Discussion in 'Economics' started by Banjo, Mar 7, 2019.
The argument is for wrong. Just because you print your currency and people are being paid in your currency does not mean people will take whatever you push on to them. At some point they revolt - by then its too late. Ask Zimbabwe.
Zimbabwe is not the reserve currency of the world.
When you simplify MMT, it comes down to this:
Inflation is the main constraint for fiscal and monetary policy. So when inflation is low, you can reduce taxes and/or increase spending. When inflation spikes, you have to walk back spending and/or remove money via taxes.
If you had discipline, non-corruptible, ethical people running monetary and fiscal policy, it would probably work fairly well.
Unfortunately the same corrupt losers who pass out benefits based on campaign donations and votes would be controlling the equation.
How About We Try Modern Monetary Theory in a Small Country First?
For many years, “modern monetary theory” advocates have been a merry band of contrarians. If they taught a course, it might be called Everything You Know About Macroeconomics Is Wrong.
They hold that a government able to borrow in its own currency need not be constrained by budget deficits and debt — meaning that it can act more boldly than economists have assumed, without negative consequences.
Something has changed recently. The M.M.T. crowd is being taken a lot more seriously.
Ideas rooted in this approach show up in the Green New Deal and other initiatives of the left wing of the Democratic Party. And these ideas are increasingly being wrestled with — though skeptically — by leading center-left economic policy thinkers.
Most prominent among the latter group, the Nobel laureate and Times columnist Paul Krugman and the former Treasury secretary Larry Summers have written disdainfully about modern monetary theory in recent weeks, even as they accept some of its arguments and in practical terms have similar preferences for economic policy in the near term.
Stephanie Kelton, a leading advocate of the theory, is, as you might expect, not having it.
This debate so far has featured plenty of abstract macroeconomic theory, but also dueling rhetorical styles and no small amount of insider vs. outsider dynamics. M.M.T. people are the insurgents who view their antagonists as a calcified elite, and that establishment views the M.M.T. people as gooey idealists. Ms. Kelton and other adherents of the theory are seemingly on a journey from outsider to insider.
But for all the digital ink spilled on this topic in recent weeks on the pure economics of the theory, there has been surprisingly little discussion of the practical implications for how economic policy would work.
For example, a core idea behind the theory is that Congress should spend money as it sees fit, and that its only constraints should involve the available real-world resources of labor and materials to carry out those spending ambitions. In this model, inflation is the sign that spending needs to be reined in or taxes raised.
But it might be too much to expect Congress to move with foresight and wisdom in applying the brakes at the right time. Elected officials have tended to have exactly the opposite instincts of M.M.T advocates. In 2011, Congress demanded deficit reduction at a time of deflation risks and weak growth. In 1981, the Reagan administration and Congress enacted tax cuts and military spending increases at a time of double-digit inflation.
It’s fine to criticize the performance of the Federal Reserve — the institution with primary responsibility for stabilizing the economy under the current economic system — for bad decisions over the years. But anyone who has watched the sometimes off-the-wall questions at congressional oversight hearings of the Fed over the last decade would be unlikely to conclude that the lawmakers have a better understanding of economic policy.
Moreover, the ability of a country to borrow money in its own currency isn’t a permanent state of affairs. It’s a credibility that a country can gain and lose, as countless nations have over the centuries. The conventional view is that you attain that ability over time through low inflation, an independent central bank, a strong legal system and good governance. How would the United States’ credibility along those lines fare in an M.M.T. world?
A country that prints its own money has no need to default on its debt. But history offers many examples of the result of using money printing as a solution for a lack of private buyers for debt: a vicious cycle of rising inflation.
The M.M.T. crowd will surely be prepared to explain why its approach wouldn’t end in catastrophe, but there is a broader point. What’s being proposed is a fundamental reordering of how economic institutions and priorities work. It would be nice to have some proof of concept before it is put in place in the largest economy in the world — also home to the world’s reserve currency.
It would be genuinely fascinating to watch a small country — with its own currency — govern itself according to the theory’s principles. Here are some possibilities: New Zealand, Norway, Switzerland, Sweden, Israel, Singapore.
If those smaller countries can work out the kinks of economic governance in an M.M.T. world, and achieve a higher standard of living, maybe then scale it up to a midsize country? We’re looking at you, Australia, Canada, Britain and South Korea.
If mainstream critics of M.M.T. turn out to be misguided, they will have egg on their face, and the conventional wisdom will surely shift. Indeed, an intellectual shift on how much to worry about budget deficits is already well underway.
There’s a bit of a parallel with another innovation in economic policy of the last generation: the setting of a numerical target for inflation, typically 2 percent. New Zealand did it first, in 1989. As it proved helpful in steadying inflation, a series of increasingly large countries embraced it. The United States did not formally do so until 2012.
@Neil_Irwin • Facebook
MMT is big government deficits and Central Bank Bond buying program... US is already under MMT regime with 1 Trillion a year deficits and QE. Ultimate MMT is Bank Of Japan, and look how fucked they are, they are a recession away from socialism meets Capitalism government. Bank Of Japan owns all there bonds and almost all there ETf's and stock market, in 5 years they will own everything! LOL
What the socialists want is to push the private sector out with SOE's and high minimum wages, reducing the private sector to mostly public monopolies... Total control in the end, very bad for the US, considering rest of world will mostly continue on Capitalism. When Oil trading becomes somewhat irrelevant in 15-20 years and Petro dollar loses status, then it'll get really ugly in the US
How is the UK a 'midsize' country? We're the 5th largest economy in the world.
This is a good article but a few key points might have been more clearly stated. Fiat money is backed by the issuers productivity. What this means in practical terms is that if the amount of money in circulation increases in disproportion to productivity, inflation may be expected. Or a similar result can be arrived at by consideration of a decrease in productivity in disproportion with money. To much emphasis is placed on "printing" by those with only a cursory understanding of MMT. One of the things that MMT teaches is that the central bank does not control the money supply. This is controlled by credit.
Conventional wisdom has it that the Treasury obtains money via Taxes and fees to pay for the goods and services the government desires. If it desires more goods and services than it has money to pay for, it borrows the difference. MMT teaches us that this is wrong. The government is not restricted in it's spending by its revenue plus borrowing, although it may act and give the appearance as though it is so restricted. It reality, borrowing is not required to spend in excess of revenue. Rather Bonds are a tool of the Central Bank, and a temporary repository of cash that pays interest.
MMT economists are experts in Treasury and Central Bank operations, the interplay between these closely related government operations and how the composite view of the balance sheets for the Treasury and Central Bank yield an overall picture of government finances.
One should not confuse conclusions resulting from consideration of MMT with MMT itself. MMT is not something that can be understood after cursory consideration. MMT is not based on supposition, but on detailed study of treasury and central bank operations and their consequences. Obviously, a few critiques of MMT have been the result of substantial misunderstanding.
I used to believe that Zimbabwe's hyperinflation was a result of printing too much money. After studying MMT however I now understand that this is wrong. Hyperinflation was caused by a sudden collapse in productivity. There was too much money printing in proportion to productivity. It was the sudden collapse of productivity, however, that was the root of hyperinflation. Zimbabwe has finally recognized this in is taking steps to improve the productivity of its farms.
All the productive farmers have fled to Australia and NZ where they were accepted with open arms, taking knowledge and work ethics with them.
As we know, if you 'drain the bank' it takes a lot of effort to replenish and most often that never happens.
However the West needs to be smart and alert that a certain East Asian country does not step into the breach when Zimbabwe is down on its knees.
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