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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.
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.
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.
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).
I understand that it sounds that way, but I dont think you believe that. Its just that I have not see how there is a benefit, and theres clearly supposed to be one, and getting to fund things with debt would be a candidate. So far, youve shown that just printing the deficit gets you the same effect as cutting expenditures to balance the budget, with some inflation along the way. I dont see the advantage in doing this. Now youve suggested a candidate for an advantage - you get to achieve full employment, either where the conventional method wouldnt, or in a better way. What are the details of that?
For one, you suggest seeing unemployment as evidence of too small a deficit. But in the previous model, there is no ongoing deficit in the equilibrium youre inflating towards. Secondly, the necessary expenditures to achieve full employment would likely be relative ones. And in what way is the equilibrium of your strategy better than just spending enough for full employment, and raising taxes to balance the budget?
Not entirely related to the rest, but conventional theory is that borrowing is less inflationary than money printing. Do you disagree?
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.
Im not entirely on board with treating a simple dollar bill as an IOU. I understand your point about it gaining value from being usable for future taxes, but the bill does not, at the point of issuing, create any obligation for the future. "I owe you tax relief, the amount and whether thats relevant at all to be decided, by me." is not a financial instrument, because thats true of everything. Nothing prevents me from demanding taxes in yuan (or kilos obsidian, or literally whatever) instead of dollar tomorrow, so how are dollars my debt, and yuan arent?
Other question: If the government borrowed in a foreign currency or gold rather than dollars, would that be inflationary?
I also notice that you never say whether somethings is in nominal or real terms, whats up with that?
This might be the crux. If people want monetary savings to keep increasing in real terms, that would mean theyre willing to work for more than theyll consume, indefinitely. Thats certainly a disagreement with the classical model, but its not really over something monetary. In that case, I can see how you can grow the economy by just spending the money they dont. A few remaining disagreements:
First, I dont think this leads to full employment necessarily. Firstly, because while more demand can be expected to increase employment, but there neednt be any finite amount of it where employment becomes full. Secondly, because the willingness to increase real saving per unit of time is propably limited, and drawing on that full amount might not be enough for whatever you want to do.
Second, even if savings increase over the long term, there will be fluctuations. If a lot of people suddenly want to spend money that youve already spent for them, what happens?
Last, people want savings, but why would they want dollar denominated savings over non-monetary assets? If people just buy index instead of sitting on money, does that already do what you want to do?
It's a bit strange to think about, without being redeemable for gold or anything, but that is what it is. Cash notes are financial liabilities of the central bank on their balance sheet: https://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm
The UK pound paper notes even still literally say they are promissory IOUs on them, with the queen or king announcing "I promise to pay the bearer on demand the sum of five pounds". You can't redeem that value in the form of anything other than another one, but yeah it's still an IOU which exists simultaneously on the issuer's balance sheet as a liability and on the holder's balance sheet as an asset. You're holding paper evidence of the government's debt relationship to you.
If by borrowing in a foreign currency you mean they create an IOU promising to pay (for example) a billion yen in the future, and swapped that with some bank like the IMF for actual yen notes or credit which they then spend: I guess it would be potentially inflationary to that other currency. What adds inflationary pressure is any actual spending. I can't think of what borrowing in gold would mean.
Well everything is just nominal in reality and in accounting. Anyone can always inflation-adjust or gdp-adjust any particular numbers when they feel it's relevant to some particular analysis, like doing comparisons over time or across countries, etc.
Yeah I mean just increasing the deficit on any random spending or tax cuts will probably juice the economy up to a certain point like 1-3% unemployment, but it would take something more targeted to try to even go beyond that, somehow minimizing transitory/frictional unemployment, without generating inflation. Can depend on how strict you want to be about the term full employment.
Definitely, it fluctuates even daily. By the nature of having decent "automatic stabilizer" fiscal policies, people suddenly choosing to spend down their savings would result in tax payments going up, safety net spending going down, and thus automatically shrinking the government deficit (maybe even driving it into surplus).
Yeah personally I have almost no appetite for monetary savings, I dump it all into non-bond index funds. I'm not sure what you mean about what I want, but yeah the analysis would be that incentivizing saving in other assets like stocks & real estate surely ends up meaning the government won't end up running as large of a deficit (no need to counter savings leakages). Again that's mostly value-free, so I don't call it good or bad.
Some people have complaints about asset price inflation, where it's not that the value of money is falling compared to goods & services, but where we're all plowing endlessly into the stock market like a clown car, bidding it up constantly. But I'm not sure about that.
The fact that they historically descend from IOUs and there are some conventions left over from that time does not tell us "what it is". Again, what actual reality stops the fed from listing all yuan as its liabilities?
Someone gives me 100 gold, and I commit to giving him back 104 gold in a year. In between, I will presumably sell the gold for money, do something with the money, and then buy gold to pay him back in the end. The difference to borrowing money is that the gold price need not be the same at the start and end.
