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Sorry People, the Government Can Run Out of Money, In Fact, It Already Has.

Stirling Newberry's picture

How did Ben Bernanke save the banking system? It's simple: he used that heroine of high finance, paper money. Since then the investors of the world have stumbled along, waiting for the next visit from the smack faerie. The performance of the markets over the last month has been the withdrawal of a small fraction of that "fiat money" from the system. Since the Yuan dynasty invented it, paper money has been one of those bad ideas whose time has come. This doesn't mean that all money not backed by gold or specie is a bad thing, in fact, for most of human history, the idea of a hard reserve was avoided because the reality is that there is only passing connection between digging rocks out of the ground and economic activity.

But let's talk about what money is actually about. This is exotic economics, which contradicts the theories that keep us safely moving from crash to crash, with a bubble in between to keep the masses hooked, hoping for better.

A Major League Strike Zone

What is money? Ask a dozen economists and you will get many shrugs and many more theories. The answer however is precise: money is the total amount of exchangeable goods and services in an economy. Governments don't print "money" for the most part, they print currency. Currency is the facilitator to exchanges, so people are able to exchange whatever they have, with someone, who thinks that they can use it, or find someone else who can. Money works the way mailing a letter does, or the TCP/IP protocol does, or networking in general does: each node sends a good on its way to someone who thinks they are closer to the final destination. The mathematics of this have been explored more fully in the last few decades, because while on a sheet of friction free ice, everything ends up where it is supposed to, in the real world, the search for a route between buyer and seller, is the traveling salesman problem, and cannot be solved in the lifetime of the universe for non-trivial economies.

That's what money and the market make possible: a middle point between the best real barter economy, and that theoretical barter economy run by immortal, ammoral, rational, telepathic economic trolls. There is a best possible estimate, and then there is what actually happens. People play the currency game then, because they think it is better than the competing alternatives: revolution to replace who runs the currency economy, or emigration, to another game, or subsistence, down to a level which does not require currency or specialization of labor beyond first order tools. The currency game is often run by a group, called a government, that wants to make the alternatives as unpleasant as possible, so that people will stay in the currency game through the bumps. Every so often a government comes to power that says "why not make it a little better?" This lasts until it becomes obvious that the population won't walk out, and then it is back to the race through the bottom. Not to, through. The best currency game, for those that run it, is where people are worse off than if they were scratching out a living on some dirt, and they play anyway. Often the inducement is some kind of intoxicant: gin, opium, Catholicism, culture, and the jiggling extrusions of porn on the internet are all examples of intoxicants.

Currency then, an estimate of the exchanges that can take place. The amount of actual exchanges is the amount of money. It is an abstract exchange, in that it abstracts the good from the location, and form, of its final consumption. The theoretical limit of money then is determined by the minimum loss of an abstract exchange economy. The amount of currency has an effect on this, because too little exchange, and people do not make exchanges that they otherwise might, out of fear of being caught in a saddle point on the currency game. There is a proof here on saddle points in repeated games and catastrophe theory. Too much, and people make exchanges for fear they will not be able to exchange their abstract units for real goods, and again, reach a saddle point.

These saddle points are catastrophic points in the "space" which is an economy, that point where you are holding money won't be accepted for goods – that is inflation to zero – or that there are no goods to be had – deflation – or both, in that ones particular abstract exchange is no longer a denomination of the market. War, for example, or a revolution. Ask anyone who was long Confederate Bonds.

This means that while the government cannot run out of currency: since chits of nominal value are always possible to create, whether paper, pebbles, shells, or electronic bits – there is a possibility that they will either run out of people who will take the money, or that there will be no more goods.

A good analogy is Major League Baseball and the strike zone. Loose money is like a small strike zone: offense gets favored over defense. Tight money is like a large strike zone: defense gets favored over offense. Too small a zone, and you get blistering hitting, too large, and scoring becomes difficult. The real balance isn't the number of points, because, after all, major league baseball can't run out of runs, but they can run out of fans, and out of time on television. Runs, and everything else about the game, aren't what the game is about. Even wins and championships are not. What these all try and get at is that unknownable quantity: what fans will watch and pay money to be fans of.

So why have Jamie Galbraith and others gotten on the paper money bandwagon? Because right now we are in mesodeflation at the bottom. There is too little, not too much, money. While the government can't print money, it can adjust the amount of currency so that the pathways between buy and seller are, statistically, optimal. That is, the best estimate that can be estimated, has been reached. Right now, the economy is too frozen, not too loose. In fact Bernanke printed about a trillion of pure paper money, and used it to buy assets which have negative value: the liability for holding them is larger than their possible returns. This is referred to in finance as "toxic waste." The government can hold these assets, because the government can simple print the money to cover the assets. Since those with claims on those assets are the very people who will be diluted if the claims are paid, a strategic equilibrium is reached: those that have claims don't make them, because the very act of paying off the claim will reduce the value of their own holdings.

The reason Galbraith is wrong, is the same reason that Bush, Greenspan, Bernanke and their crowd was wrong. The printer of fiat money hopes to gain position by the inflation or devaluation tax. It prints the money, gets people to do what it wants, say kill some other group of people, and then hopes that by the time the money has spread far and wide and reduced in value, that they have gotten some gain. Say, the oil that those other people had before they were blasted into pink powder.

The person advising fiat money, at best, has some scheme to run a positive wedge: that is, that there will be more, for them, at the end of the gamble on inflation. In effect, they are hoping to borrow from holders of currency, and pay back out of plunder, or something else. Bush had his, Jamie has his. Other people will have theirs. The reality is that this seldom works for long. It does occasionally, but only when the money is used to paper over a short term hole, and create a long term incentive to long term behavior. However, printers of paper money are likely to be the very people who don't think this way. If Jamie were saying "if we utilize this under-utilized resource, then the return will be larger than the cost." He'd be being honest and serious. Or if he said "You yo-yos, we are in deflation right now, we need to be handing dollars out on the street to get people working." He'd be being even more honest, though "serious" people know this, and won't listen to it.

So why don't we just print money to end the deflation? Because it isn't macro-deflation, really. Some of the world is in deflation, but some of the world is in raging inflation. Specifically, coastal China, and the upper income brackets. The cost of being really, really, filthly stinking rich, has gone up dramatically, as has the cost of feeding yourself in coastal China. That's why there are strikes and job riots in China, because it is now impossible to scrounge a living, the way, even a few years ago, one could work in a factory at 125 dollars a month, sleep on a filthy mattress with four other guys in a 50 square meter concrete floor room with an open toilet, and eat grease, rice, and cabbage. Now, one can't even do that.

This then is the mexican stand off of the current situation: the people, us, who want to print money, because we are in deflation, or spend with fiscal stimulus, cannot, because the people who hold the currency, and the oil, and the capital on which our low inflation environment depends on, will simply push the reset button on the global economy. That's what all the chatter about "debt crisis" is: the wealthy have made it clear in no uncertain terms that the economy of polloi-economy, that of ordinary people must use less, so that the wealthy can use more.

This is the "Malthusian Equilibrium" where advances in technology do not improve the lives of individuals, but, instead, either are used to produce more people, or to fund the luxuries of the rich. The rich want wage deflation, so that poor people will stop working for each other, and start working for the rich, and doing whatever, and I do mean whatever, the rich want. They need this, because the cost of being rich is exploding, and is, in fact, in danger of melting down. But the wealthy bet that they can survive longer without global trade, than any government now in power can survive without it.

This is why Obama and company are reducing, not increasing, the amount of money in circulation. The bet is that they can drain enough money off the top to ease mesoïnflation there, while bearing the costs of stagnation down here. Realize that for much of the last 15 years, Americans have been working for the wealthy, and improvements in our own living standard have been virtually zero, or incidental. We weren't building houses, we were making CDOs, and the houses built were incidental to this. We can see this, because many of them now stand empty.

So when someone says that we can't run out of money, that is true, in the same way that Major League Baseball can not call a major league strike zone, and not enforce steroid rules and have a home run derby, or it can call a tight zone and get three perfect games in half a season. However, at a certain point, people stop watching the game. It is the alternatives that matter.

In our present the key moment was when the financial system needed to have paper money made, and not have insolvency rules enforced. The result, a home run derby run for Wall Street. But now, they don't need particular help. Obama's administration is trying to tighten in dollops, tighten, then ease again. Bernanke signaled that his last round of tightening is over for the moment, in part because other countries are going Hooverite, and that means that the US can ease up a bit on tightening.

As long as this dynamic is going on, where at the top there is raging inflation, and they want to compress the bottom so the bottom works for them cheaper, and gives up more resources, while the bottom is intent on gutting other members of the bottom in hopes of being one of the ones saved, then the long term continues to be bleak: there is no money for transforming the economy to a better basis.

This is why the government has "run out of money," not that there could not be more exchanges, that is to say more economic activity, but because the wealthy want more control and luxury, that is to say they want their currency to be more valuable, and the elites have decided that keeping the wealthy happy is more important than keeping their own populations happy. The rising tide of labor discontent then, is going to continue to rise, until such time as governments, such as the one Obama is in charge of, stop holding people in contempt. That will not stop until the public stops hoping to be the half of the poor that the rich will hire to kill the other half of the poor.

The lever the wealthy have is that if the US government just prints money, then China does, and the oil producers raise the price of oil and demand higher returns to provide liquidity. When the price of oil makes the NEG Globalized economy blow up, it is the government, not the wealthy that takes the fall. Heads the rich win, tails the poor lose. The oil archies, with the examples of Afghanistan and Iraq to point to, know that the US cannot invade a mineral rich state in the middle east, and profitably extract the money. The headline today said that Afghanistan may have a trillion dollars of minerals. That means if the US government took all of it, we would still not break even. For comparison, there is about 1 trillion dollars of natural gas under the Catskills in New York, we'd be better off invading that and forcing the residents to allow fracking to get at the gas. Just sayin'.

Next time I'm going to write more on the reality of the Malthusian equilibrium, and what that means.

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Stirling Newberry's picture
Submitted by Stirling Newberry on

Governments don't create money by printing currency, they create money by public investment.

You can't run out of points, but you can run out of fans.

The US Government can print dollars, but it can't print oil.

The global tide of Hooverism is because the wealthy have warned governments not to spend so much on the poor, because the rich want the poor to work for less.

As long as one half of the poor is interviewing for the job of killing the other half of the poor, the political will to fix this will not happen.

Submitted by lambert on

... to advocate for their respective halves of the poor to kill the other half. Yay!

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

CMike's picture
Submitted by CMike on

You raise a crucial point about the rich and their discontents:

The rich want wage deflation, so that poor people will stop working for each other, and start working for the rich, and doing whatever, and I do mean whatever, the rich want. They need this, because the cost of being rich is exploding, and is, in fact, in danger of melting down.

I wonder if the concern of the rich has less to do with "the cost of being rich" than that, in societies with an economically secure working class, the rich do not enjoy the elevated social status they think is their due (and which is certainly their delight when they can get it).

[I think you're missing a "that" here and I'm not following your definition of deflation as "there are no goods to be had":

These saddle points are catastrophic points in the "space" which is an economy, that point where you are holding money won't be accepted for goods – that is inflation to zero – or that there are no goods to be had – deflation – or both, in that ones particular abstract exchange is no longer a denomination of the market.]

Stirling Newberry's picture
Submitted by Stirling Newberry on

A depressionary collapse. E.g. Russia in the 1990's.

cenobite's picture
Submitted by cenobite on

Born of my frustration with your writing style, but I cancelled it as unnecessarily hostile.

