Modern Monetary Theory - How the US Government really pays for things

Quote from FerdinandAlx:

Capital is currently chasing emerging markets because that's where economic growth is highest.
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IMO not true. Capital is chasing alpha via fund investment. Most funds are speculators and will not invest long term. As a consequence of that, markets are no longer vehicles for financing longer-term economic growth and companies have turned to debt. As a further consequence of that, we had the debt crisis. The more debt around, the higher the probability of a crisis.

There is plenty of capital around but it is speculative. People want returns but they don't want to deal with companies, business plans and proxy fights. There is huge money going around hungry for alpha and many good ideas die because they find no financing.
 
Quote from FerdinandAlx:

Consequently, MMT also provides effective solutions that a government may take during a crisis. They are measures that maintain the purchasing power of a nation's currency, not to "enslave" you.

One example of such a crisis was World War II. Capital and price controls were implemented in order to maintain purchasing power of the dollar in the face of the enormous government deficits that were needed for the war effort...

...It's a classic example of how a government can employ monetary policy to enforce what in the article is called the "closed loop" by strengthening it's own position to exert force. I think you agree with me that in the end the result wasn't a "fascist dictatorship", but rather a free and prosperous democracy.
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No, I think what you are describing sounds like the kind of talk coming out of Maoist China or the GDR prior to the fall of the Berlin Wall. Have you ever studied socialist / communist propaganda? It's full of lofty, noble sentiments about how the system is designed to free man rather than enslave him, how it represents the purest and fairest of ideals, blah blah blah.

If MMT's main plank is the notion that a government can temporarily suspend free markets to save itself, then it is an even more frightening doctrine than I thought. The type of thinking as you just described could be used as justification to eventually throw dissenters in prison for challenging the "free and prosperous democracy."

And not only that, but it is crazy to assume that the United States could simply "decide" to implement new capital and price controls at this time. Political decisions have roadblocks (some formidable), all decisions have consequences, and such a series of maneuvers are less likely than a man coming home to his conservative wife and saying "honey, let's have a threesome." Just think about some of the obvious problems:

-- U.S. based assets have a "freedom premium" built into their valuations (i.e. part of their value comes from the openness and stability of at least quasi free markets, free flow of capital and an open political system). Trash that and you give these assets a major markdown

-- To implement capital and price controls in the most prosperous country in the world would be a potential admission of economic policy failure so great as to possibly incite global panic

-- Political opposition would be huge and ferocious, including from yours truly: You want to saunter in and tell me at gunpoint that I can no longer invest in foreign currencies or foreign markets? FUCK YOU

-- The status of the $USD as a world reserve currency would go straight into the toilet (A world reserve currency that is subject to flow restrictions and price controls at home? WTF?)

-- America's trade relationships all over the world would be jeopardized to the point of potential catastrophe

-- There is no guarantee such measures would work in the first place, and might even instigate a new round of economic collapse

-- Look at the riots that went down (and are still taking place) in Iceland and Greece and Ireland. Newsflash: Americans are more belligerent than Europeans and many of them still like guns... there are limits to what a government can do to a free people.

Those are just a few very quick points off the top of my head. Again, to the degree you defend MMT simply on the basis of a government being able to use fascist-style force to bleed its citizens dry without limit, your ace in the hole is actually a very weak deuce of clubs.
 
Well, darkhorse, not that I am taking sides in your argument, but didn't they actually implement capital controls in Switzerland at some point (actually, they might be thinking of this again)? Last I checked democracy was still alive and well among the Swizzers and CHF assets didn't exactly go down the toilet. Obviously, the parallel is far from exact, but still, capital controls by themselves aren't a sufficient condition for the end of free capitalism as we know it...
 
To quickly add a further point -- I do find it irksome to hear it said that "a dollar isn't worth anything except what we think it is."

The belief is widely circulated that fiat currencies have no intrinsic value, that they are faith and faith alone. I don't think this is accurate.

To the extent that a government has access to a nation's productive output -- the ability to tax it and harness it WITHIN REASON -- the currency issued by that government represents a claim on the same pool of assets.

