for programs that are natively countercyclical but also to integrate countercyclical features into ones that aren’t (like inflation-triggered curbs or inflation-triggered regulatory constraints).

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1 Reagan-era fiscal orthodoxy was more talked about than practiced.

2 Not that Germany did enough discretionary spending, mind you, but the US was calling for excessive amounts from Germany in light of its automatic stabilizers and the US response.

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68 comments

  1. Alex

    This is great, in that it raises the point that are different kinds of spending and different kinds of “taxation” within the MMT narrative.
    Government spending could be a generous UBI, or it could be fat checks to big government contractors. These have hugely different effects on people, and one is far more realistic politically.
    Capital gains tax? Sales tax? Bank capitalization requirements? MMT doesn’t seem to help us choose between these.
    To me, MMT is just a way to kick the can down the road a little bit longer. Keep enriching the rich and squeezing the poor, just in a way that we can make the numbers seem to kind of balance a little better on paper for a while. If you squint, and tilt your head just the right way.

    Reply
    1. Yves Smith Post author

      *Sigh*

      MMT describes how a fiat currency system works. You are acting as if someone chooses to “do MMT”. We have been in MMT since the US went off the gold standard.

      It’s like the guy in Moliere’s Le Bourgeois Gentilhomme preening when he learns that he’s been speaking prose.

      Reply
        1. skippy

          MMT only states that a JG would be better than NAIRU with its structural un-underemployment social ills E.g. it is not fundamental of MMT, but a social policy advocacy.

          Reply
          1. Foy

            Mmmm I have recollections of Bill Mitchell emphasising in his MMT presentations that the JG is part and parcel of MMT as the price stabiliser mechanism, that it shouldn’t be taken out or separated from it. But I could never tell if that was just a way for him to try to force a JG through with MMT.

            Reply
          2. larry

            It is central to MMT as the JG functions as a price anchor, thus restricting inflation. It is a precriptive feature of MMT, but that doesn’t make it less central unless you wish to limit what is central to the theory’s descriptive sector.

            Put another way, you are rejecting the GIMMS view of the JG set out in the link provided by vlade.

            Reply
        2. GramSci

          I’ll say it again. MMT *is* descriptive. The US MIC is a now long-running JG. One only needs to be willing to kill people on command. If you have a college degree, you can do it long distance, if not, the “work” gets up-close and personal, as in “prison guard”.
          Bullsh/t jobs.

          Reply
        3. James E Keenan

          Having taught MMT twice in an adult education context, this is how I handle the description/presciption question.

          I present MMT as a description of the workings of a capitalist economy which enjoys monetary sovereignty.

          I then note that once you understand that description, there are certain inferences or implications you can draw about things that are possible in such a monetarily sovereign economy. A Federal Job Guarantee (JG) program, in my view, falls into this stage, as it is a policy option that is clearly inferrable from the MMT description of the economy — whether you think an FJG is a good idea or not.

          Finally, I argue that we then bring forward our political, social and ethical values to formulate policy prescriptions that are consistent with our new understanding of the political economy.

          Description – Inferences – Prescription — a three-stage approach, if you will.

          Bill Mitchell presents stages 1 and 3 — indeed, that’s where I got them from — but he doesn’t have a stage 2. That puts him into that others tend to find confusing, since JG is, per Mitchell (and GIMMS), “central” to MMT (with the implication that it’s part of stage 1) but is also obviously a policy prescription. Richard Murphy, for instance, doesn’t have much use for JG — but he extends the analysis of the functions of taxation in a monetarily sovereign economy farther than Mitchell or, say, Warren Mosler.

          Myself? I like both the Mosler/Mitchell/Tcherneva version of the JG and Murphy on taxation. The Biden administration policies are, as yet, along way from either.

          Reply
          1. ChrisPacific

            That’s a good way to frame it. Stephanie Kelton makes a similar distinction between the descriptive and prescriptive elements of the theory. The lines can be a little blurred sometimes. Gravity, for example, is a descriptive theory, but a number of prescriptions follow in a fairly obvious manner if you accept it (e.g., don’t jump from high places without some means of preventing a fall). An economic example would be claiming that cutting the deficit will stimulate the economy, when MMT says that the opposite is true.

