LateMechanic
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User ID: 1841
LateMechanic
3mo ago
You'll have to forgive me that I'm frustrated that every single time I try to discuss this topic with MMT advocates they do this same exact thing of just trying to discuss the accounting instead of what the policy actually results it empirically. It's about as enjoyable as trying to get Austrians who rant about praxeology to acknowledge empirical evidence.
The point is specifically about how the real-world accounting works for banking and government finance. MMT isn't a policy, it's describing the system as it already works today and how it's worked throughout history. And monetary policy is barely relevant to it. If assets and liabilities and balance sheets are not your interest, but you feel obligated to engage for ideological reasons with your own hypotheticals about radically changing the macroeconomic management from what's been working because you have your own prediction of impending disaster, I can indeed imagine that's frustrating.
MMT "advocates" are trying to explain how it works and why it has continued working despite people having your same fears for centuries, so that you can join us in sleeping soundly at night instead of despairing. FCFromSSC is not my 'opponent' in the slightest.
Who said anything about involuntary?
Well anyone can voluntarily do anything stupid. There can be a wide range of competence in macroeconomic management. The unsustainable argument is only strong if you think the system is headed toward involuntary crisis.
What leads you to that choice?
Voluntarily choosing to default on your own currency debt? Incompetence, not understanding the accounting, malice or kingly inconsideration maybe. In the US, the existence of the debt ceiling law for example is partially incompetence/misunderstanding, but mostly kept around as a political weapon to use against the opposing party in power.
Since both of these create massive political instability, good government requires avoiding the circumstances that create this dilemma, and thus a limit on non-productive spending.
OK solid. That's what I opened with in the very first post: good macroeconomic governance entails not causing runaway accelerating inflation by making the deficit too large. And we judge by outcomes, we don't get sidetracked counting the number of digits or commas.
LateMechanic
3mo ago
when weighed against "prosperity beyond what anyone can imagine" they dont weigh especially strongly. Could you at least link it? MMT has lots of cranks that will be dismissed as not representative.
OK so you were asking "why inflation is bad" from an MMT perspective? I don't know that there is any unique take, it's not part of it. MMT is a description of how money, banking, and government finance actually works.
If you wanted a pitch about how inflation 'isn't really bad', then sorry, that's not part of it. I added my own spin about how inflation is obviously a dynamic self-correcting mechanism for too much savings, and that the only way you get accidental persistent or accelerating inflation rather than it being a relief valve is when too much spending is indexed to the price level (maybe some part of the problem they had in the '60s).
Mosler's "prosperity beyond what anyone can imagine" is referring to perpetual full employment in a productive capitalist system. That was in 2012 where they were looking at the massive "output gap" of where GDP was going before the recession and how far it got knocked off trend by heavy unemployment -- just a complete waste of human potential.
I also have 'some' income outside taking on debt. I can commit to spending part of it on buying back my own IOUs/debt service in the future. Indeed, my nominal income increases with inflation and economic growth, so this is in many ways like a relative tax. Also assume I live forever.
The tax isn't just an income flow. It's forcing everyone into a debt relationship with you, where if they don't pay, you will put them in jail using force. In the past, authorities may have used fees, fines, tithes, sanctions, whatever. If in your hypothetical, you could live forever, and you could force people into paying some amount of your own IOUs back to you or else you will credibly use some level of violence against them, then certainly they will find out what they have to do to get enough of your IOUs, and maybe even some extra if they want to save some or trade them with others.
Now can I blow up my debt to infinity? Propably not; propably there is some mechanism tieing the debt amount to the size of the tax base/income, but what?
It's just the amount that people are willing to have as savings. The government's debt is the non-government's net money supply ('net', because the private sector can also expand the money supply with their own debt & credit, but that all nets to 0 as a whole).
If you incentivize savings, like with pension funds or whatever, maybe your country will have a higher aggregate savings desire, and your government debt will have to be larger in order to maintain full employment. If you instead have a culture and policy where people live comfortable retirements without requiring any personal savings somehow, then maybe there would be extremely low government debt. If you're Japan, and the population has a very low participation in the stock market after the '90s, then the government debt & deficit are likely going to be huge to satisfy the desire to save money. New money being pumped in will quickly fall out of circulation and end up inert in someone's retirement savings account.
The government doesn't need to care about the size or whether it's growing or falling. That's all value-free, neither good nor bad. It's not like the desire is to see how large the debt can grow. Private savings are a 'leakage' from the economy, like net imports. The government has to step in to make up for that if you want to stop the paradox of thrift and keep the productive economy running at full effectiveness.
Then unlimited real growth of debt would mean unlimited real growth of GDP, or an unlimited willingness of people to sit on cash and never spend it. Neither is realistic.
Yep. That's why once you understand how it works, the basic outlook changes from thinking about "sound finance" (thinking there's a budget constraint that has to be balanced either short term or over some longer cycle, and thinking that monetary policy of tweaking the interest rate and composition of savings is the main policy tool) to "functional finance" (seeing unemployment as evidence of too small of a deficit, and demand-pull inflation as evidence of too large of a deficit, where fiscal policy of taxing and spending is the main policy tool and monetary policy not mattering much).
LateMechanic
3mo ago
Im asking for some kind of real economic cost; "Its annoying when the prices are different than I remember" doesnt count, no.
You could look it up, it's not my argument. It's good enough for me that most people hate it, so let's avoid it. It's fun when nickels are worth picking up off the ground and can get you a coke.
