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Straight from the Glorious Leader

February 23, 2011

In case ya’all were thinking that MMTers think that spending is never inflationary.  It’s buried in the comments, but it is there.

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  1. Tom Hickey
    February 23, 2011 at 10:28 pm

    People who think that MMT is inherently inflationary haven’t bothered to research what they are talking.

    A fundamental principle of MMT is that a monetarily sovereign government as monopoly currency issuer has the sole prerogative and corresponding sole responsibility to provide the correct amount of currency to balance spending power (nominal aggregate demand) and goods for sale (real output capacity). If the government issues currency (nongovernment net financial assets) in an amount that results in effective demand in excess of productive potential to expand capacity to meet it, demand-side inflation will occur due to demand exceeding supply. Conversely, if the government falls short in maintaining this balance, so that supply exceeds demand and inventories build up, recession and unemployment result due to insufficient demand relative to supply (like now). See Bill Mitchell, Modern monetary theory and inflation – Part 1

    There is also supply-side inflation resulting from supply shortages of vital materials like petroleum, or a shock like war. See Bill Mitchell, Modern monetary theory and inflation – Part 2. The problem of supply-side inflation may be exacerbated by inadequate or ill-advised government response through ignorance and political pressure.

    MMT also recognizes that currency depreciation and price indexation can figure into inflationary scenarios.

    • TC
      February 23, 2011 at 11:05 pm

      Hi Tom,

      Of course, the critics don’t research MMT. If they did, they would be MMTers. ;)

      But seriously, if there was something in the Mandatory Readings titled, let’s say “Deficit Spending in Excess of Demand for Money Savings: A Potential Inflation Channel” then we could mock them for not even bothering to read the MMT basics about spending and inflation.

      I agree about the technical description that you described for the MMT take, nice one. How about this for plain english: The government has the responsibility to make sure there is enough money so people can buy all the stuff we can reasonably make, but not so much money that prices start to go up a bunch.

      • Tom Hickey
        February 24, 2011 at 5:19 pm

        HI TC,

        Waren has pointed out that Art Laffer understands monetary ops perfectly. His whole game is cutting taxes, cutting spending on social programs, and increasing corporate subsidies. This is the source of Cheney’s famous, “Deficits don’t matter.”

        The problem is that “they” do get it and have been using it to advantage. Laffer’s current disciple is GOP “budget whiz” Rep. Paul Ryan. But now the fiscally conservative GOP wing is objecting to what Poppy Bush called “voodoo economics.” So we’ll have to see how this shakes out on the GOP side. So far the Lafferites are winning, with tax cuts blowing out the deficit, which is good from the MMT vantage at this point in time, with huge leakage from demand due to increased saving/delevering and an outsized CAD.

        • TC
          February 24, 2011 at 7:56 pm

          Hi Tom,

          I didn’t put 2 + 2 together on Laffer until now! I am usually on the look out for this ultra-cynical behavior, and I totally missed this. And I knew all the facts!!

          Warren has stated Laffer’s knowledge of it a few times, and even has said he knows MMT really, really well. I thought that Laffer was just comically partizan – so ignored it and was a neo-Austrian. But your explanation makes vastly more sense.

  2. Peter D
    February 23, 2011 at 10:32 pm

    Right, this is also on page 29 or so in http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf. In fact, MMTers always emphasize that. And since aggregate savings desire is non-observable, the proxy is exactly demand-pull inflation (past the point of full employment, which is actually the only way MMT thinks demand-pull inflation may come into existence, as far as I can tell.) So, to prevent inflationary bias, watch for inflation and you’d be alright :)
    Will be reading your Basic Accounting post now!

    • TC
      February 23, 2011 at 11:09 pm

      Hi Peter,

      I know it gets emphasized, but having Warren say it loud and proud would be a big step at this point.

      This is brilliant:

      And since aggregate savings desire is non-observable, the proxy is exactly demand-pull inflation (past the point of full employment, which is actually the only way MMT thinks demand-pull inflation may come into existence, as far as I can tell.) So, to prevent inflationary bias, watch for inflation and you’d be alright.