            While it’s never stated explicitly, I think of the JG as a refinement of Keynes’ “digging holes and filling them in” example. This is nearly always misinterpreted in economic theory (viz., Keynes thought we should have people dig holes and fill them in, an obviously absurd approach, therefore Keynes was an idiot and shouldn’t be listened to) which is perhaps why the MMTers don’t draw the parallel more closely. I think Keynes was actually presenting a transitivity argument for something like a JG, by demonstrating that even the obviously absurd scenario of paying people to dig holes and fill them in again was provably better in economic terms than leaving people unemployed and doing nothing for them. So to those that complain about the difficulty of finding work for the unemployed in an efficient way, the response is that simply keeping them busy has positive economic effects, before assuming any useful outcome from the work at all. So the bar for JG success is about as low as it can possibly be.

            Reply
      1. Alex

        *sigh*. Disappointed at the condescension. And French lit… so sophomoric.

        Literally everything written about MMT contains implicit policy preferences. Usually along the lines of “quit worrying about the deficit on the spending side, use the tax lever”. Perhaps you would be kind enough to take a minute to reread your own piece?
        This “don’t blame me, MMT is just descriptive” defense is cowardly. Is it only coincidence that MMT enthusiasts are universally comfortable PMC types, who are happy to plug their ears when somebody asks about the issues I brought up?

        Reply
        1. Basil Pesto

          Well, your understanding of MMT in your first post doesn’t even rise to the level of freshman, even though you seem happy to give the impression that you have a firm grasp on the subject matter. False understanding of a subject matter combined with a total lack of humility begets condescension.

          Is it only coincidence that MMT enthusiasts are universally comfortable PMC types, who are happy to plug their ears when somebody asks about the issues I brought up?

          Well, yes. And if you think the issues you brought up are completely novel to MMT scholarship, you’d be wrong.

          Reply
          1. Yves Smith Post author

            Plus there are plenty of readers who are quite expert in MMT, such as UserFriendly, who are most assuredly are NOT comfortable. Nor is yours truly. Not only ad hom, but made worse by being sheer fabrication.

            Reply
  2. Sound of the Suburbs

    How does the monetary system really work?

    Bank loans create money and debt repayments to banks destroy money.
    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
    Money and debt come into existence together and disappear together like matter and anti-matter.
    Bank loans create 97% of the money supply
    The money supply ≈ public debt + private debt
    Money and debt are like opposite sides of the same coin.

    The money supply ≈ public debt + private debt
    Paying off the Government debt is a nonsensical notion that comes from having no idea how the system actually works.

    The mainstream have no idea how the monetary system works.
    Mainstream criticism should be taken with a pinch of salt.

    Reply
    1. topcat

      It is difficult for a man to understand something when his salary depends upon him not understanding it.

      Reply
    2. politicaleconomist

      No. Regarding public debt, there is not even a one to one relationship between US GOVT DEBT and money. State and local debt does nothing to the money supply. Tbonds for example drain money and MORE IMPORTANTLY reserves from the economy.

      Regarding private debt things are more complicated. Wray explains this very clearly in his primers on MMT. The basic concept is the debt pyramid. For example, a loan from a bank is different than a private mortgage. One crucial idea that distinguishes how much like money an IOU is is whether or not the US government guarantees it. I.e., is it committed to create reserves to guarantee payment? As it does with the banks’ IOUs, our deposits.

      Reply
  3. Steven Kurtz

    Rarely mentioned is the limit of fiat money creation imposed by international currency markets. Monetization of debt via CB purchases has ramped up like a hockey stick chart. At some unknown point, another sharp dollar decline is possible. Also, recall that Empires are not forever. Last century the Br. Pound declined from $US 5 to $US 1. Look at a 50 year chart of the $US index, and note the long term downtrend.

    https://1.bp.blogspot.com/-s4gxzNKSQfg/VKWOVkw688I/AAAAAAAA8P8/rDUIyopghbE/s1600/DXVeryLongTerm0115.PNG

    Reply
    1. RODGER MALCOLM MITCHELL

      The Brits intentionally devalued the pound on 9/21/1931. They, not the markets, have absolute control over the value of their own sovereign currency. If they wished, they could revalue the pound up to where it was.

      They are Monetarily Sovereign, meaning they are sovereign over their own currency. Any Monetarily Sovereign nation, and especially a major nation, can set the exchange value of its currency by fiat.