If you dont pay enough interest, people will stop lending you money.
When you have your own currency and central bank, people don't 'lend' you your own money at all. You can print up IOUs and tell people they pay 0% or 150%, up to you if you want to subsidize savings.
Well, you said that the difference between me and the state is that the state can tax. If it doesnt actually need to do that, then whats the difference?
I said the government levies 'some' taxes every year, reoccurring indefinitely, broadly on everyone. That provides a perpetual anchor value for the government's debt, understood universally, even though the amount outstanding can continue to rise (if people want to keep accumulating it for the future, for a rainy day, to pass down to their kids, whatever).
That doesn't imply anything about somehow taxing it all back and paying it all off or whatever, at some unspecified jubilee judgement day where we have to unwind everything.
LateMechanic
3mo ago
Now at 3.5% they're acting like it's crisis mode on the other side (too far above 2%), so they're probably shying away from argentina style for now.
But yeah with Japan's public debt size, they were definitely confusing the brake pedal for the gas pedal in the 2000s, and should have checked out what a 2% rate hike would have done as stimulus. (or just cut taxes)
LateMechanic
3mo ago
Sure, they set a price but how is that implemented? It is implemented by changes in the quantities. Yes, the rule says adjust the quantity as much as needed to get to the price. But to do that quantity adjustment sometimes you need to reduce the quantity in the market (OMOs sometimes require 'buying back' money) and for that you need assets that the market values.
This was the old rate maintenance regime, but unfortunately you're almost 20 years out of date here. The way they implement the policy rate is by simply paying that chosen rate of interest on reserves directly. They absolutely flooded the banking system with excess reserves, in order for the interbank lending rates to get pinned to that same 'floor' rate. For those entities holding reserves which aren't legally allowed to be paid interest directly, the Fed pays them interest anyway, using overnight reverse-repos that you mentioned before.
I believe basically all central banks switched to this approach rather than OMOs with 0 excess reserves (it's way easier this way).
And with this regime, there's basically no difference to the banks whether they're holding reserves or short-term securities, so the Fed's balance sheet composition and size can be changed at will.
The amount of money in real terms that a central bank can supply is limited by the assets that they hold because otherwise the bank cannot maintain the real value of money in the face of demand shocks.
I can't exactly tell, but it kind of sounds like you're describing some kind of conception of banking like they're storing real objects. Like you 'deposit' some gold bars and your jewelry, and they issue you an account balance and/or a paper money receipt for it? In that kind of idea, I can see how you would be talking about the bank's assets and how they 'back' the value of the credit money. And that kind of story is like where the 'fractional reserve -> money multiplier' ideas came from.
That just has nothing to do with how modern banking actually works (nor even really past banking apparently, the goldsmith idea was basically always a misconception or story for convenience). The Fed's balance sheet assets are almost entirely just treasury securities, which they 'bought' by creating their own liabilities (reserves). It was just a pure balance sheet expansion, which is how modern banks work. Maybe the terminology here is that banks in the real world use 'finance' model of banking while some dated textbooks discuss hypothetical 'intermediation' models.
Backing need not be about redemption. Think of stock buybacks, stocks are backed by the companies cash flows. You can't show up with one share and demand a payment from the company, but there is an implicit expected future value of the stock and the buybacks help maintain it.
You're basically just referring to things having value for various reasons. 'Backing' means there's a subject behind it, guaranteeing a value (or trying to). It's just going to serve to confuse thinking to bring out 'backed by' when it's not an actual strong case. Does a government want their currency to be more valuable than less, like a company wants their stock price to be higher rather than lower (because look at our great cash flow this quarter)? Yeah, but those are categorically different than an IOU that promises some redemption value like gold or PS5s. Now if a company has a standing offer to buy back any existing stock at some price, that is more of a real backing.
Your argument proves too much: if it were true, there would be no issues with the monetary crises in the late 20th century. Taxes are set in nominal terms, but they are set with a delay so the government will lose in real terms with inflation (after we are all bumped up to higher brackets).
I didn't follow this part, can you mention the crises you're referring to?
LateMechanic
3mo ago
So you're just going to repeat back MMT to me as if I haven't read Tcherneva and never heard of chartalism?
On the other side of the dunning-kruger scale, this is loudly announcing 'I looked up the wikipedia page'. And I'm not just repeating MMT back to you. I answered your precise first question by showing you how the actual government finance operations work in the US, with a link to an official testimony people find a bit shocking and interesting if they know anything about what's being discussed, and you thought that sounded like monopoly money that 'nobody gives a shit about'. You can't really be helped if you don't know the first thing about any of this.
Come on, at least engage with the idea of a debt crisis.
all I see from MMT proponents is a total faith in the impossibility of default or hyperinflation.
Involuntary default in your own currency that you issue? Definitely impossible. Inflation? I already started with that covered as the real constraint.
What if I start paying your military men in the new harder currency to loot your country?
Getting your state looted by foreign creditors is a real thing that really happens to people.
Ok, we're nearly up to countries can go to war with each other. Can you try to tie this back in to the fiscal responsibility of US republicans & democrats? Do you have any prediction about the timeline of the US becoming Russia?
LateMechanic
3mo ago
It surely depends on the government debt to gdp ratio. But yeah interest spending is government spending like any other, so turning on the fire hose and blasting people with free money is probably more stimulative than high borrowing costs are constrictive. You would have to think the propensity to spend interest income is near 0 to think otherwise. I don't know if that's the same reasoning as neo-fisherians use, or what erdogan is working from.
