Tim Duy (commenting on Frances Wooley’s “What Where they thinking?” post):
“Prior to the introduction of the Euro, the presence of independent central banks prepared to serve as a lender of last resort for the fiscal authorities meant that there was no serious default risk. There would, of course, be inflation (soft-default) and exchange rate risk, but no hard-default risk. You can’t really default when you can print the currency in which your debt is denominated. After Lehman, though, the possibility of default appears, and the ECB does nothing to dispel such fears. Moreover, the Greek debt restructurings dispelled any remaining doubts about European sovereign debt – the lack of a central bank backstops means serious default risk.”
The lack of default risk is huge. It changes everything, and drives government interest rates to their inflation risk/exchange rate risk levels.
I had a post on the crucial distinction between default risk and debasement risk which helped the dialogue a while back, even though it seems I overstated the inability to default back then. JKH’s post on the Central Treasury Bank is an attempt to make the obscure and sometimes implied institutional arrangement(s) between the Treasury and the Central bank obvious and explicit.
Inflation risk is something which can be modeled decently with existing financial technology. Default can be/is a political process, which is nearly impossible to model.
If expectations mean anything in the world, the future Eurozone economic growth path is being destroyed by uncertainty of a default.
“Inflation risk is something which can be modeled decently with existing financial technology. ”
Is that true? Why don’t we see papers assessing inflation risk given the massive fiscal deficits projected and how inflation might vary with different fiscal policies going forward?
I don’t know if anyone there brought this up in Wooley’s post referred but IMO, very few people knew that the EA governments cannot make a draft at the central bank. (i.e., they surrendered their sovereignty without there being a central government to who this is entrusted).
Even if they knew, they thought that there is a mechanism that any excess spending will be *disciplined* by the markets and hence will lead to less deficits by the government. Also there was this 3% deficit rule and 60% debt rule which turned out to be a paper tiger.
The two reasons were incorrect because government deficits and debts are endogenous (as opposed to the “fiscal stance”) and very little under the government’s “control”. This was first derived by Wynne Godley and very few people actually understand this even now.
Right, its the old price/quantity distinction (the Fed can control interest rates or money supply but not both), governments can control fiscal stance or budget deficit but not both.
The problem here is, what doesn’t get checked doesn’t get done. Its easy to look up deficit numbers or interest rates, but who’s tracking the fiscal stance, and by what metric? I forget offhand how Wynne measured it but without a number (or better yet, a chart!) to look at, its not surprising very few people understand this.
)
You could keep it updated and call it the Ramanan Ratio.
From IMF Guidelines for Fiscal Adjustment
http://www.imf.org/external/pubs/ft/pam/pam49/pam4902.htm
How Should the Fiscal Stance Be Assessed?
Given the size and complexity of most government budgets, it becomes important to develop broad indicators that convey a sense of the impact of fiscal policy on domestic demand and financial resources. Ideally, such indicators should reflect a comprehensive coverage of the government’s activities and be easily derived from budget documents and other available statistical sources. The reality is often different; considerable efforts are frequently required to piece together accurate and conceptually appropriate indicators of the impact of fiscal policy. Usually, this requires analysis of policies effected both inside and outside the budget. Also, taking into account the way in which the budget affects, and is affected by, other economic variables can require important adjustments to official data.
A commonly used indicator to assess the stance of fiscal policy is the overall balance, which measures the difference between revenues and grants, and expenditure and net lending.6 This balance may be in surplus or deficit. As a starting point for analysis, an overall deficit (surplus) would suggest an expansionary (contractionary) fiscal stance on the basis that the negative impact of taxes and other revenue on aggregate demand is more (less) than offset by the positive effects of government spending. Developments in the overall balance over time, particularly when related to GDP (or GNI), provide an indication of the changing impact of the government sector on the economy.
While the overall balance is an important indicator for assessing fiscal policy, it is a measure that needs to be judged with caution. Since it offers a perspective on the aggregate demand effects of fiscal policy, it is, not surprisingly, deficient as an indicator of the impact of fiscal actions on other policy variables of concern (growth, monetary stance, sustainability, etc.). Moreover, as a simple indicator, it abstracts from the range of items that comprise government operations–importantly, the way the deficit is financed–as well as from the particular institutional and other factors that affect the impact of fiscal policy in any country. These complexities are discussed below in relation to the effect of the way a deficit is financed, special measures of fiscal impact that may complement the overall balance, the time frame of analysis, and possible alternative definitions of the government sector and fiscal balance.
When attention shifts to the supply side of the economy, the structure of fiscal policy takes on greater significance, and simple indicators of fiscal policy stance become less useful. Indeed, structural fiscal adjustment may be needed even when stabilization is not an issue. This is because high taxes can foster a misallocation of resources and create work and savings disincentives, and government spending at the margin may be less productive than private spending. Issues relating to the appropriate structure of fiscal adjustment are addressed in the last section.
That definition of fiscal stance is quite different from Wynne Godley’s
Right. I was responding to beowulf who asked “but who’s tracking the fiscal stance, and by what metric?” I referenced the IMF approach, which I would assume is somewhat standard in the mainstream.
The fact that Godley’s approach to fiscal stance is different doesn’t do much good if no one is using it or tracking it and publicizing the results. beowulf’s idea of doing so is right on.
That’s okay. However note that since the deficit is endogenous, it doesn’t capture anything.
For example, IMO, Spain was very lavish in government expenditure – including at the state level since the start of the Euro. However no measure of a fiscal stance given by fiscal deficits will capture this.
OK, Wynne calls it Augmented Fiscal Stance or AFS here:
http://findarticles.com/p/articles/mi_m1093/is_n1_v41/ai_20485331/
The “augmentation” to Carl Christ’s Fiscal Stance concept is the addition of foreign sector (closed system versus open system). This is an important distinction because of our trade deficit— $600B this year, $6.3T over the last 20 years. Check this part out, the Ramanan Ratio correlates with GDP growth.
“we compared the resulting expression [with a 2 quarter lag] with actual GDP… Yet, although the nominal GDP rose 1,000 percent during the thirty-two years covered, the root mean squared “error” is less than 3 percent, and the formal diagnostic betrays no bias to speak of… Introduction of net lending into the formula greatly improves the fit: The error is reduced to 1.6 percent [Paging Steve Keen to the white courtesy phone! Doesn’t he say AD is income plus net lending?).