      All it need do is say, “From today forth, we will buy and sell an America dollar for X pounds.” The U.S. has revalued the dollar many times — every time it changed its gold/silver standards.

      And of course, there is the absolute value control via interest rate control.

      No large Monetarily Sovereign nation is helpless to the markets.

      Reply
      1. Jason

        By that account every country outside of the EU is monetarily sovereign. Even Hong Kong, since it can drop its peg at any time. So this notion of ‘monetary sovereignty’ doesn’t say much, IMO.

        Countries with non-reserve currencies and open economies have far less leeway than MMT’s target audience countries (namely US, Japan).

        Reply
    1. Yves Smith Post author

      Not in the way you mean it. We have price increase in many markets in the US due to monopolization and price collusion, as opposed to too many dollars chasing too few goods. 1. Your cable/phone/internet bill thanks to local duopolies. Many many parts of medicine due to 2. Intellectual property created monopolies (patents on drugs and medical devices) and private equity finding and exploiting choke points (buying up ER and ambulance practices, many specialist groups, dialysis in particular geographic areas, no one is gonna drive far to get dialysis). They’ve even done it in veterinary supplies (a cat kidney function test, which is regularly essential, is $200) and pet food! 3. PE attempting to get pricing power by buying rental housing in certain targeted metropolitan areas.

      And we now have 4. Some short term price increases due to supply chain issues. The most visible is related to chips, but remember last year the increases in meat and dairy due to worker shortages at slaughterhouses due to illness and for diary, with drivers?

      Reply
      1. Robert Hahl

        And wood for housing construction which I understand has doubled. Some of these prices may roll back all the way, some part of way, and some not at all. My rule of thumb has long been that prices double every 15 years, and now it feels like they are doubling every 10 years. The fact that we can debate and distinguish different mechanisms for these increases may be informative, but as they say in sports: At the end of the season they don’t ask how, just how many.

        I predict that Biden will not be able to avoid raising the minimum wage. Presumably he will wait until 2023 to boost their chances in 2024.

        Reply
        1. ChrisPacific

          Wages have barely budged over that time. Granted some things have gone up a lot in price (tertiary education might be another example) but while that is sometimes described as inflation by laypeople, it’s not inflation in the economic sense. It’s more like economic inefficiency (due to a number of factors, some of which Yves outlined above).

          The fact that houses can be multiples more expensive than they were 50 years ago without being any more or less affordable to the average buyer is an example of true inflation, in the sense of an increase in the money supply relative to productivity.

          Reply
      2. Robert Hahl

        So what we need is a term, like “stagflation,” but which describes rising prices that are not caused by wage growth or by excess demand from too many dollars — only by the unintended consequences of deregulation, non-regulation and quasi-illegal price fixing. How about “oppsieflation.”

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      3. dummy

        The unnerving quality of an inflation is that no one knows anything for sure — how much his money is overvalued, how much of his prosperity is illusory, how much of his work is useless and would not even exist in conditions of stability. All standards are lost.
        If there is any lesson to be learned from a study of inflations, it is that one never knows where he is in the midst of it, but he certainly is not where he appears to be.

        Reply
    2. Bud-in-PA

      Last week I had to pay $11.29 for each 50 lb bag of feed for my cows at TSC…up from $7.99 per bag. That’s a 41% increase!!!

      Reply
      1. cnchal

        Only 41 %. Consider yourself lucky

        Yves > . . . We have price increase in many markets in the US due to monopolization and price collusion, as opposed to too many dollars chasing too few goods.

        How would a near 400% price increase for shipping a package sound to you, courtesy of the United States Post Office.

        https://community.etsy.com/t5/All-About-Shipping/Dimensional-Weight-and-2019-USPS-Shipping-Rates-Changes/td-p/126447596/page/3

        Collusion between FedEx, UPS and their corrupt political lackeys on the postal rate setting commitee, and the result is that shipping prices for the peasant may as well be infinity. Guess what happened to sales after that?

        Reply
        1. Bud-in-PA

          Clearly we need to site specific examples on social media to make our point and embarass certain companies. Our Federal Reserve has their heads in rectal deflilade on 2% inflation regardless of any of the means sited.

          Reply
          1. cnchal

            It is even worse than you can imagine.

