‘Creeping Into The Unconventional’ And Why Everything You Thought You Knew Is Wrong
Earlier this week, a reader wondered what Harley Bassman, inventor of Wall Street's most-cited benchmark for rates volatility, thinks of Modern Monetary Theory (MMT).
The question came in response to a reprint of a piece Bassman penned in 2016 on the (remote) possibility that the Fed could eventually embark on a gold purchase program.
In fact, Bassman has weighed in on MMT on a number of occasions over the past two years. For example, last year he wrote that while he doesn't "believe MMT is vi
MMT- Isn’t that just repeating the mistakes of 2002-07, but several magnitudes larger?
It’s not clear you understand the context for this debate, let alone the debate itself. I can only do so much, folks.
I didn’t mean to come across as irritable with this reply — I had quite a few technical snags while writing this lengthy post. Anybody here use a Mac? If so, you know what the “spinning rainbow wheel of doom”/”beachball of doom” is. I was plagued with that while finishing this piece. It’s enough to leave one temporarily insane.
With apologies for not knowing all the vernacular of the banking and financing transactional systems, I wonder if anyone can estimate the cost of these gargantuan transactions that have been processed through various financial intermediaries when the government could have made these direct transactions. I’m guessing the intermediaries are loving the fed’s purchase of trillions.
I’ve lost count already on how many commentators, including many respected ones, who sum the fiscal deficit and the FED balance sheet increase and term that the amount of overall “stimulus”, without realizing most of it is double counted.
It seems to me that no discussion about the limits of MMT is the greatest challenge with MMT. It seems no way to measure how much MMT is the correct amount and what if anything to do but to perpetuate it to infinity. No one it seems in these pages defends the thought that at one point it will fail but be dammed if anyone can point to a reasonable explanation why it will fail, when it will fail and how it will fail. Maybe I am missing the point and am still trying to excise the demon of hyperinflation caused by deficit spending as we knew it to occur in history. I am trying to read with an open mind.
It’s certainly fair to question the limits of MMT, but I think the main point that H is consistently trying to make is that we already have MMT in practice and that the notion of the government running a deficit is an artifice that doesn’t really tell us anything meaningful. We need to have the discussion about what the limits to MMT might be, but we can’t have an honest discussion if most people can’t recognize the reality of where we are today. Otherwise, we are just talking past each other.
Now if we accept that MMT is already being practiced, I would argue that our obsession with deficits has already caused the current version of MMT to fail. By hamstringing our government for the sake of “fiscal responsibility,” we have left the dirty work to the Fed but they are limited in how they can respond which has led to massive inequality and limited real economic growth.
As far as the historical examples, I think it’s important to understand the differences between say, the US today and examples like the Weimar Republic or Zimbabwe. We have a fiat currency and serve as the world’s reserve currency. Could that go away? Eventually perhaps (see Dalio’s analysis about previous superpowers), but there aren’t a lot of good candidates coming along anytime soon. That doesn’t mean we run the printing press at full bore, but we do have options should inflation start to heat up.
In the meantime, we could do a lot of good investing in things that improve lives. I’d start with infrastructure and education (early childhood and college) programs, but that’s a separate topic.
I guess I am sold on the concept that we are at MMT. These pages have enlightened me to that fact. If that is true for most if not all readers then the task should be to build on that. However there are likely some or even most as you say readers here that have not understood this point.
I should also add that, as H has stated repeatedly, the other alternative to our current form of MMT would be the Austrian economics solution of letting companies go bankrupt which would almost certainly lead to a severe depression. I would also argue that scenario would be a massive failure in both human and economic terms.
To be fair, I haven’t personally experienced the type of inflation we had in the early 80s, but we made it through that without too much damage. I also recognize the short-term incentives politicians have to provide free stuff so to speak, but right now, we are already doing that and most of that stuff right now is going to the already wealthy.
Side note: I do appreciate that people can have serious discussions here. These are important questions and it’s nice to know that the readers here can generally understand the nuance in these discussions.
I have also been enlightened to the fact that these calamities are avoiding massive disruption at the cost of enriching the already rich who have controlled the narrative by widespread propaganda about how it is immoral to help the poor. To me that is the real battle, the moral imperative that is neither moral nor an imperative. I appreciate learning that simply cutting out the middlemen does much to reduce this inequality inflating machine.
Personally I think we have rationalized starvation as a moral imperative versus giving money to the already rich in the form of Tax cuts. However the poor spend what you give them and the government gets back 50-80% of what they layout in subsequent taxation as the money rolls through the economy. Give it as a tax cut to a rich man and you may not see it back in the taxation system for a generation or two. To have built these beliefs through systemic propaganda as a means to destroy the Federal Government due to hate for the Union win over the Confederacy as some people believe is something more should be aware of. My point is: there are lots of forces at work here and not all of it is ignorance.
