US national debt is over 100% of GDP. It's banana republic time from this point on.
Given that they don't even have the same dimensions, I fail to see why some arbitrary and suspiciously round (in decimal) value of their ratio has such magical significance.
You're right to be sceptical about this. All these debt limit numbers, whether it's the GP's 100%, or the Maastricht treaty 60% for the Eurozone are really just pulled out of thin air. There is no solid research to substantiate them. For a bit of perspective, consider that Japan has been running with a debt level of way more than 100% of GDP for over a decade, and they haven't fared worse than most Western countries.
The key thing that people need to understand in this debate is how currencies even work. This is amazingly badly understood, even by academic economists (this is very slowly changing, but as they say, progress in the sciences happens one funeral at a time). If you have some time, you may be interested in this Modern Money Primer, or the somewhat shorter article of PragCap.
The tl;dr version is this: monetary sovereignty matters. The US federal government, being a currency issuer, simply cannot be reasoned about in the same way as we reason about our own personal, currency user, finances. In particular, the US federal government will never be unable to make US$ payments, and it will never be unable to service its debt obligations. In fact, it could start deficit spending immediately without even issuing matching treasury bonds, and nothing much at all would happen.
Most honest people accept that after a while, but the implications always take a while to sink in. There are no free lunches, but the current austerity obsession is needlessly throwing away lots of food that's on the table. It's also an uphill battle because there are so many misconceptions on how inflation works. Food for thought: the highest rate of inflation in the US in the last 80 or so years was in a year when the government ran a surplus!
Actually, the US Federal government is also only a currency user, ever since 1913. The US Dept of the Treasury has no legal authority to create new US Dollars
The so-called independence of the Fed is all smoke and mirrors. The Fed was created by Congress, it has to operate under the rules set by Congress, and it can be undone by Congress. More importantly, even today the Fed does not operate independently from the Treasury. The Fed and Treasury coordinate their transactions to enable the Fed to manage the bonds market. Seriously, read up on it.
a pseudo-private/public institution whose owners are US banks but who is somewhat answerable to the US Congress and the President
That is quite misleading. Outside of regulatory capture (which is unfortunately a very real thing), the banks have exactly zero influence over the politics of the Fed. They are formally owners, but even the profit of the Fed is largely paid out to the Treasury.
This last point highlights just how absurd the institutional setup is, by the way. The profit of the Fed is in large part due to interest that the Treasury pays to the Fed for the bonds that the Fed owns. The profit is then paid back to the Treasury. Hooray for smoke and mirrors bureaucracy!
should Congress remove that authority from the Federal Reserve (...) in the middle of the mess we're seeing, it would bring about an economic panic that would dwarf any we've heretofore witnessed.
Oh, really. Never mind the fact that such an action wouldn't even be necessary, what form do you imagine this economic panic would take? I assume it'll be like the panic that happened after Treasuries were downgraded to AA+?
Greece, Ireland, and others are all perfectly able to coin their own money at will. They need only abdicate treaties prohibiting it and fire up the printing presses. The reason they haven't done so is that it's economic suicide.
Bad comparison, because Greece and Ireland are in a very different situation. Their problem, especially in the case of Greece, is that its currency should have devalued significantly relatively to currencies of the rest of the world, but that was prevented because Greece tied itself to the Euro. Countries that do not have pegged currencies don't suffer from the same problem, because their exchange rates never go that far off-kilter.
That said, I would say that reintroducing their own currency is in fact the best thing Greece can do economically. Better to have a very painful but short cut followed by a swift recovery, than to suffer many years of economic depression. Argentina is a good example that this can work.
We've seen in Germany, Zimbabwe, and many others what happens when you attempt to coin your way out of a massive fiscal debt.
I was wondering when the inflation bogeyman would show up. Hyperinflation in Germany and Zimbabwe was never about printing too much money; that was just the spectacular side effect of other, very different problems. This is a good introductory paper. Tl;dr: in both cases, a collapse of productive capacity combined with foreign currency-denominated debts created an impossible situation. Printing money was a symptom rather than a cause.
What happens when the US pays more in debt servicing than its entire annual revenue combined and we begin borrowing for 100% of spending plus x% of the debt servicing?
Since that can only happen due to the interest that the government pays on the debt, the answer is very simple: decrease the interest rate. The interest rate is a political choice set by the Fed, after all.
If the decreasing interest rate should cause people to buy and invest instead of saving, even better: This will cause tax r
I'm former Greek Prime Minister George Papandreou and I approve this message.
What's with all the sarcasm attempts these days?
Anyway, just like your sibling comment, you have to understand the difference between a monetarily sovereign government like the US federal government, and a government that is only a currency users, such as the Greek government. And just like your sibling comment, you may find a look at the Eurozone situation from an MMT perspective interesting.
