Well, no, they’re not

So what do we really have here? In effect, this is The Economist saying MMT works, and the processes it describes should, it says, be used to prevent mass joblessness linked to deflation, which it sees as the new risk (with which I agree).

I don’t care about the Phillips Curve. I do care about real people. And I do care that there should be people-centred economic policy making, in which context it is good that The Economist is proposing this.

It’s just a shame that they could not say they were describing a job guarantee through a national investment bank and the processes are described by modern monetary theory. That would have really been useful to the educational goal of the article, but somehow it still seems to be the case that to utter the three letters ‘MMT’ with a positive connotation attached is to ask too much. But that will change.

Actually, what they’re saying is that monetisation of fiscal policy can work in avoiding deflation. Something which even Milton Friedman would agree with – he did indeed talk of helicopter money.

OK, cool. And the point of calling it monetisation of fiscal policy, not MMT, is that the first phrase also comes freighted with all the examples of where it has gone wrong – Weimar, Venezuela, Argentina several times, Zimbabwe – which is indeed rather useful when we’ve the loons declaring MMT to be the bees knees with no downsides at all.

26 thoughts on “Well, no, they’re not”

  1. Isn’t MMT effectively taking credit for a couple of decades of carefully-curated inflation management? Saying “we can just print what we want because inflation is no longer a risk” is like saying “you can just eat what you want and not get fat” because an international cyclist has a 3000 calorie breakfast before a TdF stage.

  2. The problem is that the West (and Japan) has been printing money for ages (decades in Japan’s case) and it hasn’t resulted in a hyperinflationary event, yet of course. So its no good just hand waving and saying ‘Look at Zimbabwe!’ when we’ve probably printed as much money as they ever did, with a different result so far.

    If one looks at the poster boy cases of hyperinflation they tend to be poorer countries, with unsophisticated financial systems. That is to say the authorities literally print notes and use them to buy stuff with, or pay wages, shoving them straight into the real economy where people who are desperate for the necessities of life immediately spend them, driving up prices of those necessities overnight. The exchange rate also drops against more stable world currencies driving imports higher in price too.

    Whereas we are not like that. The governments are not literally printing dollar bills or £20 notes. We exist in electronic money systems, and are wealthy (for now at least) countries. Thus when some of the printed money hits the real economy it doesn’t tend to be spent on bread or petrol, it gets spent on rents or higher mortgage payments. And because all the major currencies are doing the same money printing, there’s no-one to devalue against, except perhaps gold, and thats not exactly a currency that can be used for day to day transactions, more a long term investment store of value. If internationally traded products suddenly required gold as payment, then you’d see some hyperinflation, but while the exporters still take fiat money of one colour or another then there can be no devalued currency.

    If you want to oppose the MMT crowd (which they should be) its no good pointing at the obvious historical cases, we’ve already printed enough to have had an effect by their example, but there hasn’t been any obvious detrimental effects, beyond rising asset prices, and to many (including our host) thats a’good thing’.
    [as an aside our host argues that the West can continue to consume more than it produces indefinitely because the West is creating ‘new assets’ it can sell to the rest of the world to pay for its consumption. Such new assets being largely property inflation based on printing money. I think you can see the flaw in this plan…..]

    So you need a better argument, to show that the reason young people can’t buy a house or get a rental for less than a kings ransom is because of the money printing thats already taken place, and more money printing will only make it far far worse. Thats the line to take, not the same old argument about wheelbarrows full of notes not being enough to buy a loaf of bread that you’ve been using for decades.

  3. Yes Jim. As I’ve been explaining for many years now.

    QE is different from MMT. Because MMT says go spend the money in the real economy. QE says don’t do that you’ll get massive inflation. Instead, use increased money supply – in a reversible manner as the Fed did for a bit – to lower long term interest rates. Don’t, DO NOT, spend the new money into the real economy, keep it washing around the financial bit only.

    Snippa is saying go spend it in the real economy which is what I’ve been saying is wrong about his attitude to QE this past decade…..

