My understanding of MMT - Please point out any errors

[Gumby]

What about tuition loans? There is currently more than $1 trillion in student loans in the US right now. Would you demand profits from students' future earnings to pay for those loans? Or would you have the government provide interest free loans? If the population is increasing, doesn't that mean the a government needs to spend more than it takes in to help those additional students as they grow up? Wouldn't that cause a government "debt" spiral?  How do those students pay off $1 trillion in student loans if the money isn't moving around the private sector efficiently?

You say that increased government spending isn't ever necessary, but then you don't fully explain how the money supply could ever grow, or could ever stay stable when additional payments are demanded, or what happens when population increases or when money isn't getting into the hands of people who need it to be more productive. You just need to fully explain how money could never increase when debt-fueled societies already depend on it being increased. I'm trying to understand how that would work.

It's not like I enjoy seeing more money pumped into the system. I just don't see how our system could be easily changed and keep the money supply stable without people defaulting or not having opportunities to fail.

[stone]

Gumby, at some point reality has to bite. There is a limit to how many restaurants the world can be doing with. If you saved those 90% of restaurants that fail, then how many more would be restauranteurs would pop up? Aren't we all supposed to be eating more home cooked food anyway? It seems nuts to me .

[Gumby]

Gumby, at some point reality has to bite. There is a limit to how many restaurants the world can be doing with. If you saved those 90% of restaurants that fail, then how many more would be restauranteurs would pop up? Aren't we all supposed to be eating more home cooked food anyway? It seems nuts to me .

Millions of restaurants have failed. Millions more will. This hasn't destroyed our country. You still haven't answered any of my questions.

[stone]

Gumby, it is basically a problem of compounding interest. I'd be perfectly happy to see anti-usury laws again. People will still want to sell goods and services. They will give interest free credit if that is the only way to sell stuff. Universities could get interest free repayments of fees from students spread over the student's life. So pay back a £30k debt as £1.5k for 20years or whatever. Basically it is the same situation as with the car loans.

[stone]

Gumby, my overall point is that a system with compounding interest repayments mirrored by an expanding monetary system does not result in money moving efficiently around the private sector, quite the opposite IMO.

[Gumby]

Got it. Though, many people believe usury is essential to the investment process and economic growth. But, if everything is interest-free, how do investors and creditors account for risk? I could be wrong, but it sounds like you want a society that doesn't encourage much risk taking.

It's not difficult to argue that banks take on, and encourage, too much risk these days, but I can't help but wonder if your society would have worse food because Thomas Keller or Gordon Ramsay was initially turned down for taking too much risk with their menu selection.

Gumby, my overall point is that a system with compounding interest repayments mirrored by an expanding monetary system does not result in money moving efficiently around the private sector, quite the opposite IMO.

I totally understand your point. But if you eliminate interest payments, you drastically change the way people assess risk. Not easy to do. And I'm not entirely sure how an asset tax and citizens dividend (as you recommend) would be any superior at moving money around the private sector efficiently. The debt-fueled approach is literally pumping money through the economy as fast as the economy can handle it (with flaws, of course). The citizens dividend/asset tax seems far less aggressive and could very well have just as many flaws.

[moda0306]

To me debt seems perfectly natural in the forms we usually consider "good debt."  Business debt (aka, old people with money borrowing to young people with skills & time) seems like a great way to keep people productive and adding value to an economy, and I see profit sharing as simply another form of that... even though it doesn't seem to require ever-expanding money.... though I still fear in reality that it would.

I think you want your monetary system to reflect the desires of the real economy, not have the real economy buckle under pressures of the monetary system (aka, letting a fixed money supply not being able to allow business growth because of deflation and/or bankruptcy since interest payments in a fixed money system is unsustainable).

I think there is this giant fear of the "someday" when we can't grow anymore to service the debt... well I see the real problem of that day being the environmental and productive consequences of how much we've grown, not the inflation and/or default that will ensue as our monetary system tries to deal with limitations of our real economy.  I hardly think it's appropriate to cripple our economy via monetary policy to prevent what is, in essence, a problem of the world we live in, not the money we use.

Think of it this way... if "someday" we'll have a solar flare that destroys the social fabric of our society and destroys our productive capacity, the true tragedy wil be the destruction of the social fabric of our society and our productive capacity, not the inflation that would ensue... the inflation would just be a monetary acknowledgement of the horrible consequences of the disaster, not the tragedy in and of itself.  Would people look at each other and say, "Goddamn QE... the fed should be abolished."  No.  It wasn't a monetary problem... it was a REAL problem.. just like unemployment is.