First, I agree with you that the problem is in the political domain. The rich learned from FDR and made damn sure it wasn't going to happen again, thus: Obama.

But you say that there is a third operational constraint on government spending that MMT doesn't anticipate, "depressionary collapse," in addition to the givens of inflation and full employment.

IIRC, the Soviet economic collapse was due to a drop in energy prices and IMF/World Bank "shock therapy" that threw millions out of work and sold state-owned industries for a pittance to robber barons. Unemployed people can't buy goods, so the economy stopped making the few goods that it was making.

This doesn't seem to be related to the government's job of controlling the money supply.

Stirling Newberry's picture
Submitted by Stirling Newberry on

Was imposed as part of a previous wave of dollar drought policies, which was intended, and for a short time was successful in creating, a Russian state willing to sell resources very cheaply. Russian leadership could have attempted to inflate their way out of the problem, but they wanted to keep convertibility to the outside world, and therefore went along with shock therapy, since it also allowed them to buy up the resources inside of Russia very cheaply. It was a classic deflation play. Parallels to this and the depressionism in America presently can be left as an exercise for the reader.

So yes, this was directly related to the tool, not job, of controlling currency for the advancement of policy ends and improving the strategic position of certain interests. Both externally and internally to the economy.

Submitted by jawbone on

bolstered by Serious Dem pols making nasty noises at unionized labor. With Obama being delighted that a whole school's staff, from janitors to prinicipal had been fired in Rhode Island. With Rahm daring unions to show any sprit, make any demands.

They think they've got unionization down low enough to screw everyone...except the few professionals who are necessary for the Uberwealthy. Those elites will be kept on -- as long as they toe the line. There will be that vast reserve army of the
unemployed to keep those few who get selected for positions with living wages to pull the forelocks and jump higher when told to jump.

Oooooof.

Greece is just an example to any First World nation with good social services and some near equality in earnings. Back to the Feudal Ages, folks. With it's small pinnacle of power and aristocracy, which, today will be the oligarchs. Now, Greece is caught in a vice of its debts and its need to meet EU debt goals, but, notably, it is not raising taxes on the wealthy. It has cut public employees' salaries and wages by 15-20%, including most of the professors as they work for public universities, including police and other security personnel.

The wealth vampires have gone on to warn each and every EU nation that they have it in the power to ruin them.

Now, here, in the good ol' USoA and no real national health care, it's no wonder there's no real concern about educating our children, about keeping libaries open and fully functional. And about keeping our population healthy by providing access to health CARE.

Will Obama be seen as the change agent he wants to be? The one who finally and completely tilts the playing field fully to the benefit of the Uberweatjy? To which, for his service to his Corporate Overlords, he will be admitted on a junior basis....

Submitted by libbyliberal on

xx

Vision without action is a daydream. Action without vision is a nightmare. (Japanese proverb)

badtux's picture
Submitted by badtux on

To be more precise, the government cannot run out of money *as long as there are slack resources in the economy* -- it can simply "print" money to use those slack resources, call it a "printing tax" to siphon off part of the economy for government use. And with close to 20% real unemployment (if you count those who want full-time employment but aren't counted as "really" unemployed by deliberately deceptive U-1 measures), clearly there are plenty of slack resources which can be matched with money in order to put them to work doing things like, say, building roads, or high speed rail lines to replace the soon-to-be-obsolete highway and airport system (soon to be obsolete because within a few short decades we won't have the oil to propel vehicles down highways or up into the sky, and will end up having to go back to rail because rail can supply electricity to vehicles via catenary or 3rd rail), improving hiking paths in the National Parks, or whatever.

In short, when there are slack resources in the economy (and unemployed people *are* a slack resource) it is because there is a shortage of currency to create matching transactions for those resources, and issuing that currency in a way that puts those resources to work -- i.e., via a jobs program such as the WPA, or via issuing contracts for infrastructure work, or via programs that require people to spend the newly-issued currency in a way that uses those slack resources -- is a viable and valid thing for government to do. When there are *not* slack resources in the economy, then this basically comprises a tax, an inflation tax, which transfers wealth (the actual resources of the nation) from the private sector to the public sector, but when there *are* slack resources, no inflation results from printing currency this way -- it simply mobilizes the slack resources rather than causing the mismatch between currency and goods and services in the economy that is "inflation".

What *can* happen is that our leaders can deliberately *pretend* that the government is out of money, via refusal to levy taxes (explicitly as a tax, or implicitly as an "inflation tax") when there are no slack resources or refusal to issue debt/currency when there are slack resources. That is what is happening at the moment. But it's pretend. The government can't *actually* run out of money as long as it is using fewer goods and services than the economy is capable of producing.

As for China and the oil barons, they are seeing inflation, but they are seeing inflation because of their own elite's decision to keep living standards down for the vast majority of their respective populations. As you say, inflation at the top, deflation at the bottom. The difference between the Chinese gerontocracy and our own "democracy" is one of degree, not of kind -- in both cases an unelected elite rule the nation, with some "elections" fairy-dust sprinkled on top to make it taste better. The biggest difference is that Americans *voluntarily* go along with this system. Americans could throw all the bums out and elect people who aren't beholden to the oligarchs, but time after time, they simply vote for the guy who is most corrupt and has accepted the most bribes (oops, "campaign contributions", my bad!). In the end, we're our own worst enemy here in the USA, and will remain so as long as we keep voting for corrupt tools.

Stirling Newberry's picture
Submitted by Stirling Newberry on

No, this doesn't work. It is entirely possible, because it has been observed, that a country can combine high inflation and high unemployment.

The reason for this is that the substitution of inputs isn't unlimited. No matter how much labor surplus there is, if a country is, for example, short of gold and does not have any deposits, it cannot get gold. Ditto oil. Ditto arable land. And so on.

In such cases, attempts to generate employment by expansionary policies fail both because they generate inflation, and fail to generate employment.

Monetary policy is "a dubious magic" in that it can saturate employment/leisure trade offs when there are potential exchanges, but it cannot conjure exchanges where none otherwise exist.

badtux's picture
Submitted by badtux on

Problem is that you are talking monetary policy, and I'm talking fiscal policy. Carter did *not* spend the money the Fed was printing in a way that put people to work, indeed, he *cut* the budget. All that monetary policy under the Carter administration was used to do was take care of the current accounts deficit with the oil-producing states by deflating our debts to them via monetary inflation.

But beyond that, monetary policy in and of itself is not sufficient because the money does not necessarily mobilize resources. That is why Bernanke's printing operation did not affect unemployment -- all that happened was that the money went straight to (virtual) mattresses, basically making one round through the economy and ending up parked right at the Fed again (don't believe me? Look at the flow of funds data for most of last year).

So you are correct that monetary policy in and of itself is not going to work. However, monetary policy *combined with fiscal policy that mobilizes slack resources with the newly-printed dough* definitely *does* work. The problem is that our government pretends that we're "out of money" in order to avoid doing the fiscal part of this equation, when that is not true -- the government cannot be "out of money" as long as it's using less than 100% of the available resources of the economy. Otherwise the U.S. could not have won WWII, because there decidedly was *not* enough currency floating around at the beginning of the war to pay for all the guns and bombs and ships and planes that won that war...

juv's picture
Submitted by juv on

but this is just so ill-informed and wrong (every single paragraph contains a facepalm-worthy mangling of basic economics) that I don't even know where to start. Glenn Beckonomics. All you need is a chalkboard.

Please, for the love of Cthulu, read some Krugman or something just to get your bearings.

- you don't know what "liquidity" means
- you actually think that economies with enormous output gaps are at Malthusian Equilibrium
- you actually take Malthus seriously
- you are just making up nonsensical terms and concepts left and right

What is money? You won't get a series of shrugs from economists (who you have obviously never bothered to ask). It's one of the most well-defined non-controversial definitions in economics:

Money is:
1. A medium of exchange
2. A unit of account
3. A store of value

Sorry to be so snippy, but this is actually THE stupidest thing that I have ever read on Corrente, Mayberry Lane included

Stirling Newberry's picture
Submitted by Stirling Newberry on

Nothing is funnier than someone given a few rules of thumb who runs off and treats them as if they are eternal verities. I am taking the time to explain the understructure precisely because the errors in categorical thinking have lead to the present intellectual meltdown, and with it the economic crisis. If you actually read the literature on the study of money, then you will find that there is a general willingness to admit that while economics studies abstract exchange there is no rigorous single definition of what, exactly, it is.

The actual meaning of currency is the means of creating information exchange in a Hilbert space of exchanges which lead to a competitive equilibrium under conditions of Pareto Optimality, convexivity, hemi-continuous lower bounding commodity bundles against a diversity of preference sets. This leads, in various times, to treating it in different ways. However, many of these preferences are impossible to reconcile under conditions which the optimum market requires (Sen's Paradox, building on Arrow's Impossibility Theorum) that is there is no one quantity and velocity of currency which allows, simultaneously, for it to be a medium of exchange, and a store of value, and a unit of account, for all members of a particular economy based on their utility preferences.

It would be worth while if you catch up on Arrow, Debreu, Sen, Aubin, Walrus, von Neumann, Keynes, Hicks etc. etc. etc. before engaging in flagrant insults.

The confusion of currency and money is pervasive, as is the failure of the utilitarian illusion. Under market assumptions money and currency are the same, and utility and money are the same, but these are assumptions and are not held in place by any fundamental requirement. As with all assumptions when they break down, the apparatus predicated on them also breaks down.

Submitted by lambert on

I don't know what this means:

The actual meaning of currency is the means of creating information exchange in a Hilbert space of exchanges which lead to a competitive equilibrium under conditions of Pareto Optimality, convexivity, hemi-continuous lower bounding commodity bundles against a diversity of preference sets.

I like the metaphor of exchange as packet switching:

each node sends a good on its way to someone who thinks they are closer to the final destination.

And I think I get that information (less entropy) is what is exchanged... But the rest of it? Either translate into English or delete.

NOTE +1000 on the eternal verities. They got us into this mess.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Stirling Newberry's picture
Submitted by Stirling Newberry on

For those of you who aren't mathematical econo-wennies, which I hope is most people, since economists don't actually produce value, let me go through this.

The important proof of market economics is this: given certain assumptions, which can be phrased in a variety of ways, the best possible economy is one where people exchange what they have, for what they want, in a competitive market. This is the Walrusian equilibrium. The proof strategy is to first assume very restrictive conditions, and no production, then gradually remove restrictions (such as no negative commodity bundles etc.) and add production. What the compact description I gave means is this, unwound a bit.

A "Hilbert space" isn't so mysterious, it is a Euclidean continous space, in however many dimensions. So everyone knows what one is, just not under that name. Think of every commodity has having its own dimension. The mathematical concept of a Hilbert space, named after David Hilbert, generalizes the notion of Euclidean space. It extends the methods of vector algebra and calculus from the two-dimensional Euclidean plane and three-dimensional space to spaces with any finite or infinite number of dimensions. A Hilbert space is an abstract vector space possessing the structure of an inner product that allows length and angle to be measured. Hilbert spaces are in addition required to be complete, a property that stipulates the existence of enough limits in the space to allow the techniques of calculus to be used.

That's wikipedia, but it is a sufficiently good description. Now let's talk about vectors. In a physical sense, a vector is a line with a direction. We add vectors to do basic kinematics. In economics, we use the mathematics of vectors to represent people exchanging things. What is useful about vectors is that we can swap out different theories about how people exchange, and still leave the basic mathematical structure in place.