I'm not up to date with milei either, though I like his chainsaw schtick. If it was his policy to cut rates, the 10-year charts are pretty striking: interest rate, inflation rate. The last I had heard was years ago, that argentina was probably accidentally making their inflation worse by following the orthodox advice of raising rates. It wasn't until yesterday that I looked this up and saw the cut rates preceding the inflation drop.
LateMechanic
3mo ago
Ill note that you still havent explained why too much inflation is bad, or how we would know what "too much" is.
I assume you're not asking for the various downsides of inflation in general and why people find it annoying when it's above some small amount like 1-2%? My original statement was that people should have the properly oriented mindset, where the problem of 'too much government debt' is along the lines of 'too much of a good thing'. The 'good thing' here is the money in the private sector, not inflation, if that was the confusion. This is all in contrast to most peoples' gut notion that "deficit" and "debt" sound negative and bad and worth minimizing on their own.
I agree that the taxes give value to the IOUs, but I dont think the made up unit gives you all that much long-term
You don't think the US making up their own 'dollar' unit of measurement is too important? You must be on some kind of galactic time scale here for what long term means. This is surely one of the most important things about being a sovereign nation, creating and issuing your own currency.
Unless you can somehow inflate above expectations indefinitely, in the long term you need to tax back what you borrowed plus interest in real terms.
Again, maybe I'm not thinking long term enough. But in the US, we went into millions, then billions, now trillions. Should we find the tens of trillions a special number, such that we wouldn't expect to see quadrillions? When and why would they ever need to 'tax back' this amount? The IOUs just roll over indefinitely.
There is no reason to borrow unless your position as the government gives you investment opportunities above market returns, youd just pay interest for no good reason.
Yeah once you recognize that all money is just transferable credit, you will notice that there is basically no economic difference between central bank reserves and treasury securities. So rather than one being 'money' and the other being 'borrowing', they are actually not 'borrowing' at all. They are just creating money in different forms. This fact has dawned on people like Larry Summers a decade after central bank reserves started paying interest just like treasury securities.
As for paying interest, it's purely a policy choice to pay anything other than 0% on any of these IOUs. It's a government subsidy to savers: they will give you more money for having money. There are various macroeconomic effects for any chosen rate. Currently the policymakers in charge think choosing to pay a higher interest rate is on balance more constrictive than stimulative, and think that low rates are on balance more stimulative.
LateMechanic
3mo ago
My thinking is not confused because I admit that money and treasuries are (consolidated) government liabilities, both of which need backing and ability to repay. People get confused with “fiat money” and think that it doesn’t require any backing. But the value of fiat money today depends on the expectations of its value in the future; that value depends on the demand and supply of money then.
I don't know what you would mean by "backing" in this context. The treasury issues IOUs that pay interest (bonds/bills/etc), and they make those interest payments by issuing more of the same IOUs in the future: they indefinitely roll over. The central bank issues IOUs that pay interest (reserves), and they make those interest payments by issuing more of the same IOUs in the future: it indefinitely rolls over. There is no promised future real 'value', it is what it is, and if there's inflation, so be it (other than the inflation-indexed bonds). And the only thing any of these government IOUs can be redeemed for when returned to their issuer is tax relief (or you can freely swap them for other different types of government IOUs).
If the federal reserve has no assets, then it cannot react to a lower demand for money by withdrawing the money from circulation so the value of money would be lower.
They are the monopoly issuer of the currency, and thus can either control price or quantity. There was a bit of a monetarist experiment with Volcker where they tried to control quantity and let price float, but that just caused the price (interest rate) to keep ratcheting up, because commercial bank lending creates deposits endogenously. They have since recognized that they just have to fix price and let quantity float, to run the system properly. So they just set the interest rate and do not care about 'demand for money' - it's infinitely available at some price. We're simply talking about numbers in account balances.
Finally, repayment in real terms is the concern. Inflation is default.
Whose concern? The government doesn't care. And no one else's opinion matters. They are not beholden to the market. If inflation ticks up, that is definitely not the same as defaulting on the debt. We still need the government's IOUs to pay taxes, so they will perpetually be valuable to that extent.
No serious monetary economist will ever tell you that a central bank has no meaningful budget constraint
Not sure what you mean by a central bank budget constraint. They have various expenses each year, but any preparation of a formal budget is to make their case to congress that they're behaving well and shouldn't be slapped on the wrist. It's not an economic constraint. They tend to end up in profit every year and just dump that amount into the treasury's account.
The usefulness of money allows you to get some value without any backing (for a different example of that look at Bitcoin).
Bitcoin has no issuer offering a redemption value, and thus is a commodity rather than money. As an economic instrument, the fair value is $0. Any valuation above that might be a small amount for the utility of making transactions (would work if each btc were 1 cent or something), and otherwise just speculative (don't get caught holding the bag).
If you're saying that bitcoin has no 'backing', but US dollars have 'backing', maybe you're using that term for what I'm calling IOU 'redemption'? (returning an IOU to its issuer, to get what is 'owed')
LateMechanic
3mo ago
In which area do you see them being hampered by the public debt? The usual story goes that ever since the 90s crash, Japan had mostly been unable to generate any inflation, in their constant fight against dipping into deflation. The only exception being the 2022 inflation where basically every currency got the same tick up.
