Modern Monetary Policy

[Beststash]

Based on the discussion we had during the thread,"The Stock Market is Not the Economy", I became interested in how/why the FED's transfusion of money during a period of record unemployment would effect the Stock Market. What were the consequences? What about inflation? Is it a bubble or sustainable?

As I listened to "NPR - Think" this AM while mowing the yard, I think I discovered the economic rationale we seem to be adopting in order to cope with the Covid-19 pandemic. It's called "Modern Monetary Theory". I confess I had never heard about it although obviously it has been around for a while.

Direct contrast to the "Tea Bag" movement which was not that long ago.

The following links are very interesting -

Video of MMT that give a basic overview (10 min)
NPR "Think" The argument for increasing the National Debt (48 min) - ****much more in depth and fascinating****

Stephanie Kelton, professor of economics and public policy at Stony Brook University and former Chief Economist on the U.S. Senate Budget Committee

 

[Ian S]

It's an interesting if controversial concept and, if right, suggests we need a fundamental change in how we look at and use "money" specifically in a nation like ours that has its own fiat currency and no debt denominated in foreign currencies. The average person looks at our federal finances much as they look at a household's finances but that analogy fails badly in many ways. MMT implies that we can spend our way out of the COVID-19 induced economic collapse without any threat of massive inflation. As long as the economy has excess labor and production capacity (which is the case in any major economic downturn), it is actually good for the government to open up the spigot so to speak.

 

[bolt]

Consider MMM- I read it a while back, but it was quite informative.

"Modern Money Mechanics" as it was originally published by the Federal Reserve Bank of Chicago in editions ranging from 1961-1992.
The last revision, made in 1992, was most recently published in 1994. As a description of our money system since the time of the creation of the Federal Reserve, hard money advocates, political libertarians and others have found the content of this book damning and used it as part of a general critique of American fiat currency. It even features in YouTube videos. As a simplified model for fractional reserve banking, Modern Money Mechanics remains an excellent informational beginning, one that can be read in a single sitting and one that has the advantage of showing us the Federal Reserve presenting itself and its operations to a broad, mass readership.

Good Luck & Best wishes......

 

[Independent]

The notion that the gov't should spend money during a depression/recession to get idle workers back to work is as old as Keynes. The idea is to break a vicious cycle where loss of confidence => businesses and individuals spend less => lower sales for businesses and layoffs for workers => loss of confidence => ....

I think "Modern Monetary Theory" says that this deficit spending (or money printing) shouldn't be reserved for the unusual times that the economy is contracting, but is business as usual even in boom times.

Paul Krugman (hardly a right wing economist) has some real problems with MMT. There are a couple back-and-forth pieces between Krugman and Kelton. Here's one (maybe the first) https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html

 

[Beststash]

"Modern Money Mechanics" as it was originally published by the Federal Reserve Bank of Chicago in editions ranging from 1961-1992.
The last revision, made in 1992, was most recently published in 1994. As a description of our money system since the time of the creation of the Federal Reserve, hard money advocates, political libertarians and others have found the content of this book damning and used it as part of a general critique of American fiat currency. It even features in YouTube videos. As a simplified model for fractional reserve banking, Modern Money Mechanics remains an excellent informational beginning, one that can be read in a single sitting and one that has the advantage of showing us the Federal Reserve presenting itself and its operations to a broad, mass readership.

Good Luck & Best wishes......

Sounds interesting - I look forward to reading and watching the videos. I'm realizing just how little I know about economics. With fiat currency here to stay the politics of money is remarkable.

 

[Beststash]

I think "Modern Monetary Theory" says that this deficit spending (or money printing) shouldn't be reserved for the unusual times that the economy is contracting, but is business as usual even in boom times.

Paul Krugman (hardly a right wing economist) has some real problems with MMT. There are a couple back-and-forth pieces between Krugman and Kelton. Here's one (maybe the first) https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html

I glanced at Krugman's responses and it seems he isn't buying the concept. I generally agree with Krugman's POV. It seems when we are in crisis all kinds of things can happen that would otherwise be laughed off. With the idea of UBI becoming so popular I see us leaning more and more away from traditional economic thinking.

I struggle to change my way of thinking but the concept seems possible??

