The can down the road...

[stone]

Moda, I also think that there is a very significant international angle to how things are set up. The "great moderation" allowed oil etc to be purchased by the developed world and the oil exporters to invest the endless supply of USD in the booming asset markets in the developed world. In effect it allowed an exchange of real commodities for account statements. If the developed world asset markets had not been booming then oil money might have been invested elsewhere and so developed world currencies would not have maintained the strength required in order for the developed world to dominate global commodity consumption. My impression was that was what was behind the alteration of the tax and subsidy systems so as to transfer inflation into asset price inflation.

[Lone Wolf]

I can't believe MMT is not more mainstream. It talks about the monetary system that we actually use. It's rather frightening that I just learned about it from this forum after being interested in finance for years...

I'm exactly the opposite.  MMT doesn't impress me at all.  I'm surprised that it's gained as much traction recently as it has.

For starters, there's this assertion that without government deficits, there can be no "net private sector savings".  A claim like this should set anyone's skepticism alarms to DEFCON 1.  It's of course false -- no government deficits are required in order to make a capital investment.

Robert Murphy had a good article on this a while back in context of a general MMT rebuttal.  The summary is that MMTer's get away with this by separating "private savings" from "private investment", a distinction that frankly makes no sense whatsoever.  (And this assertion is crucial to the theory!)

A common impression people have after reading an MMT article is that it was "brilliant" but that they could "barely understand it".  I find that this is how I feel when subjected to sophistry or a shell game rather than true genius.  Browne's "99% of All You Need to Know About Money" teaches us a lot more that's useful IMO.

[moda0306]

LW,

You could build a flux capaciter in your garage, and that would increase your net worth, but that's not savings of "financial assets"... and any increase in wealth, in order for commerce to be built around it, will need an increase in money (this is why the gold standard tends to have a limited usefulness to some economists... there's simply not enough of it to function as money to the degree that we need it).  They MMT'ers, I gather, are talking about net financial assets.  Even your "investment" in the stock of a company creates no net savings, as you purchased SOMETHING from someone else to get a business going... say that business explodes and you've got a balance sheet of 1) all the cash you've earned, 2) your initial investment of $1,000, and 3) your retained earnings of the difference (all that is money you now have that others don't, so there's not affect on financial assets)... the economy now has more wealth or assets probably, but no more net financial assets (if I'm interpreting this right)... there is a great idea you had to generate commerce, but the money supply is the same.

I think there are blog posts about the terminology difference between money, financial assets, etc.  The crux of it is that though you may have created wealth... 1) it's not savings, and 2) it will need an increase in the money supply to support the additional economic activity your wealth is generating (after all, time travel certainly could juice the economy, until the universe implodes).

I will dive into that link further at a later time, though, because this is one of my most difficult points with MMT.  Are "financial assets" fundamentally different because they affect the money supply when coconuts don't?  I highly doubt the MMT'ers are saying that no asset can exist without defecits, but in a world that uses money, "savings" maybe needs to defined in terms of money vs other consumables.

[moda0306]

Further, if the gold standard is truly impossible to handle an economy our world's size.  Should we use a commodity basket?  Euro-esque arrangement?  Peg to another currency?  Or a full sovereign fiat currency (like we have now)?  I can't imagine any option other than the last would be best for us, but even if there is, let's assume for now that's our best option.

Another question may be, do you use "government subsidized" fractional reserve banking, or maybe insist on full reserves (then people will probably be paying banks to hold their money for them)?  Do you have the treasury actually issue bonds only to have them be rebought by the fed (like they are today), or should the fed fund the government directly and let the bonds be issued separately?  Does this dramatically affect the way a fiat currency will operate, or is it just "musical money" and accomplish the same end?

Imagining us as a new country/currency, if we never run defecits financed by the fed (aka, printing), how would there ever be even $1 in the economy?  These aren't gold promises, remember... they're pieces of paper that never existed before the treasury printed them and they were dispersed, and asked to be repaid in taxes over time... how do we tax/borrow something before it's even been dispersed (assuming we're starting a currency here, not simply switching from a gold standard)?  You can't.  Therefore, you need to disperse it first.  These non-bond-funded operations are the equivalent of the fed buying bonds on the open market, as far as I can tell.