The government has grown wildly under all parties.
I have not questioned that.
What I'm saying is that the question of big vs. small government is orthogonal to the question of the government's budget balance. That may seem like hair splitting, but it's really not. When you take a look at Modern Monetary Theory economists, you'll see a very wide variety of political opinion on the question of where they stand on big or small government (Warren Mosler is a good example, but of course their opinions are usually much more subtle).
But they all agree that the deficit and debt hysteria is a red herring.
Perhaps that's not what you want to have a debate about, and you would rather debate the question of the size of government. Fine with me. I'd just thought I should point out that you're confusing categories: size of government is more or less equal to the total size of government spending. The deficit and resulting debt are something different.
All I want is that the distinction is appreciated, because it would elevate the quality of the discussion. That you believe this to be trolling is surprising (and a bit depressing).
It's bizarre how perverted the discussion has become due to the focus on deficit and debt.... Stop worrying about the deficit or the debt. They are meaningless, red herrings.
Dear Sir,
Your ideas are intriguing to me, and I wish to subscribe to your newsletter.
Sincerely
J. Weidmann President Deutsche Bundesbank
... snip lots of stuff about the Eurozone debt crisis...
I appreciate the sarcasm, but it mostly shows that you have either not read about or not understood the implications of MMT. The situation of the Eurozone countries is more like that of US states, since they are currency users, not issuers. They are not monetary sovereigns. In fact, US states have much less debt relative to GDP than the Eurozone countries, and as non-sovereigns, they have to have low levels of debt. The problem is that within a currency, there must be someone with growing levels of debt to allow growing levels of private savings. In the US, the federal government typically plays this role (the only reason there was a surplus under Clinton was that, during that time, the financial sector successfully convinced the rest of the private sector to take on more and more debt, i.e. the savings rate of the private sector was negative - historically an extremely atypical situation, which was unsustainable and lead to the GFC). In the Eurozone, nobody can play this role. That is why there is a crisis in Europe: the Eurozone was doomed to fail from the start.
I admittedly did not mention the importance of monetary sovereignty in my earlier post, but one cannot always write everything. Since the discussion was clearly about the US situation, I left it out for brevity.
Funny how distorted the discussion has become. The GP was talking about the size of the government, not the size of the national debt. You can have high deficit small government, and small deficit big government.
You have to understand that the government deficit is really just the mirror image of the private surplus plus the external surplus. Once you understand the sectoral balances (as explained in the linked article), you can chill out about the deficit and debt and start worrying about the things that really matter.
Welcome to topsy-turvy land. We've actually been here for awhile, with "fiscal conservative" presidents and legislatures growing the national debt and supposedly "tax and spend liberal" presidents actually shrinking debt.
It's bizarre how perverted the discussion has become due to the focus on deficit and debt. There is a reasonable political debate to be had on the question of whether government should be small or large. Should the government be responsible for maintaining basic infrastructure? For education? And so on.
But these questions should not be confused with discussions about the deficit and debt, at least on the federal level. The deficit is mostly endogenous. That is economist-speak for saying that the deficit is not directly controlled by political decision. Instead, it is largely the result of what happens in the private sector. If the private sector produces a lot of activity, this automatically results in higher tax payments and therefore a lower government deficit. If the private sector is running idle, tax revenue drops while at the same time federal outlays in social programs increase, hence the government deficit increases. Therefore, it is best to just let the deficit be whatever it needs to be. That is the approach of Functional Finance, which greatly influenced Modern Monetary Theory.
Stop worrying about the deficit or the debt. They are meaningless, red herrings. Start worrying about real things instead, like crumbling infrastructure or high unemployment - both are things that can very easily be fixed simultaneously at the federal level, if the deficit terrorists are finally silenced.
Thank you for your comment. It's always nice to see a fellow MMT-aware human spreading some useful links. Keep it up and keep calm in the inevitable debates that erupt;)
You're confusing the economic "strength" of a country with the value of its currency.
Also, you seem to be of the belief that there is a strict inverse relationship between the amount of dollars in circulation and the value of the dollar on currency markets. This is also incorrect. What's worth, it is not even a coherent statement. What do you mean by the "amount of dollars"? Well, literally you talked about "print(ing) more dollars". So perhaps you are setting "amount of dollars" = "amount of physical currency printed".
With that definition of amount, it is obvious that your belief cannot possibly be correct. After all, the Fed could decide to print trillions of new dollar bills without putting them into circulation. It is clear that there would be exactly zero effect on the exchange rate.
So what definition of amount of dollars do you want to use?
It turns out that there are many economists who share your belief. During their search for the proper definition of "amount of dollars", they were forced to reject many such definitions, and consequently they came up with many subtly different definitions. In the end, none of them "works". Unfortunately, economics is so dominated by ideology that those economists refuse to abandon their belief, preferring to continue to misinform the public.
