Alternative economic thinking

[odu]

Here's one of the blog entries of a proponent of Modern Monetary Theory. Some of you will disagree violently with what he has to say, but it is always useful to see what kinds of thinking are out there, to either change or sharpen your own ideas, or get the chance to call an Australian a commie bastard, if you're so inclined .

http://bilbo.economicoutlook.net/blog/?p=16113

A quote from the blog:
"The neo-liberal fiction has been exposed categorically and unambiguously. Okay, long live the fiction. That is where we are at it seems.

But emotion is one thing and facts are another. The neo-liberals operate on emotion – an ideological hankering for a ideal world which is sketched fairly crudely in the mainstream economics textbooks which they revere on the same level as hard-line Christians embrace the Bible.

Joan Robinson once said that orthodox economics was a branch of theology – 'it is all a matter of faith'. She also said that you had to differentiate the capacity of economic analysis to produce objective knowledge and the theological branch that is designed to perpetuate the ruling ideology and is used as 'an instrument of social control'."

[Hope+Change]

He consistently mentions how "crazy" modern times are, yet he hasn't fully awoken yet. He is half way there. I'd love to read his blog once he puts all of the pieces together.

I'll never understand how intelligent liberals constantly add complexity to their arguments in an attempt to justify the current system, instead of accepting it all as bullsh*t and looking at what has worked for thousands of years. They cannot bring themselves to the conclusion that maybe, just MAYBE, the US government/banks are robbing its own citizens, in nearly the same way as every other nation in the world has at some point or another. They exhibit blind faith towards both their leaders and, by embracing the debt based fiat money system, they embrace the very banking institutions which they openly hate.

A sovereign government in a fiat monetary system is not financially constrained.

There will never be a squeeze on “taxpayers’ funds” because the taxpayers do not fund “anything”. The concept of the taxpayer funding government spending is misleading. Taxes are paid by debiting accounts of the member commercial banks accounts whereas spending occurs by crediting the same. The notion that “debited funds” have some further use is not applicable.

So by this logic, Zimbabwe should be the wealthiest country on the planet?


I'll e-mail him a few GIM secrets, lol.

[odu]

I think MMT only tries to describe how a fiat money system works, it doesn't describe a gold-standard or fixed-exchange-rates monetary system. The choice between a fiat monetary system and a gold-standard system is then outside of this theory. There's a blog entry that says something about this at http://bilbo.economicoutlook.net/blog/?p=2562 .

So by this logic, Zimbabwe should be the wealthiest country on the planet?

It seems that one has been asked before, as there is a blog entry on the subject: http://bilbo.economicoutlook.net/blog/?p=3773
Note that I am not defending MMT here, I do think, however, that it does have some interesting things to say about the situation we are in in real life, which is a fiat monetary system. It also describes very neatly why the actions taken by governments at the moment could very well turn out to be counterproductive, and already are in some countries.

[Hope+Change]

He admits that Zimbabwe did in fact print loads of money. Listen to these goals:

1. The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed.

2. Full employment means less than 2 per cent unemployment, zero underemployment and zero hidden unemployment.

3. The sovereign government can purchase any real good or service that is available for sale in the market at any time. It never has to finance this spending unlike a household which uses the currency issued by the sovereign government. The household always has to finance its spending (as do state and local governments in a federal system).

Also, he has a graph measuring the %GDP growth of a country whose currency was in the process of being destroyed. This leads to a massively skewed graph which gives the viewer no real meaningful data.


He attempts to sound intelligent, but cannot bring himself to understand that money printing is theft via inflation. This fact alone makes his conclusions incorrect.
Also, the commentors had a very hard time determining what the current money supply of the US even is: M1, M2, M3...??? We here at GIM determined that it is in fact "Outstanding Aggregate Credit", yes? Currently $53 trillion for the USD?

[Hope+Change]

He already deleted my post. I'm done with this jackass. Let him cling to his paper until the end.

[odu]

No, he doesn't deny that Zimbabwe printed a lot of money, but he goes on to explain that the situation in which this happens needs to be taken into consideration to see if inflation will or won't occur. After all, there are also countries where an expansion of the money supply has not led to inflation, like Japan and to some extent, the USA.

He attempts to sound intelligent, but cannot bring himself to understand that money printing is theft via inflation.