It would appear that defecits NOT funded by "real" bonds (instead, the ones the fed "holds") are necessary to increase the money supply, and therefore to increase net private "currency savings," if you will.  Yes, someone could have a bunch of coconuts in his back yard, but should that determine monetary policy?  Maybe... I haven't worked through that yet.  All I know is that it seems like with a fiat currency you NEED to print first, and then tax or borrow those $$'s back... the borrowing only being a formality.

Assuming most of my narrative holds water so far, the next question to ask is when this machine starts to break down in one of two (or more) ways.  1) How much malinvestment does all this creation of money cause, and 2) when, if ever, do these accumulated "fed-funded deficits" or "bond (held by real people/countries)-funded defecits" become a fiscal problem for the currency-issuing country?  Do those issues go hand-in-hand (aka, the malinvestment makes the debt harder to service, even if it's not debt in the way we'd normally think of it)?

I'm not trying to dodge the misgivings about MMT's assertions of what the definitions of "savings" or "investment" are here, but simply steer around them for now until I get a better feel for the terminology and positions of Austrians vs MMT'ers.

[moda0306]

Lastly, I'm impressed with MMT because of its hyper Keynesianism (spend & monetize until we have full employment), the with an Austrian twist (doesn't like artificially low rates, hates bailouts, believes that the purpose of monetary policy is to bring prosperity to the private, not public sector).

Also, it doesn't pretend we are fixed to the normal bounds of another currency and trumpets it loud and clear.  With so many pundits trying to compare us to Greece, it's a fresh perspective if taken with rebuttals such as LW has provided.

[Lone Wolf]

You could build a flux capaciter in your garage, and that would increase your net worth, but that's not savings of "financial assets"... and any increase in wealth, in order for commerce to be built around it, will need an increase in money (this is why the gold standard tends to have a limited usefulness to some economists... there's simply not enough of it to function as money to the degree that we need it).

There's not really a need to greatly expand the stock of money.  Money responds to supply and demand just like any other good.  If the supply of goods grows faster than the supply of money, you tend to have an environment of gently falling prices.  (It's logical that this would occur as things grow cheaper to produce.)

The supply of gold grows at something like 2% per year from new production.  If this is slower than the rate at which the supply of goods grows, then you'd generally see falling prices.  This explains the deflationary prosperity that characterized much of the Industrial Revolution in the United States.

[moda0306]

LW,

Falling prices implies an ever-increasing "value" of an ounce of gold.  This is pretty preposterous in some ways, as in the end we are talking about a metal here.  If wealth is a variable-sum game, and gold has a "fixed real value," then eventually our economy starts to see a point where the demand for money rises but gold can't fit-the-bill (like someone needing an engineer to run his plant, but the strawberry picker with no highschool education wants to do the job for $100k per year).

Do you think anyone would ever sell their Porsche for a pixi-dust size piece of gold?

I don't think that would work.  I think an insistence as gold as the one-and-only currency would severly and unnaturally limit the potential of an economy, and maybe that's where our fundamental differences lie.

[MediumTex]

Do you think anyone would ever sell their Porsche for a pixi-dust size piece of gold?

Would they sell it for a stack of paper covered with green ink and pictures of dead politicians?

Money is whatever people agree that it is.

[moda0306]

Would they sell it for a stack of paper covered with green ink and pictures of dead politicians?

Money is whatever people agree that it is.

People have agreed on the green piece of paper to be currency because of how hard they have to work to get it and the basket of stuff they can get for it... so yes, it's whatever "people" agree that it is.  As you've said in the past, the value of the $$ probably lies in the government's clout in setting up a game that gives it value, so let's just call it a "gun to our head" value at its core, with the basket of goods being the natural result in a real economy.

My question still stands though... are people going to "agree" that a fleck of gold-dust will be worth a car... or a home... or a factory??  Could you actually see that ever being the case?  I doubt it... at some point people will probably try to exchange other assets that probably don't have all the nice aspects gold has as money (fur pelts?  other commodities that aren't ideal?) because they don't, collectively, assign potentially infinite value to a shiny yellow metal.

[MediumTex]

Would they sell it for a stack of paper covered with green ink and pictures of dead politicians?

Money is whatever people agree that it is.