But how do we express those vectors. Well, optimally everyone would psychically know the person who most valued whatever they want to sell, and would magically have the thing they most want to buy. This is the perfect barter economy. However, since telepathy and magic production aren't credible, even to Victorians who believed that faeries were real and female orgasms weren't, one needs to find the best possible economy. Or to put it another way "the least loss."

So the loss, how much short of the perfect barter economy, is curve, as long as that curve has certain properties, we can prove that there is a minimum to the curve, and that minimum can be found by representing the economy as a euclidean space, with vectors represent exchanges. Where the loss is minimized, there is the best "possible" economy.

Now, all this is well and good, except, first it doesn't happen to be true in the real world, and second, the assumptions - of economic space, of utility preferences, of continuousness, of insatiability - are all questionable. As importantly, there is nothing, zero, zip, nada, in the proof or anything that follows from it, that such an economy has a "tendency toward equilibrium." Or to put it another way, just because the market mechanism produces the best possible economy, there is no reason it should stay that way. And we haven't gotten to "market failure" yet.

In this context, money has a specific purpose, currency is information. You give me a good, I give you abstract exchange, and information is released: that is, what one economic actor is willing to exchange for that particular good. This tells other actors how they should direct their effort, and what prices to seek for their goods, or pay for other goods. However, even within this context – which I am going to repeat again is failing us, because it conflates currency with money, utility with currency, and other sins – there are situations were economic actors can make themselves better off without releasing information, or are penalized for having information that others don't, which are both contradictory. The first is the root cause of market failure, the second, the root of death spirals.

However, the map is not the territory. Currency is discrete, and moves by axiomatic steps. It is not difficult to show that currency cannot, therefore, map correctly a continuous commodity space for all but trivial economies, because a money economy is a string, which means that with a limited amount of money, and a limited number of rules of exchange, it is impossible to evaluate all outcomes. Which is why it is useful, as I have done here, to differentiate between currency, which is what governments and private entities can put into circulation, use as accounting and so on, and money, which is the total of exchangeable goods and services.

A good way to think about this is that in the real world there are many more possible outcomes than we can price in terms of present production, because many of those possible futures have nothing to do with anything we presently can know. Even the risks are unknowable. Which is to say, the future is uncertain, it is impossible to know everything about it at once and price it.

I dropped the econo-geekery on juv precisely to find out whether juv was just in a hurry or is genuinely a troll, the summation I gave is a paraphrase of Debreu and Aubin. And in this juv has already lost, in that I can tell people how policy is made, I won't say "works," and why governments as different as France, Germany, Japan, the United States, the United Kingdom, Spain, and others, nominally of different parts of the political spectrum, are all rushing towards hooverizing now – more over, my framework shows what should be being done, namely to limit monetary policy to a much more limited role, and pursue fiscal policy to restructure the global economy.

All juv can do is troll. We all know what a government of trolls looks like, since that was the Bush Administration. It doesn't really matter what they say their objectives are, or what they say their ideology is, trolls believe in trollism first.

As John Kenneth Galbraith noted, monetary policy is a "dubious magic" and in the present circumstances, monetary policy cannot solve our problems, because it is impossible to both keep rates low enough to sustain production, and high enough to attract capital. That's what the current debate is about: how much do we have to bribe the wealthy to not turn off the economy.

Submitted by lambert on

ASCII? Surely not.

And this is surely the comment of the day:

how much do we have to bribe the wealthy to not turn off the economy.

Looks like Corrente's very early focus on growing your own food was, again, prematurely correct.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

juv's picture
Submitted by juv on

"The actual meaning of currency is the means of creating information exchange in a Hilbert space of exchanges which lead to a competitive equilibrium under conditions of Pareto Optimality, convexivity, hemi-continuous lower bounding commodity bundles against a diversity of preference sets. This leads, in various times, to treating it in different ways. However, many of these preferences are impossible to reconcile under conditions which the optimum market requires (Sen's Paradox, building on Arrow's Impossibility Theorum) that is there is no one quantity and velocity of currency which allows, simultaneously, for it to be a medium of exchange, and a store of value, and a unit of account, for all members of a particular economy based on their utility preferences."

This needs to be framed.

Submitted by lambert on

I think, if you want to do a real takedown, you do need to quote the original sources. Just saying.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

juv's picture
Submitted by juv on

Lambert,

Arrow's impossibility theorem and the liberal paradox have nothing at all to do with the concept of money. That's all I'm trying to demonstrate. He's just throwing around terms that he has no understanding of.

"The liberal paradox is a logical paradox advanced by Amartya Sen, building on the work of Kenneth Arrow and his impossibility theorem, which showed that within a system of menu-independent social choice, it is impossible to have both a commitment to "Minimal Liberty", which was defined as the ability to order tuples of choices, and Pareto optimality."
"In social choice theory, Arrow’s impossibility theorem, the General Possibility Theorem, or Arrow’s paradox, states that, when voters have three or more discrete options, no voting system can convert the ranked preferences of individuals into a community-wide ranking while also meeting a certain set of criteria."

The first is an argument against libertarianism, and has nothing, at all, whatsoever, to do with how money is defined. The second is basically an explanation/exposition of the tyranny of the majority problem, and also has nothing, at all, whatsoever, to do with the concept of money. Neither are compatible with Stirling's usage.

Sorry but Stirling is just making up complete barking mad nonsense and referencing things that he doesn't understand at all.

Submitted by Randall Kohn on

You don't tug on Superman's cape.

JFK has been shot, we miss him a lot
He always knew what to do

-- Philly Cream

a little night musing's picture
Submitted by a little night ... on

hence with money. Go back and look at Stirling's sentence:

However, many of these preferences are impossible to reconcile under conditions which the optimum market requires (Sen's Paradox, building on Arrow's Impossibility Theorum) that is there is no one quantity and velocity of currency which allows, simultaneously, for it to be a medium of exchange, and a store of value, and a unit of account, for all members of a particular economy based on their utility preferences.

The theorem is a mathematical fact about whether individual rankings can be combined (via the "voting system" or in the extension, by a system of currency) into a ranking which preserves certain essential features of the individuals' rankings. The answer is that they cannot. This means exactly what Stirling says it means. Short of recreating another article on Arrow's theorem I don't know how to explain it (that is, I don't know how to make a shorter explanation that isn't misleading, as you have apparently been misled.). Perhaps you'll like this one better - but think of economic rankings (values of goods, etc.) instead of electoral ones as you read it.

You say " The second is basically an explanation/exposition of the tyranny of the majority problem, which is not true. Arrow's theorem says something much different and deeper than that. Please do check out the article I linked.

[And, Stirling, what a pleasant shock to see Hilbert spaces mentioned, although my initial reaction was also "well, there goes most of the audience asleep".]

We can't afford not to have Improved and Enhanced Medicare For All!!

Stirling Newberry's picture
Submitted by Stirling Newberry on

That I started the Liberal Paradox article, and the summation I wrote then is largely unaltered, even though many editors have added the formal theorum and other material.

So thank you for citing my work in other places.

juv's picture
Submitted by juv on

"editors have added the formal theorum and other material"

How am I not surprised

three wickets's picture
Submitted by three wickets on

Agree. But there is a difference between "printing" money through monetary easing to the private sector vs through deficit spending predominantly to the public sector. The former can be a temporary reversible measure, the latter a more permanent addition to the national debt. The former can control for deflation/inflation if done right and it can contribute to government revenues, the latter will devalue the currency over time and it will not necessary contribute to incremental government revenues. The former is mainly what Washington is trying to do today (wrong or right), the latter is the prospect Japan is facing today.

The problem is the Fed has run through most of its monetary options, and now it's pulling back on programs that have had no traction or have had negative effects. The Administration and Congress should drive the private sector hard for new investments in people and business development. Instead large and medium sized companies are continuing to cut people rather than hire them. Government should raise taxes on corporations, capital gains, offshore profits to exert more pressure on companies to invest and hire, and hire domestically. Government should additionally pass new short term stimulus to address the pain being experienced by 90% of the nation. But it should also define, establish and lead new long term, forward looking industrial policies and plans that will drive both our public and private economies into the future. Washington has been particularly feckless regarding that, compared to almost every other large developed nation in the world.

On China, it needs to appreciate the yuan. The world needs to force China to appreciate the yuan. It will help lift the living standards of their people and also temper their inflation and current overheating. And it will certainly help revive jobs and the economies of Europe and the US.

three wickets's picture
Submitted by three wickets on

Also to clarify, taxing corporations tends to compel them to invest and hire more people to write off against their taxable income. And ideally to put said people to work to develop and grow in positive ways and become more competitive.

Stirling Newberry's picture
Submitted by Stirling Newberry on

"Agree. But there is a difference between "printing" money through monetary easing to the private sector vs through deficit spending predominantly to the public sector. The former can be a temporary reversible measure, the latter a more permanent addition to the national debt. "

Actually under open currency macro, there's no difference between the two.

The question, strategically, is which one can the monetary and fiscal authority do and improve its position? In the liberal era, there were enough threats that governments could tax more or less without limitation, because all but a few of the right wing realized that a Nazi take over of the globe, or a Soviet take over of the globe, would probably be bad for business. As this urgency waned, so did the political force of taxation.

The second dagger was the rise of another sphere of wealthy. If you have a closed economy, and competing businessmen, then taxation isn't really so bad, because it becomes demand, and the same businessmen can profit from it. The net effect if everyone is taxed, is a wash. However, with the rise of wealthy elites not part of the same national-cultural group, this changes. If American rich are taxed, that puts them at a disadvantage against Saudi rich, who are not.

Enter monetary policy. Monetary policy has one property that is different from fiscal policy, and that is that it falls on everyone. Also in macro-theory, it is more efficient than fiscal policy.

The devaluation tax fell heavily on holders of dollars, and on those trying to competitively devalue, who had to buy dollars. The Bush executive used this to fund their war in Iraq, the value proposition being that if we "won" there, then Iraq would be a market for goods, and would have every incentive to sell oil cheaply. For Bush, there was no downside, because failure had no penalty, and if it failed, then he and the rest of the oil elites would make huge amounts of money, and stick America with both a war and with a housing bubble that the next administration would be paralyzed to protect. In this, he turned out to be correct: Obama has not rolled back Bush. Not even close. What he did do was institute a social program in return for leaving most of Bush alone. Some people regard this as an good enough trade, others do not.

This view however is warped in the present because first, government debt doesn't crowd out private investment. Second, people are up in arms about borrowing through the government, at rates which are basically zero, but don't seem to realize that the alternative is private borrowing at much, much, much higher rates. We should be borrowing through the government, because it is much cheaper. As for paying the debt off, that's why we have the Benefit Bandits wanting to crush Social Security, because of REH. Some day someone is going to have to pay the taxes. If you know you have to pay the taxes, you have to park the money at low returns. If, however, you know someone else will pay the taxes, then you can invest at a higher rate of return. Better still, you can loan the idiots who are cutting their own benefits the money that they are cutting your taxes by, and make much better returns. Increasing both capital for, and demand for, usurious financial intermediation.

Great work if you can get it.

three wickets's picture
Submitted by three wickets on

Well you may be the economist or banker. I'm not. But from what I gather, the yield curve is steepening, and it's only the short term money market bills that are at rates near zero. Up to 70% of our national debt is in the form of long term notes/bonds held by private lenders here and sovereign and private investors abroad. The rest is owed to social security and medicare.

