Austrian, market monetarist and MMT economics

[Gumby]

At the risk of derailing your discussion, would one of you guys mind explaining (to a guy with a limited understanding of economics) what the difference between MMT and Keynesianism is?

It's all in this article:

http://www.economist.com/node/21542174

...But the big difference (unless I'm forgetting something) is that Keynesianism believes that a government must save and store up a surplus during good times so that it can spend that surplus during bad times.

MMT just explains that concept is nonsensical in a fiat monetary system. When the government is just creating money and bonds with keystrokes (like a scorekeeper controlling a scoreboard) there is no way that a government can meaningfully save its own money. When you pay your taxes, all that happens is that the IRS is deleting that money from your bank account. The US Treasury doesn't have a bank account where your tax payments go. When the Treasury spends money into existence, it just credits bank accounts with its keystrokes.

When we were on a gold standard — with convertibility to gold — Keynesianism's prescriptions of saving during good times to spend during bad times may have been more applicable. Now those prescriptions are obsolete. For a Keynesian economist to admit that now would require them to pretty much nullify everything they've ever worked on since 1971.

Since our base money supply comes from government spending, MMT also shows us how a government surplus actually drains money from the private sector (when the government taxes more than it spends) — which explains why depressions almost always follow government surpluses. Instead of the continuous surplus/deficit driven boom/bust cycles in the private sector, MMT attempts to optimize the fiat money creation/destruction process in a way that maximizes output and productivity in the private sector.

As I was saying in my earlier posts, MMT's theoretical prescriptions (job guarantees, sales taxes, or asset taxes, etc) are unproven and debatable. But, the descriptive fundamentals of MMT (Treasury bond issuance, base money supply, taxation, etc) are an accurate description of our fiat monetary system. You don't have to believe in the theoretical prescriptions to understand the fundamental truths of MMT.

Cullen Roche's articles on Pragcap.com is a good place to start learning about the fundamentals of MMT. But, it requires patience and setting aside the gold-standard era thinking that we all learned in our textbooks.

[AdamA]

At the risk of derailing your discussion, would one of you guys mind explaining (to a guy with a limited understanding of economics) what the difference between MMT and Keynesianism is?

It's all in this article:
http://www.economist.com/node/21542174

Yeah, I read it.  I didn't get it.

And I still don't really get it.

It sounds like the idea is that it's healthy and sustainable to create currency so that we can pay for whatever resources we want. 

Am I being dense?

[Gumby]

It sounds like the idea is that it's healthy and sustainable to create currency so that we can pay for whatever resources we want.  

Am I being dense?

No, you're not being dense. Much like the PP, it takes time to understand MMT. You need to be patient and revisit it after you've had a chance to digest it.

You're on the right track, but there is an obvious danger of a government spending too much. The best example of MMT I can give you is the following analogy (which I didn't write):

"MMT (Modern Monetary Theory) focuses on the way monetary systems such as ours operate and the implications from this knowledge.

Is MMT advocating a free lunch? Is it saying that we can simply spend our way to prosperity? No! It instead identifies the real as opposed to imaginary constraints on economic growth.

Think about our economy as of a car that needs to get from where we're now to its destination – Prosperity! MMT recognizes that the car has a gas pedal and a brake pedal and a steering wheel that if used right can get us to our destination. Think of the gas pedal as injection of money into the economy (also known as "spending"), the brake as removal of money from the economy (also known as "taxation") The driver is the government and it can steer the car in various directions. Other countries have their own economies, so, think of other cars sharing the roads with yours.

The "deficit-hawks" believe that big deficits are always bad. Deficit is the difference between spending and taxation. So, their position is similar to a belief that too much pressing on gas (without counterbalancing by braking) causes crashes. While it is true that if you go too fast you are more likely to crash, pressing on gas and going too fast are two separate things. For example, when the car is going uphill or stalling, you really need to step on the gas to get it moving. So, deficit hawks in their myopia ignore the road conditions. They concentrate on numbers that are meaningless without a context. Additionally, their fear of spending prevents the economy from realizing its potential. Either they'd have you press on the gas very gently (spend less) or brake too often (tax more), without realizing that they might be causing the car to move too slowly and by the time you'd get to the destination Prosperity – if you got there – the rest of the world was there long ago and left to even further destinations.

