New Report: Monetary Policy Without Interest Rate Hikes

Yves here. Nathan Tankus has announced the release of a new report (of which he is the lead author) by the Modern Money Network, Our Money, and Public Money Action, on how to manage demand in a fiat currency economy. Among many other things, it debunks the backwards views that has become nearly pervasive in economics, thanks to successful capture of mind-share by the Chicago School of Economics, and the heavy presence of monetarists at central banks. The biggie is that central banks should manage the economy, while fiscal spending is to promote pet projects like the military and (*gasp*) enough redistribution so as not to promote pitchfork sales.

Tankus points out that this document addresses broad policy issues, and not immediate inflation concerns. But it is clear that the Covid crisis and the economic response has vindicated MMT. This inflation is the result of supply chain bottlenecks and/or supply constraints, particularly in categories that consumers buy all the time: energy and food, as well as cars and many building products, thanks to Covid home buying and a drop in services spending (travel, restaurants, even lavish weddings) being redirected to home fixup. Admittedly, energy inflation winds up propagating through goods and services. But the Fed is delusional if it thinks it can do anything about that, short of shooting the US economy in the head, and even that might not create enough of a dent in global demand (people will still heat homes and drive cars).

Tankus also points out how orthodox economists are trying to make MMT conform with pet ideas about the dangers of debts and deficits. Recall that “American Keynesianism,” brought to you by Paul Samuelson, who codified it by writing the most widely used introductory economics textbook, treated Keynes as a special case of neoclassical economics. British economist John Hicks, who first formalized that view, later recanted his work but the damage was done.

Hopefully Larry Summers exploding on Twitter about the prospect of an MMT adherent joining the Fed’s board is the last gasp of misguided American Keynesianism. But bad ideas have a nasty way of sticking around well past their sell-by date.

By Nathan Tankus. Originally published at Notes on the Crises

I don’t spend a lot of time writing about Modern Monetary Theory on Notes on the Crises. Regular readers will know that insights from MMT inform all my writing on this newsletter on various different topics. But I prefer to focus on my analysis of unfolding situations, rather than arguing about the framework that lies behind my thinking. Nonetheless, in other contexts this is an important part of my work. I am the research director of the Modern Money Network, after all. A major project that I took on as lead author preceding the pandemic came out of the debate over MMT in 2019. (As an introduction to Modern Monetary Theory, I wrote out a talk on the subject originally delivered to a Federal Credit Union, which you can find here)

It is hard to remember those long ago days but, at the time, the debate about Modern Monetary Theory was over whether it makes sense to say that inflation and the availability of physical resources was the main constraint to expansionary fiscal policy. In contrast, mainstream commentators came out of the woodwork to say no, if you run deficits that are too big, even if there isn’t an issue with inflation, the national debt will get out of control and bond markets will “punish” you. Some even claimed that the Trump tax cuts meant that the U.S. had “run out of ammo” for the next recession. In their framing, fiscal policy was supposed to manage the national debt and monetary policy — specifically interest rate policy — was supposed to manage the economy and preserve full employment plus price stability.

More sophisticated commentators claimed that MMT may be right — but it didn’t matter much. Josh Barro, who was at New York Magazine at the time, claimed:

If the government prints and spends money when the economy is at or near full employment, MMT counsels (correctly) that this will lead to inflation, and prescribes deficit-reducing tax increases to reduce aggregate demand and thereby control inflation. See how we have ended up back where we started? Whether you take a Keynesian view or an MMT view, if the government spends more, it’s likely going to need to tax more, sooner or later. […] Whatever the Federal Reserve’s demerits, the idea of depending on Congress to pass surplus-generating tax increases in order to keep the economy stable and prevent runaway inflation gives me hives.

Barro’s piece signaled that we were in a new phase of the debate. While many mainstream economists embarrassingly held onto the idea of the national debt “spiraling out of control”, it was clear that more and more commentators would gravitate to Barro’s idea. They came to argue that it doesn’t matter much whether you are “balancing the budget” or “budgeting for inflation”.

My colleagues and I saw various dangers in this new framing. For one thing, while we thought a focus on inflation and physical resources was a vast improvement over a focus on the size of the national debt, we had a very different view of prices and aggregate demand than mainstream commentators. Policymakers who naively focused on headline inflation could miss key bottlenecks in specific sectors which wouldn’t be solved by throttling demand (whether that throttling came from fiscal policy or monetary policy). Further, there are a variety of cost-based and market structure-grounded reasons that prices can increase when output is widely available.

