Ignored for years? What? From what I can tell that's how we got into $19 trillion dollars of debt. The only reason it's now being defended as a systematic theory is that it's become embarrassing to still believe it in the face of all evidence.
The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money.
The long term problem is that too much inflation (or, more accurately, taxation) may drive people away from our currency, and MMT will be shown for the sham that it is.
I don't think you can drive people away from the US dollar, simply because any such destabilising action will hit the real economy first. And the US has seen low consumer inflation for years now.
MMT absolutely does take account of forex by recognising that a government has a large amount of power to dictate money flows within the country, but very little power to compel terms of trade overseas. And most countries need to continuously import certain things which cannot be substituted locally, especially fuel.
Expanding the money supply lets people buy more locally produced stuff, but not more imports. This even scales down to local token currencies ("Bristol pound") or Krugman's "babysitting tokens" thought example.
" a government has a large amount of power to dictate money flows within the country, but very little power to compel terms of trade overseas."
Isn't the petrodollar system precisely the historical exception that allows the USA to have a lot of power when it comes to "compel terms of trade overseas"?
edit: obviously the other side of that ability to "compel terms of trade overseas" being the US formidable military power that allows them to further twist other countries arms when they refuse to play by the petrodollar system rules (see Libya, Iraq, etc)
Well, then let's clarify:
For almost all Americans -- who produce essentially nothing of value, yet consume a lot of very real, imported goods -- balanced trade would be a complete disaster.
>The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money.
No, the only reason it hasn't been completely catastrophic is because there's basically no consequence to having this level of debt. Interest payments on our debt are close to the lowest they've been in decades. What's the catastrophe supposed to be, again?
>The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money.
Yeah, yeah, and the only reason it wasn't completely catastrophic for Japan is for some other completely different reason (aging population, people like to save - take your pick).
Be consistent at least about your excuses. Make sure they apply to the US and Japan.
Japan's QE was in response to deflationary pressures. That's a far cry away from QE while inflation is already happening.
Further, I don't see why you can't have two completely different reasons for the same effect.
And while demographics are important, I wouldn't call it the primary effect, instead I'm with Haruhiko Murayama from the Bank of Kyoto:
"[Japan deflation is caused by] a lack of demand, which in turn is attributable to the fact that emerging countries such as China, South Korea and Taiwan have come to manufacture inexpensive high-quality electrical products by introducing new equipment and by taking advantage of their cheap labor."
Much older than that, MMT is based upon turn of the last century American socialist (specifically the Social Credit Party) economic theory, but the red scare nearly eliminated it from American discourse for most of a century. It's especially interesting in that it is especially cyclical with respect to depressions/recessions.
Edit to add: Not that there isn't important additional knowledge and theory that MMT brings to the table on top of the turn of the last century theory work, just that it's enough of a direct successor I'd draw the line of history longer.
Here is what I now believe: MMT doesn't really matter that much. How base money is produced doesn't really matter that much. A metal standard, fiat via government coercion, rocks at the bottom of the ocean, wampum, whatever. As long as it isn't insane and chaotic, it will probably work.
What matters is no longer allowing the banking system to engage in fraud by introducing multiple claims on the same currency unit in the same time period, which is to say that currency deposits must be duration matched with loans. No more borrowing short and lending long.
Of course, practically, MMT will be used to justify more government boondoggles, wars, and bail outs of the rich, rather than something that might actually be effective, like a citizens dividend, but that's politics, not economics.
currency deposits must be duration matched with loans
Why? This is the essence of banking and has been for centuries.
Furthermore, if you try to apply this consistently, what do you do about commercial and consumer credit? Ban it entirely, including credit cards? No more car loans, just cash on the nail?
It is the essence of banking, and that's the problem. The greatest trick the devil ever pulled...
Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Credit cards are not counted against deposits and, therefore, stand outside this analysis, although I'm not sure I would allow banks involved in taking deposits to issue them, because the capital structure tends to become muddled.
If you think about it, you can have nearly as much loan-expansion as the current fractionally reserved system (maybe even more since there is no need for a reserve ratio), but there is no double counting of monetary units at a given point in time and, therefore, no possibility for a bank run.