The deficit hawks don't know how the car really works. They don't even understand that the deficit should be automatically adjusted to road conditions. Imagine if somebody told you you should never press on gas continuously without braking for more than, say, 1 mile. You'd laugh and say: this depends on where you drive and a myriad of other things!

What MMT is saying, is that you should not be shy to press on the gas when needed, to press on the brakes when needed and to steer the wheel as needed. MMT allows you to take the full potential of the car, without imposing arbitrary constraints (such as "pressing on the gas is bad" or "pressing on the brakes is bad"). Is there a fool-proof way to get to the destination? No, there is always an risk and sometimes the driver will make a mistake and sometimes crashes can even occur because of other driver's actions. But have you ever seen a fool-proof system?"

Much like a US State or local government, Eurozone nations owe debt in a currency they can't print more of, so they can't take part in these MMT rules of a true fiat currency. In other words, States, local governments, and Eurozone nations have to be careful, because they can all run out of money.

I'm off to bed, but will try to answer your questions tomorrow.

[AdamA]

You're on the right track, but there is an obvious danger of a government spending too much. The best example of MMT I can give you is the following analogy (which I didn't write):

Here's my interpretation of that:

The US government wants to buy a bunch of oil.  They issue a bunch of currency which eventually gets loaned out to Exxon et al, and we get the oil. 

Now Zimbabwe wants to do the same thing, so they issue a bunch of currency, and, low and behold, no one will give them any oil for it. 

What's the difference?  One of the countries can a much bigger pain in the neck if they don't get what they want than the other one can. 

Don't misinterpret as cynicism.  I am the first one to admit that I have a poor understanding of this.

[Gumby]

You're on the right track, but there is an obvious danger of a government spending too much. The best example of MMT I can give you is the following analogy (which I didn't write):

Here's my interpretation of that:

The US government wants to buy a bunch of oil.  They issue a bunch of currency which eventually gets loaned out to Exxon et al, and we get the oil.  

Now Zimbabwe wants to do the same thing, so they issue a bunch of currency, and, low and behold, no one will give them any oil for it.  

What's the difference?  One of the countries can a much bigger pain in the neck if they don't get what they want than the other one can.  

Don't misinterpret as cynicism.  I am the first one to admit that I have a poor understanding of this.

Military is certainly a factor for the dollar's strength and acceptability. But Zimbabwe is a different story.

It's natural to look to Weimar and Zimbabwe hyperinflation when trying to digest MMT. However, every hyperinflation in the modern era has bee a result of exogenous circumstances — not printing alone.

Hyperinflation is usually triggered by a total economic collapse, foreign denominated debt (which is unacceptable in MMT), war or a collapsing government:

[align=center][/align]

Germany's war reparations caused their deficit spending to rise 50% of GDP annually. Most of their spending was used to sell their currency to buy foreign currency to pay their war reparations. In other words, Germany held foreign-denominated debt, which makes a country extremely vulnerable to (hyper)inflation because it cannot print up more of the foreign currency. That drove their currency down — causing hyperinflation — which didn’t stop until that policy ended. When the policy ended, it stopped inflation stopped dead in its tracks. In one day. Zimbabwe had civil unrest that dropped their productive capacity by about 80% while government spending stayed high and too much spending power with too few goods and services for sale drove prices through the roof.

For the US to replicate Wiemar hyperinflation Congress would have to increase deficit spending to about $8 trillion a year and then sell those dollars continuously in the market place, using them to buy foreign currencies, such as yen, euro, and pounds. And replicating Zimbabwe would mean some kind of disaster that wiped out 80% of our real productive capacity and then continuing to spend federal dollars as if that never happened.

G'night!

[moda0306]

AdamA,

Here's the best article to start into MMT with.


http://pragcap.com/resources/understand ... ary-system


It's best not to think of the government as being the beneficiary of the system.  A free market needs a medium of exchange, and one that grows with the productive capacity of the economy.  Gold, eventually, runs out of the ability to provide that.  Government can create a currency by printing pieces of paper backed by nothing, but then by requiring that all tax liabilities be paid in that currency.  This gives it value... by legislative fiat.  If the residents of a country believe that the government has the clout to collect taxes and maintain a relatively stable money supply in relation to the productive capacity of the nation, it will happily use that currency.

