[johnnybowman]

For anyone looking for a cohesive macroeconomic theory drawing from the economists mentioned here (e.g. Minsky, Godley, and others at the Levy Institute), I highly recommended taking a gander at Modern Monetary Theory

a brief overview: https://www.thenation.com/article/the-rock-star-appeal-of-mo...

A not so brief overview: http://neweconomicperspectives.org/2011/06/modern-money-theo...

[nabla9]

Non-economists have tendency to look down economists when they go astray

.. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.

[RobertoG]

We look down mainstream economists (macro) because their level of knowledge is more similar to alchemy than to physics, and because they never change their theories never mind what happens in the real world.

For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible?

Can you find some physics book that explain something that the engineers say it's not true?

My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative.

(1). https://www.bankofengland.co.uk/working-paper/2015/banks-are...

[notahacker]

Posts like this support nabla9's point. Contrary to the straw men MMT economists like to draw in their blogs, the majority of modern macroeconomists neither disagree with the Bank of England's explanation of how commercial bank loan funds work, nor is it particularly pertinent to their theories. The money multiplier is not some foundational macroeconomic article of faith, it's a pedagogical tool to illustrate how leverage can expand the money supply beyond the monetary base to first year undergrads (which also happens to be a historically correct explanation of why the private banking sector ended up with de facto money creation privileges)

On the other hand, MMT is deeply concerned with institutional arrangements in the banking system, and still elides central banks and governments in its explanations of how the system works because doing so avoids the inconvenience of explaining that the main reason budget deficits result in long term repayment obligations for governments under current institutional arrangements is because central banks fundamentally disagree with MMTers that systematically buying up all newly emitted government debt and pushing interest rates down to permanent zero is compatible with low inflation.

I think a lot of engineers would have issues with more arcane theoretical stuff like string theory too (and most physicists would have issue with engineers abstracting away certain details because the approximations they work with are good enough...)

[RobertoG]

It seems to me that if the "the majority of modern macroeconomists neither disagree with the Bank of England's explanation" and it's only a pedagogical tool or an historical explanation, they would do well in saying so. Specially to their first year undergrads and in their textbooks.

I have been following this debate for a while and it's only now that we heard "well, of course, we knew it all the time".

>>because central banks fundamentally disagree with MMTers

Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.

An engineer using Newtonian physics is very aware that is a simplification. Here the situation is the opposite, the physics (the economists) are simplifying away what the engineer (the BOE people) see in the reality, so their theories work.

[notahacker]

The Bank of England article you linked to was mainstream trained economists who devise mainstream economic models in their day job explaining how the money creation process works and why it makes certain classes of model more suitable than others for measuring economic shocks. And the role of credit creation has been part of the loanable funds literature the paper is critical of since "fiat money" was a purely theoretical idea. Ultimately if you overlook the evidence of a link you actually posted yourself in favour of preferring to believe the bad faith characterisation of "what mainstream economists really believe" on blogs written by self-styled dissidents, it says more about you than the economists...

> Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.

Central banks being unable to lend to governments or purchase government debt directly is a total non-factor in them consistently declining to match government debt emission dollar for dollar with government bond purchases on the secondary market (no MMT economist would disagree either). They are free to complement fiscal expansions with monetary expansions (at least over periods longer than changeable monthly base interest rate targets) as MMT would prefer, or take the opposite approach, which they sometimes do. If central banks thought MMT was fundamentally right, we wouldn't have seen them ever pull money out of the system to push up interest rates...

[RobertoG]

>"[..] it says more about you than the economists..."

I think I will be cavalier about that comment.

>"[..] what mainstream economists really believe [..]"

This is something that always puzzle me in this kind of discussion, maybe you can help me with that. What mainstream economists really believe?

I mean, here (1) is a review of what text-books say about money creation. In my opinion (and it seems yours too) this is not the same that we see in practice.

So, my question would be, do mainstream economist believe different things that what they write in the textbooks?

(1)- https://ac.els-cdn.com/S1057521915001477/1-s2.0-S10575219150...

[dragonwriter]

> they would do well in saying so.

IME, the simplifying assumptions are often explicit, so they do.