I will admit that this is my own economic theory and that I am used to the crazy looks from people.
> Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years.
Think about that: you deposit your money in the bank; the bank lends it to me; I pay the car dealer — which means that money is no longer in your bank! What is in the bank is an IOU from me for that money, and of course that IOU itself has some value and could itself be sold/lent to someone else for some other purchase. There's no fraud, no double-counting, but it all makes perfect sense.
The money is no longer in the bank, but I can't demand it for five years, which is great, because the bank will get the loan paid back, with interest, in four.
And yes, I would expect a secondary market to develop for deposit receipts as people misjudge their time/money needs.
What am I to think about? Duration mismatch is the problem, eliminate it and you eliminate bank runs and, more importantly, lying. The fraud is when the bank, through slight of hand, tells more than one person they can have a given monetary unit at a given point in time. That's the double counting.
Interestingly, Minsky had a large influence on the MMT economists, and you're essentially paraphrasing his financial instability hypothesis http://www.levyinstitute.org/pubs/wp74.pdf
What you're describing isn't crazy, it's how any other entity besides a bank must operate. If a friend asks to borrow $50, I have to open up my wallet and give him $50 from it (or deny the loan). I can't keep the $50 in my wallet, promise to not spend it, and print out a shiny new $50 bill to give him!
Banks were given this privilege because they were highly regulated, essentially just extensions of the Federal Reserve itself. Of course over time they argued this was unfair and chipped away at the regulation, while still retaining the privileges.
Given how much is at stake, I don't see anything changing until it all falls apart. Easy creation of money directly supports the Federal Reserve's mission of overstimulating the economy through artificially forcing inflation. The proceeds aren't just skimmed by a countable corrupt cabal, they're funding the entirety of several industries!
A few hundred years is really not that long to prove a social system. Previously banks created their own currencies - this system allows them to create the currency. The "safety" is the elimination of direct feedback, which allows problems to accumulate and creates a "too big to fail" situation. A lack of bank runs is fantastic, but when the run finally occurs on USD it will not be pretty.
"Too big to fail" has nothing to do with fractional reserve banking. All banks work the same way, but the vast majority are not too big to fail. And, many of the too big to fail financial institutions are not banks.
Banks in total provide about 20% of the total credit in the U.S. Even if they were perfectly risk-free, you'd still have the other 80% to worry about.
If you're worried about fractional reserve banking, you're worrying about the wrong thing IMO.
The "too big to fail" I'm referring to is the currency itself. If a smaller country were to inflate the fuck out of its monetary base the way USG does, they would get corresponding exchange rates in short order. But being the global reserve currency, inflation of USD instead sets the tempo of the global economy. That is until it results in a long term shift away from USD, at which point we're completely fucked as the reserve bubble pops.
I had an economics lecturer spouting this crap about how major countries never need worry to repay their debts and could lean on their massive power/influence if they got stuck. Fast forward to a post GFC world and suddenly it's like the story of the group of friends where everyone owes money to everyone else and it's all good until one new friend doesn't owe anyone and suddenly turns around and tells everyone it's time to pay up. Party stopped pretty quick after that.
The problems happened because people demanded austerity instead of allowing people to expand their debt balances, as MMT says should happen in a recession. The US did the latter and did much better than Europe did, consistent with MMT.
"I had an economics lecturer spouting this crap about how major countries never need worry to repay their debts"
Because if you print your own currency, the risk of you running out of it (insolvency) is exactly zero.
Of course, when you thought you heard "major" what he probably said was "sovereign in the currency they borrow". Big difference (US is sovereign; Japan is sovereign; Greece is not; Zimbabwe was not).
"and could lean on their massive power/influence if they got stuck"
Consider a hypothetical situation where we have to print a lot of currency to repay our debts. Foreign debt-holders realize that they are effectively getting robbed by our monetary policy and complain to their governments. Those governments decide to threaten with military power, to convince us to change our monetary policy or to take some of our assets.
In that situation, our balance sheet would be ok, but our country would be in very bad straits. So we would be stuck in a real sense, if not in an economic sense.
