MMT coming soon to an economy near you?

[bjorn2bwild]

Quote:

Originally Posted by Spock Thats a little bit of "toMAYto/toMAHto". It's still a red fruit used to make ketchup. The Fed extends new credit generated out of thin air (a spreadsheet entry) to banks which the banks use to buy Treasuries... then the banks put the Treasuries at the Fed as reserves where they sit on the Feds balance sheet. They didn't physically print money, technically they only issued new credit that somebody else then spent on their behalf. https://www.thebalance.com/how-is-th...g-debt-3306126 Which is why some are sarcastically asking "how is MMT any different than what we're doing now?"

Reading deeper into the interview he says ---

Quote:

Now you might do something like this: You might say, well, we’ll have an announcement from the Fed that they will increase the balance sheet – if the deficit is going to be $2 trillion or $3 trillion, they’ll increase the Fed’s balance to $3 trillion. But we already really tried that in 2012 and 2013. The increase in the Fed’s balance sheet in those two years equaled the budget deficit. But, you see, in that particular case, existing under the Federal Reserve Act, the money supply is still equal to the base times little m, the money multiplier. So you would have the Fed buy the government’s securities. But the banks would not be able to employ it unless they had the capital to utilize the excess reserves, which was the same problem that constrained the banks from turning the balance sheet into an acceleration in money supply growth. So when we had quantitative easing, the Fed’s balance sheet quadrupled but the money multiplier dropped from 9 to 3. And the rate of growth in money supply did not accelerate. The only thing that would really be different would be if there was a concerted effort to make the Fed’s liabilities legal tender. And my read is that that requires a rewrite of the Federal Reserve Act and also some other companion legislation as well.

Quote:

keep in mind that even advocates of greater budget deficits, such as Paul Krugman and Larry Summers, have said that modern monetary theory is not workable. There is on outstanding article by Ken Rogoff at Harvard about the unworkability and what it would mean for higher inflation. So I don’t see mainstream academic economists supporting it. And I certainly don’t see the Federal Reserve community – Chairman Powell has come out against it. It would take a cataclysmic political shift to want to rewrite the Federal Reserve Act to do that.

PS - The Ken Rogoff article to which he is referring -


https://www.project-syndicate.org/co...rogoff-2019-03

[JAGOTI]

I hope the MMT crowd is right.

I want a free lunch!

[Running_Man]

MMT is going to happen, it is in reality already happening. It will happen because when there is an ability to get something for nothing it will be offered and accepted.

The basic idea is simple,

Simple example is say a bullet train line is needed between Chicago and New York. Normally funds would need to be raised and there would be municipal bonds and someone to run the organization usually thought being a profit.

If the economy is not at full employment, instead the government issues bonds, the Treasury purchases the bonds, and the construction project will cause some of the unemployed to be employed. The debt will exist as a future liability useful in the elimination of inflation.

If in the future inflation was heating up, the government could sell the bullet train line and use the proceeds to reduce debt, reducing the public outstanding money supply by the amount of the purchase. The government could also sell its gold and do the same thing. Merely stopping of government programs financed by debt would also slow things down as once this process starts the economy will be dependent on it and ending programs is the equivalent of a fiscal cut as the economy will be set up to take advantage of the new government economy.

If the government controls interest rates by buying most of the outstanding government bonds, it can do this forever and control the market economy and never pay any interest on their debt.

[copyright1997reloaded]

It is always fun and games while the music is playing.

Underneath it all, money (and wealth as represented in fiat currency form) represents trust in a system where you are willing to forgo current consumption for the promise of future consumption.

That is what everyone here on this site is relying on by savings for retirement, which is to say I will not consume all my earning power for the promise that I can use that saved earnings to consume after I stop producing goods or services.

The creation of money can go on as long as most in the game believe that their retained buying power can someday be used. If that trust is lost, the system is lost. As has been seen historically, when it happens, it can happen quickly.

But will it happen? As a earlier poster stated, a funny thing happened in the great recession. The effect of money (thanks Econ 68 - Money and Banking from long ago) isn't just based on the amount of money in circulation (whether physical or digital), but also a function of the velocity (turnover) of money. In the great recession, the investment thesis changed from "Return on Capital" to "Return OF Capital", so having money to loan is meaningless if you are afraid to loan. That is why all the excess money in the system did not result in a huge wave of inflation.

I've been thinking about this (yes, that is dangerous). What is helping keep inflation down has been globalization (and thus the increase in labor supply). Along with this, the exponential growth of technology is deflationary, and deflationary across a wide swath of industries (not just high tech firms). The result is 'surprises' even in this fast(er) growing economy where inflation is lower than expectations.