So we can keep churning out short term liquidity now when rates are low and deflation is still as much a concern as inflation, but we'd better have a strategy for stabilizing the currency eventually. Else we'll be yoyo-ing between rationing, price controls North Korea and wheelbarrows of cash, hyperinflationary Weimar Republic. When you keep printing money like there's no tomorrow, you eventually end up being either over controlling or out of control.

Submitted by lambert on

The MMT folks are quite clear on the idea that inflation is a danger only when the government "prints money" when productive capacities are fully used. Are they? No. We are so far from either North Korea or Weimar as to be ludicrous.

I think I'm going to go do some cleaning up, now.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

Weimar wasn't sovereign in its own currency, we are. The causes of inflation in Weimar are outlined here.

As for our long term debt. Long-term debt instruments have rates that are already determined. If we think those rates are going up we can just stop issuing long-term debt, and not issue any instruments beyond 90 days duration. If there's still a problem, we can just cease issuing long-term debt instruments entirely and just spend money. the effect of this would be to flood overnight reserves in the banking system and therefore to drive down overnight interest rates to close to zero.

Finally, spending enough money to pass a Federal Jobs Guarantee Program, provide states with a $500 per person grant to ease their financial crisis, and also have a payroll tax holiday until the recession is over, is not going to de-stabilize the currency so that we'll need to re-stabilize it later. If you believe it will, then I need to ask you what your evidence is corroborating that theory, because I don't think there is any.

letsgetitdone's picture
Submitted by letsgetitdone on

Enter monetary policy. Monetary policy has one property that is different from fiscal policy, and that is that it falls on everyone. Also in macro-theory, it is more efficient than fiscal policy.

What macro-theory is that? In MMT monetary policy is a very blunt and ineffective instrument, as is shown by Paul Volcker's use of iy to wring out inflationary tendencies in teh late 1970s and early 1980s.

You also said:

Some day someone is going to have to pay the taxes.

Why will someone have to pay the taxes?

Why not just continue to run deficits, as long as there is no inflation. What prevents that?

letsgetitdone's picture
Submitted by letsgetitdone on

the corps disagree, they think that lower their taxes are the more they are likely to invest, because they have more money available for investment and they know better gow to spend their money than the Government.

letsgetitdone's picture
Submitted by letsgetitdone on

needs to be done.

Here is what would would happen if we do an MMT program and don't follow the presently contemplated austerity program.

Eventually the Yuan would take care of itself, or the Chinese would continue transferring real wealth to us. The same goes for the Euro.

Ian Welsh's picture
Submitted by Ian Welsh on

this is just one of the places where MMT is wrong. What the Chinese have gotten in exchange for giving you shit for dollars is your industry, and industrialization. What you have lost is jobs.

MMT is not a magical bullet, all it is the discovery that the government can print money. A valuable insight, but not a silver bullet.

Submitted by lambert on

1. "The government can print money" seems a bit tendentious. I would say that the state creates money for a public purpose. Surely not the same?

2. Surely a theory or a worldview or a framework (like MMT) and the policy recommendations by some advocates of that theory are distinct? Saying that "MMT is wrong" based on China policy is like saying ballistics is wrong because the Western Front was a hellhole. Eh?

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

MMT is not about "printing money." Literally there's very little printing it recommends, if any. But even figuratively, it's about Government spending money on public purposes, not about just creating money and distributing it.

Also, MMT can't overcome stupidity and bad management. It points out that we've benefited from the Chinese sending us goods and taking back USD. The de-industrialization we've suffered is due to our own stupidity in not protecting key industries and not investing in new ones that would make things. These effects however, don't change the economics, which is that we've sent them real wealth and they've taken electronic money in return.

Submitted by gob on

Stirling's writing is a perfect example of why I'm not going to adopt any firm opinions about economics based on what I read here at Corrente. It's splendidly technical-sounding (Hilbert spaces, woohoo), and utterly beyond my untutored ability to criticize. Therefore, it convinces me of nothing.

The MMT writing here, on the other hand, is beautifully simple, but repeats a small number of statements in a kind of closed world, without ever answering questions like, if inflation can be easily controlled by fiscal and monetary policy, why did we have the supposedly intractable "stagflation" of the 1970s? Or -- even more basic -- exactly why is it that government debt equals non-government savings? (Yeah, I admit it, I almost understand it, but every time I try to explain it to someone else, I realize that I don't.) However, it does at least give me some ideas to chew on. Stirling's just gives me the idea that he wants me to think he's very smart.

To actually know whether either party makes sense, I'd have to go off and do a ton of reading. (Maybe I will.)

We will push and push and push until some larger force makes us stop.

Stirling Newberry's picture
Submitted by Stirling Newberry on

MMT prints money.

Saudi Arabia raises price of oil.

Global rich demand higher returns, or they pull their hot money out of money market funds, and spreads spike, and the world can't get credit.

Global trade rolls off a cliff, under the pressure of high transportation costs and hard to get credit.

Governments fall, but the global rich are ok.

New government comes to power, and does whatever is needed to keep the global rich happy.

How do I know this will happen? Because under Bush, that is exactly what happened, and Obama won, and that is exactly what he did. Cameron won, and that is what he is going to do. Merkel won, and that is what she is doing. There's been a party change from the LDP in Japan for only the second time in decades, and that is what they are doing.

What part of "we've already tried this, and it didn't work" don't people get?

Ian Welsh's picture
Submitted by Ian Welsh on

that was a choice. There was a point where Bush or Obama could have made another choice, and destroyed the rich by forcing them to take their losses, then done a combination of printing and control over use of bottleneck resources to restructure the economy.

One of the things I've seen over and over again, however, is that pols who come to power doing things in a particular way (in this case, kneepadding for hot money and the rich) are rarely able to imagine doing anything else.

jumpjet's picture
Submitted by jumpjet on

You assume that the rich will be appeased because that's traditionally what happens. But it's not a necessity. Instead, a government could simply ignore them, create its own government-controlled bank, and issue credit to citizens directly within its borders.

Life, Liberty, and the Pursuit of Happiness

three wickets's picture
Submitted by three wickets on

Though we sort of gave that a crack with Fannie and Freddie.

Submitted by lambert on

What does this even mean?

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Ian Welsh's picture
Submitted by Ian Welsh on

is something both Stirling and I suggested back in 2008. However, we also added in serious oil demand reduction steps, among other things.

okanogen's picture
Submitted by okanogen on

You mean kind of like this?

Now that's crazy talk!

Or even more directly, as in, the government is the bank?

Actually, that is not much different from SBA loans, and being the broad "owner' of a few of these loans, well, ya gots yer upsides and yer downsides.

Sorry, I don't fall in love with politicians. I'm not that desperate.....

Tony Wikrent's picture
Submitted by Tony Wikrent on

and Charles Macune's 1889 "sub-Treasury" plan for providing credit to farmers, which led to the populist Peoples Party.

Once you understand how simple the idea of money creation really is, you're not surprised to find that all this territory has been covered before, by the greenbackers, who even created a Greenback Party in the 1870s.

It comes down to whether the power to create money will be in the hands of private bankers, using it for their own gain; or in the hands of an agency of the people (that would usually mean some form of government), used to promote the common good.

okanogen's picture
Submitted by okanogen on

I really appreciate your post as a tonic to MMT. Of course what is seemingly never said by MMTers is that what they are really talking about is exchanging inflation for currency redistribution. With the presumption being that the currency redistribution equates to wealth redistribution, with wealth defined as "living standard".

Which, btw, I don't have a problem with per se. The devil, of course is in the details, i.e. whose ox gets gored. And the details are in the methods used. If through looser monetary policy (manipulation of interest rates), the finance wing "wins", as the "money" gets transfered through them and they take their cut (rent). If it is through entitlements or direct distribution (unemployment benefits, health insurance benefits, tax rebates, etc.) or other deficit spending such as infrastructure improvements, then it benefits those either directly receiving it, or those who profit from the work produced. Of course, the rentiers still get their rent, but it just takes a little longer, and they have less control over how and what rent they get.

However, I have specific questions about your formulation above:

MMT prints money.

Using what method (see above)? Who "gets" what is "printed"? The rest of your assumptions are based on defining methodology.

[therefore] Saudi Arabia raises price of oil.

Priced in what exactly? Dollars? Aren't they also constrained in pricing by other producers and global demand?

[and] Global rich demand higher returns, or they pull their hot money out of money market funds, and spreads spike, and the world can't get credit.

"Pull their money" and put it.... where exactly? In hard currency subject to the inflation imposed by increased currency production? That is a loser. They can demand all the higher returns they want, hell, so can I, but will I get them? I wanted a pony too! Also, isn't their "money" really just "currency"? What are they going to do, turn their currency into capital goods by buying another yacht in the Med? I suppose that while plausible it is unlikely a sustainable usage. Wouldn't it be more likely they will convert their currency into capital goods, land, etc. BTW, the Chinese are already doing this, buying up US property (tools, steel, etc.) to burn up their dollars. But, then, that means they are just exchanging their currency for goods and services. Is that so bad?

[so that] Global trade rolls off a cliff, under the pressure of high transportation costs and hard to get credit.

That assumes both of your previous responses, i.e. higher energy costs (Saudi Oil, etc.), and the global rich "pulling their money" and somehow hiding it.

Governments fall, but the global rich are ok.

You have to describe better how that mechanism works. How do the "governments fall"? What (who?) makes them fall? What/who are the "global rich" and why, if as the initial post suggests, all of their "riches" are defined in currency (of various countries) are they still "ok", when governments make choices that lower the value of their currencies (inflation)

New government comes to power, and does whatever is needed to keep the global rich happy.

As for making your posts more understandable, I really, really appreciate your ideas and the discussions created, but if you could pretty please, take more time when your writing and add the adpositions, once in a awhile, it would really help the reader follow your argument.

Updated....

Thanks!

Sorry, I don't fall in love with politicians. I'm not that desperate.....

a little night musing's picture
Submitted by a little night ... on

"but if you could pretty please, take more time when your writing and add the adpositions, once in a awhile,"

I don't know about Stirling, but I have no idea what you're on about here. (And yes, I know what adpositions are, even without following your link.)

We can't afford not to have Improved and Enhanced Medicare For All!!

okanogen's picture
Submitted by okanogen on

I challenge you to tell me what these two sentences mean:

In this context, money has a specific purpose, currency is information. You give me a good, I give you abstract exchange, and information is released: that is, what one economic actor is willing to exchange for that particular good.

Either words are missing or something else is wrong here.

Or this:

So the loss, how much short of the perfect barter economy, is curve, as long as that curve has certain properties, we can prove that there is a minimum to the curve, and that minimum can be found by representing the economy as a euclidean space, with vectors represent exchanges.

Again.....

I'm not meaning to be picky here, but these are very difficult concepts even in the best case, so if you want people to pick up what you are laying down, please take the time to write it in a way that makes it comprehensible.

Or not, but don't be surprised if confusion results!

Sorry, I don't fall in love with politicians. I'm not that desperate.....

a little night musing's picture
Submitted by a little night ... on

The second one only seems to be missing the words "a" and perhaps "and" (or some punctuation: change the comma after "curve" to a semicolon?):

So the loss, how much short of the perfect barter economy, is a curve, and as long as that curve has certain properties, [...]