            On the same day, same hour, same minute and same second about 18 months ago FedEx and UPS changed their terms of service and imposed a heavy surcharge on packages over 50 pounds, down from 70 pounds. Peasants got crushed, yet the screams were drowned out by the logistics billionaires cheering.

            A coordinated price increase and price fixing by a duopoly. Anti trust is a joke.

            Despite corporate person hood they are impossible to embarrass, and so are the greedy executives that run them.

            Reply
        2. dummy

          Everyone loves an early inflation.
          The effects at the beginning of an inflation are all good.
          There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices.
          Everyone benefits, and no one pays.
          That is the early part of the cycle.
          In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait.
          In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits.
          That is the full cycle of every inflation.

          As always, the inflation which comes later is blamed on every sort of extraneous event that happened to coincide in time with the later emergence of the hidden inflation. It is reminiscent of the difficulty primitive peoples are said to have perceiving the causal connection between last night’s ecstasy and next year’s childbirth.

          Reply
      2. anon y'mouse

        and yet “they” will somehow magically force the public to accept the story that wage rises that haven’t happened yet (for multitude of reasons), and “stimulus” of a few thousand dollars in a year was the cause of these higher prices that they are already building into the system and were announced/forecast in a Water Cooler article last week.

        and/or, that the wagies loafing on too-generous UI are the cause of the shortages in the system because of their reluctance to work for the Man.

        take that to the bank.

        Reply
  4. RODGER MALCOLM MITCHELL

    All the discussion seems to be focus on net federal spending as being the cause of inflation. WRONG. Inflation — all inflations in history — are caused by shortages of key goods.

    Most often, those key goods are food and/or energy. Consider the famous Zimbabwe inflation. It was caused by a food shortage. (Non-farmers took land from farmers.)

    That inflation could have been prevented/cured by more government spending — to purchase food from abroad or to help farmers grow more food, and to distribute that food to the populace.

    Inflations often are caused by oil shortages, which can be cured domestically by federal spending to purchase and distribute oil.

    The inflation focus on net federal spending simply is wrong, and in that one sense, MMT is wrong.
    See: https://mythfighter.com/2021/03/20/federal-deficit-spending-causes-inflation-except-when/

    This link demonstrates there is no correlation between federal deficit spending and inflation.

    Reply
  5. TomDority

    Unrelated to MMT somewhat …The issue of taxes comes up always as a way to pay for something, or that without raising taxes somewhere, something has to be cut. Taxes should not be used to pay for everything but, for the most part, they should be used to curb some socially distructive activity, destructive financial practices…..they should be deployed to combat rentier and preditory practices in the market, deployed against polluter activity……They should be removed from labor and industry that actually produce something people want.
    Tax is used to make it more difficult to make a profit at something destructive to the greater economy, to make it more taxing. Money is going to go where it is easiest to make more money and avoid the tax man in so doing. If it is easier to make money gambling on the stock market trading on insider info or manipulating prices, or HFT, price gouging, accounting control fraud, persuing Greshims dynamics or otherwise being a con or shill or Skakel or polluting or paying under the table – than it is to earn enough to enjoy community and life by teaching, doctoring, construction, farming, engineering etc. Then of course the money is going to flow to that with the least resitance – Taxing is the best way to re-balance.
    That is my two cents.

    Reply
    1. RODGER MITCHELL

      You are absolutely correct.

      That is the sole economic purpose of federal taxes. In fact, federal taxes do not pay for anything, as they are destroyed upon receipt by the Treasury. (That is why no one can answer the question, “How much money does the federal government have?” The only answer is, “Infinite.”)

      To pay for things, the federal government creates brand new money, ad hoc.

      (This is different from state and local governments which do use taxes to pay for things).

      MMT is wrong to suggest using taxes to cure inflation. Taxes cause recessions, not deflations. And contrary to what MMT says, taxes are not necessary to provide demand for a currency (as crypto-currencies demonstrate)

      That is the difference between Monetary Sovereignty and monetary non-sovereignty.

      MMT is spot-on about many things, but it goes off the rails regarding inflation, taxes, and its Jobs Guarantee nonsense.

      Reply
      1. JEHR

        My understanding of MMT is that MMT describes how fiat currency works in real time. If that is true it cannot also be true that “it goes off the rails regarding inflation, taxes, and its Jobs Guarantee.” MMT can describe the way currency works or can be worked in other true-to-life situations.