Even when aggregate demand and income growth is the main cause of shortages and price increases, it does not follow that the only possible response is raising taxes or fiscal policy. Restrictive financial regulation, or even non-financial regulation can restrict demand (that’s a point I will return to). Later on, I would coin the phrase “non-fiscal payfors” to emphasize that in “demand terms”, expansionary fiscal policy could be “offset” by restrictive non-fiscal policy rather than tax increases or other spending cuts. Contra Barro, this is a very different worldthan the one envisioned by mainstream economic policy or the partisan economists who populate its conventional wisdom.

To head off Barro’s view becoming the new conventional wisdom and preemptively clarify these misunderstandings (as well as confusions I discuss below), UMKC professor Scott Fullwiler, MMN president (and now professor) Rohan Grey and I wrote an op-ed for the Financial Times. In discussions with our colleagues at the organization Our Money, it became clear that they were interested in financing a report to flesh out the idea that tightening financial regulation could serve as an alternative to both interest rate hikes and tax increases. I became lead author and spent a lot of my time in 2019 and early 2020 leading up to the pandemic working on this report. Thanks to my colleagues at the Modern Money Network, particularly Michael Brennan, I am proud to announce that “The New Monetary Policy: Reimagining Demand Management and Price Stability in the 21st Century” is finished and ready for public consumption.

The New Monetary Policy is focused on how the budgeting — and policymaking — approaches used by government agencies, particularly the Congressional Budget Office, would need to change and adjust in order to incorporate and take full advantage of non-fiscal payfors. It examines the various different elements of contemporary financial regulation and considers which financial regulatory tools would be most suited to managing demand. Finally, it recommends two suites of financial regulatory tools, geared towards different political contexts. One suite, dubbed the “Build Back Better” approach, focuses on how financial regulation could come to serve a demand management role without major disruptions to the current approaches to budgeting and monetary policy. It is meant to exemplify that policymakers can benefit from MMT insights about managing aggregate demand without signing up to a Permanent Zero Interest Rate on Government debt (PZIRG) policy.

Our more “aggressive” policy suite, dubbed “Green New Deal” monetary policy, is meant to show the kind of demand-management tools available via financial regulation if policymakers (and the public) become interested in freeing up a vast array of physical resources for Green New Deal mobilization. We also emphasize that avoiding U.S. interest rate hikes is especially important in the context of the United States, where dollar interest rates impact countries deeply indebted in dollars, both in dollar terms and in terms of their exchange rates. Whether it is the pandemic response or the climate response, raising dollar interest rates is inconsistent with tackling these global problems on a global scale. The planned Federal Reserve interest rate hikes are already having adverse impacts on much of the rest of the world.

There is much more in The New Monetary Policy than I can go over here. That’s why readers should read it! One thing, however, that the report is not about is our current “inflation” situation. As I stated earlier, it was mostly written in 2019 and has only been updated in the places where contemporary circumstances are the most critical to the argument. While we flesh out more of our thoughts about the “non-demand” elements of inflation and price stability, that topic is not the main focus of this report. The role that competition law and other areas of law that directly impact business price-making have in aiming for a true full employment economy with price stability is a subject that deserves its own paper or report. My work with colleagues Sanjukta Paul and Luke Herrine will certainly play a key role in a full developed framework answering those questions. In the meantime, I am going to write about recent arguments over this topic later this week, and the more general arguments over pandemic-related price increases.

What I can say here is that the pandemic has vindicated many of these points. Concerns over where the United States would “find the money” (rather than “finding the resources”) for various fiscal initiatives dissolved in the pandemic as the Federal Reserve launched an array of programs (which I became well known for). Congress also passed trillions of dollars in spending initiatives without offsets of any kind. In fact, just yesterday Professor Stephanie Kelton was profiled in a New York Times Profile entitled “Time For a Victory Lap*” on this exact point. Meanwhile, the pandemic became a major real world example of non-financial regulation contracting demand throughout the economy. In other words, pandemic measures reduce demand which actually required expansionary fiscal policy to “offset”.