[Independent]

Quote:

Originally Posted by Running_Man MMT is going to happen, it is in reality already happening. It will happen because when there is an ability to get something for nothing it will be offered and accepted. The basic idea is simple, Simple example is say a bullet train line is needed between Chicago and New York. Normally funds would need to be raised and there would be municipal bonds and someone to run the organization usually thought being a profit. If the economy is not at full employment, instead the government issues bonds, the Treasury purchases the bonds, and the construction project will cause some of the unemployed to be employed. The debt will exist as a future liability useful in the elimination of inflation. If in the future inflation was heating up, the government could sell the bullet train line and use the proceeds to reduce debt, reducing the public outstanding money supply by the amount of the purchase. The government could also sell its gold and do the same thing. Merely stopping of government programs financed by debt would also slow things down as once this process starts the economy will be dependent on it and ending programs is the equivalent of a fiscal cut as the economy will be set up to take advantage of the new government economy. If the government controls interest rates by buying most of the outstanding government bonds, it can do this forever and control the market economy and never pay any interest on their debt.

Let's say that 95% of the people who will build the bullet train are already employed at something else.

And, they happen to have more valuable job skills than the 5% who are not currently employed.

It seems to me that building the bullet train means taking that 95% away from the other stuff they are doing. That other stuff won't get done. I don't see "something for nothing" here.

[Running_Man]

Quote:

Originally Posted by Independent Let's say that 95% of the people who will build the bullet train are already employed at something else. And, they happen to have more valuable job skills than the 5% who are not currently employed. It seems to me that building the bullet train means taking that 95% away from the other stuff they are doing. That other stuff won't get done. I don't see "something for nothing" here.

In your example you are stating that their is an inflationary aspect to the workers needed. If 95% of all workers needed for a job are already employed then the project would not be undertaken as the industry would already be at full employment.

[samclem]

Quote:

Originally Posted by Running_Man In your example you are stating that their is an inflationary aspect to the workers needed. If 95% of all workers needed for a job are already employed then the project would not be undertaken as the industry would already be at full employment.

So, the train wasn't really needed in the first place (i.e. the point is the jobs, not what is being done)? I think I see a potential issue here.


"Give them spoon, not shovels!"

[Running_Man]

Quote:

Originally Posted by samclem So, the train wasn't really needed in the first place (i.e. the point is the jobs, not what is being done)? I think I see a potential issue here. "Give them spoon, not shovels!"

No the idea whether the train is needed or not the controlling factor is the ability of the economy to absorb the spending on extra work. Obviously a bullet train has value when completed, but if it's completion were to cause a strain on resources by bidding up labor utilized on other jobs it would not be a job undertaken via MMT. Bullet train is just being used as it is possibly electric and an example of projects required under green deal that MMT is seen justified for. MMT projects are already well utilized by the economy - think of cities agreeing to spend government funds building tunnels via the Boring company as an example, without government funds they will not be built but MMT requires a determination about inflationary impact of the spending not the utility of the spending.

[Jeffman52]

Ever since we went off the Gold standard we have effectively been moving toward MMT. Money is nothing more than balance sheets where we track our fiscal currency.

I was having a debate with someone a few years ago and they said this which makes sense.

"Inflation is an issue and must be managed, but the point is to establish that it is functionally impossible for the government to not have the funds to service the debt regardless of how big the debt is. If we can accept the premise and then demonstrate that bond sales are a monetary operation used to control the fed funds target rate and not as a method of financing, we are left with only inflation and deflation to deal with. This moves the debate from "We're going to go broke if we can't borrow enough to finance the deficit" to "How do we manage inflation" which is much more fruitful discussion."

http://www.moslereconomics.com/wp-co...oints/7DIF.pdf

This link pages 13 - 31 explains it better than I can.

[Running_Man]

Quote:

Originally Posted by Jeffman52 Ever since we went off the Gold standard we have effectively been moving toward MMT. Money is nothing more than balance sheets where we track our fiscal currency. I was having a debate with someone a few years ago and they said this which makes sense. "Inflation is an issue and must be managed, but the point is to establish that it is functionally impossible for the government to not have the funds to service the debt regardless of how big the debt is. If we can accept the premise and then demonstrate that bond sales are a monetary operation used to control the fed funds target rate and not as a method of financing, we are left with only inflation and deflation to deal with. This moves the debate from "We're going to go broke if we can't borrow enough to finance the deficit" to "How do we manage inflation" which is much more fruitful discussion." http://www.moslereconomics.com/wp-co...oints/7DIF.pdf This link pages 13 - 31 explains it better than I can.

This is true and why the stock market is doing well, with the funding of government debt being concerned with low interest rates more money is used for spending which increases the economy. Inflation as it exists is primarily residing in the value of the stock market in the United States where from 1980 to 2017 the value of the stock market to GDP has gone from 40% of GDP to 153%. Meanwhile world GDP to stock market valuation is 55% much closer to the 1980 rate in the US.

https://fred.stlouisfed.org/series/DDDM01USA156NWDB

[Independent]

Quote:

Originally Posted by Running_Man In your example you are stating that their is an inflationary aspect to the workers needed. If 95% of all workers needed for a job are already employed then the project would not be undertaken as the industry would already be at full employment.