        Reply
      2. Susan the other

        But would there be, could there be, demand for crypto without sovereign money systems to support them? For crypto be be fungible and function as even a sluggish medium of exchange it must first, itself, be exchanged for some sovereign money. Without that where would crypto be? Crypto is just a fetish.

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        1. troublemecca

          Chicken or the egg here… when you realize the crypto space is, by and large, independent of the real economy and a whole new beast (I try to describe it as stocks meet forex)… you appreciate why taxes may be (now) necessary to create currency demand. You will find crypto to crypto trading pairs, not just crypto to fiat (though these see the most volume, for obvious reasons). You value all trade in your respective local currency: inevitably USD, EUR… but imagine that frame of reference changing, globally, to BTC and ETH? Call that crazy, but it appears to be happening, at an unprecedented rate. Once you accept that money operates on a mass delusion; the delusion isn’t what’s important, but who believes it. Anyone who refuses to see this is either vain… or nationalistic (in the American sense). Janet Yellen understands lol.

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        2. John Rose

          ;Any country could adopt crypto as it’s currency by accepting it as payment of taxes. That is a, perhaps critical, way taxes are part of MMT.

          Reply
            1. troublemecca

              Human attention. Like every other “asset”. Perhaps it is a fad. One could argue, that at scale, it actually functions as a deflationary measure… a dynamic one, that operates homeostatically to sop up the excess $ in the economy… whatever people need day-to-day remains cash, while the rest goes to FIRE+C. Perhaps its value is determined by its function? Even if it is premised on mass delusion. Tesla is valued on hope and dreams.

              Think of them (the aggregate crypto markets) less as property, and more like vehicles, to carry value itself into the realm of the indestructible, whereas before it was tied to `useful`, but cumbersome, loathsome things like gold (mining), and oil (plastic, yum). In case we missed it: ‘value’ has been divorced from objective reality for at least a number of decades; eg. since `derivative` was introduced to the financial lexicon. So I don’t see why everyone is up in arms about cryptocurrencies having no analogue in the physical realm giving them value. I see that as a strength, as they are arguably the most immutable assets ever created. And assets are always created; Real estate isn’t a problem in Cuba, if you get what I’m saying.

              Reply
              1. troublemecca

                Tesla can go out of business, and cease to exist. Bitcoin is forever. It will bubble and burst ad infinitum, and as the “real” economy necessitates. And if/when the “real” economy comes to a halt, i.e. upon facing its contradictions… the world could look very different, but Bitcoin and its liberal/social governance, could survive… providing fungible value, in times of GREAT risk and uncertainty, at a scale that neither physical assets, nor incumbent markets could enable or insure.

                Which wild scenario do you see as more likely: a) paying for your cup of coffee with bitcoin, or b) paying with actual gold? That should guide your speculative strategy.

                Reply
    2. James E Keenan

      You would enjoy Richard Murphy’s The Joy of Tax. I don’t believe it’s ever been published in the US, but you can certainly score a copy on the ‘net.

      Reply
  6. Chris Herbert

    We are just coming out of a two sided anvil. Employees are gone, markets are logistically constrained. The first time this has happened without a war involved. That said, the logistics will be repaired and the low production high prices dynamic will unwind. And we will be left to witness what debt deflation really looks like.

    Reply
      1. HotFlash

        Where are the employees gone? My small neighbourhood just lost about 100 (guesstimate) jobs over the past year. Many shops, restaurants and bars closing entirely, others only doing take out. OK, so Uber bike and car delivery is up, but those aren’t real jobs. My local Dollarama, my local No Frills supermarket, and my local Shoppers Drug Mart have over this year installed self-checkout machines and cut their cashiers in half or less. Pretty sure they want me to get tired of waiting and use the machines.

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    1. Nancy Langwiser-Kear

      In every discussion of inflation, no one talks about all the bad debt that is on country and company books that should be written off but isn’t. China is a disaster waiting to happen because of all the debt and the fact that demographics will constrain their opportunity to grow out the problem. No country has grown as fast as China without some financial setbacks to clean out debt that backed non-investments. When the debt remains, and the investment no longer generates a return to cover the carrying cost, something has got to give.