  4. Not that boring old Jim

    The Jim who keeps parroting “you need a better argument….” don’t you see anything wrong with asset inflation?

    “If one looks at the poster boy cases of hyperinflation they tend to be poorer countries, with unsophisticated financial systems”, such as Germany and Austria?

  5. “QE is different from MMT. Because MMT says go spend the money in the real economy. QE says don’t do that you’ll get massive inflation. Instead, use increased money supply – in a reversible manner as the Fed did for a bit – to lower long term interest rates. ”

    A) none of it has never been reversed, and never will be. B) Where was all the QE money spent? Buying assets in order to push their prices up and thus reduce interest rates. How is that not putting money into the real economy? Did the people who sold assets to the BoE during the QE program just go ‘Oh I mustn’t go and spend this money anywhere else, I’ll just hide it under my bed’? Or could they have spent it on whatever they wanted? T

    he State was also spending all its QE riches into the real economy for sure, the only way it could borrow so much money was that it knew the BoE was hoovering up all the gilts it was issuing with printed money. So all the pensions, benefits and State employee wages that the Government borrowed money to pay for during the GFC (and are doing exactly the same now) never got into the ‘real economy’? Get real. All the QE money hit the real economy, what would be the point otherwise?

  6. ““If one looks at the poster boy cases of hyperinflation they tend to be poorer countries, with unsophisticated financial systems”, such as Germany and Austria?”

    Germany/Austria in 1920 was poor by todays standards. And they were printing notes, as evidenced by the wheelbarrows. What would the average German worker of 1920 be looking to buy with his newly printed wages? More food and heat because he didn’t have enough of either before, or a wide screen TV because he already had enough food and heat?

    They were also operating in a world financial system where gold played a far greater part as well. If the UK today had to pay for its imports in gold, then you’d see some hyperinflation.

  7. The Uk hasn’t though. And you haven’t answered my other point – did the money the UK government borrowed on the back of QE enter the real economy or not? There is no way in the absence of QE that the UK could have borrowed as much money at such low rates as they did. There would have been a rates spike and a funding crisis. Thus all the gilts the BoE holds is effectively printed money the government spent in the real economy. £700 odd billion of it. Why did that not cause hyperinflation? Or any rise in inflation at all?

  8. I like Chris Dillow’s comment on MMT fans:

    “I’ve no big issue with most of MMT’s ideas. Many of its advocates, however, remind me of Sellars and Yeatman’s view of the roundheads – right but repulsive: longwinded fanatical sectarians.”

  9. And again a decade back. I said that MV=PQ. And as shorthand we can look at M as M0 and MV as M4. It’s M4 that influences inflation. V fell off a cliff. So, printing more M0 doesn’t increase inflation because M4 doesn’t rise. Up to a point and not the the Lord Copper sense. And when is that point? Dunno but there is one. My strong suspicion – suspicion only – is that this second burst of it is going to take us past that point.

    Look for the M3/M4 numbers and we’ll see…..

  10. Dennis, CPA to the Gods

    Given that nobody in the UK is prepared to trust Richard Murphy with a twice burnt match, shouldn’t he move on to something productive… like earning a living?

  11. Dennis, he has tried that before and failed miserably at it.

    Ask yourself this: Would you employ Richard Murphy, even if it was to shovel shit?

  12. “V fell off a cliff.”

    Ah yes, the magic V. The thing that only exists as a relationship between two otherwise seemingly uncorrelated factors. And that can’t be measured in any way. The ‘velocity of money’ is economics speak for ‘We don’t know why the money supply went up but prices didn’t so we’ll create this completely invisible and unmeasurable factor to explain why our prediction failed’. You might as well call it the Wibble Factor because it makes about as much sense.

  13. I’d hire him to iron shirts. On on a cloudy still day. Then withhold some pay because what he did wasn’t sustainable.

  14. I’m creating a new formula: W/S = P/X

    Where S=number of season ticket holders aPremier League club has, W = their average weekly wage bill, P=Premier League finishing position and X = The Luck Factor.