Later on, Wynne renamed AFS the combined fiscal and trade ratio or CFTR (see charts on p. 3 of Seven Unsustainable Processes pdf).
http://www.levyinstitute.org/pubs/sevenproc.pdf
This really is something worth tracking (with and without net lending presumably) and lagged to GDP by 2 quarters.
I just had to approve this comment! lol.
Shoulda banned that guy!!!!!!!!!!!
You can’t stop him, you can only hope to contain him.
)
“if G + X = T + M, where X and M are exports and imports, respectively; and defining m as the propensity to import (M/GDP) [t is the average tax rate], the AFS is given by (G + X) / (t + m)”
X/m is called the Harrod trade multiplier. And G/t was first derived by Carl Christ I guess – but later used by Tobin, Blinder, Buiter and others.
I don’t know how Harrod interpreted his multiplier, Thirlwall and Kaldor recognized this as a constraint. Godley and Cripps had stock-flow consistent models and they derived the relation (G+X)/(t+m).
So for empirical analysis one can plot these three and see where the economy is headed and what sort of policy must be used. If X/m is quite high, the government can relax fiscal policy sufficiently to add to the growth created due to exports. If G/t is quite high compared to X/m, then fiscal policy has to ultimately give in unless something is done about the external sector. So that is why Cripps and Godley proposed import controls because it would reduce m without reducing imports necessarily.
So in http://www.lrb.co.uk/v02/n01/wynne-godley/wynne-godley-calls-for-general-import-controls Godley wrote:
“My alternative macro-economic strategy is altogether different. First, imports should be non-selectively controlled by a high, uniform tariff or by auctioning import licences, thereby ensuring that the pattern of imports would continue to be determined by market forces. Second, I insist that control of overall import penetration, in sharp contrast with selective protectionism, must be an integral part of an expansionary fiscal and monetary programme. Once having removed the balance-of-payments constraint on growth, the Government is free to expand domestic demand within the only constraint that ought to be operative: our own capacity to produce. All and more of the yield of a tariff (or the proceeds of auctions of import licences) should be given back to consumers in the form of tax reductions so as to raise domestic spending. The level of imports would be as high as under present policies. Domestic production and income would be much higher.
In relation to this strategy, all the old arguments against protectionism are irrelevant. Total national income, output and employment, as well as average productivity, would be raised; prices, at least initially, would be reduced by the tax reduction below what they otherwise would have been; the pattern of expenditure and output would be determined by market, not bureaucratic forces; no individually inefficient firm or industry would be saved from the rigours of competition; other countries on balance would not be harmed, since the total level of UK imports would be no lower as a result of the new policy.”
wow. of course! Godley is a flat out genius.
Yeah, like F. Scott Fitzgerald would say, that guy has the whole equation (“Not half a dozen men have ever been able to keep the whole equation of [motion] pictures in their heads.”).
In 2008, Wynne’s colleagues at the Levy Institute took his idea and ran with it in a report (ostensibly a review of Warren Buffett’s import certificate plan) suggesting that import certificates be auctioned off with the proceeds used dollar for dollar to cut payroll taxes. Their estimate was it’d cut FICA taxes 4.8 FICA points (presumably divided between employer and employee), so a FICA rate of 10.5% instead of 15.3%.
http://www.levyinstitute.org/publications/?docid=1077
Its a mystery to me why fair trade supporters in Congress like Senators Sherrod Brown and Lindsey Graham haven’t taken that idea and sponsored a bill (call it, say, the “Fair Trade Tax Cut Act of 2012″).
Careful. I don’t think the central bank in any monetary system ever controlled the money supply. The only time this was tried/attempted (and failed) was in late 70s/80s – by the Bank of England and the Fed and a few other central banks.
Also it is difficult to control the deficit – one can target it – as in making a rule that the expenditure and tax cuts will be changed so that the deficit is prevented from going out of a cap such as 4% or so, but if external conditions or the private sector saving preferences change, it is likely to fail.
In reality even the expenditure is not exogenous. This is because in recessions some unforeseen payments from governments have to be made such as benefits of some kind to the unemployed etc.
A nation that is sovereign in its currency cannot be forced to default operationally.
Countries, being sovereign nationally, always have the option to default as a policy choice, that is politically rather than operationally, when they deem it in their advantage to do so.
It is entirely possible and even quite plausible that a government would choose to default rather than inflate excessively, since the latter would result in domestic issues that would likely drive the government from power, for instance. In other words, it would involve evaluating options and choosing the politically most advantageous alternative.
So according to you Hungary cannot default??
Of course they can default if they make that policy choice as the best option after analyzing alternatives.
Seems to me that by the time a government gets to that point… facing excessive inflation and can’t reduce financial assets with spending cuts, can’t destroy financial assets with taxation… and the only option that looks good is destroying financial assets by refusing to honor its own IOUs maybe the real issue is regime failure and not the finer points of policy.
“can’t reduce financial assets with spending cuts, can’t destroy financial assets with taxation”
Depends on what “can’t” means. Sovereign countries have control of fiscal policy and can in principle always reduce spending and raise taxes. Whether they are able to do this as a practical matter politically is another question.
As I said above, if a government feels politically constrained domestically, then it may choose to resolve the problem externally by devaluation or default, if it cannot get accommodation, i.e., restructuring of its obligations.
We’ve discussed this before, but I think it’s a point MMT ignores because they believe money is state driven. The USA, for instance, could reach a point where inflation is essentially morphing into hyperinflation and the govt starts to have trouble procuring funds via taxation (tax receipts always decline in a hyperinflation for a multitude of reasons). The next likely step is that the govt will swamp the market with bond issues, but as yields surge higher the PD’s will confront a dilemma – do the govt’s bidding via obligations to buy bonds or save their own skin and stop buying the bonds. Ask a good capitalist what he will do and obviously the PD’s stop buying the bonds. So the Fed steps in. MMT says no big deal. The Fed can fund the Tsy and the Tsy can just spend. MMR says who cares about that. The game has already been lost. Whether you claim the govt can self fund is insignificant. The govt must always procure funds from the currency users in what is essentially the pvt sector’s way of allowing the govt to “deal” in the thing which the govt deems as fiat money. This all ties into the flaw behind the idea that taxes drive money and the horrible gun to head analogies that some MMTers are fond of, but this is the sort of scenario where the MMT principles fall flat on their face. Details matter. The govt is an operational currency issuer, but only because we allow it to be an operational currency issuer. And its currency issuing powers are totally irrelevant in a scenario like the aforementioned. This is why it’s important to get the details on operations right. Tsy is indeed a currency user and understanding the essence of money (which is MUCH older than 4,000 years) is essential here. The MMT “general case” tells us nothing of any significance about our reality and in fact muddies the reality and creates substantial confusion due to oversimplification and irrelevant metaphorical usage.