Then, if people from other countries want to sell oil and trust that very same currency, they'll allow even Zimbabwe to buy their oil... that is... if they trust the currency, or, more specifically, the government's ability to collect taxes and promise not to issue too many of these financial assets (money) to create inflation if they go beyond the productive capacity of Zimbabwe.

I'd also add that while Keynesians are much more in favor of using deficit spending rather than tax cuts to bring the economy around, many MMTers believe we should set a certain level of deficit spending to meet public purpose, and then use fluxuating taxes to regulate the amount of money in the economy.  MMTers look at the money supply as any cash OR bonds in circulation by our government, because those are all truly the net financial assets that represent the additional purchasing power our government has created via legislative fiat.

I, too, am quite tired and want to go to bed, but keep reading on this stuff.  Rest assured, I'm quite sure 99% of us were deficit hawks at one time in our lives.  You aren't alone if it seems too much like a free lunch.  Eventually, if you're like me, you'll realize that full employment isn't a free lunch... but simple an efficient lunch.

[AdamA]

Military is certainly a factor for the dollar's strength and acceptability. But Zimbabwe is a different story.

It's natural to look to Weimar and Zimbabwe hyperinflation when trying to digest MMT. However, every hyperinflation in the modern era has bee a result of exogenous circumstances — not printing alone.

But how "exogenous" are these causes really?  If these countries had the military might to essentially print money and insist others accept it, then there probably wouldn't be these exogenous circumstances, right?

This isn't a moral judgement, or bashing of the US.  It just seems to me that it's not a sustainable system because it places no restraints on resource utilization.

[moda0306]

AdamA... you keep pulling me in.

As you print more money than the productive capacity can handle in a country, yes, you'll have issues.  A government could continually try to pull those resources into itself for its own use.  But government is a special kind of entity that enforces our very way of life, and it's the only entity that can do certain things we'd be appalled if citizens do.  MMT acknowledges that government has this power no matter the money system, and in a way says that to achieve a more prosperous private sector, a properly growing fiat money supply is necessary.

If Zimbabwe was on the gold standard or had a pegged currency, it could still commit genocide, steal from its citizens, etc.  Any government has the capacity to utterly ruin an economy (or in our case, destroy the world 10 times in a row).

This probably wasn't really what you were getting at... and yes, it helps to have a decent military... that will get your own citizens to accept it.... if other governments see you as a long-term stuard of a decent currency, they'll do the same (though they're probably more picky, as they don't fear military strikes simply for not accepting payment from Zimbabwe).  The citizens, however, are much more constrained.  They ARE subject to the Zimbabwian military.

All that said, it's not just military, but productive capacity, that enters into the situation. 

[Gumby]

But how "exogenous" are these causes really?  If these countries had the military might to essentially print money and insist others accept it, then there probably wouldn't be these exogenous circumstances, right?

Well, a neo-conservative would say that we need to spend $683,000,000,000 per year on our military so that we can guarantee the safety of shipping lanes and regional stability of every corner of the world so that people are willing to accept dollars everywhere. And in many respects global companies demand that kind of world wide regional stability (from their Senators and Congressmen) so that their products make it safely around the world. But, other countries get to enjoy that worldwide regional stability for free. The idea about 'military might' is not about threatening foreigners with violence to accept dollars (though, I'm sure that could happen). It's really about providing regional stability and maintaining a stable government so that foreigners actually want to hold that fiat currency. I mean, there is a very high demand for dollars in the world.

And, yes... if you have a weak military, it's possible you may be more susceptible to exogenous circumstances, which can lead to inflation (unless you have a military superpower watching your back, like Japan does). However, having a strong military doesn't prevent inflation from happening. It doesn't. Real data shows us that there is a very strong correlation between the rate of change in disposable income and the inflation rate.

[align=center][/align]

If you take the time to explore MMT, you will see that it explains this phenomenon in very clear terms. When the private sector has too much money, and unemployment is low (i.e. disposable income is high with no means to increase supply), prices will go up.