People have agreed on the green piece of paper to be currency because of how hard they have to work to get it and the basket of stuff they can get for it... so yes, it's whatever "people" agree that it is.  As you've said in the past, the value of the $$ probably lies in the government's clout in setting up a game that gives it value, so let's just call it a "gun to our head" value at its core, with the basket of goods being the natural result in a real economy.

My question still stands though... are people going to "agree" that a fleck of gold-dust will be worth a car... or a home... or a factory??  Could you actually see that ever being the case?  I doubt it... at some point people will probably try to exchange other assets that probably don't have all the nice aspects gold has as money (fur pelts?  other commodities that aren't ideal?) because they don't, collectively, assign potentially infinite value to a shiny yellow metal.

Just for the sake of argument, look at what people are willing to pay for gold today.

A person who makes $500 a week would have to work three weeks to get a one ounce gold coin.  That would have seemed absurd to many people throughout history.

[Lone Wolf]

Do you think anyone would ever sell their Porsche for a pixi-dust size piece of gold?

I don't think that would work.  I think an insistence as gold as the one-and-only currency would severly and unnaturally limit the potential of an economy, and maybe that's where our fundamental differences lie.

This implies a very, very productive economy!

Anyhow, think this scenario all the way through.  In this scenario, it's cheaper to produce a Porsche than it is to mine a pixie-dust size of gold from the ground.  In such a world, gold really would be that precious (or a Porsche that easy to produce.)

Ultimately, gold can even be produced in a nuclear reactor.  (This can be done even today, but at a cost dozens of times greater than simply mining it from the ground.)  You'd have to assume that it'd be cheaper to produce the Porsche than to create the gold via the reactor process as well.

What's all this say about gold?  What's it say about the Porsche?

Anyway, how much would you pay today for UNIVAC I with its roughly 1 kilobyte of memory?  One pixie dust of gold?  Less?  In our world, is it the gold that changed or the type of available good?

Would they sell it for a stack of paper covered with green ink and pictures of dead politicians?

Money is whatever people agree that it is.

So true.  I can't add much to that.

[moda0306]

I'm not saying gold doesn't have value, but given the wealth we've created in our societies, I don't think gold will just automatically adjust around it simply because its rare.  I don't think society, as a whole, will give the pixie dust enough value.

I agree gold can "seem high at any price" since it's not particularly useful in extroardinarily productive ways, but that doesn't mean its qualities of a monetary metal will give it some kind of infinite value by a society.  This is just a guess of mine and not based on a study on the psychology of societies and pricing precious metals or monetary metals.

I am going to ponder the idea of money, whether gold or green paper, not needing to expand with a growing economy.  On a gut level, monetary expansion seems like market manipulation and social engineering (even though let's not forget Milton Friedman was a monetarist and believed in expanding the money supply during the depression), but I can't help but think that's a flawed way of looking at a medium of exchange... that you actually want it to have the flexibility a fiat currency can provide.

[Tortoise]

I'm not saying gold doesn't have value, but given the wealth we've created in our societies, I don't think gold will just automatically adjust around it simply because its rare.  I don't think society, as a whole, will give the pixie dust enough value.

The exaggerated "pixie dust" example does not refute the point that countless societies did use gold as their currency during and prior to the Industrial Revolution as LW noted.

One's conception of how the world should work does not change history.

Perhaps, in arguing that gold would never work as a currency going forward in this Brave New World, one is unwittingly resorting to the age-old pipe dream, "But this time it's different!"

[moda0306]

Tortoise,

I guess it's just a gut feel, but there are a lot of things that I think would have worked great in the 1800's that wouldn't work today.

And if you were to replace all the fiat currencies in the world with gold, I wonder if my pixie-dust analogy would be that much of an exxageration.

I see your guys' points though... this certainly, if anything, clarifies what my questions actually are rather than gives me solid answers.

More than ever, with some fresh blood the last couple of months, this board is really showing some great diversity, and I'm learning so much from the ideas and perspectives presented... and not a two of us seem to really constantly beat the same drum on all issues.