The government must always procure funds from currency users? That sounds like a return trip all the way back to square one of taxes-fund-spending mainstream paradigm.
What did President Lincoln do when the bankers stiffed him on financing the Civil War.
What did the US do to control inflation during WWII when the country ran up massive deficits and the debt to GDP ration rose well over 100% ?
Well that’s the operational reality of it all. The MMT idea that spending comes first is just not correct from the operational perspective. You might want to read JKH’s recent work. He’s quite clear about all of this. It doesn’t mean the MMT ideas about autonomous currency issuers having no solvency constraint are wrong, but we need to be right about the operational realities. And the operational reality is that the govt must procure funds before it can spend.
MMT never said that a government can run up deficits indefinitely irrespective of increasing inflation. Inflation is the operational constraint.
Hyperinflation can result from out of control policy, but operationally a government that is a currency sovereign cannot be forced into default, although at some point it may decide either to default as a policy options, or else to devalue the currency by running a currency board. This can happen and has happened historically.
The probability of it occurring in the US under foreseeable conditions has been highly exaggerated at places like Zero Hedge and by economists such a Marc Faber.
Right. The true constraint is always inflation. We don’t disagree there. But there’s no value in saying that the govt doesn’t need to obtain funds to spend because it absolutely does need to obtain funds to spend. The reality of the situation is that in a hyperinflation the govt loses the ability to raise funds from the private sector. So it’s a silly and useless point to say that the govt doesn’t need to procure funds. Yes, the govt can always procure funds in normal economic times and the Tsy can always harness banks as agents, but that doesn’t mean they don’t need to procure funds. It’s a precise and important point that you’re glossing over.
Yes, under current law, at least as I understand it, bonds have to be sold at auction, where they are bought by the PD’s. Is there a law that the Fed can’t just buy the tsys back from the PD’s?
What about the platinum coin exception to direct issuance?
How did President Lincoln finance the Civil War without borrowing?
Anyway, the relevant laws are political constraints that can be changed at any time by act of Congress. Politically imposed differences that differentiate countries don’t affect the operational reality described by the general theory. Those difference are relevant to special cases that have to described individually within the context of the general theory.
The general theory of MMT is irrelevant as it entirely misunderstands and distorts the reality of the monetary system. It is entirely useless to proclaim that an autonomous currency issuer doesn’t need to procure funds. It does not tell us about the relationship between the currency users and the issuer or about the essence of money. MMT’s general theory skips crucial steps in understanding this relationship and distorts the reality to satisfy a myth.
The laws that exist to constrain a govt from spending are there for good reason. They don’t exist for shits and giggles. The govt really is constrained by how much tax revenue it can generate and how much bond issuance it can generate because the currency is not a creature of the state. Money is ultimately a creature of the people because the state is a creature of the people. I find it odd that MMT recognize money as a social construct, but then tries to obscure this by proclaiming money to be a creature of the state. There’s an obvious contradiction there and they often claim MMT is not a theory of the state (how can a state theory of money not involve a theory of the state!?!?!). The people serve as a check in this relationship who allow govt to procure funds and act as the currency issuer. There is no gun to our heads or totalitarian regime forcing us to use the currency. We willingly allow the currency to exist by choosing to pay our taxes and choosing to buy bonds. The MMT general case of a gun to our head is misleading and false. I know MMTers will say that 99% of the time we have no choice to pay taxes, but this is misleading at best as it is that 1% of the time we choose not to pay taxes that results in 100% currency collapse. So any claim about guns to our heads to pay taxes are 100% irrelevant.
The MMT general theory is like saying that the US govt can drop nuclear bombs where ever it wants, but the specific case is that there are international laws and treaties prohibiting such actions. Sure, the general case might be right in some alternate reality, but the specific case exists for good reason and absolutely applies. The US govt really is constrained in its ability to deploy nuclear bombs so the general theory is irrelevant to our reality. The purpose of the specific case is simple – to constrain, restrict and define the powers of a seemingly omnipotent entity from being abused. Of course, MMT doesn’t care about this because MMT’s primary goal is to unleash govt of its constraints and implement it as the center piece of an economic strategy.
In this sense MMT has no regard for this specific case and abuses the general case to satisfy a myth.
We’ve been here before, and the conclusion is that we disagree over basic issues. After all, the divorce was due to” irreconcilable differences,” with both parties claiming that the other is wrong and neither side being willing to modify a position it takes to be correct. Hardly unusual in the case of divorce. But it was nice while it lasted.
They’re not really irreconcilable. You guys believe in a myth. You believe in things like a money monopolist, banks serving public purpose and the dual existence of a general and specific case that totally contradict each other. These are fairy tales and these points are not hard to prove wrong. Anyone with a decent understanding of monetary economics can see that they’re wrong. But what I don’t get with many of you is that it’s the political agenda that you seem to like. The general case in MMT is just wrong. There’s no denying it. It does not describe our reality. But you can understand many of the same principles without believing in this myth. You can still understand that the true constraint is inflation. You can still believe full employment through a JG is the best policy. You can still believe that an autonomous currency issuer can’t run out of money. MMR can describe all of these things without embedding this myth that MMT adheres to. So I have no idea what the allure of MMT is. By now it’s like you guys are just hanging onto a dream for dear life and it’s slipping through your fingers as reputable people prove some of its core components are wrong. MMT is a fantasy that you don’t need to adhere to to enjoy your political preferences. And it only confuses people about the operational realities. So why keep defending it so vehemently?
This is exactly what irreconcilable differences that end in divorce sound like.
The only ones married to a dream or an idea are the MMTers. The reason why a bunch of us split off was precisely because we’re not married to the ideas of MMT and realized they were demonstrably wrong. Your position is more like an unhealthy addiction in which you can’t seem to see how there’s a problem with what you’re involved in. Either way, no skin off my back so let’s call the “divorce” amicable and move on.