[Gumby]

Think of it this way... if "someday" we'll have a solar flare that destroys the social fabric of our society and destroys our productive capacity, the true tragedy wil be the destruction of the social fabric of our society and our productive capacity, not the inflation that would ensue... the inflation would just be a monetary acknowledgement of the horrible consequences of the disaster, not the tragedy in and of itself.  Would people look at each other and say, "Goddamn QE... the fed should be abolished."  No.  It wasn't a monetary problem... it was a REAL problem.. just like unemployment is.

Interesting. I tend to assume that solar flares are deflationary because everyone's money literally goes up in smoke

In all seriousness, I think Japan's fiat-based recovery from the 2011 Tohoku earthquake is a good example of fiat government spending solving problems and getting the nation back on its feet. Far better than making the remaining survivors slowly create wealth first to fund the recovery.

[moda0306]

Gumby,

At the very least, disasters like that are probably an area where supply-side economics works wonderfully... you've literally got tons of destroyed productive capacity, and you've got to get people out there to open businesses in a questionable environment.  Very different from today in the U.S.

Further, though, it identifies that Japan absolutely shouldn't have been scared by (gasp) a 200% debt/GDP ratio... like we've been saying, they have REAL problems, and trying to say that paper problems are bigger is asinine.  Direct (government cleanup, temporary social aid, and reestablishment of social order) and indirect (supply-side stimulus, low taxes, etc) government action was very appropriate, and looking at their "debt"/GDP ratio as a reason to do nothing would have been a horrible, horrible mistake.

A solar flare was an awful example... basically, something that destroys our productive capacity without destroying our money should have been what I used.

[stone]

Gumby and Moda, let's imagine usury wasn't an option (it was banned or no one had thought of it yet). Your old person has money and the young person has vim and vigor or whatever. By all means have the old person as a sleeping partner in an enterprise that the young person starts up. Or have a venture capital trust type structure to spread the risk and use management expertise to decide who to lend to. I also think it is a massive misreading of the current situation to think that bank lending favors investment risk. I think it is quite the opposite. IMO banks tend to want to lend into an asset bubble with a bubbling asset price as security and if they can't find that then they want to lend to an identikit enterprise replicating something they already know can steadily repay the interest payments. Much of the problem is that our debt based system diverts real resources away from innovation and risk.

[moda0306]

stone,

I think the biggest factor to the mispricing of risk has to do with the following chain of custody, not a general problem with debt in principle:

1) Person wants to buy a home
2) Person is in contact with 3 people, none of which are truly on "his side" (realtor, mortgage broker bank, and home seller)
3) Person takes out loan from Greedisgood Bank to buy home
4) Greedisgood Bank sells the loan to a wholesale loan collecter.
5) The loan collecting wholesaler sells these loans to bundling operations... that bundle these loans in "risk piles" for mutual funds.
6) The bundler then sells the bundle to a mutual fund company, whether Vanguard or Shadyfunds.com
7) Funds built on this mortgage debt are then sold to "consumers" in the form, often, of 401k plans that don't necessarily worry too hard about their "clients."
New B. Investor invests in this 401k fund option.

I can't imagine there's a contract-chain in the world that would keep accurate pricing on a security so far removed from the person(s) responsible for making it available to the final "consumer."  It's a giant "group trap," as HB would put it, where nobody gets much for doing due diligence, but they get A LOT for making sales, and there's little in the form of fiduciary doodee along the way.  Throw in some guarantees from Fanny & Freddy, and a fed you know will bail you out, and I think we've identified the real problem.

[Gumby]

Gumby and Moda, let's imagine usury wasn't an option (it was banned or no one had thought of it yet). Your old person has money and the young person has vim and vigor or whatever. By all means have the old person as a sleeping partner in an enterprise that the young person starts up. Or have a venture capital trust type structure to spread the risk and use management expertise to decide who to lend to.

Yes. I see your point. But that world is science fiction. Usury is an option, and many people were unhappy with anti-usury laws when they did exist.

What I like about the descriptive side of MMT is that it explains why our debt and money supply is usually growing in a world with compounding interest. It brings sense to the nonsense. Is perpetual government deficit spending perfect? No, it's definitely not. Does it cause problems with risk and speculation? Yes. Does usury cause a problem with compounding interest. Absolutely. I'd much prefer interest-free loans for things that actually help our society (tuition, small businesses, etc).

But, is government spending evil? No, I think government spending can help a country maximize its productive capacity and pull itself out of a ditch. It can make everyone's lives better in a real democracy when people value education, infrastructure, productivity and innovation. However, government spending can also be abused. It's up to citizens to hold our elected officials accountable for bad decisions. No system is perfect.