By this analogy we can think of fiat currency like shares of stock. $US dollars are shares in America Inc.... Japanese yen are shares in Japan inc., and so on.

The "currency as a share of stock" analogy captures the notion that a nation's currency is a representation of that country's economic output and productive strength, just as a share of Microsoft stock is the same for Microsoft.

But then think about something else. What would happen if Microsoft decided to issue 100 billion extra shares overnight? Or what would happen if Microsoft made a series of internal decisions that wound up killing the business franchise?

Even though a currency unit is like a representational share of a nation's output (to the degree the government has the power to tax), currency units can also be debased and degraded in the same way that over-issuance of shares can dilute value. And the other key point is that IT ALL GOES BACK TO THE REAL VALUE OF THE UNDERLYING ASSETS. (That was actually the main point of this piece, not the chartalist stuff.)

That for me is what's so frustrating about MMT. They pretend governments have some magic ability that comes from the ether, some free pass that allows them to bypass rational application of the laws of supply and demand. They do not. To the extent a government is economically powerful, it is like the board of a corporation with the ability to issue shares of stock in that corporation.

But the government cannot do whatever it wants and assume the value will always be there. The idea that the U.S. could simply issue capital and price controls in a pinch, for example, overlooks the fact that such a decision might actually completely trash the value of the underlying assets. If Microsoft's board starts thinking "we are invincible and can do what we want," they will be inclined to start making bad decisions that destroy the perceived value of the underlying assets on the whole.

There is no magic, no free lunch, and no mystery as to where value comes from. A unit of currency has value to the degree that it is a representational share of the economic output of the host country. But also like company shares, over-issuance can dilute this value and the board (i.e. the government) can make bad decisions that destroy the underlying value of the franchise.

This is all very basic, straightforward stuff and we don't need a theory like MMT -- which imputes a sort of magical immunity to governments that does not exist -- in order to explain it all.
 
Quote from Martinghoul:

Well, darkhorse, not that I am taking sides in your argument, but didn't they actually implement capital controls in Switzerland at some point (actually, they might be thinking of this again)? Last I checked democracy was still alive and well among the Swizzers and CHF assets didn't exactly go down the toilet. Obviously, the parallel is far from exact, but still, capital controls by themselves aren't a sufficient condition for the end of free capitalism as we know it...
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Yes, it's possible to construct a scenario where some kind of controls are implemented without killing the value of the franchise.

BUT, that is a hell of a risky proposition, much more so for the issuer of the world's reserve currency than anyone else, and my greater concern is with the cavalier disregard for logic or constraints in the theory itself.

The idea as presented seems to be that the U.S. government will always be okay because, if it gets in a jam, it can just lean on its cash cows even harder.

Wasteful government policies impose a sort of inflation tax -- the more the government spends unproductively, the greater the potential inflation cost (via dilution of currency value). And so if the government were to say "You can't move your capital freely," it would be the equivalent of saying "We are going to tax you to the eyeteeth now, and we're going to do it through inflation so you have to sit still."

Now, is it possible for us to move in this direction? For the government to take a higher percentage of revenues in direct and indirect taxation? Sure, of course.

Is it possible the government could take some "control" measures? Theoretically, yes. A lot bloody less likely, I would argue, because the U.S. has too much "franchise value" at risk to take the chance of making the $USD appear less convertible and free-flowing. (Think of all the $USD in global central bank reserves.)

So the point here is not to rule out a certain scenario, but to point out that GOVERNMENTS HAVE CONSTRAINTS on their roster of proscriptive policy actions, and this is the very point that MMTers seem intent on denying. They keep trying to find ways to make a government's power infinite, immortal, unchecked, etcetera. It's a flawed mental model. There are things that governments can and can't do, and three things government most DEFINITELY cannot do are 1) conjure up real wealth from thin air, 2) financially enslave the populace without limit or consequence (totalitarian regimes tend to see their economic franchise value degrade), and 3) act with zero fiscal constraints over indefinite periods of time.
 
darkhorse:

Keep in mind, the number one thing that adds value to the dollar is the fact that taxes are paid in dollars. Economic output is taxed in dollars, and so there will always be demand for dollars.