As far as how this coincides with the story about government debt corresponding to monetary savings desire, a plausible story is that the Japanese people don't trust the stock market after the crash, and thus most of their asset allocation is monetary (cash/bonds), especially as an aging society trying to save for retirement. So for the japanese government to really juice the economy with stimulus, it would have to try a lot harder with a huge deficit (instead they often balked and pulled back multiple times over the decades).
LateMechanic
3mo ago
What if people refuse to use your currency to trade goods and services? What if they tell you to fuck off when you ask them to pay you your own fun bucks?
This entire scenario is specifically about what happens when your power to enforce the privilege of exchanging debt for ressources ends.
Money is debt. So that would be inflation, which was definitely covered from the start. That is absolutely the relevant constraint on government deficit spending.
As far as the exchange rate goes: in the very worst case scenario of your exchange rate suffering, you can always at least import as much as you export. That's true whether you even have your own currency or not. But if you have a currency that foreigners are willing to save in (a world 'reserve currency', which basically all currencies are to different degrees), that just allows you the luxury of importing even more than you export (not necessary, but can be nice, although then your exporter businesses might start bitching about your country's 'trade deficit', so it's not all roses).
What happens when US treasuries are no longer viewed as the most risk free investment vehicle in the world and are replaced by something else and demand craters?
As I tried explaining procedurally above, it doesn't matter a single iota whether there's any market demand for treasuries. That's the charade part of it. The government effectively is just printing money as they deficit spend, and they always have been. They print the money, they set how much interest money pays (if any), and we have to get the government's money regardless of anything, in order to pay taxes.
If the king wants something done, he levies a tax on the subjects. Then he prints up some tally sticks, and pays them out to people to do the thing. Then they pay their tax, and he burns the tally sticks. Same with colonial american paper money: levy a tax, print up some stacks, get the work done, then shred the money as it gets paid back in taxes.
LateMechanic
3mo ago
Well the private sector definitely creates money and real wealth as well, so it's not a competition for any kind of limited quantity of financing. But it does so pro-cyclically: when times are good there's lending & investments everywhere, but everyone clams up when times are bad. The government can be the counter-cyclical engine, stopping the paradox of thrift.
If you would have otherwise had high unemployment, then creating money and paying those unemployed people to dig holes is at least better than letting them atrophy away, in terms of "damage done", because at least they go on to spend that money and generate more demand. But yeah it would always be a better idea to put people to work generating some kind of base-level valued output (goods/services). Ideally the government catches people at the bottom unemployment end, and they can as quickly as possible transfer back into the private sector to make more money and do something valuable.
LateMechanic
3mo ago
Germany lost a war and a ton of productive capacity, and had to pay war debts in foreign currencies. The other one about 'productive' was Zimbabwe destroying their own real economy with land reforms.
Don't remember what Argentina's deal was, didn't they keep borrowing in USD and do multiple voluntary peso defaults? Or recently they mistakenly were causing inflation by increasing their interest rate which was supposed to fight inflation, until they finally realized that and cut the interest rate which cut the inflation proportionally? Getting the gas & brake pedals confused is a rough time.
Anyway none of these were some policymakers learning the forbidden dark arts of 'oh the only constraint on fiat currency deficit spending is inflation, not insolvency? That doesn't sound bad, let's spend with abandon!'
I thought the 70s stagflation had put to rest the silly notion that high inflation equals low unemployment.
Well the premise would be: if prices are going up because 'people just have so much money they can't spend it fast enough', businesses would be booming and would be desperate to hire anyone that's available. But yeah, the '70s shows that if inflation is 'cost-push', ie caused on the supply side by something like an oil embargo out of nowhere, then it doesn't matter if you try to wreck the economy (as volcker tried), those prices may not be tamed by more unemployment slack. May need to deregulate natural gas in that kind of instance, to get costs back down.
LateMechanic
3mo ago
"It says here in this history book that luckily, the good guys have won every single time. What are the odds?”
Not sure you're following the point, that was saying that we have a goofy system precisely because different people have been trading off who wins & loses all the time. Especially in the 19th century the winners didn't exactly know what they were doing (constant boom & bust cycles with many severe depressions).
"Primary dealers" of monopoly money can surely not fail in delivering it to the US government, but how exactly does that translate into food rations for GI?
The government prints up some IOUs called treasury securities, and swaps them for some other government IOUs called central bank reserves, in a primary dealer auction completely unencumbered by "people choosing to buy debt". Then they use those IOUs (widely called 'money') to spend and/or give to people out in the economy, who are willing to trade goods & services for those IOUs. These government IOUs are valuable because they're the only way to settle your taxes that the government declared that you owe.
If that sounded like gibberish to you, well I already said most people don't understand the monetary system and never learned about it. If you think there's "a" world reserve currency conferring special status to a single country, that does explain where you're at, but the basic logic I just laid out also applies to other countries that issue their own currency.
LateMechanic
3mo ago
The point of me saying this was that in that situation you should put more effort on justification.
Yep fair enough, my initial 2nd paragraph was kind of declaring things outside the point of the rest of it. That was trying to punch up what people might 'know' which I think are incontrovertible, without going into subjective policy implications.
None of this describes an actual problem with inflation. It says that inflation will automatically regulate away any excess borrowings. Why then not set taxes to 0, and just let the inflation run its course?
Having some amount of taxes is what gives the currency an initial anchor value. Those taxes being levied broadly and reoccurring every year is what makes the money universally accepted and used even in the private economy. The currency is an IOU where the only thing 'owed' upon redemption is tax relief. If you levy no taxes, then inflation definitely will regulate the value automatically to the desired savings amount of 0 (give or take some inertia).
