Gyroscopic Investing

AdamA wrote: 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?

Gumby wrote:

AdamA wrote: 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

AdamA wrote: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?

"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?"

Gumby wrote: 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):

AdamA wrote:

Gumby wrote: 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 wrote: 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.

AdamA wrote: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?

Gumby wrote:

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

craigr wrote: 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.

Gumby wrote: 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.

Gumby wrote:

[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.

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.

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

stone wrote:

MachineGhost wrote: 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 wrote: 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.