Fine with me. But notice who is called who intransigeant or an addict. I am just saying that we disagree over basic issues, including facts and that this is OK. Paul Volcker once observed that in economic controversies among schools even the facts are “non-neutral.”
Wittgenstein showed in Philosophical Investigations that this is a result of the difference between “seeing” and “seeing as.” Everyone sees “reality” from their own POV, and most people regard those who see things differently as disingenuous, unintelligent, misinformed, in denial, or not possessed of their full faculties. Others recognize that there are differences in POV, and that “the proof is in the pudding.” Feedback from reality that transcends perception sorts things out.
Debate is useful for specifying differences. So I look at this disagreement as constructive. The gap between both MMT and MMR is much narrower than the gap between either MMT or MMR and many mainstream positions. It seems to me anyway that the arguments between MMT and MMR are more over nuance rather than foundations.
If you think that the operational realities of the monetary system are “basic issues” or “nuance” then you truly are in denial. And yes, I don’t mind calling people as I see them. I’m sorry if you find that too personal, but some of these points we’ve made are just flat out common sense. To me, the operational facts and MMT myths that MMRists have laid out (like the myth of the money monopolist, conflicts in MMT’s general and specific case, and the spend first myth) are incontestable. You have to be very biased to proclaim banks as serving public purpose AND enemies of public purpose (which MMT does all over the place) for instance. These aren’t minor or basic issues. They are very broad and blatant contradictions/inaccuracies in the MMT framework that result in very misleading conclusions and a warped view of reality.
I’ll agree that MMT is far better than most of neoclassical economics and its contributions are important, but I am beginning to have trouble understanding why anyone would continue to support it when some of its key insights are demonstrably false. Then again, there are supporters of lots of silly economic theories (mainly due to political biases – which MMT is filled to the brim with) so I guess that’s the reality I have to learn to live with. So be it.
Summarizes some of the irreconcilable differences. I don’t see it that way, other than that MMT economists would admit a policy agenda based on full employment. That is basic Keynesianism. They and most Keynesians would also observe that economic theories and methodologies involve assumptions that lead to policy goals, whether this is admitted or not, or even recognized.
As Marc Lavoie pointed out the difference between Godley-based PKE and New Classicalism is that New Classical economics presupposes scarcity, while PKE recognizes the role of buffers. The choice and structure of buffers is political and key in shaping economic policy, monetary and fiscal. You seem to think, for instance, that using a buffer stock of employed is too far go the left. That’s a normative judgment.
I actually never said the buffer idea was “too far to the left”. You’re just making things up. My problem with the JG was never political. It was always based on the fact that the idea is unproven and the evidence showing that it is effective is weak. The comment to Fullwiler that sparked this whole thing made that very clear. It further bothered me that MMT feels the JG is a necessary component of the underlying thinking because it had been clearly communicated to me by Mosler and Fullwiler that this was not the case. So the contradiction in the JG debates was bothersome to say the least.
Anyhow, I won’t rehash all that here. I think it’s become clear that MMT is a political agenda masquerading as an understanding of the economy and there’s no way I will ever convince any of you that your politics are not worth advancing. Nor should I do that. If you want to advance a political agenda then that’s great. But you really shouldn’t pitch it as an “operational reality” when MMT is very clearly not an operataional reality. It is a progressive agenda that requires massive institutional changes to be implemented before being applicable. But you all insist on confusing the general and specific cases in an attempt to make your political agenda more palatable. In fact, a timeline of MMT writings makes it pretty clear that the “general” vs “specific” idea was attached at a much later juncture to try to blur the lines between some past mistakes and current positions. Some would call this dishonest. I will just call it wrong.
“If you want to advance a political agenda then that’s great. But you really shouldn’t pitch it as an “operational reality” when MMT is very clearly not an operataional reality. It is a progressive agenda that requires massive institutional changes to be implemented before being applicable.”
The only policy agenda I see is the MMT JG, even though it is not a stand alone policy prescription but follows from the macro theory and widely accepted economic criteria of efficiency and effectiveness. You claim that the effectiveness is exaggerated. OK, that is a POV contested by Scott and other economists.
But what you seem to be saying here is that you detect intentional surreptitious promotion of a statist agenda based on a biased operational description. I don’t see it that way. Rather it seems to me that hobbling the operational reality of a fiat currency system, which MMT correctly describes, through political restraints in various countries is what is political, basically designed to reduce policy space similar to a convertible fixed rate monetary system.
Reducing or removing those political restraints by changing a few works in existing law, as Carlos has pointed out, is going in the direction of the less political, to my way of thinking. And as he has also pointed out there are work arounds in existing law like the platinum coin. The institutional barriers are those erected politically by the interests profiting from these political restrains that limit policy space and turn the population into debt serfs to get credit money.
There are different POV’s here, and I could accuse you of an agenda based on your role in the financial system. One would expect those in the financial system to want to preserve the status quo that befitting them.
But those kinds of accusation aren’t going to advance the debate and will further divide us, so I’ll give you the benefit of the doubt and won’t make them.
Yes, the JG follows from the idea of a money monopolist, which is demonstrably false. There is no money monopolist in a system in which the private banking system issues most of the money without govt constraint. I know you guys try to blur the lines there by proclaiming that banks serve public purpose or that banks “leverage” govt money, but these are obvious contradictions of other MMT positions like the evil banking ideas and the money multiplier. You either see these ideas as the falsehoods that they are or you just refuse to admit they’re wrong. I am not here to twist your arm, but it’s just silly to say banks serve public purpose in one sense and then go off on daily rants about how evil Jamie Dimon’s business is.
MMT is based on the idea that money is a creature of law. Laws exist for specific reasons. Yes, if you break down all the laws then you could probably prove just about anything. The govt can chop off my head. The govt can drop nuclear bombs on every city in the world. We could proclaim lots of silly things if we just remove the “political constraints”. But many of the political constraints exist for good reason (like the bond market and the need for the govt to procure funds). Just like the purpose of a private banking system which is intended to disperse the power of money creation away from govt (it is intentionally designed NOT to be a monopoly). Likewise, the govt must procure funds from the public for specific reasons as a justification of the social construct that is money. MMT just ignores all of this and essentially makes the silly argument that we can drop nuclear bombs everywhere just so long as we ignore the “political constraints”. The only problem is that reality keeps getting in the way. So the whole “general” case in MMT is a waste of time. It contributes zero to the discussion and in my opinion detracts from it by confusing people about the way things actually work.