Really nice exposition of a complicated and complex debate; I plan to read it a couple, four times over the next few days to make sure I totally understand all the competing positions.
On the inflation point, however, this graph seems key: “That kind of ‘slow-motion default’ wouldn’t necessarily be the worst thing in the world for lower- and middle-income earners. If they can secure enough in the way of wage growth to keep pace with inflation, the people who will be disproportionately impacted by a ‘slow-motion’ default would be creditors of all sorts.”
If inflation is based on expectations of future inflation driven by pressure on wages, how can we be talking about MMT-driven inflation when the job security expectations of low- and middle-income earners — let alone their expectations for higher wagers anytime soon — are low and sinking.
(Full disclosure: I have argued both sides of the inflation-coming debate.)
“By the time the government sells the bonds, the spending has already been financed.” No kidding, and the source of the financing is the buyer of the bonds. The financing doesn’t occur until the bond is bought. Is she is saying that the spending is financed “before” the bond is bought? If so, how? The word “financing” means “to provide funds for”. What funds are provided if the bonds are not purchased? It seems like what she is talking about is a proposition rather than a description of what is actually happening now. The only way to pay for spending without taxpayer or bondholder dollars is for the central bank to issue a credit directly from its balance sheet, and have that suffice as “payment”, “funding”, or “financing” of said spending. That would undeniably be “monetary-financing”.
Chris, I think you have just discovered reality my friend. We spend money first, and take it in later. You do realize that Kelton worked on Capitol Hill, right? This, from you: “The financing doesn’t occur until the bond is bought”, is literally not true, my friend. Welcome to reality! In all seriousness, I suggest you order Dr. Kelton’s book. You’ll be in for a real shocker.
The key point here, Chris, is that we create the money out of thin air. We do not have to wait on China to “lend” us dollars, nor do we have to wait on taxpayers to send us a check. That just isn’t true. We just keystroke dollars into existence. I realize that is an uncomfortable reality for a lot of folks, but there it is.
Here is a bit more:
https://heisenbergreport.com/2020/03/21/stephanie-kelton-the-same-computer-that-works-for-large-banks-is-there-for-main-street-as-well/
Words matter. Federal “debt” in a misnomer. The currency creator does not need to “borrow” currency, anymore than an apple farmer needs to borrow apples. The Federal “debt” is the stock of Treasury securities which, in turn, are simply savings accounts that pay interest and provide a safe place to store dollars which helps maintain demand for the currency.
“Debt” must be paid back, while created currency (by spending it into the economy) can be taxed back (destroyed), but does not have to be.
Treasuries securities are purchased with dollars that are already in existence (either sovereign-created, or bank -credit). The government chooses to match deficit-creation (spending) with Treasury sales, but it is not functionally required; it is a vestigial action from the gold standard days.
Also, inflation is the only non-self-imposed limit on deficit spending…and since inflation is a result of shortages (not too much money), if the spending is productive then there will be no shortages and, therefore, no inflation.
There is always a shortage of Real Estate. Now we can talk of allowed purposes, but the bottom line is that not all things can be ‘produced’. So inflation can and does result from increased money. Not all economic problems can be solved by limiting factory wages combined with the liberal application of the rod.
We all laughed at Japan back at the turn of the century and after 2009. “Why don’t they follow our example and let capitalism clear away the losers? They should just rip off the band-aid like we did!”
Fast-forward 10 years. The BOJ had led the way in MMT and were are, once again, following.
Maybe this is nothing to worry about. Who knows. Unless “no free lunch” is a flawed theory, one suspects that the risks are being minimized at present due to conviction that inflation does not appear to be “always and everywhere a monetary phenomenon.” We will only know how useful or innovative or how dangerous MMT is until after the fact.
One thing clear to me from these pages is that MMT is not a flawed theory. It is as I love to see in the physical world, one of the valid competing theories that explain our reality.
The usefulness of MMT has been recently demonstrated.
However your point about danger seen only in retrospect is sadly one of the human conditions we are faced with on many fronts. Examples: climate change, unfettered pollution, explosions, OSHA, FAA safety procedures and many many other examples.
We may be in the unconventional “weeds” these days as the problem is different from any in my 75 years experience, the basic underlying tools/levers we are fiddling with have been around. What does appear to be happening is that we are collectively more sensitive to the labels applied to people and their actions these days so it seems that much of the conversation about policy is about labels rather than actual actions. “Helicopter money,” MMT or whatever. The discussion should stay, as it does in most of H’s work, on reporting actions. Seems to be a lot of sophistry going on in pundit town. If anyone actually knows what the heck the world will look like after two or three years of COVID remediation I sure haven’t found them yet. For now the market feels a lot like it should carry the poet’s warning, “Abandon hope all ye who enter here.”