[stone]

moda, I've also pondered about what would happen if the medium of exchange were one that did not expand. You could imagine a system where there were always exactly 1 trillion USD each with a serial number or whatever. In such a mythical world you could also not allow banks to make loans out of thin air. Instead banks would only be able to transfer allocated USD that had been obtained by selling bonds or selling newly issued shares or whatever. Government tax and spending would transfer allocated dollars from some people to other people. If technology or whatever improved you would be able to get more goods and services for a given amount of USD (deflation). If people took USD out of circulation by leaving them unused, then the reduced amount of USD in circulation would also cause deflation. If people borrow money in a deflation, it can become impossible to pay back the loan. My understanding is that such deflationary pressures cause governments to resort to using expanding monetary systems.
As I see it, our expanding monetary systems seem to have very serious problems of their own. You asked what malinvestment has come from our expanding monetary system. I find it striking that in the 1960s only 5% of the US economy was in the financial sector. The massive growth of that sector of the economy seems hard to justify when you think how much computing should have reduced the manpower required. To my mind the financial sector is largely an artifact of the expanding monetary system. I think the MMTers are correct when they say that government debt equals private savings. The problem is that all those savings justify an army of wealth managers to tend them / try and poach them off each other etc.
My guess is that to have a sustainable non-expanding monetary system would require a constant dramatic government intervention to prevent the deflationary pressure. Would it work if the government moved all of the tax burden to being a flat asset tax such that every citizen had to pay a fixed percentage of their gross asset value as tax (the same rate for cash, shares, land, collectibles etc etc)? Such a system would ensure that hoarding money (so that the resulting shortage increased its value) was not more profitable than keeping it circulating by financing investment in productive enterprises etc.

[moda0306]

stone,

All good points and I have no real retort... I like that some of our differences are really boiling down to a few big questions, one of which being: Does a currency need to expand (by government fiat issuance (or the "gold-standard/fractional-reserve banking system" we had from 1913 until FDR pulled a fast one) to a growing economy?

The answer (or opinion) to this question nullifies so many more questions down the road (regarding how things "should be"... I still want to have an understanding of how things operate, or "how they are").

If you don't think money supply needs to grow with an economy by government engineering; that the private sector can engineer its own equilibrium efficiently given the resources nature gave to us and simple contract law, then you are at fundamental odds with someone trying to describe what we should do within a world of fiat expansionary currency.

[stone]

moda, I think every discussion about this has to recognize the "feudalism dead end" as an economic phenomenon just as hyper-inflation needs to be born in mind when thinking about monetary systems. Feudalism comes about as an end point when a few people get to own everything. They get served by the indebted rest of the population in any which way the owners dream up. The problem is that only the handful of owners have input into deciding what is done. A handful of people can never grasp what needs to be done and how to get it done in the way that the whole population can with each person thinking for themselves. Historically once that stage was reached the country was powerless to avoid invasion and so the system got rebooted.  A non-expanding currency can lead to feudalism very quickly. My fear is that our expanding currency system is starting to reveal how it could also lead to feudalism. Basically to my mind it boils down to it being necessary  to have power dispersed to all the individual people so that no small elite has the impossible job of controlling the economy on their own.

[moda0306]

stone,

While you put it differently than I've ever heard it, your concern of a more and more top-heavy distribution of wealth on a macroeconomic level is shared by me.  I think misallocations of wealth from innocent market failures tend to always fall in the lap of the more educated or more powerful, and therefore will have a tendency to slowly creep that way over time if not corrected by a 3rd party, which is government.  How it should do this is also debatable... government can administer broad programs, or it can simply cut a check... both having advantages and disadvantages.

I'm not saying government does this well or that it's not unfair on some levels... but simply that I don't think it will naturally happen on its own in a pure market economy or with our current priorities in today's mixed economy.

[stone]

moda, I think the big problem is that the choice is always posed as being between either having a handful of government people controlling everything (as in the Soviet system) or letting an oligarchy become ever more powerful. In reality the government could redistribute in a way that involved zero government input into what the economy did. They could just have a flat asset tax and pay a flat citizens dividend to everyone. Then all economic decisions would be being made by the private sector. I'm just setting out an extreme example of how government mediated redistribution does not necessarily need to entail entrusting the government to run anything much apart from a rudimentary tax system.

[moda0306]

I've thought of that before... having no or few "social programs," but instead a "base dividend" people get with which they could reasonably afford basic insurance levels and a certain amount of basic needs.... and as distribution of wealth started to get "unnaceptably skewed" (whatever that level would be), simply increase the tax and increase the dividend accordingly.

