My understanding of MMT - Please point out any errors

[moda0306]

If I die and stone has given up on Stonelandia and Lone Wolf has signed on to MMT (or MR, now), I'll be at peace.

[stone]

Gumby and Moda, what strikes me is that we all want much the same. I certainly wouldn't want anyone to feel compelled to work more than necessary nor to have environmental damage nor to have peoples aspirations thwarted by the failings of the monetary system. That makes it even more curious that you guys see our current path as conducive to sweetness and light and I see it as a gathering disaster and you see my stonelandia idea as you call it, a recipe for misery.

What I don't think I have managed to get across is that the state sector would be no bigger in an asset tax system. All current private property would still be owned by someone in the private sector. The main difference would be that ownership would not concentrate towards people who had gathered wealth simply by having wealth. To my mind avoiding that would actually mean that the economy would better reflect what everybody in it actually wanted. A lot of people do want to have trees growing on land and use that for having picnics in. I don't think our current debt servicing rat race does reflect that preference well at all.
In terms of avoiding environmental damage, in the UK what stops any pleasant places we have left from being turned into waste lands (so as to gather agricultural subsidies or build Mcmansions or whatever) are preservation orders of various kinds. If say a forest had such a preservation order such that it could only be left unspoilt, then that would drastically alter its market value and so mean that minimal asset tax would be payable on it.

You seem to make out that our current system merely gives nominal transfers to the FIRE sector. It doesn't. It is a huge transfer of real wealth and power and that is an ongoing process. What proportion of the economy do you want to be in the FIRE sector? When every available job is as an investment banker what are we going to eat? To my mind our system leads to a bunch of hedgefund managers and investment bankers looking on and wringing their hands because they see everyone else is not sufficiently "productive" to be worth employing whilst there are calamatous shortages of everything such that only the 1% of the population can "sustain themselves" by FIRE sector shenanigans. Growing food or providing utilities gives such a poor "return on capital" in comparison to prop-trading that it is pointless to do it in our system or how it is heading.

[Gumby]

I understand what you're saying. And I agree that it's a shame that the FIRE sector has taken over. But that's no reason to throw out our entire system.

It doesn't sound like you're talking about capitalism when you describe Stonelandia. It sounds like you want a classless society. Isn't that one of the key tenants of communism?

Classless society refers to a society in which no one is born into a social class. Such distinctions of wealth, income, education, culture, or social network might arise and would only be determined by individual experience and achievement in such a society.

Since these distinctions are difficult to avoid, advocates, such as Anarchists, communists, etc. of a classless society propose various means to achieve and maintain it and attach varying degrees of importance to it as an end in their overall programs/philosophy.

Source: http://en.wikipedia.org/wiki/Classless_society

A classless society isn't a tenant of capitalism. At best, you're describing a variant of capitalism, but I can't figure out which one it is. Social Capitalism, perhaps?

[stone]

Gumby if you just walked up to someone in the street and asked them to describe how money worked and what free market capitalism was, then I very much doubt that they would describe our current set up. I thought that the "American Dream" was that anyone who could identify what other Americans wanted and worked hard to provide that could prosper. That's all I'm suggesting should be aspired to as a system. AFAIK the American dream has nothing in it about sussing out the weird distortions of MMT and gaming that.

I'm not advocating any more state ownership nor necessarily any higher taxation than now. I don't see how anything that doesn't entail moving towards more collective ownership could be called communism or socialism. Actually to my mind the current system is socialist as it transfers wealth to the FIRE sector from the rest of the economy. If the government transfered resources from workers to providing say guide dogs for the blind, then people would call that socialist. Our system now does just such a transfer except to Goldman Sachs rather than to blind people and guide dog trainers.

[stone]

Gumby, I don't think the FIRE sector phenomenon is a mere minor wrinkle in our current system. I think it is the defining feature. Our system basically amounts to "accommodating" any saving that occurs by filling any such gap with a deficit spend. That means that the FIRE sector has sprung up to gather the deficits as fast as they can be pumped out. Look at who does most of the campaign funding. It is a set up that is bound to become more and more distorted.