      We cannot determine aggregate savings demand through any method except for inflation rates. Even then, we need to watch for supply side inflation, like some portion of the the 1970s inflation.

  3. Peter D
    February 23, 2011 at 11:59 pm

    thanks, TC!
    Even then, we need to watch for supply side inflation, like some portion of the the 1970s inflation.
    True, but seems to me this is not in the realm of monetary or fiscal policy, isn’t it? If there is a supply shock one could maybe invade a country or two, I guess. The other option would be to direct govt spending into technologies that circumvent the commodity in question in the longer term (I am obviously thinking “oil” all along.)
    Otherwise, is there a justification to reduce demand by reducing deficit when the reason for the inflation is supply shock? It seems to me like (a) punishing your citizens for circumstances beyond their control and (b) counterproductive as you’re more likely to end with stagflation. I could be totally off, of course.

    • TC
      February 24, 2011 at 3:34 pm

      I am with you on this – it really isn’t part of the stated responsibility of monetary or fiscal policy. But governments have a responsiblity to their citizens to make their lives comfortable if they can. If we have supply shocks that result in stagflation, I’d say that part of the fiscal response should be to help insure that there are viable products we can substitute into that make Stagflation less likely. Then, design tax policy to minimize the impact of those shocks too.

      My idea about government is that it should be there to help insure against risks that are too large for any one group to want to tackle. Think: Wars, asteroids, supply shocks, ect. The government response won’t be perfect. It may even actively harm the situation. It may hurt and be wrong-headed.

      But throwing up your hands and saying “I not responsible” is losers response to tough situations. That’s what losers do.

      That is related to the reason I don’t like Neo-classical economics. Neo-classical economics spends so much time justifying human misery as the acceptable outcome of forces we must worship lest we challenge the gods.

      It’s as though engineers would only let bridges build themselves, or doctors wouldn’t treat patients because it would interfere with the natural course of human life. I don’t even understand why you’d want to think like this. It is anti-intellectual and anti-human on the most profound level.

  4. February 24, 2011 at 5:05 am

    I think the biggest problem MMTers have is not understanding hyperinflation. So I have explained it in MMT terms for them:

    http://pair.offshore.ai/38yearcycle/#mmthyperinflation

    And I have MMT explained for anyone interested:

    http://pair.offshore.ai/38yearcycle/#chartalism

    And for anyone who rather read about hyperinflation without MMT view:

    http://pair.offshore.ai/38yearcycle/#hyperinflation

    • TC
      February 24, 2011 at 8:30 am

      I’ve been to that page many times before. I didn’t realize it was you! It is really, really misguided about MMT.

      You get so close to understanding, but then veer away at the last second. You don’t grok MMT, as Peter D likes to say.

      If you did really understand, you could never write this in the way that you did. Why? Because MMTers agree with it:

      The place where the Chartalists go wrong is not understanding how a government that prints money goes bankrupt. They say things like, ” The overriding point, however, is that a sovereign government can always fund its liabilities as long as they are denominated in the currency that it issues under monopoly conditions”. It is true that unlike a corporation or a household it does not run out of money. However, when the market rejects the money that a government prints, that government is bankrupt. Imagine the government payments are supporting 40% of the population, either as employees or welfare/foodstamps. Further imagine that half of that money the government spends is newly printed money. Then if the money they print becomes worthless they can not support that 40% of the population in the lifestyle to which they have become accustomed. The “liabilities” of a government are not just amounts of currency. We call this type of bankruptcy hyperinflation. This happens to governments all the time. Once this starts with the dollar it is probably less than 2 years till the end of the dollar. To help MMT folks everywhere I have written up hyperinflation in MMT terms..

      MMTers agree with this. We even more aware of it than you are. We know this down to the soul of MMT, because one of the core premises of MMT is

      (Available) Savings = Government Deficit

      The Supply of Savings out there is a known value – it equals the Government Deficit. What Peter D very ably pointed out was that we cannot directly observe the Demand for Savings. However, we can observe the inflation rate – which can be considered the “price” that solves the supply/demand curve for available savings vs. demand for savings.