AdamA, please take the time to watch this short video before going any further... [VIDEO] MMT is simple

[stone]

Adam the clincher is that you need to get the oil producing countries' dictators to save in your currency/assets. If Zimbabwe could could convince Saudi princes to buy mansions in Harare rather than in London or Zimbabwe stocks rather than the SP500, then Zimbabwe could print away and exchange account statements/unrealized ever increasing property valuations for oil. Even Norway has a bizarre Public Pension system that buys US and UK stocks in vast amounts.

I think a lot of the reason why the developed world bends over backwards to foster asset bubbles and then to try and keep them inflated is so as to invite the money of commodity exporters.

Apparently the UK and Switzerland between them have $11T USD of African money "invested". Basically that is $11T of real goods from Africa (such as copper, Tea, oil etc) that we have printed for ourselves.

If you had a country that was able to produce everything that it needed for itself and not import anything (eg potentially Russia?); then you would not need to bother about what the exchange rate was. If you export manufactured goods that other countries want (eg Japan or Germany), or commodities (Norway, Australia etc) then that will support a strong currency. Getting people to save in your asset markets is the alternative taken to an extreme by the UK. The USA has the special "exorbitant privilage" of having the currency that gets used for international trade. When China buys iron ore from Australia they use USD. Those USD kept for that purpose correspond to effectively "free stuff" for the US.

[Gumby]

Interesting...

Press Release: John Thomas Financial Successfully Incorporates Modern Monetary Theory (MMT) Into Forecasts

[MachineGhost]

If this is what MMT is like, I call B.S. so far.  High interest rates are necessary to attract capital flows for investment that then create jobs.  And to say that Treasury issuance just supports interest rates and not expenditures is the dumbest thing I ever heard of.  We don't issue Treasuries to support interest rates but to finance productive (hopefully) inflation; the Fed monetizing the lack of demand at auctions is a separate issue.

I can't read any more lest I become twisted into a pretzel like this guy seems to be.

MG

Interest Rates and Monetary Policy

It is the realm of the Federal Reserve to decide the nation's interest rates. I see every reason to keep the "risk free" interest rate at a minimum, and let the market decide the subsequent credit spreads as it assesses risk.

Since government securities function to support interest rates, and not to finance expenditure, they are not necessary for the operation of government. Therefore, I would instruct the Treasury to immediately cease issuing securities longer than 90 days. This will serve to lower long-term rates and support investment, including housing. Note, the Treasury issuing long term securities and the Fed subsequently buying them, as recently proposed, is functionally identical to the Treasury simply not issuing those securities in the first place.

I would also instruct the Federal Reserve to maintain a Japan like 0% fed funds rate. This is not inflationary nor is it the cause of currency depreciation, as Japan has demonstrated for over 10 years. Remember, for every $ borrowed in the banking system, there is a $ saved. Therefore, changing rates shifts income from one group to another. The net income effect is zero. Additionally, the non government sector is a net holder of government securities, which means there are that many more dollars saved than borrowed. Lower interest rates mean lower interest income for the non-government sector. Thus, it is only if the borrower's propensity to consume is substantially higher than that of savers does the effect of lower interest rates become expansionary in any undesirable way. And history has shown this never to be the case. Lower long term rates support investment, which encourages productivity and growth. High risk-free interest rates support those living off of interest payments (called rentiers), thereby reducing the size of the labor force and consequently reducing real national output.

The Role of Government Securities

It is clear that government securities are not needed to "fund" expenditures, as all spending is but the process of crediting a private bank account at the Fed. Nor does the selling of government securities remove wealth, as someone buying them takes funds from his bank account (which is a U.S. financial asset) to pay for them, and receives a government security (which is also a U.S. financial asset). Your net wealth is the same whether you have $1 million in a bank account or a $1 million Treasury security. In fact, a Treasury security is functionally nothing more than a time deposit at the Fed.