This would result in far fewer moral crises and market manipulations, as well as a far-simpler tax-code... other than that everyone would know they get xx per month, and any more they wish to work for is extra.

I love dreaming about how different types of societies and governments would work... including the Ayn Randian types.

[melveyr]

I definitely love dreaming up what I would do if I were dictator of a sovereign nation. For the tax code I would only have a sales tax, a capital gains tax, and a dividend tax. I would also implement the "base dividend" where everyone gets x amount of dollars. Nice and simple. No income tax of any type! All of the tax accountants, find something else to do that actually creates wealth in my economy. 

[moda0306]

Hey, quit raggin on tax accountants... 

[stone]

I think the muddled system we have with an immensely complicated array of taxes and benefits comes about because of the idea that the government needs to "do something for getting our money". The bizare thing about the citizens dividend idea is that people from left wing politics say it is a good idea but would never get past the right wing electorate and people from right wing politics say it is a good idea but would never get past the left wing electorate (Milton Friedman came up with the idea but I'm sure other people have too over the ages).

[stone]

Lone Wolf,  "Robert Murphy had a good article on this a while back in context of a general MMT rebuttal.  The summary is that MMTer's get away with this by separating "private savings" from "private investment", a distinction that frankly makes no sense whatsoever.  (And this assertion is crucial to the theory!)"

I agree that the whole "deficits to meet net savings desires" theme is the crux of MMT. My impression was that MMTers would say that the coconut example in the link you gave was an idealized, perfectly managed, frictionless, economy where there was no need to meet "net savings desires" with deficits in order to prevent waste. MMTers would argue that the real world isn't like that and so in the real world "net savings desires" do need to be met with deficits. Personally I think trying to meet net savings desires with deficits is impossible because net savings desires are a bottomless pit and so it is better to just accept that those desires always have to be thwarted.

In that Robert Murphy coconut example, the saving caused unsold inventory in the form of excess coconuts (unsold inventory is "investment"). The response to that unsold inventory was to divert resources away from coconut production towards ladder production (capital creation). The reduced coconut production led to the unsold inventory getting sold off. The full scale production of coconuts  then resumed using the ladder. MMTers would argue that in a real macro-economy, there is typically massive amounts of unused spare productive capacity. Unlike in the example, in the real world, there are plenty of would be ladder makers who are unemployed and waiting to be hired. Having unsold coconut inventory is entirely unconducive towards ladder production in the real macro-economy. The MMTers argue that the savings equals investment accounting identity needs to be broken by introducing a government deficit with a fiat currency. Then, when the coconut consumer saves his $, that saved $ gets replaced with a deficit $, the coconut consumer gets to consume the full complement of coconuts (so keeping the coconut pickers in work and preventing unsold inventory) and ladder production can go ahead anyway because coconut picking wasn't something that ever was diverting resources away from ladder making. MMTers are very explicit about saying that deficit spending should never happen in a situation where there is no idle productive capacity waiting to be used.

My problem with all of this is that it is not a stable state at all. It entails an ever increasing build up of $ in savings. MMTers argue that savings are just electronic numbers that keep people happy and have no real cost or influence (extra $ don't cause inflation if they are saved rather than spent). BUT knowing that any savings will get replenished with fresh deficits diverts the whole economy into just being a deficit harvesting machine. I think it is easy to envisage management of savings turning into such a pre-occupation that our real needs get neglected. What proportion of science and engineering graduates now get recruited into the finance industry? How is that going to provide the new technologies we need? Also the glut of $ ends up masking the signals the economy gives as to what needs to be done when. To my mind it is important that everyone has enough coconuts and enough ladders to pick them but it is pointless getting people to endlessly make more and more ladders rather than going surfing or whatever.

[moda0306]

Desert,

Don't worry about it.  Great minds think alike, right?

If my debt is "real debt" and the government's debt is some kind of "monetary manipulation device" without nearly the same consequences on national finances, why are trying to spur lending again here?  When I hear "banks are lending again" I feel good for small business but sick to think when the next round of deleveraging might come (not that we're not still deleveraging).

In my "king for a day" moment, I'd probably do a combination of payroll tax holiday, debit-card mailout, and direct government spending programs (I kind of like the idea of making a switch to the metric system).

I'm not convinced that would work or is fair, but I don't think Austerity will provide recovery... in fact I think it will give us the opposite.