I admit that's somewhat awkward still (and sorry for rewriting you, SN!) but it's not incomprehensible, and I don't see how adding "adpositions", as you specified, would help.

Maybe this?

So the loss - how much short of the perfect barter economy - is a curve, and as long as that curve has certain properties, [...]

Heck, we could all write more clearly, if we had more time. I know I could.

We can't afford not to have Improved and Enhanced Medicare For All!!

okanogen's picture
Submitted by okanogen on

for effectively short-circuiting my substantive points by taking issue with a minor issue I deeply regret detracted from more meaningful discussion.

Heaven forfend that anybody ask anybody (whose writing some find so incomprehensible that several comments were raised about it) to be more clear in their writing on complex subjects.

Or again, "OR NOT".

So, back to my substantive questions? Maybe?

Sorry, I don't fall in love with politicians. I'm not that desperate.....

letsgetitdone's picture
Submitted by letsgetitdone on

Both paragraphs are still incomprehensible to me, as is a lot of the post. Stirling's summary was very comprehensible however, and also was very easy to poke holes in. Perhaps the original was not so clear in order to hide the extreme fallibility of the argument?

letsgetitdone's picture
Submitted by letsgetitdone on

. . . Of course what is seemingly never said by MMTers is that what they are really talking about is exchanging inflation for currency redistribution. With the presumption being that the currency redistribution equates to wealth redistribution, with wealth defined as "living standard".

I don't see your point about "inflation." Are you really, really clear about what "inflation" means economically speaking? Do you think that the act of creating money leads inevitably to inflation? If you do, I think you're gravely mistaken.

okanogen's picture
Submitted by okanogen on

Why do you assume otherwise?

Why do you assume that the act of creating "money" [by which I hope you are meaning "currency"] will NOT lead to a certain devaluation of it? The examples of run-away inflation by disregarding the connection are legion. I admit we are talking a matter of degrees, but it is grossly oversimplistic to not recognize that effect is also potentially there and can be hurtful to normal people as well. Just ask anybody who lived through Argentina's experience with it.

Sorry, I don't fall in love with politicians. I'm not that desperate.....

letsgetitdone's picture
Submitted by letsgetitdone on

Why do you assume that the act of creating "money" [by which I hope you are meaning "currency"] will NOT lead to a certain devaluation of it?

Answering a question with a question, isn't really cricket, simply because I asked you for an explanation first. However, I'll assume that the answer I asked for is here:

The examples of run-away inflation by disregarding the connection are legion.

And that you believe that spending/creating money causes inflation because you've seen historical examples where creating money was associated with inflation and sometimes with hyper-inflation.

OK. The reason why I think you're wrong about imputing an invariable causal connection here is because the historical examples of inflation and hyper-inflation include that factors that aren't present in the US. For example, in Weimar, there were heavy debts owed to external parties in currencies other than the Mark, that were not controlled by the Government. So when the Government tried to print Marks and then sell them in the international market to pay their debts in currencies, they weren't able to do it successfully because the printing couldn't keep pace with the devaluation of the Mark in international circles. Additionally, Weimar Germany had the problem that price increases were quickly met with wage increases due to the power of unions, so that the wage increases created a positive feedback loop that reinforced inflation.

More recently, in Zimbabwe, the Government both owed external debts in USD, and also took certain actions that destroyed the country's productive capacity, so the new dollars created by the Government were competing for scarce goods. So Zimbabwe illustrates a classic pattern of too much money chasing too few goods, exacerbated by the inability of the Government to acquire the foreign exchange needed to pay debts in currencies it did not control.

The Argentina you case you cite, was yet another case where money was owed to external parties in a currency not Argentina's own. Argentina's inflation and difficulties ended when it defaulted and used its newly sovereign country to follow policies that were consistent with MMT. Employment problems were solved pretty quickly and the economy quickly developed a pattern of success in the 2003-2004 time period which continues up until.

In all three of these cases, patterns dissimilar to that of the US obtained. The US owes no money to external parties that are not in our own currency, and we have plenty of productive capacity that is idle now and could be used to produce more goods to handle increased demand. Under these conditions Government spending to the point of full employment won't be inflationary, especially since there is absolutely no risk of insolvency for the credit agencies to latch on to.

Finally, you said:

I admit we are talking a matter of degrees, but it is grossly oversimplistic to not recognize that effect is also potentially there and can be hurtful to normal people as well. Just ask anybody who lived through Argentina's experience with it.

I think the association of some degree of inflation with Government spending is what is overly simplistic. A number of factors have to be place to cause inflation.

See: here, here, and here.

letsgetitdone's picture
Submitted by letsgetitdone on

My only question is, why didn't you just write this in the first place. It would have been as literary, but it certainly would have been easier to understand. So:

1.

MMT prints money.

MMT doesn't print money. As stated in my post here, the Government both spends and simultaneously creates money by marking up accounts in the non-Government sector

2.

Saudi Arabia raises price of oil.

Well, don't you think there's a lot of complicated causal process between the Government marking up certain accounts and SA raising its price on oil? Clearly there is. it is far from a law of nature that one follows from the other. SA has no monopoly over oil. The Cartel is weak these days. Also, SA doesn't want to create inflation in the US, because it learned in the 1970s that this only eventually gets it a collapse in the oil market. Finally, who says the value of USD will go down if the Government spends for an Federal Jobs Guarantee program, a payroll tax holiday, and a $500 per person grant to the States. That's not going to raise the prices of Ameriican goods to SA. So why should it raise rates?

3.

Global rich demand higher returns, or they pull their hot money out of money market funds, and spreads spike, and the world can't get credit.

Stirling, again, if the MMT program above is followed, why should credit dry up? demand in the US will be higher, and the prospects for business success would be much greater as would the ;possibility for big returns. So, why should credit dry up? And if it does, then the Government can just create provide credit if it wants to? Where's the problem?

4.

Global trade rolls off a cliff, under the pressure of high transportation costs and hard to get credit.

If 1-3 above don't happen, then 4. won't happen either. Also, would it be that bad for the US if the ratio of internal exchange to external exchange increased. I don't think so. i think that wuld be a good thing for American workers.

5.

Governments fall, but the global rich are ok.

If the MMT program is followed, the US Government won't fall, because the program will be popular and the US will end its recession. As for the global rich, they're going to take a big hit if there's a big depression in Europe, which is exactly what is coming with their moronic austerity programs.

6.

New government comes to power, and does whatever is needed to keep the global rich happy.

Not if MMT is followed. There will be no new Government. On the other hand, if the austerity program is followed, then we will have a new Government, and since it will be a Republican Government, it will probably continue the sell-out to the corporatists.

7.

How do I know this will happen? Because under Bush, that is exactly what happened, and Obama won, and that is exactly what he did. Cameron won, and that is what he is going to do. Merkel won, and that is what she is doing. There's been a party change from the LDP in Japan for only the second time in decades, and that is what they are doing.

That's true, but a) As we know from the recession, the future is not always like the past, b) the context is different than it was under Bush, and c) this is a debate about what would happen if MMT were applied, not a prediction based on an assumption that past patterns of behavior will continue. Of course, if Obama keeps following the neo-liberal agends, that will be a disaster. But how does this suggest that MMT is wrong?

8.

What part of "we've already tried this, and it didn't work" don't people get?

No part of this. But you've shifted ground. We haven't done MMT before. What is being suggested is that Obama and the Congress do it now. You're saying that it won't work. Maybe not. But, if it doesn't that won't be because we're repeating past failures.

sisterkenney's picture
Submitted by sisterkenney on

I knew there were huge, gaping, holes, leaps, diversions, in Stirling's post, I just couldn't articulate my impressions of the disconnects. You are so knowledgeable, and communicate so clearly, and concisely, why even an economist could understand you :-)

"Rule number one: pay attention"-Ded Bob

Submitted by lambert on

What Corrente is good at doing is providing a forum where otherwise marginalized ideas get hashed out (see under single payer, rentier state, MMT etc.) That's what's happening here.

Now, I'm not confident in the theory about money, and currency, that Stirling propounds, because the descent into jargon made me think at least twice. But Stirling's track record on political economy is exemplary, IMNSHO, so for that reason he deserves a hearing.

Ditto MMT. At the highest level, the idea that money is the creation of the state, and should (therefore) be used for public purpose seems to be so obvious, now, as to be a truism -- and yet this concept goes totally unstated in the discourse. Ditto the idea that the government is not a household, and federal spending is not operationally constrained by revenues. Again, obvious, since where's the mechanism that would do the constraining? It's all political. Which is why they call it political economy!

In brief, Darwin will sort it out!

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

. . . if inflation can be easily controlled by fiscal and monetary policy, why did we have the supposedly intractable "stagflation" of the 1970s? Or -- even more basic -- exactly why is it that government debt equals non-government savings?

Let's take the first question. In spite of MMT's name it's not about monetary policy and doesn't say that it will help to control inflation. MMT is almost wholly about fiscal policy -- Government spending and taxation. On inflation, it distinguishes between consumer-induced inflation due to excessive demand beyond productive capacity; from supplier-induced inflation, caused by supplier domination of markets resulting in supplier-mandated price increases unregulated by supplier competition.

The stagflation of the 1970s wasn't caused by generalized excessive demand. It was caused by a supply shock -- when prices were raised by a cartel that controlled a market. The Cartel delivered a price increase in oil to the economy. The economy tried to respond by raising prices for our goods reflecting cost increases. The Fed saw this and started raising interest rates, using monetary policy to "break the inflation." This response, at first only exacerbated inflation, by raising financing costs all across the economy. Since the oil suppliers needed to buy our goods as much as we needed oil, they found that excessive price increases were not getting them anywhere. Eventually however, the cost of oil along with interest rates, and the increase in supply of oil, due to the higher prices led to an oil glut and a collapse of demand leading to the end of inflation.

MMT economists would have treated the economy differently than the monetarists did. In particular, they wouldn't have re-inforced the tendency toward inflation by raising interest rates, but rather would have brought interest rates down to close to zero, so as not to reinforce the oil price rise and to create favorable conditions for ending the "stag" part of stagflation." As for the Cartel induced price increases, MMT would have simply waited for increasing supply and decreasing demand to create a glut and break the Cartel. MMT might also have compensated sectors of the population that were disproportionately harmed by the Cartel-induced price shock.

Second the question of why Government debt equals non-Government savings dollar for dollar is easy to understand if you look at the situation from an accounting point of view. Take the whole economy. Divide it into two sectors Government and non-Government. Now note that when Government spends it marks up accounts in the private sector. Think about that. If taxes don't bring the same amount of money back into the public sector as the Government is spending we have a Government deficit, but that deficit means that money representing the deficit sent to the non-Government sector by the Government adds an increment of savings to that sector which is equal to the amount of the Government deficit.

But what if taxes bring in more than what the Government has spent? Well, we call this difference a surplus, and the amount of the surplus is both an increase in Government savings and a debit to non-Government savings reducing the amount of money in the non-Government sector.

In short, the notion that Government deficits = non-Government sector savings isn't an empirical proposition. It's matter of the logic of the accounting model describing money exchanges between the Federal Government (including the Fed) and the Governments sector (including everything else).

I hope I've made things clearer. it's time for me to go to bed. I'll take up the rest of my attempts to critique Stirling's post tomorrow.

okanogen's picture
Submitted by okanogen on

This confusion of the two is what confuses me about what you and Mosler are trying to say about MMT.