And your comment that I am biased because of my line of work is absurd. The founder of your entire theory is a banker and a hedge fund manager. He’s everything MMT criticizes on a daily basis. But hey, MMT is riddled with contradictions so why not go off accusing me of being biased or bad just because I am associated with an industry that you guys love to throw under the bus. As if everyone who ever worked in finance was a biased POS. Could your views really be so narrow as to believe such things?
You know I’ve got your back, CR, but I think you’re engaging in a bit of post hoc ergo propter hoc here when it comes to the U.S. laws around government spending. Aren’t these laws are a holdover from a gold standard era? They may now serve a purpose in checking government spending by the felicitous circumstance of requiring currency validation by a citizenry, but this is the first most of us have heard this line of argument from the writings on this site and PragCap.
Also, Greg reiterates the point I brought up last week: in focusing solely on describing the reality of the current system that is arguably based on a *false* understanding of how money works (gold is the only money) it is going to seem to many that MMR is validating these false premises. I know the state theory of money is incorrect, as well, but when you have a private sector industry given explicit state backing to create money-things and a Constitutional mandate to meet all Federal debt obligations, I’d say the state theory of money is *closer* to the theoretical truth of the system than the ideas the current operational reality of the system was built upon.
Details matter. I am not saying things like the debt ceiling make sense. But the existence of the Tsy having to procure funds makes sense. In this regard, the fact that taxes and bonds are a necessary component of the fund procurement process does make institutional sense and is perfectly coherent.
The myth of the gold std has led everyone to believe we are constrained in our ability to spend. Ie, we can run out of money. As MMT rightly notes, the true constraint is inflation. The govt is not a household because it has the power to harness the banks (and potentially its central bank) as an agent. No one needs to believe MMT’s various myths to understand this. You just need to understand the institutional structure and relationship that JKH has brilliantly laid out in great (and coherent) detail.
Also, my position on this has always been different from MMT. I have always maintained that the currency needs to be validated by its citizenry. This was a disagreement I’ve had with Mosler since day 1. And it was always mentioned in my big primer….Mosler says a gun to the head is sufficient to drive the currency. I’ve never agreed with this notion….
On the point of citizenry validation: I was specifically referring to bond auctions as a form of validation in particular. I’ve always been in 100% agreement that money is a social contract. I’ve argued this point with Gary_UK ad naseum on PragCap. In a way, it’s like language, unless two parties agree to what a word means, it is not meaningful for any sort of exchange between them.
Anyhow, I don’t come here to try and tear you and JKH down. I wouldn’t be able to even if I wanted to. I understand details matter, and I know MMR is a big project, but I though it might benefit ‘the cause’ if you got a fellow-traveler’s perspective on how these arguments are coming across.
We certainly appreciate the feedback PI. Please don’t take my response as being defensive. Maybe you can be more detailed about your view? I should probably be careful using language that refers to all laws – some of which are indeed stupid and leftovers from the gold std…..
Thanks CR. I didn’t take it as you being defensive at all. Well, not much, it’s hard to gauge tone via comments section, but I figure you know the regulars aren’t trolling.
I’m not certain of my views at the moment, frankly. I need to read up more on Goodley and Lavoie.
*Godley
Point of clarification. MMT holds that all money is a social construct (an idea not a natural thing., Money is also a key financial and economic institution historically, having general rules that apply universally (accounting) and specific rules that apply locally (custom and positive law).
The universal basis of all money as unit of account is the credit-debit accounting relationship that results in the creditor- debtor relationship that may or may not be formally contractual. All money is credit money and therefore based on trust relationships.
However, state money is different from all other credit money in that, as Warren points out, state money is a tax credit. Creditors extending credit create an contractual obligation with the borrowers, but under the rule of law, the creditor cannot enforce the contract but must go through the judicial process. If the borrower reneges on the judgment, the creditor can seize the property. If the borrower resists the creditor must get the government to enforce the judgment rather than using force. It’s the sheriff who shows up to evict.
The state, however, is itself the judicial and enforcement system, and it has the power to enforce payment of obligations to it on its own and can demand only its own liability if it so chooses.
Contracts are based on trust, but they are also enforceable. In the end, adjudication and enforcement comes down to the state. The threat of use of force applies to civil contracts as well as enforcement of obligations to the govt such as taxes, fees, and fines.
But as a lawyer Carlos is in a better position to articulate this than I am.
OK, we’re going around in circles again. You get the last word tonight. I’m off to bed. You are two hours earlier than me.
It’s not about the last word Tom. It’s about the right word. The only reason MMT was ever attractive to me was because of some of the bigger more valuable ideas that were obviously right. Ideas like inflation being the true constraint and the fact that a govt cannot “run out of money” are important insights that should be part of everyone’s understanding. MMTers get this stuff and they should be lauded for that. But they also mix in a lot of unnecessary half-truths as well. So it’s not about getting the last word or making MMT look bad or MMR look good. It’s about getting this stuff right at the operational level so we can offer a better understanding to the world.
Excuse me for butting in Cullen and Tom.
Seems to me you are disagreeing with the “government cannot run out of money ” idea Cullen. You want to have it both ways I think. Either the govt is a currency issuer or its a user that needs its funding from the private sources, it cant be both. At least not coherently. If it needs its funding from the electorate where does the electorate get the money?
The notion that the state must spend or lend money into existence is a logical category error in the context of actual institutional arrangements.
E.g. in a zero required reserve system, endogenous commercial bank money can finance government expenditures plus surpluses.
The fact that the central bank fiddles with reserve settings intra-day is not unique to tax or bond settlements, as I explained in a previous post. And the central bank will typically reset those reserves back to zero by the end of the endogenous money clearing process.
The substance of the issue then is that endogenously created bank money can easily be the actual source of government financing and spending.
Moreover, the fact that governments typically run deficits is part of the category error in question.
The fact that governments typically run deficits doesn’t mean deficits are categorically required for governments to spend, as noted in the example above.
The issue (as I understand it) is whether government is funded by currency it issues as liability or by credit money created by the private sector, which by accounting rule must net to zero.
