Modern Monetary Theory

[kotagiri_tea_planter]

or MMT, explained to me as a grade school layman with minimal macroeconomic basics

worrying about inflation is overrated, government (that has sovereign fiat currency) should spend spend spend by printing money, stimulating the economy, taxation should be used to control inflation, which won't really be a problem until efficient production possibilities is achieved

the next iteration of accepted macroeconomic theory or complete leftist bunk? Assuming the variable of normative politics is kept out. Which it can't in the real world that academic economists don't operate in.

[matt_melb]

worrying about inflation is overrated

I fear we're about to discover this might not be correct. Hope I'm wrong.

[kotagiri_tea_planter]

from the little I've read/heard, MMTists seem to be basing a strong portion of their argument on the last decade's inflation numbers, which don't seem to be doing what they were expected to be doing based on macro basics like the Phillips curve

[mishmish]

worrying about inflation is overrated

I fear we're about to discover this might not be correct. Hope I'm wrong.

maybe, but OP should maybe consider the state of affairs in countries with hyperinflation. This is not just a macroeconomic blahblah with no relation to everyday life, but among other things causes people not to save (not worth it). That's the extreme, but it points to the problem

[dBrother]

worrying about inflation is overrated

I fear we're about to discover this might not be correct. Hope I'm wrong.

maybe, but OP should maybe consider the state of affairs in countries with hyperinflation. This is not just a macroeconomic blahblah with no relation to everyday life, but among other things causes people not to save (not worth it). That's the extreme, but it points to the problem

gLod is the answer in these places, seriously. i mean you dont want to be stuffing turkish lira under the mattress..

[BAGOFSWAGS]

I fear we're about to discover this might not be correct. Hope I'm wrong.

maybe, but OP should maybe consider the state of affairs in countries with hyperinflation. This is not just a macroeconomic blahblah with no relation to everyday life, but among other things causes people not to save (not worth it). That's the extreme, but it points to the problem

gLod is the answer in these places, seriously. i mean you dont want to be stuffing turkish lira under the mattress..

Gold is never the answer and it is clear you never lived in any of these countries that dealt with hyperinflation. The wealthy buy hard assets (eg land and plant) and leverage themselves with debt in anticipation of devaluation. They don’t buy gold

[kotagiri_tea_planter]

maybe, but OP should maybe consider the state of affairs in countries with hyperinflation. This is not just a macroeconomic blahblah with no relation to everyday life, but among other things causes people not to save (not worth it). That's the extreme, but it points to the problem

By OP if you mean the MMTists, of whom I am not, they do address it since that's the easiest and major criticism of MMT. Their argument is that inflation would occur when an economy is efficiently using all its resources, which is desirable, and when it does occur, taxation is used to try to bring inflation under control, done mostly by the government without much need for a central bank's open market operations to control the money supply. The MMTists also argue that automatic stabilizers like less need for government spending thus less government printing of money when the economy is humming is a tool for trying to control inflation. Actually, that's not their argument, it's my simplification of their argument.

Either way, I doubt it can work due to political and psychological will of both people and politicians. But I'm wondering if it'll ever join the ranks of Keynesian, classical, and monetarist macroeconomic theory.

[Lost Soul]

or MMT, explained to me as a grade school layman with minimal macroeconomic basics

worrying about inflation is overrated, government (that has sovereign fiat currency) should spend spend spend by printing money, stimulating the economy, taxation should be used to control inflation, which won't really be a problem until efficient production possibilities is achieved

the next iteration of accepted macroeconomic theory or complete leftist bunk? Assuming the variable of normative politics is kept out. Which it can't in the real world that academic economists don't operate in.

Ultimately, it's bunk.

Eventually, paying interest on the debt ($20 Trillion now) will overwhelm the government.

[kotagiri_tea_planter]

Unless the MMTists had their way, which would be the government printing of trillions to pay of that debt. Those trillions would go to bond holders and creditors, theoretically increasing consumer spending and business investment and lowering interest rates with the increase in loanable funds, especially without government crowding out, which would also increase consumer spending and business investment. Sounds like a recipe for massive hyperinflation. Excerpt the MMTists say now is the time to tax to counter that. While the economy is humming. The theory, like all limited variable economic theories, seems sound. Is it really only political will that's stopping it? Although it does seem like some macroeconomic make believe. Seems the psychology just wouldn't allow it in the real world.

[Lost Soul]

Unless the MMTists had their way, which would be the government printing of trillions to pay of that debt.

That will also ultimately overwhelm the government, by making the currency worthless.

See Berniezuela, and dozens of other countries where this has been tried, for details.

[kotagiri_tea_planter]

Again, the MMTists are aware of that being the easiest and simplest counter to their theory and argue that taxation should be used to control that. Their whole deal is to upend the idea of government expenditures based on tax revenue. Government expenditures based on printing money, taxation as a tool to control for inflation.