 

[donheff]

I've read a number of articles by proponents of MMT and they basically seem to come down on the side of "print money if you need to," and you will be fine until you aren't, at which time inflation will ensue. It seems like that has been our de facto policy for 40 years, with a brief pause in the late 90s. Gotta admit, it seems to work. It is a little depressing that we print away both when we need the stimulus (now and 2009) and when we just want to goose a political gain with wars or tax cuts. That seems calculated to eventually trigger inflation leaving us with no dry powder for the next real crisis.

 

[target2019]

I found that reading a concise history of economics and money helped.
https://www.amazon.com/Money-Unauthorized-Biography-Coinage-Cryptocurrencies/dp/0345803558

It's a light read. At least that got me to the modern era, where I could contemplate all that is going on in our economic system.

 

[Independent]

I've read a number of articles by proponents of MMT and they basically seem to come down on the side of "print money if you need to," and you will be fine until you aren't, at which time inflation will ensue. It seems like that has been our de facto policy for 40 years, with a brief pause in the late 90s. Gotta admit, it seems to work. It is a little depressing that we print away both when we need the stimulus (now and 2009) and when we just want to goose a political gain with wars or tax cuts. That seems calculated to eventually trigger inflation leaving us with no dry powder for the next real crisis.

+1

 

[Independent]

Consider MMM- I read it a while back, but it was quite informative.

"Modern Money Mechanics" as it was originally published by the Federal Reserve Bank of Chicago in editions ranging from 1961-1992.
...

MMM book/pamphlet is available free at https://en.wikisource.org/wiki/Modern_Money_Mechanics/Introduction#What_Makes_Money_Valuable?

It may be good background for MMT, but it is not the same.

 

[DAYDREAMER]

If MMM is a such good policy, why not just print more money and not take tax revenue from the public. Print more $$ to improve infrastructure. Sorry, I don't buy the theory. Great way to end up like Zimbabwe!

 

[Ian S]

If MMM is a such good policy, why not just print more money and not take tax revenue from the public. Print more $$ to improve infrastructure. Sorry, I don't buy the theory. Great way to end up like Zimbabwe!

Federal taxes are required to give a fiat currency value. Because US dollars are the only accepted currency for paying taxes that gives them value. Zimbabwe had some serious problems with a huge sudden drop in agricultural productivity being critical. As long as we have excess production capacity, there is little risk of significant inflation by printing more money.

 

[donheff]

If MMM is a such good policy, why not just print more money and not take tax revenue from the public. Print more $$ to improve infrastructure. Sorry, I don't buy the theory. Great way to end up like Zimbabwe!

Federal taxes are required to give a fiat currency value. Because US dollars are the only accepted currency for paying taxes that gives them value. Zimbabwe had some serious problems with a huge sudden drop in agricultural productivity being critical. As long as we have excess production capacity, there is little risk of significant inflation by printing more money.

The MMT proponents talk about the fact that dollars are the only acceptable means to pay Federal taxes as being the cornerstone. That may make sense in that a competitor (e.g. a private cryptocurrency) couldn't take over the dollar for tax purposes. But it still seems that the public faith in the dollar (or productive capacity and the stability of the government and its commitment to pay its debts) is the key factor that makes the printing press work. The theorists say that at some point inflation will set in. If our production collapses, if we default on our debt (we have threatened that a few times in debt ceiling stand offs), or otherwise decline we will hasten the point at which inflation or even hyper inflation sets in. MMT applies to any sovereign currency but not just any country can get away with what we can. Japan has far higher debt than we do and is still afloat but others have not been so successful and EU countries have given up their sovereign currencies and are in a different (printing press-less) boat - more akin to our state governments.

 

[Beststash]

Where there is a will there is a way

It sounds like MMT might be just the solution to implementing some of our largest issues like Medicare for All or the Green New Deal. Some of the talking points against this massive undertaking has been what should the private sector's role be ? How much could taxpayers be convinced to spend? As an example - huge defense spending has been based on the idea that the threat exceeds the cost. As Covid-19 highlights some of our healthcare shortfalls or as the impact of climate change becomes more apparent, maybe something similar could happen.

My interpetation of MMT is that governments should keep on spending until such time as every person is employed and inflation finally kicks in. The government then can take action of some kind — like raising taxes, to control that inflation.

I know this flies in the face of "small government" proponents but the more I read about it the more I like the concept - what is not to like? Radically new economic ideas are usually opposed at first by the old guard.When we went off the gold standard, quantitative easing, "helicopter money" to the public as all considered "crazy" at the time by many.