Of course, it could be structured institutionally that a government has to do this if a government desires to delegate all money creation power to the private sector and limit its policy space to what share govt can borrow from the stock of loanable funds.
But is that the structure of the fiat monetary regime that is now in place generally and specifically. MMT is arguing that this not the case generally, although it may be the case specifically should a country’s politicians choose to write the rules that way. MMT further says that in the principal economies at present, that is not the arrangement specifically. Rules are constructed to make it look that way, but aggregate analysis of the outcome wrt change in the amount of NFA resulting from deficits belies that.
The argument that MMT economists make is an aggregate one having to do with change in the amount of NFA in the MMT sense of being the liability of the govt alone, and that temporal priority in the process of money creating is irrelevant because the issue is change in the amount of NFA. If the private sector funds, no aggregate change in NFA, if the government issues the amount of the deficit, then the amount of NTA is increased by the amount of the deficit.
That is how I understand it from the MMT economists anyway.
“Of course, it could be structured institutionally that a government has to do this if a government desires to delegate all money creation power to the private sector and limit its policy space to what share govt can borrow from the stock of loanable funds….”
Your comments about such an arrangement would require nationalized banking. You guys still don’t seem to understand this or you don’t want to accept it because you know it’s a political non-starter that would render MMT dead on arrival. There’s an obvious and blatant contradiction in MMT’s framework because a large and powerful private banking system is a direct roadblock to the state theory of money. You guys hate banks in almost daily rants about them, yet you refuse to admit this institutional and structurally necessary change. I know more and more of you are beginning to adopt this view on nationalized banking, but I don’t see why it’s not more widely adopted in MMT circles and central? MMT’s true base case is one vertical component. If you want a money monopoly you need to kick the private banks in the teeth and take the power of money creation away from them and “bring it back to center stage”. It seems you guys want to blame the banks for everything, but at the same time include them in the big happy family of serving public purpose by “leveraging” govt money. The contradictions in all of this are plentiful….
There’s some nuance here that I think MMR could shed some light on. The U.S. government and the private banking sector are inextricably entwined, from the primary dealer relationship to FDIC insurance on deposits to FDIC receivership of insolvent members, they certainly do seem to function as nominally private agents in a public enterprise.
I guess a question I have for JKH & CR is: in a CAD situation, if a government doesn’t deficit spend wouldn’t economic expansion merely be the result of a shell game between the banks?
The banks are only involved in this relationship with the govt because it serves their masters – their shareholders. Banks are in the business of making money for their owners. At least most banks are. They are not there to serve public purpose. They exist explicitly to serve private purpose. The fact that the govt harnesses the banks and essentially bribes them to do the govt’s bidding does not change this.
Yes, with a CAD, the private sector could become increasingly unstable under a system of ever increasing private credit. But not everyone can run a CAD so this is only relevant in a narrow sense. One of the keys, as Keynes understood, is getting the world into a more balance position. Lots of options there, but easier said than done.
“The banks are only involved in this relationship with the govt because it serves their masters – their shareholders. Banks are in the business of making money for their owners. At least most banks are. They are not there to serve public purpose. They exist explicitly to serve private purpose. The fact that the govt harnesses the banks and essentially bribes them to do the govt’s bidding does not change this.”
I think that you have a bit of rosy picture of this. Bank regulation is tight and that is make sure that banks serve public purpose by protecting the people that trust in banks rather than leaving things to the invisible hand of the market, and ultimately to the courts to sort out when things blow up as they used in the past on a regular basis. There is are good historical reasons that that there is no completely private banking system comparable to non-bank firms, and now there is increasing sentiment that governments need to regulate shadow banking too, for the same reasons. When ordinary firms go under it is creative destruction, when banks fail it can result in financial catastrophe that spreads quickly to the non-financial economy, potentially resulting in debt-deflationary depression.
You know Tom, the obfuscation gets rather tiresome. You’re not talking to someone who doesn’t understand MMT and its various positions. The legal definition of public purpose is:
Banks are not in the business of performing actions that benefit the populace as a whole. And this is clearly understood by most MMT advocates who rant on about Jamie Dimon in now daily attacks. You’re trying to have it both ways and you’re once again falling into the MMT trap of using loose language and even changing definitions. You guys don’t have your story straight. You need to get consistent on this. Either you love banks because they serve public purpose or you hate them because they don’t. I know that MMT needs a fully nationalized banking system that is controlled by “governmental action or direction that purports to benefit the populace as a whole”. You probably know this too. But you won’t admit it because it renders MMT void of value since it’s not applicable in the USA. I have huge respect for B Mitchell because he knows this and sings it from the mountain tops. He’s even going to mention it in his textbook. Big time props to him for getting consistent on this. Sorry to bring reality to the table, but the general case has gotten boring for me. I have no idea why you so vehemently defend a pipe dream that only misconstrues and confuses people about the way the system actually works. Yet you continue to pitch this all as “operational reality”. Why?
If bank regulation is not designed to limit banking to what benefits the population as a whole (fiduciary responsibility, safety of deposits, etc., reduction of systemic risk), what is it about.
MMT doesn’t claim that banks are operated privately for public purpose by choice. In the past, banks often violated public purpose by damaging individuals through losses from imprudence or inadvertence, as well as damaging the public as whole through financially induced panics and depressions. Government stepped in to create public private “partnerships” by giving guarantees and requiring submission to strict regulation and oversight, with the possibility of being shut down and restructured over a weekend if they do not conform to requirements. This is not the case with any other type of firms to my knowledge.
The govt regulates just about every entity within its jurisdiction to some degree. I am not allowed to murder my neighbor because the govt says I am not allowed to murder him. That doesn’t make me a public servant. The govt regulates all firms to some degree. Banks are not unique in this regard. I am not sure what you’re trying to pull here Tom.
” The govt regulates all firms to some degree. Banks are not unique in this regard. I am not sure what you’re trying to pull here Tom.”
Another “non-neutral fact.” Again, we disagree, even over the facts.
Well, the facts are simple. Banks don’t exist to serve public purpose. They exist to serve private purpose for benefit of their owners. This is why they do some of the things that MMT doesn’t like. But hey, if you want to pitch this as some form of public purpose while sending the daily attack dogs out on Jamie Dimon then be my guest. People will see through the obfuscation eventually so you might as well get consistent on these matters now rather than wait for them to pop up again later. No skin off my back if you guys let these inconsistencies fester.