[moda0306]

stone,

In a free society, a healthy FIRE sector would exist.  Insurance is extremely important for risk & cash-flow purposes.  Debt is a perfectly natural and usually healthy arrangement between those with capital and those with skills.  Real Estate is a long-term investment for most people, which lends itself to long-term debt contracts.

A healthy FIRE sector will help the rest of the economy realize its full potential.  Let's not throw the baby out with the bathwater.

[stone]

moda, in 1960's America there was a vibrant FIRE sector that serviced the real economy just as you describe. It accounted for 5% of corporate profits. That had grown to over 40% of corporate profits by 2007. Basically the FIRE sector is much like an administrative system for the private sector. Having an administrative burden that is over 40% of the total system is nuts.

http://en.wikipedia.org/wiki/Financialization

[moda0306]

We agree, stone.  The regulatory model of the 1960's, not Stonelandia, may be the answer to our FIRE sector.

[stone]

moda, it is the size of the stock of net financial assets that causes the size of the FIRE sector not the regulation. You could put in an exact copy of 1960s regulations but if you have 14 trillion of government debt/ private net financial assets then you will get a huge FIRE sector whatever the regulations. Basically if you have mountains of paper wealth, then that will demand a colossal effort to tend over it. If you have a huge gushing flow of new deficits then everything real will be dropped in order to focus on harvesting them.

[Gumby]

We agree, stone.  The regulatory model of the 1960's, not Stonelandia, may be the answer to our FIRE sector.

I'm with Moda. The FIRE sector corrupted politicians to loosen those regulations so that they could harvest more debt. But, who's to say that the FIRE sector wouldn't just corrupt the politicians in Stonelandia and do the same thing there? They would. Power always corrupts.

And the "American Dream" most certainly not about achieving a classless society. It's about having a strong middle class and the opportunity to rise up to the upper class.

[moda0306]

stone,

The size/stock of financial assets, in the long run, should be in some reasonable ratio to the size/stock of REAL assets.  If they are, there's no real reason to have the FIRE industry be a larger portion of the real economy than in 1960.

It's not the M0 that the FIRE industry is using to exploit our system, it's the informational assymetry relating to credit money that they're using.  It's the ability for a bank to build M1-M3 on top of M0, and then sell their mistakes to a securities market that sells those mistakes to 401k plans.  Nobody has to hold onto mistakes, so they're made 10x more easily.

It very much is a regulatory problem, not a problem of too much base money and treasury bonds (net financial assets) in the system.

[stone]

Gumby I never said anything about a classless society. You said that and I never agreed to it . Someone could become very rich and pay no tax at all in Stonelandia. They could start up a new company by spending all of the money they had on hiring staff and buying consumables to create some new invention. As soon as they succeeded, they could sell the business and start the next start up with no capital gains or anything else to pay as tax. This wouldn't be limited to start ups or high tech. Any ailing worthless company could be bought and turned around and resold for any amount and so long as it was sold once it was worth something no tax would be due.

[moda0306]

Wouldn't any business qualify as an asset subject to the 7% tax?

[stone]

moda, the whole point is that the stock of paper wealth has expanded immensely RELATIVE to real wealth. If you look at the housing stock and what factories and farmland there is and then you compare that to the stock of bonds and bank reserves and the companies set up to shuffle them around the change in the ratio is immense.

If you have that mountain of money then someone will work out a way to wriggle through any regulatory frame work to get that money gathering more money. That is leaving aside the fact that that amount of money has an enormous capacity to corrupt the political and regulatory system.

[stone]

moda, some ailing businesses are sold for £1. I think Rover the UK car maker was sold for £1.