Is there any reason this is unique to the government? Or is my deficit also literally the same thing as rest-of-the-economy surplus? Because if it is, then it seems noone else should have objections to me borrowing indefinitely, either - it just makes you better of!
The only thing unique to government is the ability to levy taxes (backed up by force). That's what allows them to indefinitely print up IOUs that promise to pay nothing but an abstract amount of value in a unit of measurement they make up, and people will still line up to earn those IOUs (working in the army or wherever).
The generalized logic is: "you will always value your creditor's own debt". Because you can cancel out the debts with each other. The government can decree that it's a universal creditor to everyone (everyone owes taxes, abstract amounts of value payable in nothing). Thus enabling it to actually simultaneously be a universal debtor to everyone (issuing IOUs far exceeding the tax liabilities, if people are willing to save some for a rainy day).
You can write any number of IOUs that say "I owe the bearer of this note 1 apple", and use that new money to pay for things. Maybe only people in your neighborhood will accept it (also helps if they know you have an apple tree in your yard, and that there aren't too many outstanding notes to enable a run on your apples). If you write "I owe the bearer of this note $1", then some people (particularly banks) may accept it as valuable if they trust your creditworthiness. Your deficit is indeed definitely everyone else's surplus, if splitting the economy into those 2 sectors is useful to any analysis. So we (in the non-Lykurg sector of the economy) do benefit. The only problem is you run out of creditworthiness before we get very stimulated.
Why would they not want more? You demand that I explain why we would ever want non-government surplus to be less, but now you just assert that it will be the case.
Well, would you be happy holding millions/billions in checking/saving/bond accounts, or would you be tempted at some point to start buying stocks, yachts, and islands instead? It seems that most people tend to have savings targets to hit, after which they feel more free to spend any excess income. And their preferred asset allocation of savings maxes out at some desired amount of monetary savings.
But indeed, the government deficit could certainly be eleventy zillion dollars, if it were to end up in someone's account that has an infinite savings desire who wouldn't touch it. In the MV=PQ identity, that would be money increasing but velocity falling off a cliff, causing no effect on output or price level.
And I didn't say that there's no reason to want to shrink the government deficit, just that it does take an explanation. I could say that I do want to shrink the non-government surplus in hypothetical situations, if we're having obnoxious levels of inflation, maybe caused by too much government spending being indexed against the price level (causing a positive feedback loop that prevents automatic stabilization).
Finally, we indeed have basically never had much demand-pull inflation in the modern era of democracies with proper central banks using fiat currency (since the early 20th century at least). The bouts of inflation are usually better explained as cost-push, often from energy price shocks. The central bankers take credit for being wizards and steering the economies well, but it's probably those fiscal automatic stabilizers doing the work.
LateMechanic
3mo ago
Yet issuing more Treasuries and then wasting the proceeds is not sustainable.
But what are the 'proceeds' in your formulation? They issue a government liability that pays the policy rate, swap it for a different government liability that pays the policy rate (central bank reserves), and then spend it. There is no difference between reserves and treasuries, so calling one 'money' and calling the other 'debt that requires backing and an ability to repay' is only serving to confuse your thinking.
It's akin to printing up a new $5 bill, then exchanging it for quarters because that's what the arcade takes. No more or less money in any form. They can print as many central bank reserves or treasury securities as they want, so 'repayment' is a non issue. Inflation is the only relevant concern.
LateMechanic
3mo ago
What will inevitably happen is that some lefty will use this bullshit to do what they always do and spend with abandon until collapse.
That seems to be the driving fear, although we've never seen it happen in a productive democracy. In the real world, regular people seem to hate inflation so much that we almost always err on the other side: too much unemployment from taxes being too high.
It will not be like greece, who was bailed out by the nordic german taxpayer (while being decried as evil austerites), more like venezuela.
It would definitely be weird if the US ended up looking like a country that gave up their own currency or a country that relied on a single export while borrowing in a foreign currency they didn't control.
LateMechanic
3mo ago
Private savings don't have to be in T-Bills. To the extent the market is flooded with them, they crowd out private investment and savings in private instruments.
There's no crowding out there, it's just a price effect. The government sets the risk-free rate, and others price risk premiums on top of that. Finance is infinitely available: price not quantity.
So even if some amount of T-bill generation each year is actually good, it would be best achieved by funding courts and police and setting taxes near to zero.
That's exactly right, that's why we fight (politically) for our preferred outcomes. It's just a mistake to say the deficit has anything to do with the size of government or what we prioritize doing in the public sector. The size of the government deficit & debt have to do with the savings desires of the populace. So it's just the wrong target to look at.
LateMechanic
3mo ago
MMT is mainly about describing how fiscal policy and money itself works, and it apparently has been essentially the same throughout human history. The word 'modern' was a joke from a Keynes quote about "the past 4000 years, at least". Mesopotamian temple accounts, European tally-sticks, various stamped coins, etc. Always money being transferable credit, and dominated by credit from the authority of the day. It's how you would bootstrap a monetary economy into existence, whether you're talking about a hippie commune, a Lost desert island situation, or a new nation, without relying on any circular reasoning "lets call this seashell money: I value it, because someone else will value it, because someone else...". Using the authority's power of taxation (and power to punish/expel those who don't pay) to give value to money is an imposition, but it appears to be the least barbaric method for organizing society we've come up with so far.