OK, we both think the other is in la-la land. Again, that’s what irreconcilable differences are about. But at least we are articulating the differences in some detail so that others can come to their own conclusions, and that’s useful.
thanks
That assertion means the opposite of bank nationalization, but rather a privately owned central bank and banking system that creates ALL the money available. The government issues nothing and controls nothing, and has to borrow from the private sector to function. In other words, there is “state money” but rather only privately created credit money, which nets to zero. There are no NFA in the MMT sense created in this possible system.
Tom,
Late in the debate – I see the time stamp of June 20 .. hadn’t seen all these comments.
Firstly MMTers weren’t the first to appreciate the supreme powers of the Federal Government. (btw Abba Lerner because he was not aware of the connection of fiscal policy and the balance of payments and hence finally incorrect). To state the supreme powers of the government, there is an overkill approach. For example there is no need to say that the private sector needs deficits to pay taxes. The government can be surplus for years without the private sector having any difficulty in paying taxes. Also I can in theory think of a system in which the private sector is in deficit forever without an issue. The crisis in the US arose because these private sector deficits went into unsustainable territory.
But I can easily have 15% nominal growth (such as in India) and with 10% interest burden and a sustainable private sector deficit of say 1% of GDP (not in India of course) with the net private indebtedness peaking at 20%. No problems in paying taxes. Theoretically at least, possible.
The MMT story starts with confusing saving with net saving and building around the theme.
The reason the private sector is in surplus is because it needs a positive NAFA as part of its behaviour and not to pay taxes or anything. This was realised by Wynne Godley in the 1960s/70s and he used it in a behavioural manner not by fake arguments that the private sector needs a deficit to pay taxes.
The whole MMT exercise to show that deficits are not a problem completely runs into counterproductive territory.
“needs a deficit” as in needs the government to be in deficit.
I believe the MMT argument is that the fiscal balance is endogenously driven by non-govt. saving desire affecting sectoral balances that must sum to zero. Government has no control over the ratio of propensity to save or consume, and so the non-govt balance is beyond govt influence. Therefore it is the public sector fiscal balance that reacts to changing non-govt saving/consumption propensity ratio.
No problem with running balanced budgets or surpluses as long as change in saving desire doesn’t result in economic underperformance reflected in rising UE, lead to unsustainably rising private debt, deflation, or fx issues. (If the currency strengthens, then imports become less dear and exports dearer, with effects on the economy.)
Similar with deficits. If the fiscal balance is in deficit in offset of rising saving desire so as to keep the economy performing at potential, which is reflected in full employment, then it is a “good” deficit. If the deficit rises due to falling tax revenue and increasing automatic stabilization, then it is a “bad” deficit. The financial constraints involving deficits are inflation or fx devaluation.
According to MMT economists, there is no non-financial constraint other than availability of real resources , but policy makers have to be aware of changes in employment rate, price level, and fx in policy formulation. (If the currency weakens, then imports become dearer and export less dear, with effects on the economy.)
The notion that MMT economists say that government should just create enough currency to buy up everything is silly just because they “could” in terms of the general theory, which allows this in the sense that there is no operational limit on how much a currency issuer can issue under a non-convertible floating rate regime — available real resources being the non-financial constraint in this case. But even in the general theory, issuers have to be aware of financial consequences of policy in terms of employment, price stability, and fx in an open economy.
I should add that there are no political issues involved in the general theory, which abstracts from political conditions as a monetary economic model. Political conditions and institutional issues affect special cases when the general theory is applied to specific currency issuers, i.e., nations having different customs, institutions, laws, and different cultural and political environments, as well as different economies and economic conditions. All of these have an impact on the kind of special case that can practically be constructed and implemented.
Tom,
Funny how you use “General Theory”. That term is reserved for JMK’s book so please don’t use it. I can’t stop you but it is detrimental to your own cause.
Nothing of what you say above is original to MMT even though “MMT says xyz”. However on top on it, much of confusions start when Chartalists if you try to argue that if a government runs surpluses the private sector runs out of funds to pay taxes and so on.
JMK doesn’t own “general theory.” But my use is inspired by what he said about his use of the notion. He used it a particular way. His specific method is different from the use of theory in the hard sciences.. An economic theory is not explanatory and predictive in the same way . It’s designed to perform a different function. People complain that Keynes never formalized the general theory, even though he was a mathematician by training. This was neither an oversight nor a lack. Keynes set out to do something different. He was not trying to make economics a science, which he rejected as an impossible project. The subject matter of economics doesn’t lend itself to purely descriptive methodology because of the human element.
In the sciences models are general in the sense of being universal. Evolutionary advances have been in the direction of greater universality of cognition. Human advancement is follows the same pattern. But models in the life and social sciences are different from the hard sciences due to differences in what they study. Models in the life and social sciences aren’t highly formalizable and also universal due to the need to limit assumptions in model construction to make the model tractable.
Providing a general theory in the social sciences is examining the logic that underlies many different specific behaviors. It is an advance over merely describing the specific behaviors individually, in that it shows boundary conditions that all observe, or even must observe due to contraints, as well as invariance that they share. This is the sense I am using, and of course, mine is within the scope of a relatively short post, which is its own limitation.
Greg, one of the main purposes behind JKH’s recent post was to show the institutional relationships that make the govt both a currency user and a currency issuer. Tsy, a part of the govt, is indeed an operational user while the ability to harness banks and the central bank make the total govt a currency issuer. Maybe have another go at his post if you’re still confused on this. It’s VERY coherent as far as I can see, but maybe you have some critiques? AS I said to PI, we’re not against constructive criticism here….
Cullen
Is anyone a pure currency issuer? Or maybe I should word it this way. Is there anyone who can ALWAYS have their money accepted for exchange? Of course not. Theres not a bank or Central Bank in the world that holds such a position and never will be outside of some horrifying totalitarian regime that would be unthinkable to live under. So Im not sure why there is any value in pointing out that “technically” our Treasury is a currency user and CAN have its ability to spend constrained. That criticism applies to EVERYONE on earth. Its all a matter of who sits where in the hierarchy of currency issuers. I dont hear any “End the Treasury” campaigns being started up by Ron Paul or Dennis Kucinich.