      The zero real interest rate environment has led many to think debt can be continually rolled, that short term spending can be funded by long term debt. When junk bonds yield hardly anything relative to gov’t debt, it’s very clear that risk – what risk in the MO in most financial markets. My guess is we will be back talking deflation in a few years because debt will finally strangle growth.

      Biden’s proposals are just putting the spending before the economic emergency. People are so shorted sighted. This is not the seventies when the oil embargo with the icing on the cake after we never bothered to fund the Vietnam War by raising taxes.

      I’m all for revising the tax regime to claw back what I consider has been “stealing” by the wealthy and wealthy corporations over the last 50 years, because they have not used the income or wealth to build a better economy, rather the whole emphasis has been on speculative excess. Add to that the huge concentration within industries, the huge power wealthy corporations and individuals have over the political process, and you have an American that is falling apart and becoming less competitive with each coming day. An America that can be bothered to invest in human capital. A government that is not going to d fix things just by spending but by using the tax club to change behaviors. And change behavior in a big way before a monumental disaster, like a real Depression, with severe deflation is upon us once again. Post war growth happened because WWII destroyed so much of the physical stock and population of both Europe and Japan. It certainly wasn’t because of wise implemention of Keynesian economic theory. The next 50 years is not going be driven by wise implementation of MMT. Until we return to economy not strangled by bigness, until we turnaround the decline in innovation (how much more investment do we need in companies making computer games, meal kits, and products only about 20% of people can afford?). Monetary policy has held up the world for the last ten years, it hasn’t done much except prevent the ship from sinking. But it’s created so many false incentives, so much complacency that the idea of rising real interest rates makes investors shudder. They have has a good run in financial assets, but those financial gains have not been translated into anything lasting. The Covid vaccines show what industry can do. But it’s limited now as companies fight over money they could earn by enforcing patents. So, much of the world is not going to have access to vaccines for years, and Covid is likely to be a gift that keeps on giving.

      Sorry to be so negative but the merits of MMT is not what is going to determine the course of the twenty-first century. Neither is AI as many techies envision it, if it causes more more economic destruction of the aging work force. Bigger, better, faster, disruption is leading to short sighted decision-making focused on short term financial returns.

      Reply
  7. WillyBgood

    Yves just created a word I’m going to be using in my discussions. For example, it happens “automagically” :)

    Reply
    1. R

      :-)

      It makes more sense to me that whatever a two-sided anvil is supposed to be. Is it a cloud or a chart form?

      It seems to me that MMT is like geometry. It is descriptive of a system but the axioms chosen will define different systems, like Euclidean (parallel lines only meet at infinity) versus non Euclidean (parallel lines cross, e.g. on a spherical surface) geometries. A jobs guarantee MMT may be a valid alternative economic geometry to a minimal MMT, under which models will behave differently.

      I suspect the proposition that taxes are required to give value to a currency is a necessary proposition of MMT for really taxes give minor control of taxpayers to the civil power and that is the source of monetary sovereignty, the state’s monopoly on violence. A monetary sovereign is only sovereign domestically, it cannot force foreign powers to accept its currency and may have to trade in terms if real resources. Consider the UK’s position in Lend Lease, assigning its foreign exchange assets, Caribbean naval bases and military technologies to the US when the gold ran out and the US refused to take sterling….

      Reply
    2. Angie Neer

      Indeed, a very useful word, but not a recent creation…I can testify it’s been in circulation for at least 30 years.

      Reply
    3. Yves Smith Post author

      Sorry, I heard “automagically” first from Michael Hawley, then of MIT’s Media Lab (when he was just a hotshot grad student) when he graciously helped me get a NeXT and did support for me. This was early 1990s.

      Reply
  8. Dick Swenson

    So long as many who report on the goings on in the world continue to use imprecise, ambiguous language and often seem to speak only to confirm their economic bias, will we need simple explanations of why the phrase “national debt” is incorrect in the case of governments of sovereign monetary nations such as the US.

    Managing private debt is a problem that is different from dealing with US government budget deficits.

    Continue these clarifying posts, please!

    And if anyone can recommend ways to educate the news networks, please respond.

    Reply
  9. Dave in Austin

    Modern Monetary Theory is now 30 years old. Like modern art and modern architecture it is no longer so modern. So I’m a follower of Post-Modern Monetary Theory (PMMT) which say “Money is paper; turn your paper into something you can eat, shoot, live in or use to bribe your new Klingon overlords, the Chinese.”