His lecturer probably (naively) believes that America will be dominant for so long that we won't have to worry about pesky things like the threat of war from other countries on economic grounds.
>Consider a hypothetical situation where we have to print a lot of currency to repay our debts.
Why? The US government could pay off all of its debts tomorrow by printing money but the hypothetical situation where it would 'need' to simply won't arise.
Same for Japan. Or the UK. Or anybody. Inflation is the only real problem most governments need to concern themselves with (and is inflation too high in the US or Japan?).
>His lecturer probably (naively) believes that America will be dominant for so long
And I suppose Japan has managed to remain solvent with ~220% debt/gdp by being a superpower as well?
His lecturer wasn't being naive. The austerian economists who predicted hyperinflation in Japan in the late 90s for the exact same reasons you're proposing were being naive.
>Why? The US government could pay off all of its debts tomorrow by printing money but the hypothetical situation where it would 'need' to simply won't arise.
It could arise pretty easily if international markets lost confidence in the USG's ability to repay. In terms of wealth, I mean. Of course the government can print money to pay in dollars, but from an investor's perspective there's no difference between a country that inflates its currency and a country that only pays a percentage of obligations in an uninflated currency.
Most US debt is short term. It has to be rolled over, and it has to be rolled over at very low interest rates. That was the real genius of QE - they found a way to print money and lower interest rates at the same time.
>And I suppose Japan has managed to remain solvent with ~220% debt/gdp by being a superpower as well?
Japan has remained solvent because that 220% number isn't real. If you subtract out interagency borrowing it's more like 130% (or it was, anyway, the last time I looked into it), which, while not ideal, doesn't exactly put the country in a league of its own.
Wow. I don't know where to start with some of these comments. There's just a real lack of understanding of central banking.
Protip: Your critique of "status quo" (e.g. central banking) systems will be taken more seriously when you demonstrate thorough knowledge of the subject matter and don't rely on emotionally laden arguments involving "fraud" and "lies."
Whether the critics are aware of how central banking works, central banks are losing credibility.
They've tried everything in Japan & Europe, getting governments trillions into debt, and now they want to go negative interest rates. Clearly what they did before didn't work, and now they are trying something else. They're shooting in the dark and unknowingly killing the economy. It doesn't take a genius to figure out people will just keep cash at home if you impose negative interest rates, and by keeping cash away from banks, reduce the reserves banks hold, and the money they can lend, reducing the money supply, exacerbating the deflation the NIRP was supposed to fight in the first place.[1]
There's no fraud and no lie, except for the fact central bankers operate on economic models detached from reality. The only lie is claiming to know more than they do.
> Clearly what they did before didn't work, and now they are trying something else
Erm no, they're trying the exact same thing even harder. The top of the economy is awash in capital with nowhere to go, while the bottom has to run ever faster on the debt treadmill. Creating even more debt that funnels wealth upwards is obviously the solution <g>.
On the one hand, printing money instead of [1] taxing is good because you can get rid of whole government departments (saving real resources) and tax collection no longer has to invade people's privacy by forcing them to give the government extensive records of their economic activity.
On the other hand, taxation is good because it reminds people there are costs to government services when they have to actually pay the tax, and in addition you can use a tax to inject a market signal about costs that would be normally externalized.
[1] Unfortunately, MMT implemented by any government will likely be "in addition to" rather than "instead of" existing tax mechanisms.
38 comments
[ 3.0 ms ] story [ 92.7 ms ] threadSimply put: MMT completely ignores floating exchange rates.
The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money.
The long term problem is that too much inflation (or, more accurately, taxation) may drive people away from our currency, and MMT will be shown for the sham that it is.
I'm not sure where you're getting this from, but I learned the difference between fixed & floating exchange rates by reading MMT economists.
MMT absolutely does take account of forex by recognising that a government has a large amount of power to dictate money flows within the country, but very little power to compel terms of trade overseas. And most countries need to continuously import certain things which cannot be substituted locally, especially fuel.
Expanding the money supply lets people buy more locally produced stuff, but not more imports. This even scales down to local token currencies ("Bristol pound") or Krugman's "babysitting tokens" thought example.