If you want to argue that in fact the US Treasury CAN run out of money then so can the US Central Bank. Everyone can run out of money if we go down that line of reasoning. Certainly every private individual or company CAN go bankrupt along with every country. So?
It’s about explaining the institutional structure so that people can understand exactly how the monetary system works. The value is in the understandings and the specific details outlining these structures so we can properly understand them. Vague metaphors and a loose “general case” give us a poor understanding of the operational realities and the relationships at work here. Perhaps you don’t see it as a balanced and precise view. I’m not here to twist people’s arms into believing MMR is right. You and some of the other MMTers are clearly in favor of blurring the realities if it’s necessary to push a policy agenda forward. That’s fine. It’s okay to be progressive. But MMT should not be portrayed as “operational reality” because it is not. It is a progressive policy agenda that requires vast institutional restructuring. Personally, I think MMR has made great strides in clarifying the points where MMT goes wrong. In the end, you can still use the understandings from MMR to push whatever policy agenda you want. So I have no idea why anyone would understand MMR and still promote something like MMT as “operational reality” when it’s very clearly not…..MMT should be promoted as a progressive policy agenda and that’s about all.
Personally, I see great value in this precision and detail since it offers us all a better foundation from which to proceed….
Thanks for the response Cullen
I want to start by saying that this one of my favorite sites on the web. MNE and this site have become my starting places on my daily trek through the “news”. Its not because I get all my viewpoints validated anywhere but because issues I think are interesting today get explored. I know Im not “in” the MMR fold by your definition but I hope you dont find me hostile. I have referred people to this site from other MMT sites who have expressed in comments that MMT seems too leftish because usually the broader points of the MMT sites can be learned here as well. I think this is only ADDING to the heterodox landscape and making it stronger. Any other site whos mission is to end the worthless bullshit that comes out of the mouths of most mainstream econ discussions should be trumpeted by all who want some sanity…….. I cant say “restored” because that implies we once had it…….. so maybe…..inserted into our discourse.
While I appreciate to a point a desire to describe “exactly” how our money system works, isnt it true that even JKHs efforts have fallen short of that mark?
What I mean is this, whatever institutional/legal arrangements we have today which dictate the process we go through when the govt “buys” a widget , then issues or prints a bond and then the accounts at the fed which are created (by whom?), named and debited/credited, isnt in FACT all this completely provisional? IOW there are always escape clauses that can be used by our govt to get what it wants. How and when it does and should it do that seems to me the most basic nature of our POLITICAL disputes today. Right now I think we are teetering on the edge of such a situation. Why? Because a group of very powerful bondholders/bankers throughout the WORLD are saying STOP IT to govts everywhere. CBers are sort of in the middle of this, working for govts but trying to support prices of bonds and other assets even as the real economy around them is deteriorating. Do they have the right to say stop it? Sure, people can say what they want to a point but at what point are their actions “acts of aggression” against a sovereign? And what will the US Treasury/Congress do when there is an act of aggression against it? I dont think JKHs magnum opus has considered that in its scope. In that sense though his post is simply an example of “assuming” all parties involved in these transactions are content, everything is humming along normally etc etc. But right now that is NOT the case at all.
Hi Greg. I don’t see you or any of the MMTers as being “hostile” at all. I really don’t take things personally here even if my tone might come across as harsh at times. Rather, I view most of the MMTers (not necessarily you) as defending an inflexible policy position which renders their understanding of the monetary system slightly skewed (albeit better than just about all neoclassical economists). I think the creation of this general and specific explanation is an attempt to explain away the operational realities so that the mythical spend first/money monopolist world can be rationalized in a way that does not damage the policy ideas. You all are very passionate about the policy ideas and that’s admirable and there’s certainly nothing wrong with it. But to describe this as “operational reality” is simply not accurate. MMT should be described as a progressive policy idea and its proponents should convince the world that MMT’s vision of the world is superior. They should not describe it as “operational reality” because it is clearly not. We probably wouldn’t be having this discussion if MMT had been able to convince many of us that their policy ideas were sound. Instead, they insisted on claiming they’re based on “operational realities” like a mythical money monopolist and other ideas that I believe have now been proven false. That was the wrong approach and it should be righted. Unfortunately, I fear 20 years of academic work means they are too far down this path to turn back now. So they must defend prior erroneous positions by altering their story. That’s where the general and specific nonsense comes in. It should be dropped.
Fortunately for me, I am in the business of being wrong quite a bit. Guys in my business who hang onto losing ideas end up out of a job. So you adapt and evolve, recognize mistakes, fix them and move on. Being wrong is part of life. MMT is not the first theory that made mistakes. But they refuse to move on. So they’re hanging onto a losing trade and it’s bankrupting the entire theory.
I think it’s hard for anyone to dive into the operational details to the degree that even you would like to see. I think what MMRists have tried to do is explain the institutional structures in a broad sense as they exist today. This allows us to understand the broader relationships at work here. Even so, I think JKH has gone into more detail than most on this topic so his explanations are very clear and precise as far as I can see. Granted, the world can change, but I seriously doubt many of the broad institutional structures that JKH describes will be altered to any sizable degree in the next few decades. And if they are we will evolve. Ironically, it is MMT that needs these institutional changes to occur before the theory is truly applicable yet its proponents still describe it as “operational reality”. I find that baffling. I have a feeling that what occurred with MMT was this. You had a bunch of academics who were in love with the idea of a job guarantee and full employment, but they couldn’t quite make it work. Then comes along Mosler explaining how an autonomous currency issuer can’t run out of money. An aha moment occurs and the missing link in Minsky’s ELR is filled. How do you fund it? You just change numbers in the accounts! We solved it! So the academics took the elephant by the tale, starting with the policy ideas rather than getting the operational stuff 100% right. And here we are today. Trying to jam a square peg in a round hole. That’s just a guess, but given everyone’s background involved in this, it’s probably a pretty darn good one.
BTW, Warren posted a link to my post at MNE and there are many interesting comments coming up there. Warren has explained or clarified his position in some of them.
BTW, FDO15 has put forward some interesting contributions there too. I confess that I have thought of him as a crank due to his abrasive style and often responded in that vein , for which I apologize — no excuse for overreacting. He (assume he is “he”) is a knowledgeable guy about banking, although I disagree with his political views and conclusions drawn from them.
“Cranky”? “Abrasive”? It’s always a “he”.