Nearly 20 years ago, Soft Currency Economics was written to reveal that government securities function to support interest rates, and not to fund expenditures as generally perceived. It goes through the debits and credits of reserve accounting in detail, including an explanation of how government, when the Fed and Treasury are considered together, is best thought of as spending first, and then offering securities for sale. Government spending adds funds to member bank reserve accounts. If Govt. securities are not offered for sale, it's not that government checks would bounce, but that interest rates would remain at the interest rate paid on those reserve balances.

In the real world, we know this must be true. Look at how Turkey functioned for over a decade - quadrillions of liras of deficit spending, interest rate targets often at 100%, inflation nearly the same, continuous currency depreciation and no confidence whatsoever. Yet government "finance" in lira was never an issue. Government lira checks never bounced. If they had been relying on borrowing from the markets to sustain spending, as the mainstream presumed they did, they would have been shut down long ago. Same with Japan – over 200% total government debt to GDP, 7% annual deficits, downgraded below Botswana, and yet government yen checks never bounced, and 3-month government securities fund near 0%. Again, clearly, funding is not the imperative.

The U.S. is often labeled "the world's largest debtor." But what does it actually owe? For example, assume the U.S. government bought a foreign car for $50,000. The government has the car, and a non-resident has a U.S. dollar bank account with $50,000 in it, mirroring the $50,000 his bank has in its account at the Fed that it received for the sale of the car. The non-resident now decides that instead of the non-interest bearing demand deposit, he'd rather have a $50,000 Treasury security, which he buys from the government. Bottom line: the US government gets the car and the non-resident holds the government security. Now what exactly does the U.S. government owe? When the $50,000 security matures, all the government has promised is to replace the security held at the Fed with a $50,000 (plus interest) credit to a member bank reserve account at the Fed. One financial asset is exchanged for another. The Fed exchanges an interest bearing financial asset (the security) with a non-interest bearing asset. That is the ENTIRE obligation of the U.S. government regarding its securities. That's why debt outstanding in a government's currency of issue is never a solvency issue.

Source: Seven Deadly Innocent Frauds of Economic Policy

[MachineGhost]

But Graham's Law contradicts what you want to happen.  You can't have gold and FRN's compete because FRN's will drive gold out of circulation.  The only way for them to both coexist as legal tender is for the FRN's to be repegged back to gold and that worked out so great last time.  Gold is a free market now, how about we keep it that way and render until Ceasar what is his?

Gold clauses in contracts have been legal since 1976.

MG

Fundamentally, I have far more faith in Gresham than I do in Keynes.

I also think the Federal Reserve should go away. They are the third central bank we've had. We got rid of two of them and can get rid of this one, too. We should bring back Andrew Jackson to assist if needed.

[moda0306]

MG,

The fed does not set private interest rates.  Players in the private sector have the right to charge as much as they want to attract capital.  The treasury doesn't NEED bonds, so there's no reason to attract capital, and therefore interest rates on treasury bonds are more of a monetary tool to keep money sitting still instead of going out seeking other investments or spending.  Since the treasury doesn't need bonds to create base money, and they can't default, it's basically free risk-free return... something that we couldn't get before the gold standard was ended because there was a fundamental difference between your treasury bond and your dollars... today they're kind of the same thing.  

Further, believing in a 0% fed funds rate is one man's opinion on prescriptive form of MMT... not descriptive MMT.

I find it much easier to grasp MMT if you stick to the descriptive side first.

[MachineGhost]

Correlation is not causation and as government action lags the business cycle, so would accumulated surpluses.  Seriously, 1929 was caused by a budget surplus?  Give me a break.  The British real estate collapse caused Black Monday.  The trade war via Smoot-Hawley and rolling sovereign bond defaults caused and perpetuated the Great Depression.

If this is the kind of crap I have to read to understand MMT, I'll pass on it.  Plus anyone in the public limelight hobknobbing with the ruling elite like Al Gore is immediately suspect as a statist in my book.  It sure seems to me like this Mooser has a hankering fetish to impose his "truth" prescription on everyone else.

But hey, I could be wrong.

MG

Looking forward to it. I hope you'll take the time to seriously explore it. Keep in mind that MMT is not really about the theoretical prescriptions (such as the Job Guarantee or taxation methods) — which are still up for debate. The fundamentals of MMT are about accurately describing how the monetary system operates.