Example:

If taxes don't bring the same amount of money currency in dollars back into the public sector as the Government is spending we have a Government deficit, but that deficit means that money currency in dollars representing the deficit sent to the non-Government sector by the Government adds an increment of savings [in dollars] to that sector which is equal to the amount of the Government deficit.

But what if taxes bring in more than what the Government has spent? Well, we call this difference a surplus, and the amount of the surplus is both an increase in Government savings and a debit to non-Government savings reducing the amount of money currency in dollars in the non-Government sector.

I'm not sure exactly what the difference is here, but I sense there is one, and it is what Stirling is trying to explain.

But regarding government "spending", now isn't that the buggaboo?

And regarding inflation, you totally do not address inflation due to excess creation of currency. In fact, as I have read MMT, correct me if I am wrong, the central tenet is the following:

It doesn't matter how much the government borrows (in dollars), because the government is the one that decides what the currency is worth. Therefore, all government spending does is speed up the economy (by spreading out more dollars) and all government taxation does is slow down the economy (by taking dollars away). So right now with the economy slow, the government should get rid of taxes, and increase spending. Everybody happy!

Like every cheap, easy, victim-free solution, I sense that there is something not being said here, and if you have to ask who the sucker is....

Sorry, I don't fall in love with politicians. I'm not that desperate.....

Submitted by gob on

First, thanks to letsgetitdone for the elementary level lessons.

Part of my residual feeling that it's all kind of hinky comes from what okanogen says: "cheap, easy, victim-free solution"s usually turn out like everything else in life that seems too good to be true. Part of it comes from wondering if something isn't missing because we're only considering the dollar economy. When we divide the world into government and non-government and do the accounting, that's the world of all entities holding dollars. Some of those entities are domestic, some are not. Some hold only dollars and aren't likely to hold any other currency; some are very much players in other currencies. What about them? (I can't suggest concretely why this needs to be accounted for -- I'm too ignorant!)

Is my concern about non-dollar money related to "money =/= currency"? Why is it important to note that "money" is not the same as "currency"? When you assert this, are you asserting it about the commonsense view of "money" as "legal medium of exchange"? Please don't refer me to Stirling's post for answers; reading him makes me feel as if bees are living in my head.

We will push and push and push until some larger force makes us stop.

letsgetitdone's picture
Submitted by letsgetitdone on

Part of my residual feeling that it's all kind of hinky comes from what okanogen says: "cheap, easy, victim-free solution"s usually turn out like everything else in life that seems too good to be true.

Nobody's saying there can be no problems as long the Government spends money. What MMT is saying is that there's no solvency problem. There can be other problems. Maldistribution of wealth for example. Inflation, also, once we reach full employment. But these are other issues. So, the point is stop talking about measures that are supposed to be related to insolvency in fiat money systems, but are not. And sttart talking about the real consequences of Government spending on the economy.

Submitted by gob on

No offense meant.

I was trying to say that sometimes the MMT statements seem so easy to understand, and so much like what I'd like to believe, that I have an uneasy feeling that something is being swept under the rug. As I'm totally naive about economics, I can't tell if that's true or not. Being highly educated in a different technical field, I'm familiar with the kinds of misunderstandings that can take hold in the minds of outsiders.

We will push and push and push until some larger force makes us stop.

okanogen's picture
Submitted by okanogen on

was saying, I would agree (mostly).

Although I'm wondering what Simon Johnson would have to say about this theory.

And, just as a reminder, you are not your argument. Neither am I and neither is Sterling or Ian.

Sorry, I don't fall in love with politicians. I'm not that desperate.....

letsgetitdone's picture
Submitted by letsgetitdone on

I'm not sure exactly what the difference is here, but I sense there is one, and it is what Stirling is trying to explain.

The difference between what and what. I'm referring to the difference between the amount spent and the amount taxed. What difference are you talking about?

Submitted by Anne on

who just doesn't get it - I get only so far, and then it's like someone flips a switch and all I read is gobbledygook.

I'm working on learning, but it's slow-going: like I am swimming through cold molasses.

This particular post? I know it's supposed to be in English, but it might as well be in some ancient and little-studied language for which there is no translation - and it really puts me off trying to keep slogging through the weeds.

It may be first-rate thinking, or it could all be crap, and since I kind of like to be able to tell one from the other, I think I will have to pass on future posts.

Ian Welsh's picture
Submitted by Ian Welsh on

is to keep reading more articles until you get it. One of my smarter friends read Stirling for about a year till he understood Stirling's economic model, and found it well worth putting in the work.

Submitted by Anne on

Maybe I'm reading more into your comment than I should, but I don't need you to tell me what the "correct response" should be, for me.

Economics and monetary theory has never, in my entire almost-57 years, been something that resonated with me, in any way; it's just not my thing - my brain simply is not wired for it.

Yes, I could put in the work, but in a life that contains a full-time job, a family and interests that extend beyond the blogosphere, I've come to know what my limits are, and where I want to put in the time.

I had hoped to "get" more about all of this economics stuff, enough to be able to discuss it somewhat intelligently with the circle of people I encounter in my day-to-day life, and all I was attempting to say was, I can't read Stirling's posts because they simply make no sense to me. And, that he's not writing these posts so that someone like me can understand more - he's writing them for people who already know far, far more than I ever will.

And as far as I'm concerned, my response was perfectly correct, for me.

juv's picture
Submitted by juv on

Anne,

I'd recommend this as a good intro to economics, if you are so inclined:

http://www.economicsforeveryone.ca/

There are many chapters available for free on there under the heading "excerpts". The author is a union economist who was educated at Cambridge, but is very good at explaining economics without unnecessary jargon. It would give you a good basis for understanding economic issues and discussions without taking a lot of time. Beyond that, Paul Krugman and Dean Baker are two good economists who are able to explain the current issues in an understandable way.

letsgetitdone's picture
Submitted by letsgetitdone on

of economics for everyone is The Seven Deadly Innocent Frauds, which is, fortunately, available right now in a pre-publication version for reading and commenting from Warren's site.

CMike's picture
Submitted by CMike on

I wasn't going to do this but if you're passing out thank-yous, I recommend Robert Heilbroner's The Worldly Philosophers to anyone who has not read it. I would think you'd be able to pick it up at the local library. The book was first published in 1953, most recently in 1999, and you can read some of the first chapter, I. Introduction, here but not the best part, the check lists on page 15.

First time through, I'd advise skipping Chapters; V. The Dreams of the Utopian Socialists, VI. The Inexorable System of Karl Marx, VII. The Victorian World and the Underworld of Economics, X. The Contradictions of Joseph Schumpeter, and XI. The End of the Worldly Philosophy?. (Chapter VIII. The Savage Society of Thorstein Veblen is too enjoyable to skip.)

Paul Krugman's 1994 book Peddling Prosperity reviews aspects of twentieth century American economic history with an emphasis devoted to 1970s and 1980s and it is entirely accessible to the non-economist. In fact, it's a quite useful read for the non-economist because, unlike the Heilbroner book, Peddling Prosperity cites data and introduces an occasional graph which shows how powerful economic modeling can be in policy debates. (The caution about models is if the underlying assumptions are incomplete --and they are kept at a minimum intentionally-- or one of them is incorrect you end up far from reality.) That book might be at your local library too.

Then maybe double back and look at parts of The Worldly Philosphers' Chapter VII The Victorian World and the Underworld of Economics.

letsgetitdone's picture
Submitted by letsgetitdone on

I read it during may college days, if I recall correctly in 1958. It really helped to provide much needed background in economics.

Submitted by lambert on

Might I ask you to act as if Ian had written "one useful" instead of "correct"?

Because Ian's got a point, so far as I'm concerned.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

There are two obvious questions:

1) Have you read Stirling and understood his economic model, or are you still reading? and

2) Has your friend read any MMT, and if so, does he understand it?

Ian Welsh's picture
Submitted by Ian Welsh on

I understand Stirling's model, yes. I use it regularly, and I have found that its predictive accuracy is significant.

I don't know if my friend has read MMT, we don't talk as often as we did back in the mid 2000's.

letsgetitdone's picture
Submitted by letsgetitdone on

But it's really Stirling-ease. For example, every time you see "Money" in an American context, you can't think "USD", as you would normally. Instead you have to think "the total amount of exchangeable goods and services in" the American economy. Everyone else thinks that USD is money and money = currency. But not Stirling. So, the first question that has to be asked about this piece is "what's gained by redefining "money" as Stirling does? How does that clarify any issues we may have or any difficulties we may have in understanding him? Does it clarify anything, or does it just mystify?

In my recent post here: I quote Jamie Galbraith as saying:

Many economists value complexity for its own sake. A glance at any modern economics journal confirms this. A truly incomprehensible argument can bring a lot of prestige! The problem, though, is that when an argument appears incomprehensible, that often means the person making it doesn't understand it either.

(I was just at a meeting of European central bankers and international monetary economists in Helsinki, Finland. After one paper, I asked a very distinguished economist from Sweden how many people he thought had followed the math. He said, "Zero.")

Of course, Stirling doesn't do math in this post. He just suggests that perhaps Catastrophe theory is somehow relevant to his argument. But, the fact, that there's no formal math in it, doesn't mean it's comprehensible. Does it?

Card-carrying_Buddhist's picture
Submitted by Card-carrying_B... on

enjoyably challenging posts.

Interesting to observe the group process.

Hm.

This post has struck a nerve.

Much more so than his prior recent posts.

Why is that the case?

Reporter to Mahatma Gandhi: What do you think of Western Civilization?
Gandhi to reporter: I think it would be a good idea.

Tony Wikrent's picture
Submitted by Tony Wikrent on

Hopefully some of the previous commenters will chime in here, so we get it from the horse's mouth. But my initial thinking is that a great many people, distressed beyond disappointment at the lack of real change being wrought by the Obama administration - and almost literally at their wit's end as they realize that we are on the verge of actually dismantling what's left of the social safety net - have suddenly found the very-well packaged Modern Monetary Theory, and latched onto it in the desperate hope that it might, just might, allow us to avoid the plunge into the Inferno.

There is a very real problem on the left. I think Stirling suffers from it as well. I'm referring to a knee-jerk reaction against any talk of war or institutional violence. So, let me relay a comment by an old friend. First, I want to impress you with my friend's pedigree. His mother was an in-house cook for one of the Rockefeller households, back in the 1920s and 1930s. She was a plant: a spy for the Socialist International. One of the comments he remembers her reporting back from a dinner conversation is "A depression is the means by which we harvest the gains made by the lower classes."

Here is what my friend says. "The existence of a parasitic finance-capitalist ruling class is not a function, or result, of "sociological" processes. There was nothing "natural" about it. It was a war: the finance capitalists--the British Empire--won that war, and the industrial capitalists like Edison and Ford, and immumerable colleagues and predecessors, including the American System patriots, lost that war."

Last month, when I posted my essay on The Obama administration as “managed democracy", someone on DailyKos asked "So what brings American industrial companies to apparently not being able to protect themselves in the same way against financialisation? What went wrong there that didnt go wrong, as it seems, in Germany, or India, or Japan?"

I replied:

Well, we better put on our tinfoil hats (5+ / 0-)

because if you really want an answer, I'll give it to you. The part of the explanation that can be ascribed to indigenous causes begins with the Lewis Powell memo. But I think there was much already happening before Powell's 1971 missive.