As if this all were not enough, our concern that the mainstream view that inflation is only caused by excess aggregate demand would mean particular supply chain bottlenecks would be used to justify demand restraint has been prescient. The business press is now daily focused on the intimate details of supply chains. That new focus is based on the idea that you need to understand those intricacies to understand wider economic conditions, and what would be the most effective policy response.

We were worried about how these potential future bottlenecks would play out politically at a time when few other commentators were focused on such issues. Now president Biden commonsensically says: “if car prices are too high right now, there are two solutions: You increase the supply of cars by making more of them, or you reduce demand for cars by making Americans poorer.” Naturally, he concludes he endorses the former. Biden’s Federal Reserve, however, still appears poised to pursue the latter.

The New Monetary Policy is a major step in laying out an alternative to the orthodox policy consensus — and I look forward to producing more work in the future that fleshes out that alternative even more.

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  1. Basil Pesto

    Sorry for a general comment rather than a specific one on this paper which I intend to read, but it is interesting to note that MMT twitter has been aflame thenpast few days, even, I think, preceding the NYT article on Kelton. I do have a sense that the ground is shifting a bit, as the standard attacks seem ever more phoned-in, and even people who don’t consider themselves MMTers coming to its defence (which is quite possibly Summers’ intervention backfiring on him)

    I often check Mitchell’s blog to see what he thinks about the way the wind is blowing (he’s usually good value for a strong rebuttal of whatever mainstream crap is being trotted out as an “aha!” attempted mainstream repudiation of MMT on any given week), and nothing on the latest little spike in interest (no pun intended) thus far. He also seems to not really like Kelton for some reason, so maybe he won’t comment.

    Anyway, kudos to young Nathan!

    1. PlutoniumKun

      I don’t follow the MMT crowd so closely these days, but I’ve noticed too recently that the term keeps popping up in unexpected contexts. Its slowly creeping into the public consciousness and I think we are at the point where the mainstream announces something along the lines of ‘well, we all believed that anyway!’ And they’ll try to absorb it and then isolate it within the mainstream, instead of outside the mainstream. A little like the way infectious disease specialists are now pretending they believed in aerosol spread all the time (while still ignoring the policy implications).

      I’ve also noticed a few catty remarks recently aimed at Kelton. I assumed its just the usual professional jealousies aimed at someone who gets a lot of attention. Maybe there is some substance to them, I’m not sure, but I found her book really well written and super clear in its arguments, which is very refreshing for an economist. Mitchell can be prickly I think – a couple of years ago he reacted badly when some observers pointed out the many errors in his writing on EU matters – he didn’t come out covered in glory.

      1. Terry Flynn

        Mitchell was the first person I came across who wrote about MMT – as I implied in reply to your comment elsewhere today, there were lecturers of mine at Cambridge working on it (Godley) during my time there who later went on to work with Kelton and flesh it out. However Mitchell was first in mastering blogging.

        I don’t read him anymore. His tone reminds me of someone I really don’t care to remember….. Someone brilliant but…..

        Kelton’s book is brilliant. She and Mosler are the bees’ knees.

      2. Jeff W

        “…her book really well written and super clear in its arguments…”

        I’ve long thought that Stephanie Kelton is easily the best communicator of the MMT proponents. If she is, as the NYT profile puts it, “the most familiar public face of Modern Monetary Theory,” all the better for MMT. She really deserves all the accolades she gets.

      3. ChrisPacific

        I think Kelton gets attention for good reason – MMT will never get anywhere unless it can be explained easily to laypeople, and she does that brilliantly (and I agree on her book).

        For a long time around here it was mostly Randall Wray, who is very knowledgeable but demands a lot of his listeners/readers (he was inclined to assign reading homework to people as a prerequisite to discussion, and the sources he referenced often turned out to be written in High Academic). It’s all well and good for advancing the academic theory, but taking it mainstream and actually getting it accepted and applied in the real world takes a different skill set. I think some of the MMTers were slow to realize that, or fell into the common academic trap of disparaging anybody that makes their subject sound too simple or easy.

      4. larry

        PK, re your reference to Mitchell on EU. I don’t think I ever saw that. Can you supply a referece? Thanks.