I'm not sure it is a matter of understanding. MMT explicitely describes why "printing money" is not necessarily inflationary, only when the money supply is expanded beyond what is necessary to get the economy working at full capacity, i.e. almost full employment. Expanding the money supply beyond that point will be inflationary, according to MMT.

It's easy to see that if the money just sits there as reserves, there will be little impact on the economy, it's like printing money and then storing it in warehouses. That "printing money" and large deficits in and by themselves do not necessarily lead to inflation is demonstrated in Japan and other countries. That's real world data. It seems the relation between expanding the money base and inflation is more complex than a simple "the one always leads to the other". It seems that what this money is spent on, if at all, also matters, together with the demand situation and the unemployment rate.

It will be interesting to see how things work out eventually in Japan, the USA, and other countries. Huge inflation is easy to see, so time will tell if the automatic "printing money -> inflation" theory is sufficient to predict what happens in the real world.

[Hope+Change]

It's easy to see that if the money just sits there as reserves, there will be little impact on the economy, it's like printing money and then storing it in warehouses.

Yes, but who would want to hold onto a warehouse full of paper currency which is being steadily devalued by as much as 10% per year? I do see what you are arguing: the selling of cash based savings to buy assets(food, commodities, PMs, even stocks) can create inflation just as much as printing money can create inflation. However, you cannot have inflation without money printing. The number of existing currency units must be increased in order to have a sustained rise in prices.

Also, it is my view that the reason the economy isn't already functioning at maximum capacity is due to never-ending compounding interest on debt. In this case, money printing does temporarily help alleviate the symptom to a certain degree. But isn't this the old "heroin addict shooting up to prevent withdrawal symptoms" analogy?

Lastly, his view that savings cannot exist without huge amounts of debt based instruments endlessly collecting interest(bonds), is absolutely absurd... Although I will admit that it is a widely held belief, lol.

[odu]

However, you cannot have inflation without money printing. The number of existing currency units must be increased in order to have a sustained rise in prices.

So you say that money printing is a necessary precondition for inflation. That sounds right. What interests me is: does money printing also CAUSE inflation directly, or is the relationship far more complex?

Also, it is my view that the reason the economy isn't already functioning at maximum capacity is due to never-ending compounding interest on debt.

Do you mean that the interest burden of private debt suppresses demand causing underutilisation of capacity? Maybe this scenario played out in the USA (thinking out loud here): Salaries did not keep up with productivity increases in the USA, causing a larger proportion of money going to profits and less to workers. To keep spending up, or even just to get by, both partners in families had to work. When that was pushed to the limit, people had to borrow (and were encouraged to borrow by those profit makers that depended on consumer spending for those profits). People borrowed against their houses, when that bubble burst, they maxed their credit cards. At some point, the interest burden and the relative lack of income prevented them from borrowing and spending more. This, combined with the spending of what was there on imports (little choice there as a lot of production is offshored), lead to a huge drop in demand causing production and employment to drop with it.
And no, borrowing more is not a way out of this.

Lastly, his view that savings cannot exist without huge amounts of debt based instruments endlessly collecting interest(bonds), is absolutely absurd... Although I will admit that it is a widely held belief, lol.

As I understand it, MMT says that there can't be private savings without a public deficit, or at least public spending. Still thinking about that one.

Still, MMT also says that you can neatly avoid the counterproductive workings of the bond market and the government's paying interest to the FED, which is a private bank, by stating that if you have the choice of either having the FED conjure money out of thin air and then borrowing that money and pay interest, or conjure the money out of thin air yourself flipping a finger at the FED, and thus have the money interest free, why not choose the latter option? This isn't saying that creating money out of nothing is necessarily a good thing, but if you do, why go through the FED and the bond market? It's like giving up monetary sovereignty to a private bank, and pay interest to boot.

[TimoneX]

Great read guys. I think I'll have to go over it a couple times to take it all in. On your last point Odu, I believe Congress was either tricked, bribed, or a combination of the two which led to their abdicating their authority to regulate the money supply. Perhaps fear mongering by bankersters convinced congressional leaders that they knew better how to handle currency regulation. When we've tried debt free non-commodity based currency(Lincoln's greenbacks and Kennedy's notes) it's worked out fine.