The company my better half worked for was started up by venture capitalists. They paid rent for the premises, paid staff and bought equipment and consumables for nine years before they had a marketable product. Once they did, they sold the company for 30x what they had spent but basically up until the year they sold it no one believed there would ever be a product to sell. That business was worth nothing before the year they sold it.

[moda0306]

stone,

That's awesome but if they'd kept the company, it would have been taxed to the owners at a rate of 7% every year as they operated it.  I don't think we can use crazy startup scenarios as a model for what the typical business would have to pay in taxes.

Also, I'll have to analyze the "paper asset to GDP ratio," trends, but I think you are probably talking about the amount of leveraged assets built on top of the base fiat net financial assets, and these are subject to regulation & market manipulation... but net to zero, with the liabilities also involved (not that they're not worth considering).

I think it's these paper assets/liabs that net to zero, and how the FIRE sector has used them, that have gotten us into so much trouble. 

[MachineGhost]

MG an asset tax would not be a tax on profits. It would be a tax on market value. So you would pay the same amounts of tax on say 1000 acres of farmland irrespective of whether you left in fallow and so got no income from it with which to pay the tax or used it productively so that you could pay the tax and also buy your neighbours farm that he had to sell because he had left it fallow and so had no means with which to pay his tax. The point is to ensure that assets are controlled by those who get them earning and also so that asset values are a function of the earning capabilities of assets rather than being a function of asset bubbles. It also means that it is only the holding of assets that gets taxed not the  creation of new real assets.

Don't we have this kind of tax already?  It's called inflation.

MG

[stone]

Moda, I'm not talking about private sector leverage here, I'm talking about net financial assets AKA the government debt. The government debt has increased somewhat . On some MMT sites they have that debt clock thing but with the name changed to "private savings" so you can see the numbers zooming round as $15T comes ever closer. That $15T is the net financial assets that are in the form of treasury bonds and bank reserves. That is what underpins the FIRE sector and determines how large it grows.
The key ratio is NOT paper assets to GDP (though even the debt to GDP ratio HAS grown). Remember much of our "GDP" amounts to FIRE sector activity -shuffling around of pre-existing assets with bloated valuation. Basically the key ratio is simply the size of the government debt/ the number of USAs (always one).

With regard to most of the economy not being start ups- of course that is true. My point is that all of those stable established companies would still be owned by shareholders in the private sector. The overall tax burden would be no more than now. The government would be taking no more from the private sector than now. Wealth preservation would probably be MORE focused on choosing good companies to own shares in than is the case now. Clearly people who only did start ups would be shouldering much less tax burden than they do now but we also wouldn't be needing to shoulder the burden of our current huge FIRE sector.

That really is the key point- the government would be taking no more from the private sector than now.

[stone]

MG, inflation works in a very different way than an asset tax would. Inflation erodes the value of any contract in fixed USD but that in itself amounts to a transfer of real wealth to who ever is on the right side of that contract. The FIRE sector is basically an industrial scale harvesting of those wealth transfers.
An asset tax would apply equally to all assets (cash, bonds, stocks, land, collectables etc). Inflation would not have done anything to "tax" the person with the unused farm in my example. Quite the opposit.

MG an asset tax would not be a tax on profits. It would be a tax on market value. So you would pay the same amounts of tax on say 1000 acres of farmland irrespective of whether you left in fallow and so got no income from it with which to pay the tax or used it productively so that you could pay the tax and also buy your neighbours farm that he had to sell because he had left it fallow and so had no means with which to pay his tax. The point is to ensure that assets are controlled by those who get them earning and also so that asset values are a function of the earning capabilities of assets rather than being a function of asset bubbles. It also means that it is only the holding of assets that gets taxed not the  creation of new real assets.

Don't we have this kind of tax already?  It's called inflation.