[moda0306]

Mosler (not Mooser) has made a lot of money trading based on his understanding (MMT) of sovereign finance.

I don't think "surpluses caused the depression" per se, but it's interesting that every depression since the 1800's was preceded by surpluses, and all surpluses were succeeded by depressions.... or at least very close to all of the time.

I think MMT'ers use that to say "this gives us a lot to think about regarding sovereign finance," not that there weren't other overriding factors in the economy.

I will say this though... many "bad things" that happen in society (war, plague, famine, genocide, etc) have very real, tangible, visible things that are inflicting the pain... depressions are much more vague, and I think deserve much more thought about what is TRULY happening.

When you have people with skills unemployed, and that's why they aren't able to purchase the skills of others, but you have a ton of productive capacity in the country/world going to waste because everyone's in a Mexican standoff with each other, to me this is simply a self-fulfilling tragedy of private-sector balance sheets and cash-flow projections.  Workers haven't been killed by Germans, factories haven't been bombed, disease hasn't run rampant, and people aren't mouth-breathing imbeciles incapable of producing value... simply everyone's looking at each other waiting for their balance sheet to get better, and probably not in a position to bartar (and therefore not affecting the financial balance sheet).

As melveyr has often mentioned... this phenominon wouldn't happen in a society that is very comfortable with bartaring... but when we use cash, not bartaring skills, to contract for value, that leaves both our upward and then subsequent downward potential very large.

Depressions certainly do appear to be different.  Gov't doesn't have to perpetuate bubbles or bail out bad players to engage the economy in a way that uses the productive capacity either directly (infrastructure projects) or indirectly (balance-sheet repairing stimulus).

But... again... I'd suggest looking mostly at descriptive MMT.  The functionings of how the fed & treasury work... what could possibly give our currency value in an economy with taxes but no gold-swap, how constrained our government is to spend and what our treasury bonds represent is all relevant stuff, even if you don't think it's moral.

[MachineGhost]

It doesn't mean his right about anything else.  Lots of GOOROOS make claims that are truthful to garner a mediocum of respect, then cover it up with layers of doo doo.

MG

[align=center]The funds to pay taxes and buy government securities come from government spending.[/align]

Makes a nice tattoo. Such a true statement, but few people ever seem to grasp that concept. Took me a long time fully understand it so I completely relate to the difficulty one can have digesting MMT.

[moda0306]

MG,

It surely doesn't mean he's right about everything else, but he's started by getting one big thing right that people who have totally mispredicted what will happen in the economy have gotten wrong... like Peter Schiff and Ron Paul.

So at the very least he's started out by getting my attention.

What MMT concentrates on is we should look at the constraints of our real economy to see if we have "problems," not an irrelevant debt clock.  This was my favorite part and is incredibly refreshing.  Even with SS they've pointed out that we should look at the real resource implications of too many retirees and too few workers, not whether some imaginary trust fund is being "drawn on" or not.  Basically, is there enough productive ability and incentive for the workers to produce value for the retirees.  Right now we have people begging and pleading for jobs, not an overwrung working class busting butt to produce value for retirees.  This is obviously not the problem that SS alarmists would have us believe.  We have a ton of willing workers willing to pay high payroll taxes just to keep most of the rest of their money... heck, even retirees are trying to keep working.  It's this focus on how we should view the real economy vs the financial assets that make up our fiat currency framework that makes MMT very refreshing.  They may not be 100% right, and they do make some bold assertions at times, but nobody is better at describing the way our currency works and leading into conclusions from that starting point.  Austrians cry "we're broke," before even thinking their way into step 1 of our monetary system, and Keynesians think we should convince Americans we'll have an Alien invasion so we crank up defense.  (both are exaggerations, of course).  MMT simply acknowledges the way our money works, and why we should look at tangible limitations of our economy, not some ticking debt clock, to decide what the future may hold.

[moda0306]

MG,

This is a quote by stone that I think can unite all sides of the money debate.

Paper wealth is just a way to portion up the real world. All that increasing paper wealth can do is redistribute power over other people's time and possessions. It can only create (or destroy) real wealth insofar as it alters how much real wealth people waste or create.