  2. Anthony G Stegman

    This type of thinking is indicative of the problem facing capitalist societies. Current levels of consumption are unsustainable, and yet all kinds of schemes are being devised to maintain high levels of consumption. MMT is one of these schemes. We all need to work less, make less, buy less, aspire to less, and chill out more. if this is seen as being poorer then we all need to be poorer.

        1. Michaelmas

          Low earth orbit actually, the freezing radioactive space is a little forbidding.

          They could do more than go to LEO. Cislunar space is generally okay, because Earth’s protective magnetosphere extends adequately enough to the Moon’s orbit short of a solar flare or coronal.

          But yes. Trans-solar space is problematic and Musk’s claims of colonizing Mars are a joke inasmuch as if you try visiting that planet via a chemical rocket that takes nine months to get there all your astronauts will either be fried from the radiation or riddled with cancers by the time you arrive

          Nuclear rockets with continuing 1G acceleration will get people there in three months. But that means NERVA-style/nuclear cryogenic propulsion (which is NOT Orion a la Freeman Dyson and Ted Taylor) and no government is likely to let Musk play around with nuclear reactors in orbit above our heads. Maybe on the Moon.

    1. eg

      MMT describes fiat monetary operations and the policy space available to states which issue their own sovereign, floating currency and don’t borrow in foreign currencies. It has nothing to say about what or how much people ought to consume.

      1. Scott C. Thorton

        What? The author’s entire premise is based on demand management.

        His new book is entitled: “The New Monetary Policy: Reimagining Demand Management and Price Stability in the 21st Century”

    2. anon y'mouse

      MMT is not a scheme. it’s how the thing is done, has been done, etc since we were formally taken off the gold standard.

      it describes what is, not necessarily what should be. although a lot of the MMTists spend a large portion of their time discussing what should be to get out of our current dilemmas.

    3. jsn

      MMT explains how the existing monetary infrastructure can be used to transition to a low consumption economy without forcing the poor and all those who are dependent on jobs to pay for their food and shelter to bear the costs.

      If we are to transition to a low consumption economy, everyone dependent on wages needs to have a viable path from the current high consumption economy they are required to participate in to survive to a better one.

      Working less and chilling out are a path to near term starvation for lots of people, get out and look around, lots and lots of people don’t have choices about how they’ll eat and put a roof overhead without continuing on the high consumption treadmill. MMT is an explanation of how money works. Without understanding that, transition is impossible except through mass die off, which appears to be the current plan.

  3. Mikel

    Ok. Let’s see a report about interest rates from a broad variety of lenders and talk about usuary and the effects on the economy.

  4. Susan the other

    Freeing up money for the Green New Deal. Nathan and Stephanie have both been proven correct. We can free up money for a green revolution, no problem. Inflation is just an inflated concept. The whole concept of monetary inflation is based on the idea that money has its own value. It doesn’t. Money is a nominal item, it only realizes a value by having been spent on a valuable real life asset, a social asset. Don’t tell Larry. It’s so fun to watch him make snide remarks about MMT. Whatever is causing demand “inflation” is some transitory demand. Powell at least got that right. So controlling demand is key – and the best way to do this is to maintain a supply of basic products – food, transportation, medical, etc. Financial regulation is a no-brainer because it is unregulated finance that pushes prices. Demand pulls them; consumes them. Demand is a good thing; it keeps the economy going, as it should go. Finance is basically just greed, it pushes speculation like dark energy. So if there is any rationing to be done, let it be done in finance. Unless financiers want to start minting their own money (based on what?). The whole question of whether it is good to feed demand is one of necessity. If it is necessary, feed it. The whole question of “necessary” has now become a question of sustainability. If it is sustainable then it is almost by definition necessary. So Green New Deal demand management is the center of the storm. And tweaking interest rates is such an antique fixation, based on private money delusions of wealth accumulation, that anybody appointed to the Fed should be given an acid test on the subject. Interest for what exactly? The old answer was usually interest to compensate for other “lost” opportunities to make profits. Thus, profits should be made contingent on sustainability as well. And controlled. That wouldn’t be too big a step, would it?

    1. anon y'mouse

      Unless financiers want to start minting their own money (based on what?).

      isn’t that what all this blockchain digital money NFT hoo-ha is about?