Monetary policy as the business of setting interest rates, isn't of that much concern to me. I think they've landed on basically sane goals of desiring slight inflation over time, and a policy regime of simply paying interest on reserves to set the base interest rate (much better than the pre-2008 system of open market operations). I would like to see them just set the interest rate at 0-1% and leave it there forever, as I don't think there's good evidence that it controls inflation or the economy like they wish it did, and I think interest payments are maybe some of the worst government spending.
But have you sit down for a second and asked yourself if that's a good thing that it works like that or not?
I was basically a libertarian before I learned MMT and became a normie, although I never really had that core furious uncomfortability that someone else's decisions can affect 'my money', which seems to really animate some people in these questions you're raising.
The whole current system especially in the US is downstream of hundreds of years of business interests, ideological libertarians, and others clashing over precisely the kind of political questions you listed. The core economic logic is actually extremely simple, but there are a million self-imposed constraints, strange terminology, and extra steps between it all (leftover from the gold-standard era mainly, but it's been through a lot).
And most importantly, what happens to all this the day that people stop buying US debt no questions asked?
It's almost purely a charade that they pretend the market has a role in buying US debt. 'Almost', because they currently do like to take the temperature of market predictions on longer-term securities, and let those rates up the yield curve fluctuate with market sentiment. It's a self-imposed constraint that the treasury and central bank are separated, a self-imposed constraint that the treasury can't go into infinite overdraft on their account, a self-imposed constraint that they can't directly swap liabilities with each other, etc. After WW2 when they re-imposed that last constraint, the Fed chair Eccles told congress exactly that the market plays no real role and that it was a charade, but they re-imposed the pretend restriction anyway for the optics.
The current system of maneuvering around the laws in the US is that the central bank contracts commercial banks as 'primary dealers' who have an obligation to make sure every treasury bond issuance goes off perfectly without a hitch at the chosen policy rate. No bond vigilantes get a say in the process.
MMT is propably not a popular position here.
That is definitely the case, but I would be surprised if anyone could do the t-accounts for various government & banking accounting operations and actually put the liabilities & assets on the correct sides, etc. Even most economists mess it up completely. It's just not something most people learn or care about. My guess was definitely about US officials and how their actions may be explained by their private knowledge, rather than an estimation about our forum members' beliefs.
The rest is the same thing in different words. And as for that.
Identities are a basic check to make sure you're not getting something totally wrong. If you think the government deficit is a bad thing that should be reduced, you have to explain why you think that of the non-government surplus as well. It is quite literally the same thing. As Kelton said in that presentation, people goof up on this all the time. The WSJ in the late clinton years proudly proclaiming in one column "isn't this wonderful? This is the longest sustained budget surplus since 1929!" while the next column over is hand-wringing "this is very worrying, the private sector savings are plummeting!".
Why is inflation correcting it?
When collectively the private sector has more monetary savings than we want, we will value money less and increasingly try to spend it away - the hot potato effect. Prices will get bid up high enough from this economic activity (falling value of a dollar) until we have the correct/desired amount of savings again. Or before that, the increased economic activity will cause the excess monetary savings to get shed off in increased tax payments (monetary destruction, IOUs returning to their issuer).
So taxes being set at rates instead of flat amounts is therefore one of our main automatic stabilizer policies (the other being safety net spending): the government deficit automatically shrinks & grows depending on the state of the economy. Demand-pull inflation is the final relief valve after that, re-valuing money downward until we have the amount we want.
LateMechanic
3mo ago
I've said this before, but I'm pretty sure a lot of members of congress have learned at least some MMT stuff about banking & government finance accounting. They pretty much all still use the deficit, debt, and fear of large numbers as rhetorical weapons against their opponents when out of power. But we seem to see fewer people than ever signing up for the mistaken sucker play of being in power and actually crashing the economy with austerity. Maybe more senators than house members understand the reality; surely more democrats than republicans have been incentivized; and definitely more congressional aides and rank&file treasury/fed people know how the financial plumbing works compared to elected & appointed officials (but in the US in particular, these types seem to effectively be able to get the word out to stop politicians from wrecking things usually). This time around, Trump even potentially had Elon as a perfect fall guy to take any blame, if Trump actually wanted to cut the deficit (luckily he didn't).
To be economically literate, one would have to know that saying the government deficit should be cut is identical to saying the non-government surplus should be cut. Or that the government's debt is not "our" debt, it's our asset: the government is just a balance sheet entity we made up, which we use to emit IOUs that we (the actual people) get to hold & use. It's much more akin to a scorekeeper, tracking the points everyone has. The national debt is essentially the net money supply, and that money is being created by running a deficit (constantly for hundreds of years, with no reason to stop if the people keep wanting to accumulate monetary savings). Government deficit & debt are good things, and the only problem is along the lines of 'too much of a good thing' (inflation, which is the self-correction mechanism).
I think MMT was especially catching on amongst politicians around like 2018-2019. The inflation of 2022 probably put it on the backburner for awhile. But even back in 2012, here they are talking about how a load of congress members understand things but just can't say anything publicly: https://youtube.com/watch?v=ba8XdDqZ-Jg&t=1h4m25s
Moderator: Can you answer the question of why does the system not adopt what you're saying?