I agree that political psychology and will won't allow that to happen. As sound accepted macroeconomic theory, though?

[thegreenlantern]

Again, the MMTists are aware of that being the easiest and simplest counter to their theory and argue that taxation should be used to control that.

I admit to being completely baffled as to how tax policy could be used to mitigate the standard problems brought about by high inflation. Could you maybe describe how this is supposed to work?

[kotagiri_tea_planter]

My understanding of it is pretty simplistic, but the idea is that taxation would be used to curb consumption and business investment. Increase taxes to decrease spending, which would control inflation. The MMTists say that tax revenue shouldn't be seen as a source of government expenditures. Instead, taxation should be viewed as a tool to limit inflation with government expenditures based on the printing of sovereign fiat currency. That's the major difference in macroeconomic theory they're advocating and I'm wondering if it'll be ever accepted as mainstream macroeconomic theory.

[kotagiri_tea_planter]

Another obvious problem I see is lag time in political response to inflation. Increasing taxes is already a fraught exercise. Doubt the government has the will to raise tax rates so quickly to counter spiraling inflation. But economists would not consider political will an economic issue. And MMTists would argue that if their theory is accepted, lag time can be mitigated.

[thegreenlantern]

My understanding of it is pretty simplistic, but the idea is that taxation would be used to curb consumption and business investment. Increase taxes to decrease spending, which would control inflation. The MMTists say that tax revenue shouldn't be seen as a source of government expenditures. Instead, taxation should be viewed as a tool to limit inflation with government expenditures based on the printing of sovereign fiat currency. That's the major difference in macroeconomic theory they're advocating and I'm wondering if it'll be ever accepted as mainstream macroeconomic theory.

So the idea is that the government taxes to remove the money it created from private hands? It creates money, spends it, then taxes it out of the economy? If the government isn't spending this tax revenue, what is it doing with these taxes? If it sets fire to the taxed money, then prints more to spend, it's hard to how this policy's net effect on the money supply is necessarily different than simply taxing and spending.

This seems like a horrible idea, but my confusion on how this is intended to work makes in hard to nail down which horrible consequence is going to result. From the git go, the long term problem with high inflation is that it already curbs consumption and investment because inflation erodes the purchasing power of saved assets. Using tax policy to further depress these behaviors sounds like lunacy. When people spend in hyper-inflation, it's to mitigate the losses the inflation causes to savings, so taxation isn't going to prevent the problem, anyway.

[kotagiri_tea_planter]

I might've been confused in explaining taxation as a tool to control inflation. I don't think MMTists would say it's to be used to bring back inflation after it's hit high levels, but that taxation would be used like a central bank uses open market operations these days days to impact interest rates and thus inflation. Minor adjustments every now and then based on outlook.

[Vince]

So you mean by taxing and subsidising investment returns perhaps? Otherwise I’ve no idea what you’re talking about. Inflation is always a monetary phenomenon.

[thegreenlantern]

I mean, I suppose it's theoretically possible to manage the spending glut that accompanies inflation in the short term by taxing such that no one experiencing the increased money flow feels richer, but once you've taxed away inflation gains AND their money is worth less due to inflation ... aren't they poorer?

More importantly, let's say the Magic Taxation Wand perfectly mitigates the inflation effect... why is this better than just taxing? It seems like a very complicated way to achieve the same effect and the benefit relies on some conspiratorial secret calculations.

[Vince]

Ok I’ve read the wiki page and it’s not taxing interest, but it does sound wrong.

[Electrolyte]

worrying about inflation is overrated, government (that has sovereign fiat currency) should spend spend spend by printing money, stimulating the economy

Only in the particular circumstances we've been in for the past decade.

I admit to being completely baffled as to how tax policy could be used to mitigate the standard problems brought about by high inflation.

By reducing aggregate demand.

If the government isn't spending this tax revenue, what is it doing with these taxes?

Saving them (or else the policy is ineffective at controlling inflation). They borrow less or they buy back bonds.

once you've taxed away inflation gains AND their money is worth less due to inflation ... aren't they poorer?

Yes, but their government is richer, so they have fewer future tax liabilities, so that roughly evens out.

It seems like a very complicated way to achieve the same effect

It's usually less desirable than to use monetary policy, but it's not more complicated.

[kotagiri_tea_planter]

MMT seems to be getting more airtime due to some of the leftwingers who got elected to the House recently. Here's a back and forth between Paul Krugman and Stephanie Kelton, who seems to be leading the MMT academic side of the debate.