[hn0]

> On the other hand, MMT is deeply concerned with institutional arrangements in the banking system, and still elides central banks and governments in its explanations of how the system works because doing so avoids the inconvenience of explaining that the main reason budget deficits result in long term repayment obligations for governments under current institutional arrangements is because central banks fundamentally disagree with MMTers that systematically buying up all newly emitted government debt and pushing interest rates down to permanent zero is compatible with low inflation.

I’m not sure what MMT books you’ve been reading...

[dragonwriter]

> The money multiplier is not some foundational macroeconomic article of faith, it's a pedagogical tool to illustrate how leverage can expand the money supply beyond the monetary base to first year undergrads

Particularly, it's a tool for estimating a limit of an effect in a particular idealized policy circumstance and with other simplifying assumptions.

The simplifications don't represent real world conditions, so the computation is of little real-world relevance though the effect is.

Much of a first-year physics text will be simplifications that apply in idealized conditions that are broadly similar, IME.

[nabla9]

I'm well aware of that paper.

Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking.

Banks don’t create demand out of thin air by providing loans.

While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.

[hn0]

Richard Werner did empirical tests of the theory you describe, and found it to be false:

https://www.sciencedirect.com/science/article/pii/S105752191...

And

https://www.sciencedirect.com/science/article/pii/S105752191...

Economists at the Bank of England re-ran these tests in an attempt to disprove the above theory and found themselves reaffirming it:

https://www.bankofengland.co.uk/working-paper/2015/banks-are...

It has since been reaffirmed by other central banks, including the Bundesbank

https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentl...

[RobertoG]

>>Banks don’t create demand out of thin air by providing loans.

This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says.

See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed.

>>While banks can create loans "out of thin air" [..] they are limited by their reserves.

My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details.

Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves.

If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.

[dmichulke]

> Non-economists

So who defines who's an economist?

> the most fringe and unsound theories

According to ...?

> "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics

This sounds as if being comprehensive or radical is something bad. Keep in mind the earth not being flat and orbiting the sun was both radical (at that time) and comprehensive in terms of laws governing that movement.

[mannykannot]

If we are going to invoke the history of human knowledge, we should note that historically, the idea being compared to the great revolutions in knowledge almost never measures up.

[notahacker]

Trying to comprehensively and radically replace a mainstream view by taking as the starting point the assumption that the entire mainstream profession is not only wrong but also malicious is far more often the modus operandi of the field's equivalent of homeopaths than the field's equivalent of heliocentrists...

[dmichulke]

Comprehensive and radical are not sufficient to judge any idea, no matter whether the judgment is good or bad.

I just gave a counterexample to the suggestion of GP that it's a positive indicator of bad ideas.

[ThomPete]

I don't look down on economists at all but I am highly critical of them because they have the ears of our politicians when it comes to predicting the future.

The biggest problem I have with economist is when it comes to discussing technology and economy. While they have no problem having opinions about the effect of technology most treat it as an externality and not something central to their models.

Yet any economist worth their salt should do exactly that as technology has a bigger impact on the economy than what you can find in behavioral economics.

So the problem isn't the economist themselves but the power they have on public policy and that should be critiqued for the nonfactual base it is.

[nabla9]

>While they have no problem having opinions about the effect of technology most treat it as an externality and not something central to their models.

This is not true at all.

I think you are confusing talking heads and pundits in TV with academic economics. Productivity, technology and economic growth

Technology and it's relation to economics is included in growth theories and it's important subject that it subject of active study. It's in the A in Solow–Swan model. The model predicts that in the absence of continuing improvements in technology, growth per worker must ultimately cease. More modern theories take the technology even more seriously.

[ThomPete]

Exponential growth isn't (economist don't like that because it creates radical uncertainty)

There are a few people like Tyler Cowen who take it seriously but most models used by governments (Like the Danish DREAM model) aren't even close to factoring those things in. And they are the ones who the politicians end up listening to.

[crdoconnor]

Austrians keeps predicting hyperinflation, which doesn't exactly make it sound, but what exactly is unsound about MMT?

[Matticus_Rex]

Austrians do not "keep predicting hyperinflation."

A few fringe Austrians (only one with academic credentials) have mentioned hyperinflation as a possibility. An additional few Austrians suggested a high possibility of something like 7-10% inflation, which was still controversial among Austrians. Of the Austrians actually active in academia (which is a higher number than many would guess), I can think of one assistant professor who predicted rising inflation.