Mosler: Yeah so last year we had the debt ceiling drama. Remember that last summer? And right after the State of the Union, Paul Ryan got up and said 'Look the US could be the next Greece, we're going to be on our knees to the IMF, interest rates are going to spike, we might get downgraded, we might default, we have to take $1 trillion out of the deficit, and we're not going to vote for the debt ceiling increase unless we do that'. And Obama actually agreed! The president agreed, and he had a plan to take 6 trillion out, but they didn't like what each other was doing, they got right down to the wire, they kicked the can down the road with a compromise... Interest rates had gone up in anticipation of something terrible happening, the stock market was crashing, and we got downgraded by S&P... And what happened? Okay, interest rates went down instead of up. 3-month treasury bills were going through at 0%. Everybody was like 'what's going on, how is this possible?' No move on the deficit, we're up over 16 trillion...and, you know this is supposed to be the end of the world. And then suddenly it started sort of coming out: you had Alan Greenspan come out and say 'well you know, we print our own money'. And Warren Buffett came on and said 'we're 4A not 3A, because the Federal Reserve prints the money'.
So I compare this to the War of 1812 and the Battle of New Orleans. The Battle of New Orleans was fought after the war was over. So what's happened is that moment when they came out realized that we weren't going to be the next Greece...okay the US was not going to be at its knees, that deficits don't drive interest rates up (and there's absolutely no reason to think they would when you understand monetary operations--they never do)... the war was over! Okay, we had won the war. The reason for deficit reduction was gone. It disappeared. All the reasons that, you know, Ryan and Obama..."we've run out of money", all these things were over! Okay, but they kept fighting the war anyway! And it's kind of the strangest thing. They just started pushing ahead with, 'okay, now we got to do it towards the end of the year...'. And nobody talked about Greece for a while, and then now all of a sudden in the last few months you're starting to hear Greece sneak into it again. Okay, that war is over, you're right, it should be over! Okay we know that deficits don't cause any default risks, they don't cause interest rates to go up, they don't cause any of that. Now, they might cause inflation, if we overspend. But let me say two things on that.
Japan's been trying to inflate as hard as it can for 20 years, and hasn't managed to get out of deflation. The Federal Reserve has been trying to inflate with everything it's got, every trick in the book, every tool it can imagine, for four years and hasn't done it, it's utterly failed. It's not that easy. I've been writing for years that central banks cannot cause inflation no matter what they do. And I think we've seen that proven out. So #1, inflation is not that easy. (The causes of these other things were all special circumstances, all the hyperinflations I won't get into that). But if there is any reason to think that we do need deficit reduction, that we should cut spending or raise taxes, it has to be inflation. Because none of the other things are a factor. So let's look at our inflation forecast: there isn't one analyst out there who has a reputation to defend that's forecasting any kind of inflation. The treasury index bonds, 30-years, are forecasting very very low inflation. There's not a single inflation forecast out there.
So I talked to representative, what's his name, Hollen--he's on the deficit reduction committee from Virginia, he's a progressive Democrat. I said "okay the war is over, why are you pushing for cuts in social security, cuts in Medicare? Isn't the burden of proof on the other side to tell you that we have to cut or else is going to be inflation? Maybe they have to do a little research, and prove to you that there could could be inflation and therefore we have to cut Social Security and Medicare? Because there's certainly no forecast out there. Why are you just voluntarily (the left, the Progressive Democrats) out there proposing these cuts?" He goes, "well, it's a pretty large number and I think we need to do something about it." It's like 'What??'
Okay there's something very wrong with the political process. And I think what's happened is they become victims of their own propaganda. They've gotten it so instilled in people that we have to do something about the deficit, they can't even begin to talk otherwise. Even though they know the war is over, even though they know they've lost any possible reason for it, even though they know the burden of proof is on the other side now to show that spending needs to be cut or taxes need to be raised for some reason... The polls show and the reactions show that if they come out and aren't for deficit reduction, they get laughed off the stage and they they lose their spot. So this is the the Battle of New Orleans being fought after the war is over because people don't realize the war is over. So even though the policy members might know that, they're dealing with a population that doesn't know...and is just an economic disaster, a real tragedy.
Let me say one more thing about taxes, if I can, and the size of government because I want to make this entirely apolitical (which it should be). The size of government is a political question. How many teachers do we want in the classrooms, how many soldiers do we want in the army -- if you take too many there'll be nobody left to grow the food and we're going to starve, if you take too few we're going to lose the war. These are all political decisions of what resources we want to move from the private sector to the public sector. And you'll have differences of opinion: some people think we need more government, some people think we want less government. But once we've settled politically on the right size government, then there is an appropriate level of taxes that allows the right size deficit, so we have the right amount of savings, to offset our pension needs and stay at full employment. So given that the size of the government is a political decision that shouldn't be based on whether the economy is good or bad -- 'we need a a legal system, how many judges and clerks do we need?' Well you know if there's a 10year wait, maybe we need more. If they're calling you up asking you to see 'why don't you go out and sue somebody, we have people waiting around to have a trial', maybe we've got too many of them. See, you've got to come up with the right size legal system and everything else.
But once you've done that, taxes are the thermostat on the wall. If the economy is ice cold and unemployment's high: you're taking too much money out for the size government we have, and you need lower taxes for that size government. If on the other hand it's overheating, there's too much spending, and prices are going up too fast, and unemployment is too low (whatever that means): then taxes have to be raised because for the size government we have, taxes aren't high enough (we're not taking enough money out). So for this right size government, taxes are the thermostat on the wall. They're not there to balance a budget, to bring in money. We're just changing numbers down, we're changing numbers up. The deficit is a residual. You find out afterwards if it was a right size deficit by counting the bodies in the unemployment line. Not by worrying about 'paying it back' or 'becoming Greece' and all that nonsense -- there is no such thing.