      1. Susan the other

        And more than disconcerting because if crypto is allowed to continue it will 1. find a way to launder itself into sovereign exchanges and create imbalances which will be socialized into sovereign money systems, and even worse, 2. it will create/has the capacity to create exponential and exclusive (beyond regulation) demand for resources. None of this would be a threat except for the fact that private money has always had only one main objective and that is to make the holder fabulously wealthy. With the profit motive still intact, consumption and profits will be far greater if crypto is allowed to operate within the established structure of development and management, and most importantly imo, extraction will be out of control and the environment will be done for. Beyond salvage. There will be no environmental reclamation. Because profits.

        1. larry

          Crypto is also ecologically destructive because it consumes so much energy in its creation and maintenance. In my view, it should be banned. I also agree with your regulatory criticisms, or lack of regulation. Your comment about it infiltrating sovereign exchanges is another reason for doing so.

  5. Bart Hansen

    The very first paragraph in the NYT piece, written by a woman, focuses on what Kelton was wearing for the interview. Can’t believe they are still doing this.

  6. djrichard

    Speaking of raising rates, the 13 week treasury yield just went up a huge amount: 8 basis points and now stands at 0.275%. Compare at where it stood at beginning of Jan when it stood at 0.025%.

    0.275% is above the effective target range of the Fed Funds rate of 0.08% and also above the target range ceiling for the Fed Funds rate of 0.25%. So looks like a Fed Funds rate increase of 25 basis points is imminent. Would need about 8 rate hikes of 25 basis points each to get it above the 10 year yield and invert the yield curve.

  7. Stanley Dundee

    Over at Pekingnology, Bofei Zheng and Zichen Wang have provided a translation of an MMT dismissal by Lu Lei, a high-ranking finance official in the PRC. Sadly, he gets important things wrong about MMT, especially regarding the MMT view of quantitative easing. But interesting that Chinese officials (along with the usual US economic dinosaurs like Krugman and Summers) feel the need to debunk (something they are calling) MMT.

    1. PlutoniumKun

      Its interesting that such a high ranking official seems confused about QE and MMT.

      I’ve often seen it suggested by some outside observers that China runs on an MMT basis, but this simply isn’t the case. If it was, then they’d never have gotten into such a tangle over local government and infrastructure funding. In many ways, the classic export led, domestic consumption suppression, high domestic infrastructure spend model which China follows works on very different assumptions from that of MMT theorists.

      Michael Pettis has an interesting analysis of China and MMT theory from a couple of years ago.

      1. Stanley Dundee

        Thanks for the reminder about that Pettis article. That’s a great piece that provides an excellent demonstration of using MMT to reason about policy in the face of particular constraints (e.g. supply constraints, demand deficits, inequality, infrastructure). Pettis suggests that China is maxed out on intrastructure but could usefully spend freely to reduce inequality by improving poor and middle level incomes. Spending by giving money to the rich (e.g. tax cuts, subsidies, cheap capital) is possibly useful in a developing economy with investment shortage and high capital costs (and was indeed useful for China in the early vigorous days of its development). More money for the rich might be maxed out here in the US though. ;-)

      2. larry

        Carnegie Endowment left out Pettis’s flow chart, his Figure 1. I don’t suppose that I am the only one who would like to see it.

  8. NotThePilot

    I’ll have to read Nathan’s new article and some of the archives on his site.

    On the claim that MMT supposedly isn’t that different from Keynesianism, I’ve actually been thinking about a possible difference for a while. I’ve never seen others mention it though, and it may even contradict the normal MMT recommendations some, so I’m not sure if I’m missing something.

    IIRC Keynesians see tax-cuts as reliably stimulative and raises as repressive by acting on marginal propensity to consume. But if you go with the chartalist / MMT principle that taxes create a baseline demand for sovereign currency, doesn’t that suggest taxation can drive money velocity? So while Keynesian rules apply normally, could it be that if velocity is very low, taxing X and spending X+Y is even more stimulative than deficit-spending Y?

    1. tindrum

      As I understand it taxation is a means of getting people to work in crappy jobs that they don’t wan’t to do by forcing them to pay taxes in whatever FIAT currency is being used. The fact that the currency then becomes necessary or useful for other transactions is a side effect. I don’t see how taxation drives velocity. If you tax at 100% then there are no other monetary transactions and the employees are slaves.

      1. NotThePilot

        Right, that’s one idea of how fiat currency first took hold as an institution, and it makes sense.

