Gyroscopic Investing

AdamA wrote: Gumby posted this link in another thread. 

http://neweconomicperspectives.org/p/mo ... rimer.html

http://gyroscopicinvesting.com/forum/pe ... /#msg71834

I've been reading some of the posts and it's very good, if you're interested in understanding Modern Monetary Theory a little better. 

The Primer (what I've read so far) is excellent.

Mdraf wrote:

AdamA wrote: Gumby posted this link in another thread. 

http://neweconomicperspectives.org/p/mo ... rimer.html

http://gyroscopicinvesting.com/forum/pe ... /#msg71834

I've been reading some of the posts and it's very good, if you're interested in understanding Modern Monetary Theory a little better. 

The Primer (what I've read so far) is excellent.

And to make things even here is a very interesting rebuttal to MMT theory:

http://mises.org/daily/5260/The-UpsideDown-World-of-MMT

Mdraf wrote: And to make things even here is a very interesting rebuttal to MMT theory:

http://mises.org/daily/5260/The-UpsideDown-World-of-MMT

I think there are two areas in your argument that would be worthwhile to revisit as critiques of MMT, as they appear to miss certain claims of MMTers and therefore don't fully attack/criticize the MMT position.

1) The Crusoe and coconuts argument. This example does not involve a monetary system at all, whereas MMT starts from the assumption that we have a monetary system--specifically, a fiat one. A barter system such as you outline is perfectly legitimate, but is outside the scope of MMT. If a society wanted to subsist on barter, it would be free to do so, but MMT would have nothing to say about its operations.

That said, you do bring up a very good point that most MMTers completely miss: That fiat money is really more of a special case in the history of monetary systems and its use does not guarantee (1) stability or (2) wealth generation and prosperity. The more responsible MMTers will acknowledge these points and admit that the system they outline merely removes some of the limitations on a commodity-backed monetary system, while the ways in which that money is spent (productive or non-productive, wealth-generating or rent-generating) are wholly up to the society that implements them. The arguments of MMT only apply to monetary systems and are no guarantee that the fiat currency will be spent on productive activities.

2) The example of Sam and Tabitha. You write:

"But what is the point of accumulating bonds that will only be redeemed when Uncle Sam coercively raises the necessary funds from the same group of Taxpayers in the future?"

One of the most fundamental pillars of MMT is that the currency-issuing sovereign authority does not have to raise the necessary funds from taxpayers. Taxes regulate private sector demand to make room for government spending (and thus try to keep inflation under control), they do not generate funds to enable the government to pay out on its bonds or other liabilities. While the taxes are confiscatory, they are not used to fund the very bonds that the taxpayers have invested in.

Now, there are some concerns with inflation here, and MMTers discuss something called "inflationary barriers." They reject the quantity theory of money and instead state that inflation on the demand side happens the economy is running at full capacity and more dollars are injected. It is also possible for demand-pull inflation to happen prior to that point if there are particular demand bottlenecks that the economy cannot immediately pass and must build out more productive capacity to meet.

Now we're getting to the limit of my understanding of MMT and economics in general. I understand that inflation will also occur with supply shortages (same amount of demand, fewer supplies) and that a low level of inflation will likely occur as economic and population growth occur and I don't believe MMT denies this either. As I said, I'm just an amateur trying to think through these ideas.

After my admittedly brief exploration, I have concluded that the MMT worldview doesn't live up to its promises.

Modern Monetary Theorist: Hey, my friend. Why do you look so glum?

Austrian Economist: I'm worried about the inevitable boom-bust cycle that will result from these artificially low interest rates.

MMT: I'm a bit confused about why you think that would happen.

AE: It's pretty simple, really.

In a market economy based on gold and 100 percent reserves at banks, low interest rates signal present savings are available for future consumption. Businesses expand in longer-term, more capital-intensive ways because they anticipate the demand created by the extra savings.

MMT: Right. I've got that. But you do realize that we're not on the gold standard and haven't had that kind of banking system in generations, right?