So your question now is "why can't the political process get us there?" And now that you know all this, I'm going to ask you for the answer. Because it's becoming more of a mystery every day. Because the more people I know who know the right answer.... you know, it's almost like the less willing they are. I talked for hours to Senator Blumenthal who read my book Seven Deadly Innocent Frauds (you get it free online, it's an easy read). And he gets the whole thing and he won't do anything -- just sits there. Same with Lieberman from Connecticut (I ran for Senate from Connecticut a couple years ago). Talked to these people, I talked to Hollen, I talked to all kinds of people over the years... and they're not going to be the ones to move us off the dime on this. We've got the academic community starting to get some of the right answers and through the blogs. And it's called mmt: modern monetary theory (somebody gave it a name, wouldn't be the name we chose). It's been expanding rapidly. But it's not there yet: that the only thing between us and full employment and prosperity beyond what anyone can imagine, is the space between our ears. There's nothing else in the way right now: there's no food shortage, there's no shortage of housing, we have surpluses of everything.
Kelton: Warren, remember. I won't say who it was, but Warren and I met with a member of Congress together. And we went through all of this with this person, and when we got done, this person looked at us and said "I can't say that". Not "I don't believe that", "I disagree with that", "you're wrong", "you're crazy" -- "I can't say that"! We have to make it increasingly safe for these folks to say that, to take these positions. And wasn't it FDR who said 'I can't do things, you have to make me do things'.
Mosler: And this is pro-agenda for all of them. The Republicans would love to cut taxes and not have to cut spending. They could agree to that. But they can't...if they cut taxes, they've got to cut spending even more because they think they have to balance the budget, so they don't even do their own tax cuts. Democrats would like to increase spending.
LateMechanic
3mo ago
Remember that weird moment when Colbert announced that Comey had been fired by Trump? The audience cheered, before being corrected by Colbert that Comey was now a good guy and was to be lionized if you're anti-Trump (the updated narrative which went on for the next month or so in the media).
So it potentially helps Elon to some extent, to make a more dramatic break from Trump with big WWF promos cut from both of them. It depends on how the media plays it, but this could be the same kind of whiplash that erases a fair amount of elon derangement among democrats and lets him slip out of washington with a bit more independent posture intact.
LateMechanic
4mo ago
There's a clear different memetic impact depending on whether people mentally bucketed covid as 'a new potentially-deadly virus' or 'a new strain of the flu', so that was always an important territory to fight over.
LateMechanic
5mo ago
Similar to how the best way to use Reddit is to find actually smart people and then follow their entire post histories.
I used to do that, but my mistake was thinking SlateStarCodex must have been some MMO people were playing like Eve Online or something, so I skipped past those posts, and ended up finding the motte group way later than I should have.
Definitely, primarily because the separation is just incoherent.
In the conventional view, you call central bank reserve account balances "money" which is evidence of "printing", while you call treasury t-bills "debt" which are evidence of "borrowing". But they are both are just government liabilities which promise to pay nothing in redemption other than other government liabilities, and which pay the policy rate of interest. To make it funnier, these are literally both types of accounts that the central bank runs on their books, because the Fed does the banking on behalf of the Treasury. You can call them checking & savings accounts at the government bank, although they pay the same interest, and you can freely swap between these accounts (you're never 'stuck' holding them). To call only one of these accounts "money" takes a special kind of incoherence.
Physical paper/coin money cash is just a bearer receipt version of the electronic reserves. That's the only government money that doesn't pay interest now, as a tiny fraction of the money supply, held for some types of convenience.
The MMT people often try to be more precise and avoid the word 'money' because it can lead to confusion sometimes, but I just plow ahead and risk it. The clear definition of money from what we use now and even throughout history is "transferable credit". So we can just talk about money as IOUs. Someone issued a financial liability, which someone else gets to hold as their financial asset. A bank balance is your valuable asset because it's the bank's debt. A reserve account balance is the bank's valuable asset because it's the central bank's debt. A $5 bill is your asset because it's the central bank's liability. Always credit-debt relationships, the issuer owing the holder.
So I'm perfectly happy to call the outstanding reserve balances part of the "government debt", just like I call treasury bonds/bills/securities "money". These are all both money and debt.
So issuing/printing new reserves or issuing/printing new t-bills, which are nearly perfect equivalents, no, they would not have different inflationary impacts. The size of the government deficit is the size of the amount of money being printed, and it always has been.
Many mainstream economists like Summers & Krugman got to this a bit late, in the 2010's, when they reconsidered that 0% government debt instruments were essentially 'money'. So they started reconsidering what they thought they knew about 'monetizing the government debt' and QE, etc. I'm not sure if they ever caught up to the fact that in 2008, central banks switched to paying interest on reserves directly, making 'money' look just like securities even when we're not in a 0% interest environment.
I'm sorry I couldn't really parse what you were saying in these 2 paragraphs. That balancing the budget was the same as running a deficit, or somehow it had the same outcome in a particular way?
Well if anyone is ever saving money, then by identity someone else must be dis-saving an equivalent amount (running down prior savings, or just issuing debt). Because it's all zero sum. In aggregate, what we find is that people like to accumulate monetary savings over time (even with populations that aren't growing I think). So unless your hypothetical has some way to stop that, that saving is a leakage in aggregate demand which will not let you get to full employment without the government being in deficit to supply the desired savings. A government balanced budget means they are draining out exactly as much money as they're injecting in to the economy.
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