Krugman February 12th: https://www.nytimes.com/2019/02/12/opin ... nkish.html

Kelton February 21st:
https://www.bloomberg.com/opinion/artic ... e-for-doom

Krugman February 25th:
https://www.nytimes.com/2019/02/25/opin ... nkish.html

Kelton March 1st:
https://www.bloomberg.com/opinion/artic ... -about-mmt

So so far my query about whether MMT will move from the extreme into acceptable economic theory has been answered with: Not yet considering the pushback is coming from those who could be considered left leaning Keynesian macroeconomists and they're not even using the obvious political shortcomings but questioning its macroeconomic basis. The right leaning monetarists and classicists aren't ignoring it but seem to feel it isn't even worthy of debunking. Still interesting to see where this goes.

[Ped_Yai]

Let me state two immutable, inevitable, unalterable laws of financial and economic systems.

ONE: We will always have ostensibly "intelligent" people who will convince themselves, and try to convince others, that there really is such a thing as a financial perpetual motion machine. Their constant motto is "This time it's different."

TWO: It's never different.

[flojin]

Let me state two immutable, inevitable, unalterable laws of financial and economic systems.

ONE: We will always have ostensibly "intelligent" people who will convince themselves, and try to convince others, that there really is such a thing as a financial perpetual motion machine. Their constant motto is "This time it's different."

TWO: It's never different.

And yet..the people warning of inflation have been wrong for a long time now. I'm not pretending to know how things work, but Japan, for example has been borrowing money for a decade and experiencing deflation the entire time. This is not how it was supposed to work.

[Lost Soul]

Losing population exerts deflationary pressure on an economy.

[dBrother]

worrying about inflation is overrated, government (that has sovereign fiat currency) should spend spend spend by printing money, stimulating the economy, taxation should be used to control inflation, which won't really be a problem until efficient production possibilities is achieved

so about that, what happens when you just import everything from china to save on production costs, will it be a problem then?

[Andrea1]

or MMT, explained to me as a grade school layman with minimal macroeconomic basics

worrying about inflation is overrated, government (that has sovereign fiat currency) should spend spend spend by printing money, stimulating the economy, taxation should be used to control inflation, which won't really be a problem until efficient production possibilities is achieved

the next iteration of accepted macroeconomic theory or complete leftist bunk? Assuming the variable of normative politics is kept out. Which it can't in the real world that academic economists don't operate in.

Have just listened to the following, I was curious to see if it had been discussed here (I value the knowledge of people around here) did a search and found this thread.



What I took from it is:
There is something going on between the government and the treasury. They're in a unique position - being able to print money via the printing press. It's potentially a con job, depending, but that it can work as a stimulus, or, as it is called in the youtube video, 'liquidity infusion', puts money into the economy that can be spent. It has been in operation, basically for a longtime. The British Government/Bank of England did/does it, Japan does it, the US does it. Etc., etc.. Printing their own currency knowing there will be a deficit, is supposed to be unsustainable, but nothing traumatic has happened as a consequence of this practice in the US in a long time.

Since Ronald Reagan, debt ratio is up to 90%of GDP - beyond the supposedly 'bad ' tipping point, Japan has 240% - no inflation, interest rates below 1%. It sounds scary, everyone is insolvent, something catastrophic should well have happened before now, but they're muddling along.

Bonds are a major element - I can't explain this but the following is how I understand it

"Recently, the Federal Reserve held US Treasury securities amounting to about $2.2 trillion. The interest income from this is remitted back to the Treasury. (In 2017 it was $80 billion, more than any other private company.) The Treasury pays the Fed, and the Fed gives the money back to the Treasury. It is as if the Treasury paid nothing at all. In effect, the interest rate on these bonds is zero.

If you issue a bond, and never pay either interest or principal (the bonds are typically rolled into new bonds upon maturity), then it is as if you made them disappear. The Treasury has, over the course of decades, managed to make $2.2 trillion of bonds disappear. This is functionally similar to if the Treasury simply ordered up $2.2 trillion in the form of $100 bills on forklift pallets, and used them pay bills."

A con job that we are all totally invested in, reliant on it continuing to work, fingers crossed. No going back, without a major meltdown.

[Zamuel]

"Recently, the Federal Reserve held US Treasury securities amounting to about $2.2 trillion. The interest income from this is remitted back to the Treasury. (In 2017 it was $80 billion, more than any other private company.) The Treasury pays the Fed, and the Fed gives the money back to the Treasury. It is as if the Treasury paid nothing at all. In effect, the interest rate on these bonds is zero.

If you issue a bond, and never pay either interest or principal (the bonds are typically rolled into new bonds upon maturity), then it is as if you made them disappear. The Treasury has, over the course of decades, managed to make $2.2 trillion of bonds disappear. This is functionally similar to if the Treasury simply ordered up $2.2 trillion in the form of $100 bills on forklift pallets, and used them pay bills."

A con job that we are all totally invested in, reliant on it continuing to work, fingers crossed. No going back, without a major meltdown.

Which means : Ultimately, the $ is devalued. Which is defacto payment by the $ holders for whatever the government spent the $$$ on. Without any congressional approval or pesky voters screwing things up. The secret of the eye on top the pyramid that's printed on all those dollars.