MG

[moda0306]

Quick Analysis of MMT Assertion about trade & fiscal deficits:

MMT asserts that fiscal deficits expand the base money supply... the fiat net financial assets that our contracts, debts and real transactions are built around... but that we also have to take into consideration trade deficits when considering how much in "purchasing power" we're really farming out to Americans that's staying in their hands.  Basically, if a dollar is spent into the economy and immediately goes to China, it no longer exists as a net financial asset of an American, but instead a net financial asset of a Chinese company or person.  Yes, they could send it right back to buy our stuff, but for now it's not doing anything for our economy (and definitely not "funding our deficits").

People today are both appalled by our trade deficits and our fiscal deficits, thinking that both are going to be our ruin, but to be honest, one causes the need for the other, so our economy can continue to have enough motor oil (base money) to run efficiently and smoothly (service debt money, safe adequately, and engage in commerce).  

I was pretty curious as to what our balance of trade & fiscal deficit balance looked like from the mid 1990's to today (especially since the MMT'ers blame the 90's surplus, somewhat, on the recession that followed).

http://www.davemanuel.com/history-of-de ... states.php
http://www.census.gov/foreign-trade/sta ... /gands.txt

Here’s what I found from the sources just above (Year; Surplus/(deficit); trade surplus/(deficit)) (in billions):
1993; -255.1; -70.3
1994; -203.2; -98.5
1995; -164; -96.4
1996; -107.5; -104.1
1997; -22; -108.3
1998; 69.2; -166.1
1999; 125.6; -263.2
2000; 236.4; -376.7
2001; 127.3; -361.8
2002; -157.8; -417.4
2003; -374; -491
2004; -413; -605.4
2005; -319; -708.6
2006; -248; -753.3
2007; -162; -696.7
2008; -455; -698.3
2009; -1,416; -381.3
2010; -1,294; -500
2011; -1,299; -540 (estimate based on October & November)

If you follow the simple math that increased USD savings must equal our fiscal deficit minus our trade deficit, you’ll notice that our ability to save money, service debt and grow our economy would have been likely hampered after a few years like 1997, 1998, and 1999… literally, what was happening was that China and others were sucking out more dollars than the US was spending into existence, and therefore there was less base money for us to service already-acquired-debt.  Balance sheets started to realize this, and, among other causes, a recession occurred because of it.

Now some people say “well if deficit spending is the answer then why have the last 10 years been so awful”?… well look at where all our savings were going?  We had been, and still were, building up mountains of private debt on an ever-decreasing American-citizen-held monetary base.  Not once from 1997 until thru 2008 did we spend more money into existence than we sent over to China and others.

This fits right into mine (and others first) theory/assertion that only once adjusted for trade balance (aka, $$’s sent to other country’s bank accounts) do we really know what affect deficit spending will have on an economy.  The $5,602 Billion in deficit spending from 1997 thru 2011 hasn’t made up for the $7,067 in savings we’ve lost to other countries… and that’s after 3 years (2009-2011) of MASSIVE deficit spending to make up for all the trade deficits of years past.

Could this all come back to buy our goods?  Sure could, but at that point we won’t need to deficit spend nearly as much, as our tax revenues will be paid for by Chinese demand for our widgets paid for in dollars.

I hope this helps to clarify, even just a bit, the fact that the deficit spending of the last 15 years has not been disastrous… that it might actually have not been enough, considering that other countries have been demanding our dollars like crazy and removing them from our domestic savings accounts.

This means our private debt is built on less-and-less base money every year.  This is absolutely unsustainable, even if the debt had stayed even throughout the late 90’s and early 2000’s.  

[MachineGhost]

This means our private debt is built on less-and-less base money every year.  This is absolutely unsustainable, even if the debt had stayed even throughout the late 90’s and early 2000’s.  

You need to redo this analysis with the current account balance not balance of trade.  We don't exist in a barter economy.

"The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid)."

"The balance of trade is the difference between a nation's exports of goods and services and its imports of goods and services, if all financial transfers, investments and other components are ignored."

MG

[moda0306]

MG,

While I see what your saying, I've repeatedly seen it viewed as "trade balance," not BOP, that matters... I'll have to think of this... maybe Gumby will weigh in.