Well sort of,
She writes
This was exciting news for fans of the alternative economic school, more popularly known as MMT, which asks people to think of money, credit and tax in a completely different way to what is usually considered conventional in economics.
All in all, we have to say, the article did a good job, at least when it comes to explaining the origins and basics of the theory. As a primer it worked well.
. . .
The reaction, of course, is interesting because it shows to what degree MMT really does represent a paradigm shift in economics. If you can’t flip your brain into MMT mode, try as you might, you’ll never really understand what they’re going on about.
So earlier I made some disparaging comments about folks who don’t get the basic ideas that either the MMTers or the MMers are pushing. That was at minimum inappropriate.
Still, I think it’s a mistake to talk about MMT as if it is some grand new way of looking at the world. Its basically just understanding how Central Banks with a little bit of progressive liberalism sprinkled on top for extra fun.
For example Izzy quotes Stephanie Kelton as saying
And while “Keynesians” worried about the impact that large deficits would have on US interest rates, we calmly explained the flaws in the loanable funds framework and insisted that rates would remain low as long as the Fed was committed to low rates (as the Bank of Japan has shown for decades).
That has nothing to do with being a Keynesian or anything. It simply has to do with not thinking about what you are saying. Is there any theoretical difference here between this framework and the dominant economic framework?
I don’t see it.
Its just that people saying that interest rates would rise in the face of massive deficits are not even trying to walk through the mechanics of either interest rates or deficits. They are just asserting something that they think they heard once but weren’t really even paying attention to.
Maybe I am wrong.
If so I would like to hear the alternate story. I posit that no such consistent story exists. Anyone claiming to have one is engaging in hand waving or is speaking gibberish.
Or take this also from Kelton
And while Nobel laureates, like Robert Mundell, were espousing the virtues of a common currency in Europe, we warned that the new design would put bond markets in charge of government policies. At some point, being right should actually count for something.
Mundell’s endorsement was aesthetic. For example, I am allergic to cats. If someone said we should adopt X monetary policy and I knew a side effect was going to be to run all the cats out of America (sorry Kevin) then I am going to be more predisposed to supporting that monetary policy.
However, that is not to say I have an “alternative theory of money and cats.” I just don’t like cats or rather I don’t like their effect on my immune system.
Or take Micheal Hudson quoting me and responding
“You can’t just fund any level of government that you want from spending money, because you’ll get runaway inflation and eventually the rate of inflation will increase faster than the rate that you’re extracting resources from the economy,” says Karl Smith, an economist at the University of North Carolina. “This is the classic hyperinflation problem that happened in Zimbabwe and the Weimar Republic.”
Me: Wrong again. The Weimar inflation stemmed from the balance of payments. The Reichsbank created deutsche marks and threw them onto the foreign exchange markets to raise the money to pay reparations to the Allies (who turned around and paid the United States for arms purchases made prior to U.S. entry into the Great War).
What exactly are we disagreeing on here?
I am tempted to say nothing and that this is just a meaningless exchange of English phrases. But, if anything then it is probably the definition of the word “government.”
I am happy to talk this over with Michael but I feel overwhelming confident that he will agree that attempting to purchase an unbounded quantity of goods and services with no countervailing extraction of purchasing power from the economy will lead to hyperinflation.
The only place that I could possibly forsee a disagreement is over whether Michael thinks the extraction limit is less than 100%, which I would suggest that it is. However, that is first an empirical question and second I don’t think would prevent us from agreeing that by virtually any sensible definition of terms an extraction rate of 500,000% is not possible and absent any bank intervention the means through which it would be thwarted would be hyperinflation and a rejection of the currency.
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Wednesday ~ February 22nd, 2012 at 8:55 am
Chris Cook
“Still, I think it’s a mistake to talk about MMT as if it is some grand new way of looking at the world.”
With respect, the point is that MMT has a different – and neither ‘grand’ nor ‘new’ but rather, straightforward but forgotten/airbrushed from economic history – basic assumption or axiom to that of either mainstream economics or your economics.
And that is that fiat currency is in fact a credit instrument – a quasi ownership claim issued by an originator of value or ‘money’s worth’ – rather than a debt instrument issued by someone as a claim over value originated by a counter-party.
The MMT’ers and a few others eg Steve Keen, are a bit like physicists whose Physics is based upon matter, rather than a Physics which is based upon anti-matter, and which suffers a disconnect from reality as a result.
Wednesday ~ February 22nd, 2012 at 9:11 am
Karl Smith
“And that is that fiat currency is in fact a credit instrument – a quasi ownership claim issued by an originator of value or ‘money’s worth’ – rather than a debt instrument issued by someone as a claim over value originated by a counter-party.”
How are these two things different? Just based on who created the actual piece of paper or computer bit?
Wednesday ~ February 22nd, 2012 at 9:49 am
Max
Let’s see if I can succeed in drawing a contrast. The mainstream likes to pretend that there’s a firewall between government bonds and base money, enforced by an “independent” central bank. The bond market restrains government spending. There is no inflation concern unless the central bank commits the ultimate sin of ‘debt monetization’.
Alternatively, government bonds are implicitly backed by central banks (except in the EZ) so they have no more default risk than currency. The bond market is irrelevant. Monetization is irrelevant. Government bonds are born monetized.