AE: Sure. That's the problem. You see, when interest rates are artificially lowered by a central bank or fractional reserve credit expansion, the interest rates are a false signal about present savings. Business expand but the future demand doesn't develop because the savings weren't there. The low interest rates created the illusion of savings.

MMT: I can totally see how this would be a problem if we had your free-market system in place and then a central bank intervened.

AE: So we agree. Do you want to borrow my copy of "Man, Economy and State?"

MMT: Thanks. I will. But I do not quite agree. I don't think you actually understand how far central bank intervention has gone.

AE: That seems implausible. I worry about central bank intervention almost every day, from dawn 'till lights-out.

MMT: Here's the thing. In our system — non-redeemable money, floating exchange rates, central bank — short-term interest rates don't reflect savings at all. Interest rates just do not reflect or signal real savings in the economy.

AE: That's what I was saying!

MMT: Take it a step further, though. Interest rates are now policy-based rates, not savings-based rates. The Fed targets rates and meets its target, when necessary, by paying interest on reserves, supplying new reserves or draining reserves. It's completely irrational to do any business planning that attempts to read savings from interest rates.

AE: It sure sounds like you are agreeing with me.

MMT: I am agreeing with you. But I don't think you have understood the full scope of our departure from the gold standard. In our current system, banks do not lend out deposits.

AE: It's a giant illusion.

MMT: Sure. But it's not an illusion of savings, in particular. It's a credit system built on central banking plus banks which are semi-public institutions that are licensed by the government, to create new deposits by making loans "out of thin" air and backed by the government in the form of the central bank's role as a lender of last resort.

AE: Holy crap! This is the unlimited credit expansion that Murray Rothbard was warning about in "The Mystery of Banking."

MMT: Even Rothbard didn't quite understand that things were much "worse" than he thought. Banks are even less constrained than he believed.

AE: This is going to lead to disaster. Bubbles, unsustainable expansions, banks lending willy-nilly.

MMT: Yes. We've been warning that this financial system leads to fragility for a long time.

AE: We're screwed.

MMT: Well, we're screwed unless we put in place prudential regulations and have bank regulators that can shut down banks that exceed prudent limits.

AE: What guarantee do we have that regulators can effectively set prudential limits? Weren't Lehman Brothers and AIG within the limits set by regulators when they blew up?

MMT: But that was because of irresponsible deregulation.

AE: What makes you think that regulators can get it right? Won't the powerful businesses and banks dominate the regulators?

MMT: This is a policy question, not an economic question. We think that well-meaning, informed regulators can set the right rules of the road.

AE: The last decade doesn't shake your confidence in this proposition?

MMT: The last decade teaches us the need for more regulatory vigilance.

AE: You seem to have a double-standard here. You think that financial markets are prone to instability but that regulators can escape this tendency and stick to policies that embrace stability.

MMT: That's the policy we're urging.

AE: Good luck with that. I'm going to buy some gold.

Source: http://www.cnbc.com/id/46720765/MMT_and ... y_Dialogue

Pointedstick wrote: Oh man, I'd forgotten about that. Wonderful stuff. I find myself agreeing with both of them--that this system will lead to disaster eventually, that regulations are required to make it last but inevitably the political process will not supply them, and that it's good to hold a big slug of gold.

Frankly the highly financialized credit-based financial system scares the hell out of me, but it seems strangely resistant to collapse if only because it turns out that us silly humans are more than willing to use money based entirely on shared illusions. I remember asking of my parents as a kid, "if money is just paper, what will happen if people just realize it's worthless?" In retrospect, it wasn't a bad question, but the answer is that this never just randomly happens; it's precipitated by political disaster. Which makes sense, since credit-based fiat money is a political creation, not a market product people would start buying without the gun-to-the-head effect of taxes.

Mdraf wrote: Some people would say that 2008-2009 was indeed The Collapse of the system, as they lost their jobs, their homes, their medical insurance, their retirement savings.

Mdraf wrote: All I'm saying that collapse can be subjective.  What actually happened was that government mended private sector balance sheets very subjectively (ie. political)