Maybe it is time to go from a "tax and spend" economy to a "spend and tax" economy??

As we transition to a less work, more leisure based economy (which I think is inevitable) our thinking will have to be radically changed and I, for one, have a hard time dealing with change. But as Bob Dylan says - "Youngsters don’t have that tendency. They have no past, so all they know is what they see and hear, and they’ll believe anything. Young people have no memory lane to remember. So it’s probably best to get into that mind-set as soon as we can, because that’s going to be the reality."

 

[Cobra9777]

I think MMT is mostly just a description of how the current process works. It's no secret that central banks can create money to support any government spending, including paying down the debt. There's no need to offset the spending with new tax revenue or borrowing. But if government spending stimulates demand that exceeds the physical capacity of the economy to supply that demand, then inflation results.

Proponents of MMT argue that spending bills should be evaluated NOT by their impact on the deficit or the national debt. But by their positive impact on employment vs the risk of inflation, which in fact is the Fed's dual mandate. So why should lawmakers use a different metric? But today, the political apparatus still operates as if the federal government was a household or a business or a state, where all spending must have an offset. That's the argument.

It seems to me that where MMT goes astray is the association with huge government spending proposals that some believe should be left to the private sector. It strikes me as a quasi-fringe "theory" that has been adopted by progressives to answer the question, "But how are you going to pay for all that?"

What's odd is that no one seems to have a problem with MMT when it comes to things like Covid-19 relief, even if that were to include a massive infrastructure project to accelerate recovery. People didn't like the bailouts of 2008-9 quite as much, even though we enjoyed a decade of growth afterward with none of the inflation that was predicted.

But still, when it's used to bring credibility to a business-as-usual, legislative debate... well, that seems like a stretch. I also read some of Krugman's responses and I agree with much of it, but he also sounds a bit like the "old guard" defending the fort, i.e. the traditional roles of the Fed and Congress in monetary and fiscal matters.

 

[misanman]

My understanding is that for MMT to work, you would need a tax system, such as a VAT (?), that responds automatically to inflation. When the time comes to increase taxes you just can't count on government having the will to do it. I guess this means you always have your foot on the accelerator but are counting on the brakes to activate automatically.

 

[sheehs1]

Have been following this thread as I have never really delved into this theory.

Certainly it can not be as simple as the "Modern Monetary Theory" suggests. This link states "MMT is a bait and switch wrapped in a slight-of hand" and points out a few consequences such as (1)" MMT will shift more money to the Government. It's a bait and switch in that the government has replaced goods and services that people want with goods and services the politicians want" ...meaning instead of more cars and homes we have more tanks and border walls " and (2) "MMT focuses on debt and dollars rather than resources and product. Shuffling those merely changes the ownership of resources and products -it doesn't create more". (3) Then there are a couple of short blurbs about the Dollar being the reserve currency and that MMT inflates foreign currency and pointing out the Dollar does not have to remain the reserve currency.

Right now I am on the side of it being a somewhat intriguing theory but questioning if it is realistic and it's potential consequences.

https://fee.org/articles/modern-monetary-theory-isnt-economics/

 

[Retch The Grate]

Have been following this thread as I have never really delved into this theory.

Certainly it can not be as simple as the "Modern Monetary Theory" suggests. This link states "MMT is a bait and switch wrapped in a slight-of hand" and points out a few consequences such as (1)" MMT will shift more money to the Government. It's a bait and switch in that the government has replaced goods and services that people want with goods and services the politicians want" ...meaning instead of more cars and homes we have more tanks and border walls " and (2) "MMT focuses on debt and dollars rather than resources and product. Shuffling those merely changes the ownership of resources and products -it doesn't create more". (3) Then there are a couple of short blurbs about the Dollar being the reserve currency and that MMT inflates foreign currency and pointing out the Dollar does not have to remain the reserve currency.

Right now I am on the side of it being a somewhat intriguing theory but questioning if it is realistic and it's potential consequences.

https://fee.org/articles/modern-monetary-theory-isnt-economics/

It really is as simple as it suggest, it's totally worth going and reading the writing by the folks who have been working on MMT, but yes, it also has the effects that article suggests. The danger is that if you went to infinite government spending, all economic activity would be just what the government is choosing to spend on. Basically at infinite money creation you end up in a command economy. Which we have fairly compelling economic theory that says it can't be as efficient at capital allocation as a pure market economy. OTOH, pure market economies can't pursue larger societal goals, so of course our existing economy is a mix of both. The FEE article you linked rightly points out the impact of going to the extreme, the more you just create money and spend it, the less efficient the allocations will be because you are removing the market and replacing it with politicians choosing where to spend. Same is true with taxes, regulations, government spending and any other method the government chooses to use to direct the flow of capital in the economy. They all come at efficiency cost, but with the hope that the societal choices are worth it.