Wednesday ~ February 22nd, 2012 at 11:27 am
reason
But MMT says the opposite. Selling government bonds takes money out of the economy, monetarisation doesn’t.
Wednesday ~ February 22nd, 2012 at 11:30 am
reason
It’s neo-Keynesians (paticularly Brad Delong) who say that monetarisation and selling bonds are the same – because in a liquidity trap bonds and money are nearly perfect substitutes.
Wednesday ~ February 22nd, 2012 at 11:21 am
RickR
Am I misunderstanding something here, or is this a reasonable ~100-word summary?
MMT is based on the realization that when a government creates money, what it spends that money on matters. Basically, when the money is spent on consumables, it has an inflationary effect, because it increases demand. But when it is spent on assets that are being held as a store of value then there is no inflationary effect because there is merely a swap between different asset types, but does not increase demand.
Wednesday ~ February 22nd, 2012 at 11:26 am
reason
Karl,
I don’t agree with MMT on everything, but for me the insight that is new important and relevant is the point that private net financial assets are (ignoring the foreign sector for a moment) determined by the government deficit. If the private sector as a whole (because of say the crash of an asset bubble and associated insolvencies/foreclosures) is trying to recapitalise, then the government must run a deficit.
Thursday ~ February 23rd, 2012 at 9:40 am
Karl Smith
Yeah, but this obviously true just by summing up. One cannot owe money to no one. Nor can one have a claim on no one. Someone’s liability must be someone else’s asset.
Friday ~ February 24th, 2012 at 11:19 am
reason
Just read some Austerian arguments and you will discover that this “obviously true” fact, is not widely understood. Nor do most mainstream Keynesians emphasize it.
Wednesday ~ February 22nd, 2012 at 1:51 pm
rjs
google krugman & galbraith; they’ve debated MMT several times, lot of posts on that out there, krugman comes out looking like a right-winger…
Thursday ~ February 23rd, 2012 at 1:28 pm
arioch
May i dare to disagree : mainstream economics tends no to expose the way the monetary system really function (Mishkin’s book is not accurate). For example, see what Goodhart says about monetary economics in this paper (“Monetary economics : a steady refusal to face facts”).
http://www.boeckler.de/pdf/v_2008_10_31_goodhart.pdf
Or what Ulrich Bindseil says in this ECB paper : http://www.ecb.int/pub/pdf/scpwps/ecbwp372.pdf
“Academics developed theories detached from reality, without resenting or even admitting this detachment. Economic variables of very different nature were mixed up and precision in the use of the different concepts (e.g. operational versus intermediate targets, short-term vs. long-term
interest rates, reserve market quantities vs. monetary aggregates, reserve market shocks vs.shocks in the money demand, etc.) was often too low to allow obtaining applicable results.” (p37)
Thursday ~ February 23rd, 2012 at 4:27 pm
a
It would help if you defined the acronym at the start. Or are you only speaking to the cognoscenti?
Friday ~ February 24th, 2012 at 8:32 am
Mr. Violet (@EuropeanViolet)
“storing value”, “extracting purchasing power”, someone told me that all economic and physics mixtures attempted before were silly things or something like that… but it seems very much to me that economy is about energy.
Actually work is energy, and humans from this perspective are “biological infrastructures” able to store energy and employing it in order to transform rough materials in laboured products. Also they are capable of taking raw material and transform it in energy. So we have infrastructures able to keep raw material and transform it in energy and infrastructures able to employ energy in order to transform raw materials into laboured products. Humans can function in both ways. So in some way we are just talking about energy and matter transformations…
a corollary of this would be that the economy physical limits are given by the amount of energy which can be deployed (= extracted + employed) by humans (+ their artefacts) and this would be the measure or ”real” full potential (and this could be calculated with some approximation!).
But then there is an other factor, energy and matter are “blind”, I mean that humans need concepts guiding them in some way, so money kicks in. In this sense money is almost nothing, I mean it’s neither energy nor matter, and in fact it arises from nothing and goes back into nothing… but while circulating it works, in some way, in putting humans at work, in this sense it is a kind of “symbolic medium of exchange of energy or matter” which means that the value of money is given by the capacity of this symbol, or concept, to move (or motivate) humans. From this perspective not only currencies are money, but anything which can motivate humans can be seen as a potential medium of exchange and symbolic storage of value. I use the world symbolic here, in order to remember that the value stored is actually nothing outside of human conceptual world.
So when there is an excess of money (or whatever symbolic equivalent) saving, “real” economy shrinks because we are just storing a concept not energy or matter, we’re not storing an actual value but a conceptual one, and so the real economy gets blocked and we’re left with empty (often quarrelling) narratives.
ok, this my pseudo-scientific pseudo-OT pseudo-narrative
Friday ~ February 24th, 2012 at 2:47 pm
anon
Karl, Michael Hudson is disputing the historical cause of German hyperinflation, he does not appear to be saying a government couldn’t possibly engineer hyperinflation by attempting to buy an “unbounded” amount of goods.
Deconstructing the words like “government” to fit your needs is foul play.
He’s saying hyperinflation was caused by having foreign-currency debt.
Germany had to first convert its currency to pay creditors. This lowered the value of its currency on exchange markets, thus INCREASING the size of its debt.
Tuesday ~ May 7th, 2013 at 1:42 am
i-nicole
It is tough to obtain knowledgeable persons on this subject, but you sound like you know what you’re talking about! Thanks