The Bernanke Bust

[Lone Wolf]

MMR has skewered MMT for the point you've just made.  The private sector can save.  It's called investing ... If a company on the S&P 500 increases its balance sheet by adding a factory, and taken on a loan to do so, somebody (or more likely many people) owns that loan.  It's likely that this loan has a mortgage on the property... it's almost literally BACKED by the asset itself... kind of like the dollar used to be backed by gold... That is savings.  It's backed by investment (not a promise to pay, but productive asset).

I cannot tell you how gratifying it is to hear that the new-school MMR guys have pushed back against the MMT old guard on this.  You might recall that the failure to recognize investing as savings was one of the big points that I criticized MMT on.

I hope that you and Gumby are sitting down because I am about to say nice things about MMR (although not MMT.)

I googled "Cullen Roche" a couple of days ago when the name came up in another topic.  It turned out that he was one of the former high priests of MMT that wound up disenchanted with it and moved on to establish MMR.  I wound up reading an article about how MMR differs from MMT.  I couldn't believe my eyes -- he was pulling huge chunks off of MMT and tossing them over his shoulder.  What was left was really interesting.

Get this quote: "The reality is that the Treasury is a currency user under the current institutional framework and the Fed is the currency issuer.  So the Treasury must obtain funds for its account at the Fed before it can draw on these accounts... So it’s illogical to say that spending must precede taxation."

That quote sounds like something I would friggin' write!  Here was the article: http://pragcap.com/understand-the-moder ... t-from-mmt

More points where he blasts some of the old, crazy MMT ideas:

• MMT's absurd prescription of tax hikes as the solution for inflation
• The MMT idea that money is a creation of the state.  Money existed centuries before the state did.  Money emerges organically everywhere, from prison camps to the international stage.
• MMT blaming the dot-com crash on the "Clinton surplus"
• The idea that money derives its value solely from taxation.
• MMT welding itself to leftist policy prescriptions.  (Something I sensed but wasn't fully aware of.)
• The hardcore Moslerite idea that the financial sector produces nothing of value.

I used to think that the MMT crowd was a cult and incapable of modifying their thinking.  The fact that this apparent MMT/MMR schism thing (?) occurred over points like those above shows that some serious independent thinking has been going on in this branch community.  Being able to deconstruct ideas that you have publicly advocated and discard the parts that don't work takes a lot of courage and intellectual integrity.

Very impressive stuff.  I may not necessarily be an MMR believer, but who cares?  This is really well thought-out material.  Just light years ahead of the old-school Mosler/MMT crap from a couple of years ago!

[moda0306]

LW,

The user/issuer thing is one that I've only noticed more recently.  There's a guy on monetaryrealism.com called JKH that completely blows wonkish economic analysis into a new realm but is usually just clear enough for me to hold on with my fingernails and keep reading... he's simply amazing and I'd challenge anyone in any economic camp to say otherwise... my basic question is this...

If the fed's job is to maintain a stable monetary system, and they MAINLY do this through controlling base-risk (treasury) interest rates, and they mainly do this buy buying/selling treasuries with base money, and (maybe more debatably) have the power to, through controlling of conditions, engineer all the member-bank demand at the price THEY set for treasuries, then how on earth would the treasury ever default, and how does that not really change the nature of the issuer/user designations?

They haven't answered me yet, but probably because there are smarter people asking smarter questions.

I have also pushed back on the 1970's as an example of a time period where we had high inflation, high unemployment, low real interest rates (most of the time), and high taxes.  Haven't gotten what I feel to be a sufficient answer.  I did it for Lone Wolf.

Seriously, though.. I think we've mostly respectfully hashed this out so much that we know where each others differences are, respect those differences, and see where progress can be made with observations, facts, etc.  I DO respect Austrianism for using a moral philosophy (one I like at an an individual level to a huge degree) as the backbone of their study... though I think it's also their biggest weakness.  

[moda0306]

I'd add, the whole Clinton surplus thing I've hashed out a bit with Cullen myself.

I think we agree on this being the case:

Surpluses themselves didn't cause the economic problems in 2001 or 2008, but more base savings (cash & t-bonds) at or nearly after these investment crashes would have helped them from acting as such systemic problems, and let the economy simply adjust better, especially in 2008... We agree that bigger deficits wouldn't have prevented the 2008 crash, but either during or after the run up to 2008, having had or inserting mounds of safe financial assets on peoples' balance sheets would have helped immensely in preventing these economic crises from becoming so systemic.  We both see supply & demand as in some sort of equilibrium, and if you slash demand to 80% of productive capacity of the investment that has occurred, you simply will not get more investment, in aggregate.  "Businesses hire when they're swamped with demand" I believe is a phrase used on one of their blog posts as a title.

Some of the conversations that occur there are amazingly similar to ones here in terms of thoughtfulness and the style of debate, though so frustratingly wonkish at times that it's hard to take the ego-beating that ensues when you see that there are so many people that can trounce your economic verbology.

Their focus on balance sheets & supply/demand equilibrium is what I love so much... it makes so much more sense than looking at M1 that I wonder why we ever sat scratching our heads wondering why we weren't in hyperinflation using terms like "monetary inflation vs price inflation" and "liquidity trap"... it's so much about balance sheets, and debt-servicing and other cash flows.

[Gumby]

Great stuff, guys. Sounds like we all agree that modern macro is a learning process for all of us. I'm still learning more every day (often thanks to this forum).

[hoost]

Hey guys,

Sorry, I didn't get a chance to read your posts today until now.  Busy day.  I do have some thoughts, but I probably won't get a chance to post them until tomorrow (hopefully).

I will agree and say I'm learning a ton and I'm really enjoying our discussion.

I hope to talk to you all tomorrow. 

hoost

[MachineGhost]

If you look at times when our debt has skyrocketed in this country, it's almost always war, many of which were unnecessary (Civil, WWI, WWII (though I think it's arguable we were justified in engaging in WWII), Korea, Vietnam...). 

I think you have to use a broad categorization of "oppression" to include "austerity" and the "Red Menance", etc. as different forms of "oppression" that influences the political spectrum demagogues.

If Greece does not exit the EuroZone, it will 100% provoke a civil war with Germany.  When people cannot resolve their issues peacefully, they will act out destructively.  Middleman politicians exploit this angst and deftly manipulate such people to get the cyronist outcome they personally want.