[crdoconnor]

Ron Paul has predicted it pretty consistently for about ~25 years at least and as far as I'm aware the mises institute has agreed with him all of that time. He is probably the most high profile Austrian adherent that I know of and mises the most high profile think tank dedicated to it.

I'd be interested in hearing about all of these academic Austrians who have argued that they are both to be full of shit.

[dragonwriter]

> Ron Paul has predicted it pretty consistently for about ~25 years

Ron Paul is not an Austrian-school economist (or any other kind of economist.)

> as far as I'm aware the mises institute has agreed with him all of that time.

[Citation needed]

[crdoconnor]

Sure, but first, who are all of these Austrian economists who think Ron Paul, the most famous proponent of their brand of economics, is full of shit and when did they call him out on it?

[Matticus_Rex]

Ron Paul is a politician, and the Mises Institute (which is not a think tank and not the most high profile Austrian/Austrian-inclusive organization) has largely disagreed, other than Gary North and Doug French, who are both about as low profile and unserious as you can get.

Also, Ron Paul usually doesn't predict hyperinflation, though I would agree that he's very hyperbolic.

[nabla9]

MMT is extreme to the other end. Critics (most of them mainstream Keynesian) say that it oversimplifies Keynesian model. Usually simple theories that are internally consistent miss some variables.

Basic observation: Government that issues debt (or money) in it's own currency can't go bankrupt. This is essentially correct and it even works in practice. Hyperinflation is a problem only if you have to pay foreign debt in foreign currency.

Where MMT differs from mainstream is that in their model this ability can be exploited freely. The fiscal-monetary conflict goes away. They also assume that the only feedback loop goes trough taxation–taxation is seen as the tool reducing the money supply. Other ways money creation affects the economy don't exist or don't matter.

[crdoconnor]

MMT's most controversial assertion is that a government that issues its own currency can't go bankrupt.

You called it extreme and then largely agreed with it....?

[nabla9]

How is that confusing in the context of everything else I wrote?

True premise can lead to wrong conclusion.

Some models can work only within a some range.

If you accept only one-handed economists you get into trouble.

---

joke explainer: “Give me a one-handed Economist. All my economists say 'on hand...', then 'but on the other...” ― Harry Truman

[crdoconnor]

>How is that confusing in the context of everything else I wrote?

Because when you declare a school of thought to be "extreme" it's kind of weird to agree with the core (and most controversial) concepts and only disagree on unspecified details.

On the one hand, it's like declaring that the Catholic Church is run by religious extremists because their wafers are exactly the wrong shade of pale off-white. On the other hand, it's exactly like that as well.

[mistermann]

A lot of middle to upper class people who would like to buy real estate in a major city in Canada have certainly witnessed a form of hyperinflation.

Just because a government publishes a 1% inflation number (that may be derived from heavily manipulated statistics) doesn't real mean inflation isn't happening.

[nonidentified]

TL;DR: MMT starts by saying that governments that manage their own currencies have unlimited spending ability – they can simply create money when they need it. And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite). Then, building on that premise, MMT basically claims that nobody needs to get hurt when governments create money out of thin air. The explanations for this are pretty wonky and hard to follow, but they amount to saying that the theory generally predicts no harmful inflation of the currency.

Analysis: Hasn't mankind already concluded that governments can't just create and spend money boundlessly without harming the economy and the people who constitute it? I'm looking at Argentina, Venezuela and Zimbabwe right now, where the governments have each created money to finance their spending, and people are truly suffering as a result. And those are just some contemporary examples – human history offers many more, and they're quite consistent. If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect.

Radical alternative theory: Governments should be fiscally responsible, practicing balanced budgets and promoting currency stability. Outlandish, true. But it turns out that historically this has been a very winning formula. More efficient economies, less corrupt governments, fewer innocent people getting hurt.

[RobertoG]

>>" If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect."

That is not at all what MMT says and I don't understand how an honest reader of the MMT literature would arrive to that conclusion.

What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending.

>> And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite)

In the MMT framework, there is always demand for the currency in what taxes have to be payed. That's obviously true. That doesn't mean that inflation is not a factor.

By the way, most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock (http://bilbo.economicoutlook.net/blog/?p=3773).

[nonidentified]

> public debt and public deficits are irrelevant

Translation: Countries can incur as much debt as they want, because they can "print" their way out of it without harmful consequences.

