Gyroscopic Investing

So the MMT is stuck in the old fixed exchange rate equilibrium also?  Interesting.

But in fairness, very, very few people are cognizant that commercial banks create their own private enterprise money on demand whenever a borrower deposits a signed promissary note, i.e. the borrower funds the loan as the bank is acting as a moneychanger and not a lender.  AFAIK, savings and loans, community banks, possibly credit unions, may still do it the old way, i.e. lend out other deposited capital to borrowers, but that doesn't change the obfuscated nature of where the capital originally came from.

MG

stone wrote: This link (spotted by Gumby) has a very thorough description of how our finance system works that clearly sets out how saved money is NOT involved in bank loans:
http://pragcap.com/mmt-and-the-operatio ... ary-system
" Every transaction in a real-world economy affects financial statements of those engaged, and if an economic theory or a posited model is not consistent with how real-world financial statements are affected, then the theory is inapplicable.  A typical example used by MMT’ers is the loanable funds market, which posits a demand for loanable funds and a supply of loanable funds available for the macroeconomy.  This model is simply inapplicable to our current monetary system in which bank loans are created “out of thin air”? without the requirement of prior reserve balances or deposits to “fund”? the loan’s creation.  Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases."

Machine Ghost, I'm probably just being stupid but I'm not sure whether you are saying that MMT has got it wrong. My understanding was that MMT agrees that loans create deposits ie endogenous credit money creation just as you describe. When the bank grants me a loan and I deposit it in a bank then that is new money out of thin air.

AFAIK, every school of economic thought gets it wrong about the source nature of capital that finances lending.  It is the difference between theory vs reality.  I mean, we operate under rule of law and sanctity of contracts; banks cannot just hazily "create money out of thin air" literally.  It has to be on a lawful basis.  And that basis is the signature and promissary note of the borrower-cum-depositor.

The reason why this distinction matters: to extinquish this promissary note liability, the bank has to pay it off, i.e. pay back the borrower-cum-depositor the full amount that was deposited!  Ponder that for a while.  But does that happen in reality?  Not currently.  But if you understand how the banking system works unlawfully, you can use it to your advantage at the court level to get out of alleged debts (in a way, sort of similar to the more recent Show Me The Note in foreclosure cases or disputing third-party assignments of unsecured debts, which are illegal). 

This is all aside from the moral implications of not honoring commitments, of course.  But what is more immoral than obfuscating that the borrower is the one financing his own loan via a moneychanger masquearding as a lender?  There's a reason that Jesus got pissed off in the Temple and that Shariah Law forbids interest.

Just as the political money system has the IRS and legal tender laws to force value upon the Federal Reserve Notes, the private money system has debt collectors and the Credit Bureaus to give value to their moneychanging monopoly.

MG

stone wrote: Machine Ghost, I'm probably just being stupid but I'm not sure whether you are saying that MMT has got it wrong. My understanding was that MMT agrees that loans create deposits ie endogenous credit money creation just as you describe. When the bank grants me a loan and I deposit it in a bank then that is new money out of thin air.

Machine Ghost, my understanding is that MMT says that banks are quasi-governmental. They can always pay off the deposits because they have the governments bottomless well of bank reserve creation behind them if necessary. The government just encharges the decision making as to who gets given how much money to the banks as a sort of subcontracting arrangement. Personally I doubt the wisdom of it all. I just think it is a fudge to pretend and extend issues that come from wealth inequality. A system without such money creation could work IMO so long as everyone had pretty much similar financial power.

Here's an interesting article from 2003 (!) that I just came across that settles the supply side debate as to whether or not tax cuts increase revenues.

http://209.157.64.200/focus/f-news/882137/posts

MG

When people talk about the so-called "Laffer Curve" and how tax cuts can increase revenue it's interesting how they assume that it actually is a curve based upon perhaps two or three points on the graph. 

The truth about the Laffer Curve is that it could be a variety of different shapes, depending upon the tax rate you start with, underlying economic conditions, monetary and fiscal policy, etc.

I find Art Laffer to be a member of the "Smug Pundits Who Are Often Wrong" club.  He just strikes me as so self-satisfied that he seems incapable of learning anything new. 

Although I think Peter Schiff is sort of a loudmouth, I love this classic verbal beatdown that Schiff gave Laffer back in 2007:

http://www.youtube.com/watch?v=lYkFYdLTTw8

Schiff may be wrong about hyperinflation but he sure called the crap out of the housing bubble.

I've really enjoyed the running debate between Austrian and MMT perspectives in this forum.  But, I don't really think they are in that much disagreement, to be honest.  At least, on a descriptive basis, I think they're pretty orthogonal.  MMT describes one thing (fiat currency accounting on the macro scale), while Austrian economics comes in with the qualitative praxeology and marginal utility arguments.

I just think that some MMTers and some Austrians have taken their schools from the descriptive toward some dubious predictive/prescriptive conclusions.

Peter Schiff's hyperinflation thing is one thing, while MMT's got the job guarantee thing and the whole "we should have full employment or capital is being wasted" angle.