I also think it is a massive misreading of the current situation to think that bank lending favors investment risk. I think it is quite the opposite. IMO banks tend to want to lend into an asset bubble with a bubbling asset price as security and if they can't find that then they want to lend to an identikit enterprise replicating something they already know can steadily repay the interest payments. Much of the problem is that our debt based system diverts real resources away from innovation and risk.

You raise a valid point. But, unfortunately, that's the system we have. I don't think you can easily ban bank lending or restrict the free market for long with anti-usury laws. The society you're imagining is highly theoretical and seems a bit too far removed from our own current reality. You'd have to start your society fresh, on a new planet, that was entirely mentally and physically detached from our current system of usury.

[MachineGhost]

Gumby, everyone seems delighted to me whenever they see prices fall in a sale or whatever. I was delighted on Saturday to see that crusty brown loaves were now 72p rather than 75p. I don't see people wringing their hands about computor prices falling as they do. I'm just advocating a system that reflects reality rather than using smoke and mirror trickery as a political expedient/ means of fraud. You say that spending more than taxation is a way to avoid having private sector workers needing to pay for what the government directs to be done. I think that that is a very simplistic interpretation. Nominal wages do get devalued by pumping more USD out. The fact that we do not see deflation despite improvements in technology etc is simply down to devaluation of all of our wages. Things are actually worse than that because of the waste that comes from the economy becoming corrupted into simply being a machine for harvesting the effects government debt expansion rather than the economy delivering what people actually need and want.

People like to see expenses go down, but not income.  It's behavioral finance.  Losses hurt 2.5x more than equivalent gains.

MG

[MachineGhost]

You seem to think that this thread is the only source about the descriptive and prescriptive parts of MMT.  Believe or not, there are lots of sources about Modern Monetary Theory.  Some of the sources are cheerleaders and some are skeptics.    I agree with the skeptics. 

I agree with the skeptics too, but I am also open minded because I see our current system's faults as per behaviorial economics.  Only empirical evidence will settle the debate.  Three countries are already trying minor versions of the Job Guarantee so far.

That being said I find MMT to be a misnomer.  What it really is is Lerner's Functional Finance + theories of how to exploit such a public monopoly money system.  The Functional Finance part does not really need to be included as that is descriptive, not theoretical.

MG

[MachineGhost]

I can't imagine there's a contract-chain in the world that would keep accurate pricing on a security so far removed from the person(s) responsible for making it available to the final "consumer."  It's a giant "group trap," as HB would put it, where nobody gets much for doing due diligence, but they get A LOT for making sales, and there's little in the form of fiduciary doodee along the way.  Throw in some guarantees from Fanny & Freddy, and a fed you know will bail you out, and I think we've identified the real problem.

The real problem is greed. 

MG

[stone]

Gumby, you make it sound as though the system we have is static and is as it has been since time immemorial and can sustainably continue as it is. In fact it is in an extremely rapid state of flux. The debt (private and state) to median wage ratios are currently as we speak transforming our monetary system. Our system whether we like it or not is in a state of constant transformation. Choosing to "go with the flow" with this is just like choosing to go with the flow in the face of any sort of injustice or repression IMO.

[stone]

Gumby, small incremental changes could be made in the "right" rather than the "wrong" direction. Currently GDP growth is what everything is directed towards even if that simply means a growth in indebtedness. Getting out of that mindset could be a start. When leveraged buy-outs of companies happen now, that debt becomes the company's debt. It could remain as the private owner's personal debt with no limited liability just as if you or I borrowed a stupid amount to buy a load of stock. Currently all of the direction of travel is towards encouraging debt.

[Gumby]

Yes, yes. I'm not saying you can't change the system and move it in the right direction, but the idea of having a government that only spends as much as it takes in seems like a pipe dream. Running a government is incredibly expensive.

What about healthcare and caring for the sick and elderly? Does everyone have to survive off of their citizens dividend?

What about your trade deficit? When you import oil, and wheat, and iPhones — and the money to pay for those imports just collects in a foreign government's bank account, in your country — how do you keep that money moving around the economy without increasing the money supply? Would you tax those bank accounts to force the money out? Wouldn't that just give foreign countries less incentive to do business with your country?

As far as I can tell, your entire theory — as I interpret it — of having a balanced budget and no increase in the money supply depends on many things going perfectly, including:

- zero interest private loans
- zero interest government (savings) bonds
- no incentive to save
- an asset tax
- a citizens dividend
- no major earthquakes or natural disasters
- no population booms
- zero trade deficit
- no war
- no large aging population that needs to be cared for
- no taking on debt for bridges or schools that actually make society more productive

That's not the world we live in. And all these lofty, and unobtainable, goals just to avoid a few debt-driven asset bubbles?