> inflation is the most important constraint in public spending

Translation: People's economic suffering is the most important constraint in government spending.

> most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock

Translation: Most cases of hyperinflation in history were due to economic crisis.

Hyperinflation is due to creating far too much new money. Enough to foster price increases of at least 50% per month. Economic crisis does not necessitate doing that.

By the way, in the case of Zimbabwe, it was the government economic mismanagement that created the economic crisis that you blame for the monetary mismanagement. From your article: "From an economic perspective though the [government] farm take over and collapse of food production was catastrophic." Then the government chose to try "printing" its way out of the problem. Hyperinflation wasn't mandatory, it was a consequence of reckless behavior.

> how an honest reader of the MMT literature would arrive to that conclusion

The only substantial concession to inflation risk I've seen in the MMT literature is in conditions of "full employment." Feel free to set me straight if that's not correct.

Empirically speaking, inflation follows injecting money into an economy, and inflation is quite harmful. It seems MMT resists at least the first conclusion, if not both.

While we're on the topic of honesty, doesn't MMT feel like an economic "get rich quick" scheme to you?

[simula67]

> What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending.

I heard this story in a debate between an MMT economist and an Austrian economist

Imagine a husband and wife having the following conversation :

Husband : Let's go and buy a new mansion, a Lamborghini and a private jet

Wife : Are you sure we have enough money to do all that ?

Husband : Well, if we don't, I can always pick up my shotgun and hold up the nearby bank

Wife : Are you crazy ? You could go to prison. Or get shot by the police

Husband : Well, I know that. But I just wanted to point out that not having enough money was irrelevant. Going to jail or getting shot was the most important constraint from spending all that money.

[hn0]

This misses THE central point of MMT, the fundamental difference between currency issuer (souvereign authority) and currency user (households, firms, regional governments, etc).

[RobertoG]

I'm not sure that your metaphor illuminates the issue at hand.

[stephen_g]

Governments have not historically kept balanced budgets more often than not, and when they have it's not a winning formula. Some of the worst economic crises have occurred after some of the most successful runs of 'responsible' Government balanced or surplus budgets, because it saps net financial assets from the private sector, with the only way for growth to happen being private debt (which eventually leads to deleveraging when the private sector can't take on more debt, which pretty much always results in recession). The only way run a Government surplus and avoid this is to run a big trade surplus (like Germany) - but that's a zero sum game so not everyone can.

Argentina, Venezuela and Zimbabwe aren't in any way representative of the results of "printing money". They are much more complicated than that, and MMT actually has much more explanatory power to explain what went wrong (variously - huge supply shocks leading to massive unemployment, attempting to maintain a peg to a foreign currency, and having debt denominated in a foreign currency, etc.).

One of the leading MMT researchers, Prof. Bill Mitchell is especially interested in inflation, and they have actually generated a pretty strong theoretical framework for how it happens that again has better explanatory power than competing theories (i.e. Austrian economics that predicted hyperinflation due to QE, monetarism that can't explain why inflation is so sluggish with such low interest rates, etc.). He publishes a lot of info on this his blog nearly every weekday, it's definitely worth a read.

[WalterBright]

Any theory of money needs to explain how the US went from subsistence farming in 1800 to superpower in WW1 on the gold standard (which more or less means balanced budgets).

[stephen_g]

That's definitely in spite of being on the gold standard. Have a look at the history of financial crises in the US [1]. In the time period you mentioned, there were 21 recessions, five 'panics' and three depressions.

If you look at the CPI history, it was largely deflationary (which is good if you do like recessions and depressions), but also times where inflation reached 27% [2]. The gold standard can't stop price inflation, and when inflation takes off it makes currency pegs impossible to hold, which is why pretty much every commodity convertible currency has eventually failed.

1. https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit... 2. https://www.minneapolisfed.org/community/financial-and-econo...

[WalterBright]

A gold standard does not imply currency pegs. I think we can all agree that pegs never work.

As for the panics etc. in the 19th century, yes they happened, and were usually the result of government monkey business with the economy. Note that with fiat money we've still had panics, depressions, and recessions, including the Mother Of All Depressions.

The last one was just 10 years ago.

> The gold standard can't stop price inflation

If it doesn't, then you don't actually have a gold standard. You have pegging a currency to gold, which is something quite different.