Okay.

We're already below 5% unemployment. Even when the economy is terrible, we have 10% unemployment. I don't see any situation where new public works jobs don't get most of their workers from people already employed doing something else that seems to be productive. By this standard, we never get something for nothing.

Quote:

Originally Posted by Running_Man MMT requires a determination about inflationary impact of the spending not the utility of the spending.

It also requires a determination about the impact on the production of other economic goods. We may have all the money we want to create, but we don't have an unlimited supply of skilled workers.

[Spock]

Quote:

Originally Posted by Independent ... We may have all the money we want to create, but we don't have an unlimited supply of skilled workers.

There are 7.5B people on the planet with a median per capita income of <$3K/year and skyrocketing immigration. "Skilled" isn't necessary with the "spoons vs. shovels" work projects and besides they can be trained just like anybody else.

[samclem]

Quote:

Originally Posted by Running_Man Inflation as it exists is primarily residing in the value of the stock market in the United States where from 1980 to 2017 the value of the stock market to GDP has gone from 40% of GDP to 153%. Meanwhile world GDP to stock market valuation is 55% much closer to the 1980 rate in the US.

1) The use of "market captialization-to-GDP" ratio (aka "Buffet ratio") is not especially useful in nation-to-nation comparisons. This is due to the (sometimes large) differences in the portion of industries in each country that are publicly traded vs state owned or closely held.

2) Similarly, in the US economy, over time an increasingly large share of industry is in publicly traded companies, so it is not surprising that market cap is growing relative to US GDP.



3) Also, as US publicly traded companies make a larger share of their earnings and profits from activity outside the US, the "Buffet ratio" will be affected for reasons not related to "inflation" of equity values.


Still, it is true that US equities are at higher CAPE levels than those of (almost?) any economy, and are also very high by US historical standards. That's a greater cause for concern than the Buffet ratio, IMO.

[jollystomper]

Quote:

Originally Posted by audreyh1 Hmm, seems like whichever side is in power decides deficits don’t matter. Witness the last big tax cut and recent demands to lower interest rates. Nothing new here.

+1000

[foxfirev5]

Quote:

Originally Posted by audreyh1 Hmm, seems like whichever side is in power decides deficits don’t matter. Witness the last big tax cut and recent demands to lower interest rates. Nothing new here.

Yes indeed. Talk about the elephant in the room. And yet I want to know how those of us on the ER forum can react. Conservative or aggressive in our investment approach all of us are vulnerable. Everything for cash to penny stocks is on the table. Even a fixed annuity or pension has risks. A COLA'd pension who knows?

[samclem]

Quote:

Originally Posted by foxfirev5 Yes indeed. Talk about the elephant in the room. And yet I want to know how those of us on the ER forum can react.

Having a fixed-rate mortgage at today's rates, with an offsetting balance in TIPS, etc, would feel pretty smart if inflation went to 10-15%. Much above that and we are into remote farmland, MREs, toilet paper, etc.

[sengsational]

MMT sounds a lot like "it's different this time" to me. Anybody else?

[ArkTinkerer]

For me, MMT at least posits a theory as to why we value paper $$ or electronic tallies of such. Not that I like it but it is the first step beyond emotions/habits left over from days when dollars were certificates for gold/silver. What makes a dollar valuable? At the very base of the system is that you are required to own $$$ to pay your taxes. Doesn't that sound like a government boot on your neck?

[Independent]

Quote:

Originally Posted by Spock There are 7.5B people on the planet with a median per capita income of <$3K/year and skyrocketing immigration. "Skilled" isn't necessary with the "spoons vs. shovels" work projects and besides they can be trained just like anybody else.

Running man proposed the bullet train under the condition that the "economy is not running at full employment". I took that to mean a situation where we have too many unemployed workers and the bullet train project would provide them work which was at least somewhat productive.

Somehow, that seems to have morphed it the idea that we should import unskilled workers from other countries to build the bullet train.

That seems kind of backwards. I think what happened is that he saw the goal of the project as jobs for unemployed Americans, you see the goal as a train.

[samclem]

Quote:

Originally Posted by ArkTinkerer For me, MMT at least posits a theory as to why we value paper $$ or electronic tallies of such. Not that I like it but it is the first step beyond emotions/habits left over from days when dollars were certificates for gold/silver. What makes a dollar valuable?

But, in this respect, how is the situation different with gold? The industrial value of gold would be about $75 per ounce IIRC. It is worth more only because people believe it has value. Sure, it is somewhat limited in the amount that can be produced (it is not unique in this regard), but if was strictly an industrial commodity, then the gold reserves currently in existence would meet >many< years of industrial demand--prices would not be "supported" effectively by scarcity.
Just like printed dollars, gold has value only because people believe it does. Both are tradition, left over from the distant past. That doesn't mean they won't endure. But we have a long history of many other paper currencies and it is clear they are prone to devaluation once the money supply is increased at a faster rate than the value of goods and services is increasing.