And I don't understand how this mythical society — where everything is fine and no one pays interest and no one ever gets old and sick at the same time — would protect itself and trade with other nations without a blue water navy to protect its shipping lanes across the globe. Would you expect another super power to take care of that? Or would you fund your own blue water navy?

[stone]

Gumby, we all agree that all of the real challenges such as an aging population, wars to fight, bridges to build, tsunami damage to repair etc etc are the same irrespective of the monetary system and also that the real means to meet those challenges (ie people and natural resources) are the same irrespective of the monetary system. The monetary system is just an administrative framework that hopefully leads to the real resources being used effectively to meet the real challenges. The ideal monetary system would be one where entirely voluntary actions led to everything working smoothly such that all resources were optimally deployed to meet everyone's needs with no one having to be told what to do or deceived in any way.

I guess everyone everywhere aims for that same ideal? The only quibbles are about whether any alterations to our current set up might move things further or closer from that ideal. The thing to have in the forefront of our minds though, is that our current set up is itself causing the set up to change. It is like an ecological succession.

It seems as though you are saying that government deficit spending has a unique ability to induce people to "do the right thing". I just don't fully take that on board. I agree that it can trick people into being herded about without needing to use more transparent inducements (such as visible taxes and visible payments). Personally I prefer transparency. Government deficit spending can never create something for nothing. It is only ever another way to herd people around. I'm not anti-government. I agree that some things are best done by government. I just prefer the herding, that government needs to do, to be done in a transparent straightforward manner. Then people can see how much they were herded, can assess what they got out of it and decide whether to vote for more or less next time.

[Gumby]

I read that. It makes sense. And then I find myself scratching my head as to how you would deal with trade deficits and the need for a blue water navy to protect your shipping lanes. How you would keep the total savings and money supply steady through all that is beyond me. From my perspective, it still sounds like you just want to create a little tiny country somewhere, that doesn't grow much, where all citizens 'do the right thing,' and people sing song and dance merrily — and let the superpowers protect your kingdom and its trading partners. That's fine — it actually sounds like a nice place to visit for a weekend. I just happen to live in a superpower, with a growing aging population, that has a dozen aircraft carriers and more than 70 submarines to make sure iPods make their way from China and oil makes its way through the Strait of Hormuz without pirates and other countries raiding the shipments along the way. And then we print off more confetti so that China and Saudi Arabia has something to hold on to when they print off their own currency to give back to their citizens for all the work they did for us.

No one is saying it's a perfect system. But, you often have to spend a bit more than you tax when you're a global superpower with the world's reserve currency, and the fact that everyone on the planet expects interest to be paid every step of the way doesn't help.

[stone]

Gumby, I think the UK probably pushes the envelope with the current monetary system even more than the US does. Basically the UK is like New York and New England in isolation with all of wall street but without the rest of the USA. I don't think the scale of the country is relevant.

The US military does get real equipment and provisions for military families etc provided for it by other US citizens. The monetary system does nothing to exempt you from that. Thanks to the monetary system the US gets to both have 10% unemployment and Chinese manufactured goods. Basically the unemployment is what (for the time being) you are getting for free in return for the Chinese getting their 3T USD.

[stone]

Gumby, I'm not sure that previous superpowers followed a MMT system. Big empires in the past sometimes used a tax and spend system didn't they? Wasn't that the case with the Roman Empire, the Chinese empire and also the British empire in the 1800s?

Trade deficits will balloon if you accommodate them with monetary trickery and self correct if you don't. If things are let to take their course, the value of the importer's currency drops, imports become more expensive, exporting becomes more attractive and the trade deficit goes. Germany and Italy apparently had a perfectly matched balance of trade before the euro.

[Gumby]

The US military does get real equipment and provisions for military families etc provided for it by other US citizens.

And where does the money to provide those 11 aircraft carriers, 70 submarines, and provisions come from? Not nearly enough of it could come out of people's paychecks to pay for it. You're not going to collect enough from asset taxes to pay for those warships either, and schools, and bridges, and healthcare for the elderly. And by the way citizens, there's no incentive to save any of your money (and good luck saving for tuition or retirement when your savings are being lost to an asset tax).

Gumby, I'm not sure that previous superpowers followed a MMT system. Big empires in the past sometimes used a tax and spend system didn't they? Wasn't that the case with the Roman Empire, the Chinese empire and also the British empire in the 1800s?