On the other hand, if we as a nation decided we really wanted more investment in infrastructure, MMT argues that we can indeed just spend a trillion dollars on that, then tax out any negative consequences of too much money sloshing around. Of course how to tax while imposing minimal distortions is the challenge there (along with taxing soon enough, and not letting politicians set the long term on fire for their short term gains).

 

[Retch The Grate]

Here's the MMT primer blog posts that I read when I got interested in MMT years ago, it looks like it has since been collected into a book that is probably an even better read:
https://neweconomicperspectives.org/modern-monetary-theory-primer.html

 

[BeachOrCity]

So if governments ultimately decided to print "whatever is needed", basically "Money" becomes a temporary tool for purchases with no actual long term store of value. In essence, hard assets would be the only store of value. Buildings, land, potentially businesses (stocks) would be stores of value, but if gov'ts just print away, money only has short term value to purchase things, or services. In the latter case, the recipient of the money for services would want to put that into a real "store of value" asap.

In other words, money would move at high velocity, and savings in terms of "money" would largely disappear. People would "save" by owning hard assets.

Gold would of course do quite well.

Thoughts?

 

[donheff]

So if governments ultimately decided to print "whatever is needed", basically "Money" becomes a temporary tool for purchases with no actual long term store of value. In essence, hard assets would be the only store of value. Buildings, land, potentially businesses (stocks) would be stores of value, but if gov'ts just print away, money only has short term value to purchase things, or services. In the latter case, the recipient of the money for services would want to put that into a real "store of value" asap.

In other words, money would move at high velocity, and savings in terms of "money" would largely disappear. People would "save" by owning hard assets.

Gold would of course do quite well.

Thoughts?

It seems we have been living out an experiment with MMT for most of the last 40 years. You can just look around you to see what has value.

 

[Ian S]

US paper money has value because it's the only currency you can use to pay federal taxes. It sounds strange but it works. If you want to use gold or real estate to pay your taxes, you first have to sell those assets for US$ at which point you use the dollars to pay your taxes.

 

[Theo]

Here's a link to the website of the guy who developed the theory. Warren Mosler, former bond trader.

http://moslereconomics.com/mandatory-readings/innocent-frauds/

 

[RetiredAtThirty-eight]

My understanding is that for MMT to work, you would need a tax system, such as a VAT (?), that responds automatically to inflation. When the time comes to increase taxes you just can't count on government having the will to do it. I guess this means you always have your foot on the accelerator but are counting on the brakes to activate automatically.

The US tax system already responds automatically to inflation since almost all taxes are based on the value of the item being taxed. If labor is being taxed it is taxed at a percentage of the wages. Sales taxes naturally rise with inflation because the taxed items rise in price.

There are probably minor exceptions to this rule but the only major exception I can think of is the federal gas tax which is a flat rate per gallon which was a giveaway to the oil and gas industry who have the benefit of a tax that declines over time (as a percentage of the value of the gas) unless congress increases it.

 

[Independent]

My interpetation of MMT is that governments should keep on spending until such time as every person is employed and inflation finally kicks in."

How do we know when every person is employed? We always have frictional unemployment -- I lose my job but I'm confident I can find another. I may delay looking, I don't take the first offer because I'm holding out for something better, I've accepted an offer but don't start work until the first of the month, etc. The BLS says I'm unemployed for any of those reasons.

Or, I teall a BLS surveyor that I'm looking for work and unemployed, when in fact I don't want to work except for the perfect job that will probably never come. Or, I'm employed on the side, getting paid cash, and don't want to tell the gov't about that job. Again, the BLS says I'm unemployed.

I think we had full employment in 2019, but the gov't didn't say it would balance it's books.

Regarding inflation, how do you know it has "kicked in"? Is there some number that's critical, or is it always going to be "yeah, prices are going up a little, but that's okay" ? If the response to inflation is to cut gov't spending or raise taxes, both of those seem to slow the real economy. After living the debt supported high life for some years, will the political will be there to make those changes?