At the outset it sounds like a huge Austrian argument, but it outlines MMT to a huge degree, too.  The general reason we have a fiat currency is the same reason we have freeways... it's simply more efficient to have the government do it... at least in some peoples' opinions.

So while it can greatly encourage efficient free enterprise, the currency itself has can't have any real value... it's simply a claim on resources elsewhere in the economy.  Corporate Bonds and stocks are claims on productive assets (in essence), treasury bonds are claims on cash, and cash is a get out of jail free card.

Considering this, we need to look at our real economy and see what's happening....

Are we suffering from disease?  If so, the only thing gov't can do is maybe enact public health strategies.  Have our factories bombed?  If so, our government can work to restore order, shelter, etc.  Maybe the gov't can't or shouldn't do anything about these problems, but the fact remains that these are REAL problems caused by phisical, tangible events that we can see.  Depressions are one giant Mexican standoff caused by an economic shock or malinvestment... very different animal.  We are healthy and capable, haven't been bombed, and everything has the ability to work efficiently and productively... but for some reason it doesn't.  The last thing we should do is pretend we have imaginary constraints to cure REAL problems.  We don't have to prop up housing prices or bail out bad players to repair balance sheets.  We definitely shouldn't act like an economy with mounds of unused productive capacity is limited by pieces of paper.

[stone]

High interest rates are necessary to attract capital flows for investment that then create jobs

Machine Ghost, I'm not sure that I'm understanding you on this. I got the impression that high short term interest rates set by the central bank act to entice foreigners to save in our currency. That shifts the currency exchange rate. A strong currency makes it easy for citizens to purchase foreign commodities and assets. I'm not so sure about that creating jobs. It makes it hard for exporters and easy for importers.  An exception is if trading partners have some insurmountable obstacle to competition (ie they don't have the know how or machines or whatever). Then a strong currency enables commodities to be bought from them for less. If they don't have any such obstacle, then a strong currency will just cause them to make manufactured goods and export to you and leave your productive capacity underused. That was what happened to the UK in the 1980s. It financialized our economy and hollowed out our manufacturing sector.
I'm wondering about when the Chinese currency fully floats. My impression was that they are artificially depressing their currency (by buying up USD) so as to give Chinese exporters an advantage. That way they develop the productive capacity and skilled workforce and the West looses all of our productive capacity and skills. They then float the Chinese currency with high interest rates. We then all save in Chinese currency and that strengthens  their currency so that they are able to buy commodities for a fraction of the man hours we can. We still import manufactured stuff from them because only they have the capacity to make it. Anyway any US or Europeans with money to invest, invest it in China rather than in the sink hole that the West has become. We just become a commodity exporter. Anyone not employed in mining, oil extraction or agriculture is left to scavenge much as most people in the developing world have for the past few decades. Just something perhaps we should be looking out for. Basically it would be us screwing ourselves over in much the same way Africa did in the 1980s and 90s.
I'm always struck by how the Romans invaded the UK because of our mining (and for slaves). Basically there is not much to say that the western world shouldn't simply be a source of natural resources with the population cast to one side. It's only political and financial schenanigens that have made it the other way around IMO. Obviously in an ideal world no one would be cast aside. I'm sure that of the seven billion people alive today, there are probably plenty of would be Steve Jobs, Einsteins etc  trapped by poverty.

[MachineGhost]

I was referring to higher long-term interest rates as those are necessary to attract capital flows to where it is most needed in the world to do good.  But, if the central bank intervenes in the economyc to force down those long-term interest rates, capital is not attracted, no money is available for capital investment and subsequent employment, and the economy sputters.  The capital flows could be horizontal and vertical, both domestic and foreign.  I don't know if MMT addresses the valuable signals that interest rates give out.  All I read was that interest rates were an alleged anarchronism for reserve clearing.