I'm willing to bet the Roman's and Chinese didn't need to build a few dozen $4.5 billion warships, or spend $738 billion on military expenditures each year, or borrow a $1 trillion in private student loans. Actually, I'm fairly certain that they used slavery to finance their expenditures (and we did too, at one point). Again, you seem to be applying the economics of the middle ages to today's society (no interest, no exorbitant expenditures, no retirement, short lifespans). It's not the world we live in.

Do you really think a superpower could exist today without increasing the money supply? If so, please walk us through the process of how your country has the ability to build dozens of multi-billion dollar warships, educate the youth, accommodate population booms, and take care of the elderly without ever increasing the money supply.

Trade deficits will balloon if you accommodate them with monetary trickery and self correct if you don't. If things are let to take their course, the value of the importer's currency drops, imports become more expensive, exporting becomes more attractive and the trade deficit goes. Germany and Italy apparently had a perfectly matched balance of trade before the euro.

And if the exporter pegs its currency to yours? Then what?

[stone]

Gumby, when you are saying "where does the money come from" to pay for aircraft carriers etc I'm puzzled because I thought the whole point of MMT was to look for real constraints and if those real constraints don't exist, then realize that there needn't be monetary constraints. Clearly the US people are able and willing to build aircraft carriers. Currently the monetary maneuvers employed to orchestrate that involve sustained dilution of the USD etc. I guess what you are saying is that people would go on strike and refuse to pay taxes or work towards making aircraft carriers if they could see just how expensive they were. I'm not sure about that. Perhaps they value them and can't think of something they would rather contribute towards and so would want to pay up. It just seems to me as though your position amounts to a request to be tricked rather than be faced with a straight up decision. Underneath it all the same decisions are being made about whether people are busy building aircraft carriers, or providing health care, or sitting unemployed, or taking their kids to the park or whatever. You say an asset tax couldn't pay for it all but all the current system does is shift relative wealth towards asset holders so as to devalue economic activity so as to make economic activity appear "more affordable". All that an asset tax would do would be to cycle that wealth back around so as to have a system in equilibrium rather than in an exponential monetary transformation.

[Gumby]

Gumby, when you are saying "where does the money come from" to pay for aircraft carriers etc I'm puzzled because I thought the whole point of MMT was to look for real constraints and if those real constraints don't exist, then realize that there needn't be monetary constraints.

Yes, exactly. In the US, we just print up the dollars and bonds to pay for the aircraft carriers and submarines and people come out to build them.

But, I thought you said that Stonelandia doesn't build aircraft carriers and submarines unless it's part of a balanced budget? I'm under the impression that Stonelandia doesn't like to spend any more than it takes in. So, I'm just not sure I understand how Stonelandia can "afford" to do spend how US does, considering that the US couldn't possibly tax people enough to balance out everything it spends on.

I assume you would say that the money would just move around the private sector more efficiently. But, I'm not convinced. Don't people want to save for college, and a house, and retirement? I thought you said that everyone would be taxed to for trying to save? (My apologies if I'm misconstruing your asset tax/citizens dividend)

Clearly the US people are able and willing to build aircraft carriers.

Yes. Because the contractors are usually motivated by money.

Currently the monetary maneuvers employed to orchestrate that involve sustained dilution of the USD etc. I guess what you are saying is that people would go on strike and refuse to pay taxes or work towards making aircraft carriers if they could see just how expensive they were. I'm not sure about that.

I suspect the aircraft carriers wouldn't get built if Stonelandia required a balanced budget. People would want to save their money, demand lower taxes, and they would prioritize schools over warships and bombs (or vice versa if they felt threatened by their enemies).

It just seems to me as though your position amounts to a request to be tricked rather than be faced with a straight up decision.

Nope. There's no reason why a country can't print up some money to build a warship, if the country's shipping lanes need to be secured. That's what we do, and now we have a blue water navy. My impression of Stonelandia is that it would be straining to balance its budget when printing up the money would easily solve its security problem.

Underneath it all the same decisions are being made about whether people are busy building aircraft carriers, or providing health care, or sitting unemployed, or taking their kids to the park or whatever. You say an asset tax couldn't pay for it all but all the current system does is shift relative wealth towards asset holders so as to devalue economic activity so as to make economic activity appear "more affordable". All that an asset tax would do would be to cycle that wealth back around so as to have a system in equilibrium rather than in an exponential monetary transformation.

I think what you're saying is that the people end up paying for it either way because their dollars are devalued in the end. Is that correct?

If you tax people's assets and savings, how does one properly save for college, retirement or a home?