I think there is a global fight that begins in earnest with the American Revolution, and the establishment of the republic under the Constitution a decade later. Lincoln understood what the world-historic stakes were when he proclaimed America was mankind's last, best hope. At what point did the British oligarchy ever resign itself to allowing the United States to exist? You know, the U.S. War and Navy Departments kept updated plans for war with the United Kingdom right up to the 1930s. So, my deep suspicion that has developed is that the House of Morgan was implanted into the U.S. in the 1850s as a British intelligence operation. There were probably many other such operations - just read Naomi Klein's Shock Doctrine about the various U.S. intelligence efforts to impose Milton Friedman's economic policies on South American countries. It's not that far-fetched to think that British intelligence was operating in much the same way in North America [in the nineteenth century). And isn't it interesting that the original nexus of the American Eastern Establishment was intelligence, oil companies, and Wall Street? (Here, reference Bill Clinton's professor at Georgetown, Carroll Quigley).

If I were advising President Obama right now, I would try to convince him to put Rupert Murdoch under a microscope in a search for any ties to any foreign intelligence agencies, especially in the period in the early 1970s when Murdoch begins to buy and develop his operations in the United States. I'm willing to bet Murdoch has MI-6 tattooed all over his butt.

So, the question then is: how much of the rise of American movement conservatism is due to actual indigenous developments, and how much is due to the workings of foreign intelligence interests? This is tricky, because I'm sure British intelligence has been largely privatized through outsourcing, just like U.S. intelligence has been. So, you have to look for much more than just formal tables of organization.

By the way, this whole answer is a reminder that the only major shortcoming of Veblen is that he never considers how secret intelligence agencies might influence economic policies and practices. But, no other economists do except for a small group of radicals, mostly Marxists. I hope this will change, what with Shock Doctrine and John Perkins' Confessions of an Economic Hitman having been published in recent years.

It's useful to bring up Perkins in this thread to Stirling's analysis, because Perkins reveals in Confessions of an Economic Hitman that he was part of the secret team that negotiated with the Saudi royals the mid-1970s agreement to have the Saudis begin "investing" their petro-dollars back into U.S. government debt.

The implication of my lengthy comment, of course, is that so long as the usurers and the rich control societies, being anti-military is not a bad thing. But you must be prepared, once the usurers and the rich lose control, to quickly and ruthlessly utilize all available means of state action. There should be, in other words, a very large number of "yachting accidents."

Submitted by Fran on

is the reason this has struck a nerve. We are all trying to absorb MMT, and Stirling is pointing up some weaknesses. I don't think he is trying to debunk it, just trying to put things in perspective.

We have to have production of things in order to exist. That would be the industrial economy. People make a living, people make a profit and we get things we need. Money is the means of exchange. But even money is not simple because it is not exactly the same thing as currency. Plus, the system gets 'gamed'. The financiers don't actually produce anything. They just play the game. Politics can help the process or warp the process.

We're all just trying the understand how it went so horribly wrong and where to go from here.

I think the oligarchy are laughing all the time. Their 'hot' money sets the bubbles in motion. And who gains in the end? Not us.

The cover story in Harpers this month is about how 'hot' money flowed into the grain business and made people rich and caused people worldwide to starve. The price became completely disconnected from the product. Isn't this what happened in California with Enron and the price of electricity?

Just a simple person here, trying to make some sense and respond. (I got some understanding of MMT really from transcribing - listening over and over. I liked reading Stirling's post, even though it is dense. I don't think you need to understand every detail in order to get the main points - but he does fill out those points if you care to follow.)

letsgetitdone's picture
Submitted by letsgetitdone on

Great comment. I don't have that problem about talk of war.

tjfxh's picture
Submitted by tjfxh on

Agree with Card-carrying B about this being a particularly striking post. Look forward to more comments in this vein.

I would not call Jamie Galbraith exactly a proponent of MMT, though. Maybe a supporter, but it's not something he has written much on to my knowledge. The bulk of the literature is by others, and it would be interesting to have your thoughts on what key people in the field have had to say. Bill MItchell's billy blog speaks more to the politics and policy applications that any other popular format.

tjfxh's picture
Submitted by tjfxh on

Joe, I agree that Jamie has been edging his way out, but writing sympathetic bits isn't coming out for an economist. He need to publish something serious to be considered more that a supporter or cheerleader. Previously he had a toe in the water, Right now, he has only a foot in the water. But the direction is right.

MMT needs a big name to give it the cred it deserves. Jamie could be the one. But he has to do more than cheer for that.

Submitted by lambert on

In the interim a great variety of morbid symptoms appear.

* * *

Surely everyone can agree that mainstream economics as anything but a pure tool of social and ideological control is dead, dead, dead? As a result of the financial collapse? That is, that none of its proponents can maintain any pretense of intellectual honesty or indeed morality?

Hence, people who are trying to make sense of the world need to look elsewhere. MMT is one such place. Stirling's "framework" -- and note that he proposed that his framework is testable -- is another.

See "Rent Party." Now, this discussion may have no value. It is new, not old; nobody has a rent stream that depends on these ideas.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

Stirling's is not. It has a major contradiction and an invalid definition of money with no connection to previous usage and no useful function in a new theory. See my criticisms above.

Submitted by lambert on

1. On the political economy aspects, equal stress on both words, I think Stirling, as so often, as the right of it (and I think you are both in agreement).

2. On the technical aspect, I'd like to fully understand the model that Stirling is propounding; I believe Ian when Ian says it's testable and tested.

3. I agree with you that inventing an idiosyncratic definition of money isn't very sensible. I'm not so sure the concept behind the word is off, though. I like this, a lot:

Money works the way mailing a letter does, or the TCP/IP protocol does, or networking in general does: each node sends a good on its way to someone who thinks they are closer to the final destination.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

But it's not consistent with his definition of money. It's in contradiction with it. I'm not even sure that more normal definitions of money are consistent with it. Why do you think his definition fits this?

Submitted by lambert on

(And I confess that I've been grappling with RL, too, so I haven't given the post nearly the attention you have.)

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

but think it through. Keep in mind:

. . . each node sends a good on its way to someone who thinks they are closer to the final destination.

And then ask yourself. What is a node in this analogy, and how does it send a "good" or "service" on its way?

tjfxh's picture
Submitted by tjfxh on

I think that Stirling has to work a bit on the definition, but he has the right idea in emphasizing that econ is based on real resources and their exchange. However, finance is about claims and their exchange. Money in the general sense represents a financial/legal claim. It not the resources themselves or their exchange. That, I think, is a problem in the model.

Submitted by lambert on

... and the real OPERATIONS of the economy, is something that both the MMTers and Stirling share -- in contradistinction to the flat earth economists at the Ivies.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

the relationship between money and "real resources" by making money equivalent to the total amount of goods and services exchanged in the economy. Not that these are exactly the same, but clearly part of the goods we produce, in particular, the capital goods, are real resources we use for further production, while "money" is an abstraction and not a real resource.

I think it is important to keep in mind that there is a distinction among different kinds of capital to be maintained here, and that broadly there are five kinds of capital: natural (or ecological) capital, financial capital, human capital, social capital, and constructed capital. The first kind isn't human-made; it's resources provided by nature that are part of our the ecological context in which we live. The last four are created by humans, and so may be called "anthro" capital:

-- Financial capital is, essentially, money.

The remaining definitions come from the glossary in my friend, Mark McElroy's Ph.D. dissertation which I recommend to everyone concerned about sustainability.

Human Capital is:

-- "Individual knowledge, skills, experience, health, and ethical entitlements that enhance the potential for effective individual action (Mincer, 1958; Schultz, 1961; Becker, 1964)."

Social Capital is:

-- "Shared knowledge and organizational resources (e.g., formal or informal networks of people committed to achieving common goals) that enhance the potential for effective individual and collective action and well-being in human social systems (Coleman, 1988, 1990; Putnam, 2000; Ostrom and Ahn, 2003; McElroy et al, 2006;)"

Constructed (or built) Capital is:

-- "Material objects and/or physical systems or infrastructures created by humans for human benefit and use; the world of human artifacts, in which human knowledge is also embedded. Constructed capital includes instrumental objects, tools, technologies, equipment, buildings, roads and highway systems, power plants and energy distribution systems, public transportation systems, water and sanitation facilities,
telecommunications networks, homes, office buildings, etc. (Daly, 1973, 1977; Daly and Cobb, 1989; Costanza et al, 1997)."

And McElroy after a review of the literature defines the general term "Capital" as:

"A stock of anything that yields a flow of beneficial goods or services into the future - as required by humans and/or nonhumans for their well-being (Costanza et al, 1997; Porritt, 2005).

One very important aspect of MMT or "functional finance" is the impact of the use of Government-created financial capital on the other four types of capital, and particularly on their sustainability by which McElroy means:

" . . . human impacts on various kinds of capital (natural, human, social, and constructed), relative to norms for what such impacts ought to be in order to ensure human well-being.

All this, btw, also implies that money is a "stock" and not a flow. Since exchanges are flows. The total of all exchanges of goods and services in the economy is an aggregate of flows and is not, in itself, a stock.

letsgetitdone's picture
Submitted by letsgetitdone on

I'm not a professional economist. Actually, my most recent field of expertise is Knowledge Management and my Ph.D. is in Political Science. But since taking a few economics course in undergraduate school in 1958 or 1957 (I don't remember), I acquired a taste for reading economics from time to time, and also acquired an appreciation for Keynes, partly due to Heilbroner's treatment of him, partly due to Paul Samuelson's, but also due to reading Keynes with some diligence and concentration.

I recall that one of the first things we learned in economics class was that money and real wealth were distinctly different things and that one must not be mistaken for the other. One of the reasons why I like MMT, is the very clear distinction between Government spending and creating new money, and the consequences of that spending. Another name for MMT is "functional finance," after the title of a book by Abba Lerner. Functional finance means that the focus of Government fiscal policy must be on its real consequences, like unemployment, price stability, environmental degradation and sustainability, poverty, the distribution of wealth -- in general, what Galbraith the elder called The Public Purpose. So, in short, MMT is about the relationship between the Government spending money and the consequences of that for the public purpose, and so it focuses like the proverbial laser on the distinction between the money and the real consequences of creating it.

letsgetitdone's picture
Submitted by letsgetitdone on

This is pretty much a paragraph-by-paragraph commentary on Stirling Newberry's post. I've skipped over some parts that I didn't think were very relevant. Perhaps I've missed something important. But, if I have, I'm sure Stirling will point it out. In brief, my bottom line here is that I think Stirling's implied critique of the MMT approach is very confused and invalid. I'll come back to this main point, after I'm done with the detailed commentary.

“How did Ben Bernanke save the banking system? It's simple: he used that heroine of high finance, paper money. . . . The performance of the markets over the last month has been the withdrawal of a small fraction of that "fiat money" from the system. . . .”

Ben Bernanke, did not use “paper money” to do this. He didn't even use tax money. He used electronic fiat money. He marked up accounts. He's testified to that in front of Congress, and also told Scott Pelley on 60 minutes in reply to a direct question about whether the Fed used tax money to lend to the banks:

”It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.”

Next, the markets can't withdraw fiat money from the system. Only the Government (including the Fed for my purposes) can do that. Finally in this paragraph, Stirling seems to be talking about “currency” one form of which is “paper money.” But in the very next paragraph he says:

What is money? Ask a dozen economists and you will get many shrugs and many more theories. The answer however is precise: money is the total amount of exchangeable goods and services in an economy. Governments don't print "money" for the most part, they print currency. Currency is the facilitator to exchanges, so people are able to exchange whatever they have, with someone, who thinks that they can use it, or find someone else who can. . . . “

There are disagreements in economics about the nature of money, but if you google “what is money?” you won't find anyone who defines it as “. . . the total amount of exchangeable goods and services in an economy.” In fact, no one even defines the total amount of money as equal to the total amount of goods and services in the economy. Nor does Stirling use the term money this way in his first paragraph. So this definition introduces a clear contradiction into his post.