    Inflation?

    The federal gov numbers and the NYT say “low”

    Plywood at Home Depot + dollar vs Yen and Euro charts say “High”

    Fiat currencies last until they don’t… like Fiat cars.

    So in January I cashed in my stocks and got companies that produce objects like copper, gears, chips and windmills. So far the invisible hand is giving me a thumbs up.

    Reply
    1. Keith Newman

      @Dave in Austin
      The core developers of MMT say the basic ideas underpinning MMT are at least 4,000 years old.
      The reality of the power of state money has been disappeared over and over again because it is not profitable for private interests.
      Easy example: health care in the US would cost about one half what it currently does if it were organised by the state. Every other developed country spend about that. But then US private interests (Big Pharma, Big Insurance, Big Hospital, etc.) would lose out on $1.4 trillion since the excess costs amount to about 7 points of GDP.
      Obviously those industries would fight tooth and nail to prevent any change. And they do. They lie, they invent heroic stories about themselves, they find shills who will say anything at all, they prey on poor patients and bribe them, etc.

      Reply
  10. Susan the other

    So, theoretically, if we didn’t use money as our “unit” of account, but instead had an electronic accounting system that didn’t translate the “use” of money into units of time which in turn translate into accumulating debt and inflation of the value of that debt, just a system that dealt with goods and services, directing various exchanges and keeping some sort of balance, where would that leave the concept of “inflation”? If there were scarcity, then there would simply be scarcity – no frantic scrambling to cover debts by certain deadline, etc. So when you think about it that way not even scarce resources should cause inflation if there were a system that simply accounted for the exchange of things in some natural order of time. So sovereign spending could certainly go a long way toward achieving this. It could just ride out the rough patches – like Jay Powell is now saying – this “inflation” will only be temporary.

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    1. Susan the other

      And also too. Time is now real time. Whoever controls the sovereign switch board controls time. It’s not like we have a bag of silver and gold coins that we can rent out for our own lost opportunity expense, our sacrifice. Which was also nonsense, but human delusion dies hard.

      Reply
  11. Steven Greenberg

    See Fadhel Kaboub’s explanation – https://www.youtube.com/watch?v=_6_hgLwaFuk

    Every inflation is different. He suggests that you “Look for the actual sources of inflation in the real economy”. You also have to “Look for market concentration” for the ability to raise prices.

    With all the monetary stimulus from the Fed and now the supply shock because of the Covid lockdown, you would expect inflation. So a good MMTer would ask themselves why there is no inflation. Since all the QE from the Fed, we have to look for who got the money in the private sector. Most of the money went to the 1% who did inflate the stock market. Now that ordinary people are getting stimulus checks while they are unable to go to work to create the goods they used to be able to create, we are starting to see signs of consumer price inflation.

    Reply
    1. Keith Newman

      @Steven Greenberg
      Really glad you brought up MMTer Fadhel Kaboub’s take on inflation. I have seen other videos of his and he describes what you and Yves say. The causes of inflation have to be identified and dealt with cause by cause. They aren’t necessarily due to high demand. If prices are high due to oligopoly or monopoly these need to broken up or prices need to be regulated. He lists other causes which I recommend readers look up for themselves (to be honest I don’t remember them all). Yves mentions some.
      I think many people expect too much of MMT. It explains the functioning of the monetary system through its detailed description of the (long-concealed) monetary operations of central banks. It recommends spending along the lines of functional finance until just before demand push inflation occurs.
      However stopping short of demand push inflation will probably mean some involuntary unemployment still exists, especially for workers with few skills or those who are unable to work due to disability/difficult personal circumstances, etc.
      The Job Guarantee humanely deals with this remaining unemployment and provides an inflation anchor by setting a country-wide minimum price of labour (including benefits). The neo-liberal way to counter inflationary pressures is to cause high unemployment and let that discipline workers into accepting lower wages or at least not demanding increases.
      What MMT DOES NOT DO is describe what social programs a country should have and how to get them. People have to work that out for themselves, or more likely fight like heck to get them. The sadistic US healthcare system will not be solved through MMT. More money is not needed. It already costs about double what every other developed country spends.The system needs to be completely revamped. MMT is of no use. Similarly for childcare. The Canadian province of Quebec (non-MMT capable) has a brilliant publicly funded locally run childcare system. No MMT was necessary. Certainly, funding from the monetarily sovereign federal government would help. It would help a lot in establishing new quality programs in education, childcare, elder care, and long term care. People demanding the services they deserve will make these things happen. But that means defeating the power of Big Pharma, Big Insurance, for-profit long term care chains, etc., etc.