It seems like moda and stone are coming in with the second angle, where unemployment equates to wasted capital.  Actually, I agree that unemployment may sometimes be a form of waste...  on the other hand sometimes it might not be.  I think it depends on the "reason" for the unemployment.

From Austrian economics, I've learned that the economy is much more complex than a factory churning out widgets.  The factory always knows exactly what its goal is.  It's only a matter of getting the raw materials and labor, and using them efficiently.  In fact, the factory is single-minded and single-purpose to churn widgets out.  If workers were sitting around inside the factory, or material was being wasted, then that's clearly a case of "rotting coconuts," (as long as there is demand for the widgets such that the factory is profitable in operation).

However, I think that the economy as a whole has a different goal:  to provide as much as possible of what people demand, using as little labor and materials as possible.  This goal is far more complex than churning widgets out.  I think unemployment could be a reflection of uncertainty in terms of what direction the economy SHOULD be moving.  It may take some time before the economy gains enough certainty to mop up the excess labor and materials.

In other words, I think it might actually be harmful to try to put those unemployed people to work in some cases.  An analogy is Mises' example of construction workers building a house.  Suddenly, they realize that they don't have enough bricks to finish construction by the original blueprints.  The best course of action is to halt some construction activity until new plans are drawn up that incorporate the newly acquired knowledge.  Trying to stimulate "full employment" would be the equivalent of telling everyone to continue building the house regardless of the brick shortage...  until they build themselves into a corner.  Then, they might need to go back and demolish some sections to rebuild them.  This might result in more wasted labor and materials than if they had stopped while the new blueprints were drawn up.

In the real economy, this would manifest itself as malinvested resources...  i.e. the people on the margin who are put back to work by the added printed "savings,"  MAY actually be doing work that has negative marginal utility for the economy as a whole.  Otherwise, somebody would have hired them, and they wouldn't have been unemployed to begin with.  The "invisible hand" could be trying to send a message through the tight job market.  Perhaps there's something else the unemployed worker could be doing that would have more marginal utility than the specific job they are unsuccessfully seeking?

Another good Austrian analogy I like is one made by Robert Murphy (another guy who loves to talk about massive inflation).  I think his Schiff-like inflation argument is flawed, but his Gnome Thought Experiment is great:

http://mises.org/daily/5626

"...imagine that one night, mischievous gnomes decided to rearrange all of the capital goods and skilled laborers in the country. The next morning, brain surgeons who were supposed to report to a hospital in Albuquerque would wake up in Miami. Factory owners in Trenton would open their doors and see that their assembly lines were gone, replaced by defecating cows. Farmers in Iowa, for their part, would be baffled to see drill presses and computer servers sitting in their empty fields."

I'm not denying that the MMT has the accounting correct when it comes to how fiat money flows between government and the private sector, but I don't agree that we can consistently reduce unemployment in a constructive way (defined as increased marginal utility) by manipulating the supply of the little pieces of paper we call "money." 

Mind you, there are a lot of important qualifiers in that last sentence.  So, even if unemployment numbers are empirically shown to decrease when you increase the private supply of money, that may not qualify as counter-evidence to the argument I'm trying to make here.

edsanville,

Good post, mano... I'd say one thing on unemployment... but this is just my take.

Unemployment is simply the evidence of your uncertainty, malinvestment, or bad balance sheets.  Unlike Keynesians, I am not ready to declare war on Aliens .  I think, though, there's a good argument for the following.

1) To the degree that we've got need for improvements or expansion in infrastructure to service the needs of the future economic growth, do it before we're at full capcity, freeways are packed, and labor is expensive.

2) I think energy-efficient improvement credits almost have to be a net-gain for the economy.  It puts our construction workers to work doing things that will make small, old, inefficient homes that aren't going anywhere, more efficient... but obviously if owners are strapped for cash, these improvements may normally feel a bit expensive.  New insulation in the attick, new windows, and a better furnace-a/c to replace the originals should be helped a bit by gov't... though I usually disagree with piecemeal market-manipulators like this.

3) An all-out assault on Vo-tec (for the "kinda" smart), and heavy math and science (for the more capable) education.. teaching people... teaching people to teach other people.  Spread some friggin' knowledge and get people learning again.  One of the few good things that probably came out of WWII spending was that people were LEARNING how to engineer things, make things work better, solve problems, and run a distribution network... once bullets stopped, toaster ovens were just taking the same skills and applying them elsewhere.  These people were otherwise going to be one of the 15% unemployed, quite likely, right before the war ramp-up started.

4) If you STILL don't have full employment, I think at this point maybe government should NOT hire more people to do make-work.. I think at this point it's about balance-sheet repair and giving the private sector (consumers and businesses) the decision-making power to decide how money is spent.  A Keynesian would say "well this won't increase spending much and the velocity of money won't go up so we won't hit full employment as fast," and they very well could be right, but I don't think that means we hire people to do nothing.  Cut taxes, kick up spending some, and watch balance-sheets repair themselves and Americans decide, collectively, to start putting each others' skills to use again... or so my theory goes.