MG

High interest rates are necessary to attract capital flows for investment that then create jobs

Machine Ghost, I'm not sure that I'm understanding you on this. I got the impression that high short term interest rates set by the central bank act to entice foreigners to save in our currency. That shifts the currency exchange rate. A strong currency makes it easy for citizens to purchase foreign commodities and assets. I'm not so sure about that creating jobs. It makes it hard for exporters and easy for importers.  An exception is if trading partners have some insurmountable obstacle to competition (ie they don't have the know how or machines or whatever). Then a strong currency enables commodities to be bought from them for less. If they don't have any such obstacle, then a strong currency will just cause them to make manufactured goods and export to you and leave your productive capacity underused. That was what happened to the UK in the 1980s. It financialized our economy and hollowed out our manufacturing sector.
I'm wondering about when the Chinese currency fully floats. My impression was that they are artificially depressing their currency (by buying up USD) so as to give Chinese exporters an advantage. That way they develop the productive capacity and skilled workforce and the West looses all of our productive capacity and skills. They then float the Chinese currency with high interest rates. We then all save in Chinese currency and that strengthens  their currency so that they are able to buy commodities for a fraction of the man hours we can. We still import manufactured stuff from them because only they have the capacity to make it. Anyway any US or Europeans with money to invest, invest it in China rather than in the sink hole that the West has become. We just become a commodity exporter. Anyone not employed in mining, oil extraction or agriculture is left to scavenge much as most people in the developing world have for the past few decades. Just something perhaps we should be looking out for. Basically it would be us screwing ourselves over in much the same way Africa did in the 1980s and 90s.
I'm always struck by how the Romans invaded the UK because of our mining (and for slaves). Basically there is not much to say that the western world shouldn't simply be a source of natural resources with the population cast to one side. It's only political and financial schenanigens that have made it the other way around IMO. Obviously in an ideal world no one would be cast aside. I'm sure that of the seven billion people alive today, there are probably plenty of would be Steve Jobs, Einsteins etc  trapped by poverty.

[stone]

Machine Ghost, I'm unfamiliar with your idea that high long term treasury rates cause more real investment (training of staff, developing new technologies, building machines etc). I'd be really interested to hear a step by step operational description of how that comes about.

[MachineGhost]

Read this working paper: http://www.imf.org/external/pubs/ft/wp/2006/wp06189.pdf

I think capital flows are best detected empirically during crises when panic sets in and flees a currency, such as the Euro currently, the Wong/Baht/Ringgit in 1997 or the Pound in 1992.  During the 1930's as sovereign bonds imploded left and right, capital was truly panicing out of one country into another over and over in a manic dash for safety and stability.

It's interesting to think on how to reconcile capital flows with MMT.  If capital never technically leaves the country of issuance (other than paper notes), then isn't any so-called panic essentially that of an accounting identity?

MG

Machine Ghost, I'm unfamiliar with your idea that high long term treasury rates cause more real investment (training of staff, developing new technologies, building machines etc). I'd be really interested to hear a step by step operational description of how that comes about.

[stone]

MG, I think the "flow" is a "flow" of relative purchasing power rather than a flow of nominal currency units. Although the USD may technically never leave the USA, the value of those USD can very much leave. Let's say people sell GBP and buy USD in a dash. Each GBP sold gets sold for less USD and as a consequence each GBP is able to buy less oil or wheat etc.

I think a lot of the "inward capital flows are good" IMF stuff is very nasty and damaging. It basically is a rallying call for fostering asset bubbles and selling everything off/becoming indebted to foreign investors. It doesn't create real prosperity. Real sustainable prosperity comes from elevating the standard of living of a countries inhabitants based on what they produce.  That is just a function of the people getting organized to work well. It doesn't require a strengthening currency in order to do it. A lot of the recent advance of emerging market nations has been because they have rejected all of the "attract currency flows" nonsense.

[MachineGhost]

Below is (or was) my current understanding of how the monetary system works.  Where, how and why does MMT differ?


Treasury = Issues and auctions off debt securities in form of bills/notes/bonds to finance Congressional spending ("create money").

Publc = Buys securities directly or indirectly from Treasury ("decreases money to private sector").

Federal Reserve = Buys securities from banks with currency and/or credits the banks' reserve accounts ("lowers interest rates").  Or same, but at slower rate ("raises interest rates").  Or buys directly from Treasury ("print money").

Government Spending = Tax revenues + Change in securities held by public + Change in securities held by the Federal Reserve.

Inflation = Rate of government spending + Change in velocity - Rate of output growth.