Stirling says that Governments don't print money for the most part and that they print currency, but he doesn't point out in that context that currency is one type of money, and that its only a small part of the money created by the Government, most of which is electronic these days. Stirling also points out that currency is the facilitator of exchanges and this is true, but he neglects to say that money of all kinds facilitates exchanges.

“Currency then, an estimate of the exchanges that can take place. The amount of actual exchanges is the amount of money. It is an abstract exchange, in that it abstracts the good from the location, and form, of its final consumption. . . .

Since money is the broader category and currency is only a small proportion of the money in the system, it also seems that Stirling's claim that “currency” is an estimate of the exchanges that can take place is another error. Still further, he says that “the amount of actual exchanges is the amount of money.” But this can't be the case either, whether money is defined as a medium of exchange, or whether it's defined as “. . . the total amount of exchangeable goods and services in an economy.” Think about it. If money is a medium of exchange, then the number of exchanges that can take place is a function of passing time, average amount of money required per transaction, average cycle time of using money in transactions, as well as other factors. On the other hand, even accepting his unique definition of money his statement still can't be true because each exchangeable good or service can enter into an exchange more than once. So here too there are more errors.

. . . while the government cannot run out of currency: since chits of nominal value are always possible to create, whether paper, pebbles, shells, or electronic bits – there is a possibility that they will either run out of people who will take the money, or that there will be no more goods.”

This is certainly true. But they won't run out of people to take the fiat money as long as the Government requires that taxes can be paid only by using the money, and also sees to it that enough people are subject to taxation, and that it continues to maintain a near monopoly of the means of legitimate physical coercion and the will to use these to compel payment of taxes. Also, there will always be goods to buy unless the Government so mis-manages things that productive capacity in the economy is destroyed. These things can happen, but they represent extremes that the US is very far from.

“So why have Jamie Galbraith and others gotten on the paper money bandwagon? Because right now we are in mesodeflation at the bottom. There is too little, not too much, money. While the government can't print money, it can adjust the amount of currency . . . . Right now, the economy is too frozen, not too loose. . . .

Firs, Jamie Galbraith has not “gotten on the paper money bandwagon.” In fact, he doesn't advocate “printing money” at all. He just advocates Government spending to enable full employment. And that spending would, I'm sure, occur by marking up non-Government bank accounts, and not “printing” or even coining money. Jamie would agree that “there is too little, not too much money.” But, of course, his view of money is, evidently, not Stirling's so in saying what Stirling says he means something entirely different. He means that there is not enough of the medium of exchange in the proper hands in the non-Governmental sector for there to be enough aggregate demand to create full employment. He doesn't mean that there are too few goods and services available to facilitate a healthy economy. Nor does he think that the amount of currency can be adjusted to improve the economy. He thinks instead that the amount and kind of Government spending can be adjusted to create more aggregate demand to improve it.

“The reason Galbraith is wrong, is the same reason that Bush, Greenspan, Bernanke and their crowd was wrong. The printer of fiat money hopes to gain position by the inflation or devaluation tax. It prints the money, gets people to do what it wants, say kill some other group of people, and then hopes that by the time the money has spread far and wide and reduced in value, that they have gotten some gain. Say, the oil that those other people had before they were blasted into pink powder.“

Of course, this is a distortion in many ways. First, there was no “printer of fiat money,” not even Bush. There are instead creators of electronic money. And while I will not comment on or argue about what Greenspan, Benanke, or Bush either intended or still intend. The MMT folks, including Galbraith do not intend to have either an inflation or devaluation tax, what they intend is to facilitate full employment in order to utilize the full productive capacity of the United States to increase goods and services. In the normal meaning of the term “inflate,” this should not inflate or de-value the currency of the United States at all. Why would it?

“The person advising fiat money, at best, has some scheme to run a positive wedge: that is, that there will be more, for them, at the end of the gamble on inflation. . . . . If Jamie were saying "if we utilize this under-utilized resource, then the return will be larger than the cost." He'd be being honest and serious. Or if he said "You yo-yos, we are in deflation right now, we need to be handing dollars out on the street to get people working." He'd be being even more honest, though "serious" people know this, and won't listen to it.”

Again you miss the point, because you're too fixated on the idea of “printing money.” The MMT people are not advising handing out money on the street. They are advising spending on getting people back to work in a Federal Jobs Guarantee Program, giving States money to keep people employed, and giving people payroll tax holidays to give consumption a boost to help to end the recession. MMT people are quite open direct, and honest about such a program.

So why don't we just print money to end the deflation? Because it isn't macro-deflation, really. Some of the world is in deflation, but some of the world is in raging inflation. . . . “

This is irrelevant to Jamie and MMT because they are advocating just printing money, they ae advocating functional finance, which is Government fiscal policy involving spending with the expectation of getting certain real results.

“This then is the mexican stand off of the current situation: the people, us, who want to print money, because we are in deflation, or spend with fiscal stimulus, cannot, because the people who hold the currency, and the oil, and the capital on which our low inflation environment depends on, will simply push the reset button on the global economy. That's what all the chatter about "debt crisis" is: the wealthy have made it clear in no uncertain terms that the economy of polloi-economy, that of ordinary people must use less, so that the wealthy can use more.”

This issue is political, not economic. If the political situation were ripe for MMT, they wouldn't be able to reset, because the same political situation would allow us to tax away their control over money and also to seize their physical capital, if necessary. What you're saying is that MMT won't work, because we already have a plutocracy with full control by the globalizing elite. But that's not an objection to MMT as an economic approach. It's a claim about the political situation. It may be correct, but I prefer to believe that it's not and that Democracy can still prevail.

“This is why Obama and company are reducing, not increasing, the amount of money in circulation. The bet is that they can drain enough money off the top to ease mesoïnflation there, while bearing the costs of stagnation down here. Realize that for much of the last 15 years, Americans have been working for the wealthy, and improvements in our own living standard have been virtually zero, or incidental. We weren't building houses, we were making CDOs, and the houses built were incidental to this. We can see this, because many of them now stand empty.”

I don't agree that ”This is why . . . " But I agree with this description of our situation. It's very apt.

“So when someone says that we can't run out of money, that is true, in the same way that Major League Baseball can not call a major league strike zone, and not enforce steroid rules and have a home run derby, or it can call a tight zone and get three perfect games in half a season. However, at a certain point, people stop watching the game. It is the alternatives that matter.

Again, you're not using “money” in the way you yourself have defined it, but have lapsed back into a more correct usage, and we see that you agree that the Government can't run out of money, in spite of the title of your post. Having said that however, if Government spent beyond full employment and kept on spending, then the resulting inflation would make people start focusing on the alternatives. But so what? If one is following MMT, one wouldn't do that.

In our present the key moment was when the financial system needed to have paper money made, and not have insolvency rules enforced. The result, a home run derby run for Wall Street. But now, they don't need particular help. Obama's administration is trying to tighten in dollops, tighten, then ease again. Bernanke signaled that his last round of tightening is over for the moment, in part because other countries are going Hooverite, and that means that the US can ease up a bit on tightening.”

Outside of the silly reference to “paper money” I agree with this. It's another very apt description.

“As long as this dynamic is going on, where at the top there is raging inflation, and they want to compress the bottom so the bottom works for them cheaper, and gives up more resources, while the bottom is intent on gutting other members of the bottom in hopes of being one of the ones saved, then the long term continues to be bleak: there is no money for transforming the economy to a better basis.”

I don't know that there's raging inflation at the top, but the rest of this is correct and that's why we've got to stop “the shock doctrine” dynamic.

“This is why the government has "run out of money," not that there could not be more exchanges, that is to say more economic activity, but because the wealthy want more control and luxury, that is to say they want their currency to be more valuable, and the elites have decided that keeping the wealthy happy is more important than keeping their own populations happy. The rising tide of labor discontent then, is going to continue to rise, until such time as governments, such as the one Obama is in charge of, stop holding people in contempt. That will not stop until the public stops hoping to be the half of the poor that the rich will hire to kill the other half of the poor.”

Again, I agree with most of this, but the first sentence is wrong. The Government hasn't run out of money. It can't. The flat earth economists and the President are just telling us that it's running out of money for the reasons you state. So we've got to tell them it's BS and kick their butts.

The lever the wealthy have is that if the US government just prints money, then China does, and the oil producers raise the price of oil and demand higher returns to provide liquidity. When the price of oil makes the NEG Globalized economy blow up, it is the government, not the wealthy that takes the fall. Heads the rich win, tails the poor lose. The oil archies, with the examples of Afghanistan and Iraq to point to, know that the US cannot invade a mineral rich state in the middle east, and profitably extract the money. The headline today said that Afghanistan may have a trillion dollars of minerals. That means if the US government took all of it, we would still not break even. For comparison, there is about 1 trillion dollars of natural gas under the Catskills in New York, we'd be better off invading that and forcing the residents to allow fracking to get at the gas. Just sayin'.

This is just a fantasy model you've conjured up. The Chinese are not likely to print more because they want to export, but if they should print more, then they will feed domestic demand and export less. Isn't that what so many Americans want? As for the oil price rising, it's going to happen sooner or later anyway. It's time we rationed it, and got along with domestic and Canadian sources while we transformed the energy foundations of our economy.

So, that's it. There are numerous errors of logic in this post. There are some good descriptions. But the causal analyses are highly questionable and the implied critique of the MMT position in the context of Galbraith very much misrepresents what the MMT position is, and certainly draws the wrong conclusions about what could happen if the kind of spending recommended by MMT practitioners were to be implemented

sisterkenney's picture
Submitted by sisterkenney on

I've never seen a more elegant analysis outside of mathematics.

"Rule number one: pay attention"-Ded Bob

letsgetitdone's picture
Submitted by letsgetitdone on

I appreciate it.

Submitted by lambert on

I think Tony Wikrent would tell us that arguments about "what money is" are notoriously slippery, based on history.

"Philosophers have only interpreted the world..."

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Submitted by gob on

I couldn't read Stirling's post closely. You've made it possible and blown some fresh air into it. Although I think you could have let it go about "printing money" which I think Stirling always means metaphorically; you used it that way yourself in the second-to-last paragraph.

Incidentally you may have answered my naive question about the difference between "money" and "currency". If I understand right, when I have money in the bank, that's not currency; it's numbers in a computerized accounting. The bills and coins in my wallet are currency. I think.

Slight correction: you meant "This is irrelevant to Jamie and MMT because they are [not] advocating just printing money,...", I'm sure.

All in all, a very useful clarification of MMT ideas. It helps me a lot to see them rub up against other ideas!

We will push and push and push until some larger force makes us stop.

letsgetitdone's picture
Submitted by letsgetitdone on

I went so hard on the "printing money" thing, because that's a meme the deficit terrorists and the gold bugs use against Government spending, always claiming that it's just "printing money" so that it never produces any real value but just de-values the currency. e need to fight this meme, or the Government will never be able to fill its proper role in the economy. Whenever you hear someone say that MMT is just "printing money," give them what for, because that's not what it's about. It's Government spending for the public purpose.