I asked about this because before you suggested employment as an indicator for the right deficit. Do you have any suggestion for something that directly tells me when the appetite for monetary saving is satiated?
Things like this are why Im wary of your nominal-only analysis. I would like to know if the people doing that spending then end up worse of from your previous spending, and how that can in turn influence previous saving. As is Ill have to work it out myself sometime when Im not right about to go to bed. It propably also negates/displaces the growth benefits of that previous spending.
In theory, all stocks should have the same expected ROI. If you unselectively pour money into a market thats in equilibrium, then active traders will lower their standards for what IPOs to buy, and a corresponding supply of them will show up. The money ultimately goes to new investment.
That is part of why I suggested it: Because while just more demand will grow the economy generally, it also makes a difference what that money is spent on. Digging ditches an filling them back in is worse than building more capital. Putting money into stocks means that the active traders will direct it towards the best investments. Note that current practice is that the fed does its intentional inflating by ultimately subsidising lower interest rates - that has a similar effect. If you do government spending specifically for the sake of the economy, thats generally better than spending on specific things (again, excepting cases where a certain investment is only open to the government).
And this just may be of interest to you: The classical models dont believe that people will increase monetary savings indefinitely, for reasons that go back to the "unwinding date" that came up before. I dont know how familiar you are with economics outside of macro, but classical models use backwards induction a lot. Backwards induction requires some kind of "end of the game" with final scores to reason backward from. What is that? Well, it turns out that the backwards induction arguments you want to use in general economic models dont depend on how far away the end date is. So you bascially model the situation as if there was an end date so far in the future that only these in-principle effects are relevant.
Youre not getting any utility out of unspent money at the end, therefore youll spend it down before you get there, therefore monetary savings dont grow indefinitely. Im very curious what an economics looks like where you avoid these indefinite future end arguments generally, rather than just in this one context.
Here's a chicago fed piece that tries to describe it one way, if you like this "But currency is a liability to the central bank that issues it—a promise to stand behind the currency’s value in the future.".
It's just easiest for all the accounting and understanding, to see it as a bearer physical receipt version of the general electronic account credit (rather than the other way around, seeing the electronic reserve balances as promises to pay the physical version). Just all as types of credit from the central bank, which no longer promise redemption into anything, other than abstract value that is accepted by the government for relief from taxes/fees/fines/tariffs/etc.
I agree it's possible that you could do the accounting in other ways, and in fact I think maybe coinage in the US is in a weird spot like that, technically (like they are a liability of the treasury instead of the fed, or even that the treasury doesn't recognize them as a balance sheet liability maybe).
I'm not really sure what that would mean. Without it actually being a real liability, you could just say it is and that their balance sheet is in a massive capital loss in a fake way?
Technically, what actually stops that in the real world is that what the Fed can do is precisely limited by what congress has allowed in the Federal Reserve Act. But yeah congress amends that plenty throughout history.
OK yeah I guess that's a gold bond or practically commodity-futures trading. If writing that "IOU 104 gold at x date" note enables any extra normal spending that you wouldn't have otherwise done, that spending would have some inflationary pressure on prices of things you buy. Because again it's the spending which is the relevant thing.
It's something you observe after the fact. I think in the original transcript post I made at the top of this chain, mosler called it 'you count the heads of the people in the unemployment line', and you also see what is happening with the price level week by week, month by month, seeing if it starts ticking up.
The mainstream econ version of this, at least 20+ years ago, was called NAIRU: the non-accelerating inflation rate of unemployment. The level of unemployment below which any extra pushing just gives inflation. But they were treating it in a very strange way, trying to assume and make predictions about it ahead of time "maybe the nairu is now 5 or 6 instead of 7, can we allow unemployment to keep getting lower before we jump in and cool things off?". That posture is only explained if you think you're going to accidentally tip into a spiral which is hard to escape from (which was never borne out).
There's multiple ways to count unemployment, but the basic headline unemployment rate can definitely get down to 2-3% with no inflation, it seems from maybe the last 50-100 years. It's a bit hard to say because policymakers have usually been so cautious that we barely have any experience with demand-pull inflation (usually there's some type of cost-push supply side explanation for inflation). Probably the best evidence would be re-examining the '60s and what mainstream keynesians found trying to push for full employment.
I suppose it just looks more like just looking at the real world. As they say, the long run never really gets here, we are always in a series of short runs. The actual concrete accounting, logic, and plumbing seems much more useful to nail down and understand first, before starting to build more & more elaborate models on various assumptions. I bet it would probably be a fun job to make DSGE models and papers about theoretical risk-adjustments if you can find someone to pay for them, coming up with new tricks and techniques and assumptions. But I'm not too impressed with the real-world understandings & predictions of most equilibrium thinking, whether in econ or finance. I liked this Keynes quote, compared to Barro-style ricardian equivalence type stuff:
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