    Thus you will see that as Liverpool FC started 2019/20 season with an average weekly wage of 106k, and 25k season ticket holders we would predict that they would finish 4th, if X was 1. But they actually finished 1st, so we conclude that their Luck Factor must have risen dramatically to around 4.

    Arsenal on the other hand had 46k season ticket holders and an average wage of 92k, and finished 8th. Thus showing that their luck factor dropped catastrophically to 0.25.

    Anyone can produce this shit, it predicts nothing.

  15. V is just GDP divided by money supply. Pretty easy. GDP is only those things that are sold and done with money. Therefore you’ve got to use money for these things to happen. There’s only so much money around. So, how many times a year does a piece of money get used?

    Doesn’t seem too difficult.

  16. The government does not determine the fiscal balance. That is determined by the non-government sector. A quote from “heteconomist”:

    “Broadly speaking, in MMT it is usually argued that once the government has formulated its fiscal policy settings, the behavior of non-government (which includes both the domestic private sector and the external sector) will determine the ultimate size of the government deficit (or surplus) through its behavior. In particular, tax revenues will rise and fall endogenously with oscillations in non-government activity. It is further held that if the government’s fiscal settings are not consistent with non-government achieving its intended net saving position at full employment, there will be either unemployment or inflation. Fundamental to this position is that there is no mechanism in a market economy capable of automatically generating full employment, and so in such cases it is up to government to adjust its fiscal settings to provide a better fit with non-government behavior.”

    source: http://heteconomist.com/sectoral-balances-and-keynesian-causation/

  17. re: velocity of money

    The problem with the MV=PQ equation is that it doesn’t take into account non-GDP transactions. GDP transactions are a subset of all transactions. Rewriting the equation in terms of velocity, we have:

    V = (PQ)/M

    or V = GDP/M

    Because of the unusually low interest rates, money is increasingly being borrowed for financial transactions, like share buybacks for example. Since M increases without a corresponding increase in GDP, then V falls as it must by arithmetical necessity.

    The decline in velocity is simply telling us that there has been an increase in financial engineering in the economy.

  18. “V is just GDP divided by money supply. ”

    Precisely . Its calculated with respect to 2 other things that you can measure individually. Its a ratio, its never measured in and of itself. You never measure V itself, you conclude that it ‘must have’ risen or fallen, because you’ve already made the assumption of the relationship between all the other factors. You ‘know’ that MV=PQ so V must always move the way you assume it does to make your formula work. Its circular reasoning.

  19. Jim,

    Another VERY important feature of QE which does not exist in MMT is that QE money printing is sterilised. By this, I mean that the central bank pays interest on those reserves and mops up excess money/money supply in the system.

    The act of doing this brings any excess inflationary pressure down back towards NAIRU. Which is one of the reasons we haven’t seen inflation spikes thanks to QE.

    MMT just prints money, which no realistic mechanism to control it and the money supply on a daily basis – unless you count taxes. Which won’t control the short term money supply at all, unlike interest rates/paying interest on reserves.

  20. Dennis, Mad Hatter

    Ask yourself this: Would you employ Richard Murphy, even if it was to shovel shit?

    I think he’s already demonstrated his proficiency at shoveling shit.

  21. “The problem is that the West (and Japan) has been printing money for ages (decades in Japan’s case)”

    I was watching a pre-WW2 Japanese film* recently, and the female lead mentioned “this dress… cost 52 Yen”. !!!!

    That’s something like 30p today.

    *A bit of Googling reminds me it was: Sisters of the Gion, 1936.

  22. “Velocity is distance moved divided by time taken”

    Precisely . Its calculated with respect to 2 other things that you can measure individually. Its a ratio, its never measured in and of itself. You never measure V itself, you conclude that it ‘must have’ risen or fallen, because you’ve already made the assumption of the relationship between all the other factors. You ‘know’ that V=s/t so V must always move the way you assume it does to make your formula work. It’s circular reasoning.

    Can you see how silly this sounds, Jim?

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