Isn't the petrodollar system precisely the historical exception that allows the USA to have a lot of power when it comes to "compel terms of trade overseas"?
edit: obviously the other side of that ability to "compel terms of trade overseas" being the US formidable military power that allows them to further twist other countries arms when they refuse to play by the petrodollar system rules (see Libya, Iraq, etc)
Right, so for most developed nations this would be disastrous.
There's a reason NAFTA has been so unpopular.
No, the only reason it hasn't been completely catastrophic is because there's basically no consequence to having this level of debt. Interest payments on our debt are close to the lowest they've been in decades. What's the catastrophe supposed to be, again?
Horseshit.
>The only reason that hasn't been completely catastrophic (for the US) is that we're the global exchange currency, and can basically tax the whole world by printing more money.
Yeah, yeah, and the only reason it wasn't completely catastrophic for Japan is for some other completely different reason (aging population, people like to save - take your pick).
Be consistent at least about your excuses. Make sure they apply to the US and Japan.
Further, I don't see why you can't have two completely different reasons for the same effect.
And while demographics are important, I wouldn't call it the primary effect, instead I'm with Haruhiko Murayama from the Bank of Kyoto: "[Japan deflation is caused by] a lack of demand, which in turn is attributable to the fact that emerging countries such as China, South Korea and Taiwan have come to manufacture inexpensive high-quality electrical products by introducing new equipment and by taking advantage of their cheap labor."
Much older than that, MMT is based upon turn of the last century American socialist (specifically the Social Credit Party) economic theory, but the red scare nearly eliminated it from American discourse for most of a century. It's especially interesting in that it is especially cyclical with respect to depressions/recessions.
Edit to add: Not that there isn't important additional knowledge and theory that MMT brings to the table on top of the turn of the last century theory work, just that it's enough of a direct successor I'd draw the line of history longer.
What matters is no longer allowing the banking system to engage in fraud by introducing multiple claims on the same currency unit in the same time period, which is to say that currency deposits must be duration matched with loans. No more borrowing short and lending long.
Of course, practically, MMT will be used to justify more government boondoggles, wars, and bail outs of the rich, rather than something that might actually be effective, like a citizens dividend, but that's politics, not economics.
Why? This is the essence of banking and has been for centuries.
Furthermore, if you try to apply this consistently, what do you do about commercial and consumer credit? Ban it entirely, including credit cards? No more car loans, just cash on the nail?
Loans for cars, or anything else, are fine, as long as the bank has deposits covering the loan on hand for longer than the duration of the loan. I put my money in the bank for 5 years, they loan the money to you to buy your car for 4 years. Credit cards are not counted against deposits and, therefore, stand outside this analysis, although I'm not sure I would allow banks involved in taking deposits to issue them, because the capital structure tends to become muddled.
If you think about it, you can have nearly as much loan-expansion as the current fractionally reserved system (maybe even more since there is no need for a reserve ratio), but there is no double counting of monetary units at a given point in time and, therefore, no possibility for a bank run.
I will admit that this is my own economic theory and that I am used to the crazy looks from people.
Think about that: you deposit your money in the bank; the bank lends it to me; I pay the car dealer — which means that money is no longer in your bank! What is in the bank is an IOU from me for that money, and of course that IOU itself has some value and could itself be sold/lent to someone else for some other purchase. There's no fraud, no double-counting, but it all makes perfect sense.
The money is no longer in the bank, but I can't demand it for five years, which is great, because the bank will get the loan paid back, with interest, in four.
And yes, I would expect a secondary market to develop for deposit receipts as people misjudge their time/money needs.
What am I to think about? Duration mismatch is the problem, eliminate it and you eliminate bank runs and, more importantly, lying. The fraud is when the bank, through slight of hand, tells more than one person they can have a given monetary unit at a given point in time. That's the double counting.
But perhaps I'm misunderstanding you.
Banks were given this privilege because they were highly regulated, essentially just extensions of the Federal Reserve itself. Of course over time they argued this was unfair and chipped away at the regulation, while still retaining the privileges.