      Reply
      1. Susan the other

        And look how big international corporations are fighting back the tide of human rights. They are now calling for democratic, not autocratic, decision making globally. Making themselves apex hypocrites. As if they would ever give up their profits “democratically”. Or even limit them modestly for the sake of democracy, which they have made meaningless in this country with blatant bribery and extortion. But at least we now know they are concerned about their viability or they wouldn’t have started this absurd new word-salad narrative. Of course the best way to pin them down is to show which countries are authentically democratic. And it might well prove that autocratic countries have addressed human rights more efficiently. By far, if the pathetic record of the United States for the last 40 years is taken into account.

        Reply
  12. dummy

    The trouble with this way of thinking (Bidenomics and MMT) is two fold imho:

    First, it lacks a limiting principle: if $3 trillion in stimulus is OK, why not $6 trillion? If a $15 minimum wage is harmless, why not $30?
    We can ignore limiting principles for now for one reason above all: interest rates are near zero. In fact, Fed Chairman Jerome Powell is the single most important player and enabler of the government largesse. The longer the government proceeds as if limits don’t exist, the more likely it is to hit them.

    Second, it does not explain how wealth (national) is created. If wealth is created simply by spending then every 3rd world country would be an economic power house since they spend every cent that have and borrower plenty.
    It is not the nations that spend the most but those that produce that are the wealthiest. Spending can be achieved by any politician but increases in production can be achieved by true innovators, inventors, and investors.
    Laws of God and human nature cannot be repealed. (We all know it is better to borrow than to lend. ) It is never good to go into debt that has no real return on investment for the future. The risk in increasing debt as a nation is that you can’t know what the tipping point is. Still, it is foolish to try and push for the limit any sooner than necessary. Likewise, it seems unwise to keep interest rates so low that when the next real crisis occurs, there is only room to go negative. Debt and money printing will have a tipping point, history has in the past shows no nation is immune, so to think we have an economic path without repercussions is folly.

    Reply
    1. Nancy Langwiser-Kear

      Yes and no major or emerging country in the world has a clue how to be the last one standing. The US has a better chance than other if it continues to grow it’s population by attracting highly motivated immigrants who work very hard and by shaking up the backward assumption of the wealthy corporations and the wealthy that their activity actually contributes to a strong US in the future. The majority of people in America have been sinking away which has led to the epidemics of drug abuse and suicides and led too many to fall to the siren songs of conmen, of those preaching conspiracy theories, the gospel of wealth and and fascism. While I know that QE was absolutely necessary it is beyond belief that no one has an answer to why deflationary pressures have been so strong for so long, and after the hysteria of inflation, are going to dominate again. When Michael Milken preached his revolution that a portfolio of junk ratexdebt was less risky than was believed, people mistook what he meant. Instead, leverage became the rule, except people confused junk with debt that would never end up paying cent on the dollar if at all. How we are going to remove all the debt that will never be repaid is beyond me. That’s, I think why too many are hoping for inflation to reduce the real value of all debt. But no one has ever proved to know how to stop inflation at an acceptable level without killing the economy and impoverishing the workers.
      MMT is a nice construct but monetary policy has carried the world for decades, now it is getting to the point where it can’t prevent much

      Reply
      1. Keith Newman

        @Nancy: “it is beyond belief that no one has an answer to why deflationary pressures have been so strong for so long”
        Take a look at Mark Blyth’s video in yesterday’s Naked Capitalism. Current deflationary forces are not some kind of mystery.

        Reply
  13. Momo

    For me the big takeaway from the MMT discussion is that big picture resource allocation and income distribution are all way ultimately political choices. We have gotten used to dressing them up as market outcomes but they are the outcomes markets produce given the starting conditions politicians set. Unfortunately I fear that political expediency is the weakness of fully MMT based policy making. It really asks a lot of our systems in terms of having a sensible time horizon, balancing social interests, honesty and competency. Which is not to say it is worse than other approaches which have the same weakness but dissemble and hide behind markets.

    Reply

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