[dragonwriter]

> Any theory of money needs to explain how the US went from subsistence farming in 1800 to superpower in WW1 on the gold standard

No, it doesn't. Especially since the the US was on a bimetallic standard, not the gold standard, for much of that time.

> which more or less means balanced budgets

No, it doesn't. Either in theory or US practice.

[WalterBright]

> on a bimetallic standard

Sort of, but the point is it was not fiat money. There was no net inflation from 1800-1914.

> No, it doesn't.

Since the government at the time did pay off the national debt, that means balanced budgets.

[dragonwriter]

> Since the government at the time did pay off the national debt

There was a brief period in the early half of the 19th Century where it paid off the debt, but the it ramped up beforen the secession crisis, went sky high during the civil war, and was never paid off after that, so, no, in net budgets weren't balanced in the Revolution to WWI period.

Also, other problem with your scenario is that the US didn't start as a subsistence farming economy (which would have made it near worthless as a set of colonies.)

[Rescis]

What would you propose to be the explanation?

[WalterBright]

That fiat money and inflation is not necessary for a thriving, growing economy.

[tim333]

Both ideas mentioned are bad:

- spend money boundlessly

or - balanced budgets

What governments should do is spend appropriately to maximize the welfare of their people which includes not having runaway inflation and also borrowing and spending during economic slumps.

[nonidentified]

> What governments should do is spend appropriately to maximize the welfare of their people

Are you suggesting that people aren't capable of spending appropriately to maximize their own welfare, and that the government would do a better job of it (after taking a cut of the money)?

> What governments should do is ... borrowing and spending during economic slumps

Even if this were true, and I think global economic malaise since the financial crisis is evidence it's not, it omits the corollary that governments should then repay debt and save during economic booms. You can't responsibly have one without the other, can you?

> balanced budgets [are a bad idea]

So debt is a good idea? We should finance current spending at the cost of future spending? That's a pretty radical statement. The burden of proof is on you.

[digi_owl]

And that is what MMT actually suggests, when one do not leave out half their argument.

Their argument is that taxation can be used to take money out of the economy while government spending puts it in. Balance the two and you also control inflation.

His however hinges on the economy being largely self-sufficient, or has tight controls on imports.

Across history, the nations that has gotten into trouble over "money printing" have actually run a massive current account deficit, meaning that they are importing way more than they are exporting.

[AnimalMuppet]

> His however hinges on the economy being largely self-sufficient, or has tight controls on imports.

So, not actually applicable to the US. (Unless you're going to argue that the US's imports aren't enough to matter. If you want to try to make that argument, go ahead, but it's clearly an additional step that's needed before you can argue that we should actually try to apply MMT.)

[digi_owl]

This leaves out the taxation side of things.

In MMT, taxation acts as the ultimate sink. It is the combination of taxation and government spending that acts to "balance" the national economy.

This flip the normal budget worries on the head, as taxation comes after spending rather than before.

Note though that unlike your example, MMT requires a nation that is internally self-sufficient when it comes to basic supplies. The problem for both Venezuela and Zimbabwe (i am not up to speed on Argentina) is the amount of imports needed to sustain the population.

When imports overtake exports, the exchange rate suffers, and exchange rates can't be fixed by printing more money.

Venezuela got into the predicament it is in because the government thought they could use oil exports, that were at the time an all time high, to counterbalance the imports used to help the poor. But then the oil price tanked. And Venezuelan oil is a particularly expensive oil to process, so it was the first to go when refineries cut back on production.

[nonidentified]

> MMT requires a nation that is internally self-sufficient when it comes to basic supplies

To be fair, isn't this a lot like saying, "MMT requires conditions that don't generally exist"? What modern economy isn't shopping internationally for the best prices on basic supplies?

Ultimately this condition seems to imply that MMT requires either 1) a subject economy to be the most efficient producer of all basic supplies (probably impossible, and if achieved then impossible for any other economy) or 2) a prohibition on the import of basic supplies (despotic and economically dysfunctional). Is this correct?

This is making me think of Import Substitution Industrialization (ISI) in Latin America. It was a strategy to become economically self-sufficient, but it didn't work out well.

[crdoconnor]

>If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect.

Provided the money created is spent, it does predict inflation.

[wallace_f]

What I dislike about my training in econ is that there is no way to experiment.

I think you are right that it is a terrible idea, but who knows?