Given how much is at stake, I don't see anything changing until it all falls apart. Easy creation of money directly supports the Federal Reserve's mission of overstimulating the economy through artificially forcing inflation. The proceeds aren't just skimmed by a countable corrupt cabal, they're funding the entirety of several industries!
Banks in total provide about 20% of the total credit in the U.S. Even if they were perfectly risk-free, you'd still have the other 80% to worry about.
If you're worried about fractional reserve banking, you're worrying about the wrong thing IMO.
Because if you print your own currency, the risk of you running out of it (insolvency) is exactly zero.
Of course, when you thought you heard "major" what he probably said was "sovereign in the currency they borrow". Big difference (US is sovereign; Japan is sovereign; Greece is not; Zimbabwe was not).
"and could lean on their massive power/influence if they got stuck"
"Stuck"?
In that situation, our balance sheet would be ok, but our country would be in very bad straits. So we would be stuck in a real sense, if not in an economic sense.
His lecturer probably (naively) believes that America will be dominant for so long that we won't have to worry about pesky things like the threat of war from other countries on economic grounds.
Why? The US government could pay off all of its debts tomorrow by printing money but the hypothetical situation where it would 'need' to simply won't arise.
Same for Japan. Or the UK. Or anybody. Inflation is the only real problem most governments need to concern themselves with (and is inflation too high in the US or Japan?).
>His lecturer probably (naively) believes that America will be dominant for so long
And I suppose Japan has managed to remain solvent with ~220% debt/gdp by being a superpower as well?
His lecturer wasn't being naive. The austerian economists who predicted hyperinflation in Japan in the late 90s for the exact same reasons you're proposing were being naive.
It could arise pretty easily if international markets lost confidence in the USG's ability to repay. In terms of wealth, I mean. Of course the government can print money to pay in dollars, but from an investor's perspective there's no difference between a country that inflates its currency and a country that only pays a percentage of obligations in an uninflated currency.
Most US debt is short term. It has to be rolled over, and it has to be rolled over at very low interest rates. That was the real genius of QE - they found a way to print money and lower interest rates at the same time.
>And I suppose Japan has managed to remain solvent with ~220% debt/gdp by being a superpower as well?
Japan has remained solvent because that 220% number isn't real. If you subtract out interagency borrowing it's more like 130% (or it was, anyway, the last time I looked into it), which, while not ideal, doesn't exactly put the country in a league of its own.
Protip: Your critique of "status quo" (e.g. central banking) systems will be taken more seriously when you demonstrate thorough knowledge of the subject matter and don't rely on emotionally laden arguments involving "fraud" and "lies."
They've tried everything in Japan & Europe, getting governments trillions into debt, and now they want to go negative interest rates. Clearly what they did before didn't work, and now they are trying something else. They're shooting in the dark and unknowingly killing the economy. It doesn't take a genius to figure out people will just keep cash at home if you impose negative interest rates, and by keeping cash away from banks, reduce the reserves banks hold, and the money they can lend, reducing the money supply, exacerbating the deflation the NIRP was supposed to fight in the first place.[1]
There's no fraud and no lie, except for the fact central bankers operate on economic models detached from reality. The only lie is claiming to know more than they do.
The policies the Japanese central bank tried to impose to lower the value of the Yen in the past few months, only raised it. https://au.finance.yahoo.com/q/bc?s=USDJPY=X&t=3m&l=on&z=l&q...
"Central bank impotency" heading your way.
[1] http://www.wsj.com/articles/japanese-seeking-a-place-to-stas...
Erm no, they're trying the exact same thing even harder. The top of the economy is awash in capital with nowhere to go, while the bottom has to run ever faster on the debt treadmill. Creating even more debt that funnels wealth upwards is obviously the solution <g>.
Hence why the alleged benefits of a cashless economy are being pushed across the board at the moment.
Cue the "if you insist on holding cash, you must be a terrorist" rhetorics.
On the other hand, taxation is good because it reminds people there are costs to government services when they have to actually pay the tax, and in addition you can use a tax to inject a market signal about costs that would be normally externalized.
[1] Unfortunately, MMT implemented by any government will likely be "in addition to" rather than "instead of" existing tax mechanisms.