      What you’re claiming is that there can be sudden and massive shifts in the demand curve. I don’t buy it for the Euro, the Yen, or the U.S. Dollar. The reason for this is simple – there is no place to put the ocean of demand for other things that would result from a dramatic drop in demand for USD or any of the G-3 currencies.

      Imagine the early stages of the hyperinflation in Japan. They have government debt equivalent to roughly 10 trillion USD. You can probably sell the first $2 trillion to someone else with losses of only 20% or so. But every sale of one thing is a purchase of another thing -what did they buy $2T of? So then this happens in the U.S. and the Eurozone too. What did these sellers pay $6T for? There isn’t anything in the world outside of these three countries that could absorb this much demand.

      Hyperinflation presupposes the existence of a viable other place to put value, be it goods or objects.

      I would disagree with you on Hyperinflation being common. We see a few a decade, over hundreds of countries and thousands of country years. Not only that, but despite this, countries that experience hyperinflation tend to do ok after. See Poland, Israel, Brazil, and Argentina for examples of this.

      • beowulf
        February 24, 2011 at 7:50 pm

        The Supply of Savings out there is a known value – it equals the Government Deficit. What Peter D very ably pointed out was that we cannot directly observe the Demand for Savings. However, we can observe the inflation rate – which can be considered the “price” that solves the supply/demand curve for available savings vs. demand for savings.

        Hmm, that point about Demand for Saving is an interesting way to look at it. Peter if you (or TC), have any links to other threads on this point, please let me know. Thanks!

    • February 25, 2011 at 4:13 pm

      Increased productivity/increased output productivity is the cure for any accelerating inflation.

  5. Tom Hickey
    February 24, 2011 at 12:53 pm

    Vincent fails to mention the numerous MMT’ers who refute him hereby showing he doesn’t know what he is talking about wrt MMT and inflation.

    • TC
      February 24, 2011 at 3:18 pm

      Oh I know, he is a troll. He doesn’t want MMT to be true, so he makes up crazy nonsensical critiques of it.

      MMT isn’t political. It just takes accounting seriously. I haven’t seen anyone approach it from the perspective of an inflation hawk, but you could approach the accounting from this standpoint.

      I’d say the problem with approaching it with stingy government spending as the intended goal, is that once you see the accounting, the most obvious reason to be stingy on government deficit spending requires you to be an asshat. Nobody wants to be an asshat. So to avoid the cognitive dissonance of thinking yourself to be an asshat, some people would rather deny that the accounting is true, or insist we’re missing something, or make up things that MMT doesn’t say.

      Of course, there may be other avenues of thought that use the accounting of MMT that end up with stingy government spending. Who knows?

  6. February 24, 2011 at 4:30 pm

    “What you’re claiming is that there can be sudden and massive shifts in the demand curve. I don’t buy it for the Euro, the Yen, or the U.S. Dollar. The reason for this is simple – there is no place to put the ocean of demand […]”

    “What did these sellers pay $6T for? There isn’t anything in the world outside of these three countries that could absorb this much demand. ”

    I have a $100 trillion note on my wall. Some people save the first $1 they earn, I have held onto my first $100 trillion.

    Once hyperinflation gets going you might pay $1 billion for a barrel of oil.

    This idea that “there is no place to put that much value” assumes that the currency keeps its value. But the whole point of hyperinflation is to reject a currency so that it ends up with no value at all.

    Now the dollar is a bit different from other fiat currencies. Most every currency really has a central bank with reserves to stabilize the value of their currency. The dollar has like $300 billion in reserves with trillions of dollars out. But as long as other central banks buy up dollars the dollar has support. But if they flee the dollar, the dollar has nothing for support.

    Yes. Life goes on after hyperinflation. I think the dollar will be worse than most because it was the world reserve currency. This means that international trade has some chaos and since most central banks use dollars for reserves many other paper currencies will have chaos too.

    • TC
      February 24, 2011 at 8:20 pm

      Vincent,

      You’re thinking of late stage hyper inflation. But before that happens there must be a little bit of time during which inflation is 20% or so. Hyper inflation doesn’t happen in a day – nope, it takes months and months to work up to the final blow out. And even before that end, there is usually a year or so of damn high inflation that isn’t quite hyper inflation.