        What I’m saying though is a bit different. I’m not saying just tax, but on top of the ideal level of deficit spending, literally have the government bring in X dollars in taxes and spend X dollars right back out (I don’t know if transfer payments would technically count, though there’s a place for those too).

        Obviously, too much of it would annoy people, plus if it has no structural effect, it would just be the monetary version of Keynes’ paying people to dig holes & refill them. There could always be a compensating effect too. But IIUC, if an additional number of dollars also passed through public spending once a year without average velocity in the private economy decreasing, velocity would increase by definition.

    2. anon y'mouse

      the only velocity that needs increase are the huge pools of hoarded money that roam around seeking a return, lots of which is in those family offices, trusts and other schemes to hide it from being liberated.

      taxing the poor man just keeps him invested into the money-using system. it also deftly keeps him alongside the arguments that the rich use against taxes which mostly benefit themselves. it also funds local infrastructure (in my view, not optimally).

      it also keeps the dream alive that “gov’t is like a household”.

      1. NotThePilot

        I won’t necessarily argue with any of that; whom is taxed is important. What I’m saying though is that independent of that, taxing X and spending exactly X right back again might sometimes give the government an additional economic lever, by acting on velocity instead of money supply.

        The zombie idea that an economy or government is like a household is a problem, but people have been pointing out how wrong it is since at least the Physiocrats. One could just as easily describe it as “priming a pump”” though instead of balancing a budget. There will always be people that insist on balanced budgets though (often for political reasons, despite knowing its false) so I wouldn’t want the marketing to drive the policy.

  9. lance ringquist

    if you are going to make more new cars, where are the chips going to come from, let alone lots of other parts and materials to make cars? this was all free traded away decades ago by the dim witted bill clinton.

    seems to me free trade has made those chips, other parts and materials more expensive, and if the demand goes up under free trade, there will be even more bigger supply bottlenecks, higher prices, and more money flowing off shore.

    i see no mention of the 800 pound pink gorilla standing right next to Tankus.

  10. Sound of the Suburbs

    We need to look at the time line to see what’s going on.

    Economics the timeline.
    Classical economics – observations and deductions from the world of small state, unregulated capitalism around them
    Neoclassical economics – Where did that come from?
    Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics
    Neoclassical economics – Why is that back again?

    We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics.
    On bringing it back again, we had lost everything that had been learned in the 1930s and 1940s, by which time it had already demonstrated its flaws.

    The attractive, new ideology of neoliberalsm, was the Trojan Horse that delivered the payload of dodgy old, 1920’s neoclassical economics to global policymakers
    Under the bright, shiny, new wrapper of neoliberalism is dodgy, old, 1920’s neoclassical economics, and it’s still got its old problems.

    What did they discover in the 1930s?
    The use of neoclassical economics, and the belief in free markets, made them think that inflated asset prices represented real wealth.
    1929 – Wakey, wakey
    The wealth evaporation event of 1929 finally brought them to their senses.
    They needed to find out what real wealth was.

    It took them a long time to disentangle the hopelessly confused thinking of neoclassical economics in the 1930s.
    This is when they invented GDP.
    The real wealth creation in the economy is measured by GDP.
    Real wealth creation involves real work, producing new goods and services in the economy.
    That’s where the real wealth in the economy lies.

    They used to think rising asset prices were creating wealth, but after 1929 they realised this was not the case.
    They needed to find out where real wealth was created in the economy and they invented GDP.
    This is why GDP is the thing we want to grow; it is the real wealth being created in the economy.
    Real wealth doesn’t have a nasty habit of evaporating again.

    What is the fundamental flaw in the free market theory of neoclassical economics?
    The University of Chicago worked that out in the 1930s after last time.
    Banks can inflate asset prices with the money they create from bank loans.
    Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
    “Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”

    When you use the money creation of bank credit to fund the transfer of existing assets it inflates the price.
    The banking system and the markets become closely coupled so that when asset prices collapse it takes the banking system down with it.
    “It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” All the Presidents Bankers, Nomi Prins.
    When this ponzi scheme of inflated asset prices collapsed it took out the financial systems of the US, UK and Euro-zone.

    What did they learn in the 1940s?
    In the paper from 1943 you can see …..
    They knew Government debt and deficits weren’t a problem as they had seen the massive Government debt and deficits of WW2.
    They knew full employment was feasible as they had seen it in WW2.
    This ushered in the Keynesian era.