Which brings me to this: why was the federal reserve created within a year of the federal income tax? That's not a coincidence, in my opinion. The two work together.

But that's a domestic topic. It is in the international arena where monetary systems are created or ended. Just look at WWI, WWII, the end of Bretton Woods - 1971.

We are in the midst of another change. This is not a conspiracy - it's simple math. The current monetary system was born in 1971, and the preceding one, in 1944, and before that, post WWI. To think that the current monetary system will significantly outlast those two is naive, in my view. (Not that I am saying that is your belief.)


I agree with you about MMTer's but I also agree with them on how the system works. Those are two different arguments: one is how it works, the other involves the system's limitations. Two different issues.
 
Quote from Misthos:

darkhorse:

Keep in mind, the number one thing that adds value to the dollar is the fact that taxes are paid in dollars. Economic output is taxed in dollars, and so there will always be demand for dollars.

...I agree with you about MMTer's but I also agree with them on how the system works. Those are two different arguments: one is how it works, the other involves the system's limitations. Two different issues.
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Yes, but the irony is MMTers like to point out the government could finance itself with no direct taxation at all. And they are right. Taxes and bond issuance really are a form of policy controls.

I agree with the MMTers from a technical perspective too. That is why, in my extensive critique of MMT, I took the time to point out that the self-funding assertions are basically correct.

The fatal flaws, however, come from the misguided and unjustified assumptions that spring forth from the technical observations. MMT starts from a reasonably sound technical footing and winds up in a very dangerous place by way of the incorrect assumptions it makes along the way. At the end of the day we need to avoid getting caught up in a government's ability to manipulate payment and credit flows, and instead keep our eye on the ball in respect to wise spending decisions, economic franchise value, and maintaining the productivity of real assets.
 
darkhorse,

I'm glad to see that you've adopted some of the technical observations that MMT makes into your own framework. I do think your critique of MMT is mostly caricature though. MMT does not rely on magic. In fact, what MMT points out is that classical economics needs to assume the extistance of "magic" or "alchemy" when it tries to describe monetary systems entirely in endogenous terms. According to MMT we need to adopt exogenous descriptions as well in order to have a working theory of monetary systems. In pointing out this need it moves the area of constraints from the monetary domain to the political. MMT does not pretend that there are no constraints, instead it says that those constraints are political.

Your critique turns into caricature when you pretend that MMT advocates the removal of any and all political constraints. Nowhere in the MMT literature is this advocated. What MMT does advocate is the removal of very specific politcal constraints which are very harmful to the economy as they bring about price instability and underutilization of labour capacity. This all about maintaining the productive capacity of real assets.

When I pointed out that a government can implement price and capital controls I gave a description of what governments can and will do during a severe crisis to maintain the purchasing power of a currency. It's important to have constraints in place that make sure such measures can't be implemented willy nilly. In fact I think it's obvious that the exertion of political will presuposes some constraints on itself. Those constraints should be recognized as self-imposed however, and therefore be flexible enough to be tossed out when needed during a severe crisis.
 
Quote from FerdinandAlx:


Your critique turns into caricature when you pretend that MMT advocates the removal of any and all political constraints. Nowhere in the MMT literature is this advocated. What MMT does advocate is the removal of very specific politcal constraints which are very harmful to the economy as they bring about price instability and underutilization of labour capacity. This all about maintaining the productive capacity of real assets.
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Well perhaps this is a mutually beneficial thing. My critique was in direct response to the overwhelming message I received from (perhaps misguided) MMTers in the course of my investigations.

If it turns out that MMT is actually much more sober and rational underneath the surface than the way many have presented it, this is an opportunity for general education levels to increase on both sides, in respect to the strengths / weaknesses of MMT as generally presented, the knowledge base of those who support it, and the general impressions made on those unfamiliar with it.
 
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