      Look at 1918-1919-1920 Germany. The mark still had some value for years- you can bet that 20% of the bond holders sold their notes, and bought something else pronto in the very beginning.

      Thats when the insiders get out, right? They purchase other stuff with the soon to be worthless money that isn’t worthless yet.

      So take 30% of the U.S. debt – or 4.5 trillion dollars – and discount it by 33% to get $3T of purchasing power. Do the same with the Eurozone debt for another roughly $3t of purchasing power. Then do the same with japan for $2T more of purchasing power. This is in the runup to the hyper inflation stage, so these sales are possible .

      What the hell can they buy? Total cap of the Shanghi Stock exchange is $2.7T. So maybe they will buy all of the stock in China, India, and Russia and Korea, and Brazil, and all of the commodities. And then they will have a trillions of Yuan and Rupees left over

      This is what you think will actually happen? Frackin’ crazy talk.

      • Tom Hickey
        February 24, 2011 at 8:50 pm

        No, he thinks they will bid up the price of PMs to astronomical levels and everything will be priced in PMs. That’s what just about all the hyperinflationists hold.

        Maybe I’ll should buy up some fool’s gold just in case. :)

      • TC
        February 24, 2011 at 11:43 pm

        Gold $81,000/oz. If all world GDP was backed by gold, I calculated 81K/oz at one point.

        But I was just kidding.

        You do know that all of the gold ever mined could fit in an olympic swimming pool?

  7. February 24, 2011 at 8:48 pm

    If you think you will have 5 years of slowly working up to hyperinflation just because Germany did back in 1918 to 1823 you are mistaken. This is a different world today. We have something called the Internet. There are computers automatically trading stocks. Germans did not understand for years what was going on. Today when it is clear something is going on everyone will go to Google and learn about hyperinflation. Then they won’t wait 5 years to act. Commodities alone could soak up your trillions because the value of the money will be going down so fast. Wait and see.

  8. February 24, 2011 at 9:09 pm

    To think it is not possible to convert the value of paper money into other things is to really really not understand hyperinflation. Read about all the cases of hyperinflation. You never find a one where this is some kind of problem. The money goes down in value. Anyone who has not converted to something else loses all value.

    • TC
      February 24, 2011 at 11:39 pm

      It is difficult to respond to this without being insulting.

      What about the first people to convert? Somebody – a lot of somebodies – have to start the process of abandoning the currency. The currency has to be abandoned by someone. Thats how and why hyperinflation happens. People abandon the currency. The first people to get out do really well, because they get nearly full value for the currency.

      In the case of the U.S., the people that abandon early will oceans of purchasing power to buy stuff. What will they buy as they abandon the currency? Same goes for Europe and Japan – what market is big enough to absorb this demand for savings?

      Oh, and there is this:

      “Hyperinflation in Zimbabwe was one of the few instances that resulted in the abandonment of the local currency. ” Few instances! And you think the USD will be abandoned? Oh come on! Are you working for Koch Industries or something and looking for non-conforming economic thought?

  9. February 24, 2011 at 11:54 pm

    The value of bonds can crash very early on. If interest rates go up a long term bond can lose nearly all its value very fast. So much of these trillions can just go “poof”.

    In almost every instance of hyperinflation the end result is the death of that fiat currency. Really. Very very few are saved. If you believe Zimbabwe was “one of the few instances the local currency was abandoned” you need to study hyperinflation more, you are way off. Hyperinflation is the process by which a fiat currency goes to die.

    Hyperinflation is a real thing, why do you think it is “non-conforming economic thought”?

  10. studentee
    February 25, 2011 at 3:09 pm

    vincent is incurably obsessed. there’s no reason to pay much attention to him…

  11. February 26, 2011 at 2:17 am

    studentee :
    vincent is incurably obsessed. there’s no reason to pay much attention to him…

    Sometimes obsessed people are right. Studentee, please put plenty of your money into long term US bonds. You will see the value go “poof” and then know, “vincecate was right”.

  1. March 8, 2011 at 11:13 pm
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