    Balancing the budget was just something they used to do before WW2, but it wasn’t actually necessary.
    Government debt and deficits weren’t a problem.
    They could now solve all those problems they had seen in the 1930s, which caused politics to swing to the extremes and populist leaders to rise.
    They could eliminate unemployment and create a full employment economy.
    They could put welfare states in place to ensure the economic hardship of the 1930s would never be seen again.
    They didn’t have to use austerity; they could fight recessions with fiscal stimulus.

    MMT have found the evidence that they worked a lot of this out after WW2, and they did.

    1. anon y'mouse

      The real wealth creation in the economy is measured by GDP.

      as my econ prof, who had actually worked for decades in applied economics, said once “how do we raise GDP? well, we could burn down a bunch of houses and infrastructure and then build them back again. that would raise GDP. but would the economy genuinely improve?”

        1. Sound of the Suburbs

          Global policymakers spend their time trying to achieve economic growth.
          They want to grow GDP.

    2. lance ringquist

      you have to remember that the era of the 1930’s-40’s was under smoot-hawley, which made sure production stayed here, that is where real wealth comes from, production.

      i do not believe the new deal would have worked as well as it did if it was not for smoot-hawley.

      we see today any investments in production, just leaks off shore almost before the ink is dry.

      we are no longer the richest country on earth, we have a lot of money, but any country can have that, like any banana republic has lots of banana’s.

      money is but a medium of exchange, individuals with lots of money are rich, they have lots of money to buy the results of production.

      but a country with lots of money and little or no production is not a rich country.

      GDP is meaningless less today because its been remodeled to show growth in money, not production.

      and almost all GDP is captured by a few.

      so if we did away with the banks ability to create money, which i am all for, and did MMT for the masses which will include much upgrading of our standard of living, its still without production, and we will have even a larger more massive mess from free trade, as billions more pours out of the country to purchase production which will line the pockets of the rich and foreigners even more.

      can you imagine the mess at the ports under that scenario!

      the regulation of commerce here and between the nations is critical to make sure MMT does not get swallowed up as it pours over the border into production in other countries.

      1. Sound of the Suburbs

        What was really happening in the Great Depression?
        When you look at the data you can see what the New Deal did.

        Richard Koo used to be a central banker at the Federal Reserve Bank of New York, and he looked at both sides of the bank’s balance sheets around the Great Depression.
        Richard Koo shows the US money supply / banking system (8.30 – 13 mins):
        1) 1929 before the crash – June 1929
        2) The Great Depression before the New Deal – June 1933
        3) During the New Deal – June 1936

        The money supply ≈ public debt + private debt
        The “private debt” component was going down with banks going bust and deleveraging from a debt fuelled boom causing debt deflation (a shrinking money supply).
        It was the public borrowing and spending of the New Deal that helped the economy recover.

        The money supply ≈ public debt + private debt
        The New Deal restored the money supply by increasing the “public debt” component of the money supply.
        Once the New Deal was working, they reduced Government borrowing and plunged the nation back into recession again.
        The enormous public spending and borrowing of WW2, eventually sorted things out.

        It’s all about maintaining the money supply to avoid debt deflation.
        The money supply ≈ public debt + private debt
        If the private debt term is going down, you want the public debt term to go up to compensate.

        1. lance ringquist

          yet you are over looking the fact that demand for goods and services is wage driven. the money supply can get us out of recession/depression, but can we stay that way when its drained off shore in such huge quantities, under cutting our own production, which under cuts wages.

          money cannot work for us if its drained offshore, into the pockets of the wealthy and foreign entities.

          so the new deal could not have worked as well as it did, if the new dealers did not understand article one, section eight of the constitution,

          the regulation of commerce between the states and countries.

          the utter nonsense of free trade, lets let ben franklin educate about the doctrine of high wages vs. the walmart economy: Ben Franklin: the high wage protectionist constitution: The Doctrine of High Wages – How America Was Built

          HAWB 1800s – The Doctrine of High Wages – How America Was Built

          Friday April 01, 2016 · 9:51 AM CDT

          your making the same mistakes that friedman made, its more than just the money supply, its where it goes and stays that is just as important.

          you are trying to fill up a bucket that has no bottom.

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