Note that high frequency trading is a subset of algorithmic trading. Algorithmic trading per se doesn't necessarily have to be bad. It can help to facilitate market making, i.e. you get people who have both buy and sell orders standing by, which makes it easier to sell or buy stocks at any particular point in time.
On the other hand you have HFT, which is a subset of algorithmic trading, which basically asks questions like "Can we predict the value that company X will have in 30 seconds?". That is about the most ridiculously wasteful activity you could think of.
There is the "supply/demand curve" and a few other general formulas, but you can't really predict anything other than general trends with those concepts.
And even those supply/demand curves, as presented by typical introductions to microeconomics, are full of bullshit. Steve Keen (Aussie econ prof and author of Debunking Economics) has uploaded some of his lectures to YouTube, and the first few installments here deal with those issues. Well worth the time to watch IMHO.
Amazing how far selective quotations can get you, isn't it? You left out the sentence that immediately followed - that wasn't an accident.
(4) is not false - and I have not claimed it is. It is simply too weak to support the claim that you wanted to support, which is that a certain event necessarily leads to inflation. I have tried to make it increasingly obvious in the last few posts that my position is that it may or may not lead to inflation, and can in fact also lead to better real economic outcomes (via growth and increased employment) - it depends on the circumstances. But you have consistently ignored those subtleties.
It's funny, because I really don't think you're being thick on purpose. I originally had the impression that you are a very reasonable person, and your posting history supports that as well, but something seems to have gone seriously wrong and things have gone down-hill. Perhaps you're taking things too personal. Who knows. So I'm going to just disengage from the discussion now, no matter what you write next (if anything). That's probably better for both our sanity.
You are continuing your straw man arguments, and I have had enough of that. Not once have you actually answered the point I made, (...)
Talk about the pot calling the kettle black. Where the hell did you even get the idea that I claim that "increased demand does not increase prices, everything else being equal" (*)? You claimed that I make that claim in your earlier post, and I have addressed that in my previous post - pointing out what I actually said instead. Yet you do not address that, and continue with your straw men. If you truly believe that I made the claim (*), you should at least have the intellectual decency to explain where you got that idea from.
Or perhaps the problem is that you have a radically different interpretation of the quantifiers that are involved in those statements, or are not considering quantifiers at all? Perhaps you think that I am arguing that "increasing demand never raises prices", while you claim that "increasing demand always raises prices"? There's a middle ground, you know.
What I have tried to make increasingly explicit in the last three posts (admittedly I should have done that sooner, I just thought that it was obvious) is the statement that whether an increase in demand leads to increased prices (and if so, by how much) depends on additional factors. Sometimes you will get an increase in prices, and sometimes the prices will stay the same. (There is no force at work that would prevent suppliers from lowering their prices in reaction, but it's fairly safe to say that that would be extremely unusual.)
Do you agree with the preceding paragraph or not?
Here's a hint to help yourself against embarrassing yourself: I have yet to read an economist who seriously argues against the statement made there - it's perfectly in line with "basic economic theory". A second hint: perhaps you should consider the difference between monotonically increasing functions and strictly monotonically increasing functions.
(Yes, I have also made some tentative statements about how the link between demand and prices works based on additional factors, but I'd be happy if we could at least reach an agreement on the above. One step at a time;))
I am quoting the key points on this topic from my last comment (with some emphasis added):
So the most intellectually honest statement is something along the lines of "$X can lead to a devaluation the currency, but it can also cause real economic growth, and it may of course also cause a mix of those two things". (...) All I'm really saying at that level is that it is in fact much more likely that the economy reacts by increasing Q, especially in the current situation where there is high unemployment and a large output gap.
If you read those statements as "increased demand does not increase prices, everything else being equal", then I feel that reasonable communication with you is no longer possible.
My hope is that this is simply you lashing out one last time because you fail to defend a point that is too much part of your identify. It's a shame, because I already told you that I would agree to a weaker form of the claim you originally made, and this could perhaps have led to a synthesis we could both agree on. Oh well.
The "money supply" is a stock. It is something like the sum of all deposits, depending on the definition. How could that possibly affect inflation directly?
Who cares if it affected "directly", whatever that means. You are changing the question, which is : "Will increased money supply increase inflation (or decrease deflation, if you like)"
I care. Because bringing up the valid point that there is no direct impact forced you to explain your chain of thinking, which allows us to look at where the weaknesses are.
My point was that the stock of money is not one of those inputs.
Says who? It is a pretty common practice to simply adjust all prices to account for inflation. Not a perfect method, to be sure, but easy and simple.
The stock of money is not a priori equal to inflation. So if you account for the inflation numbers published by whatever institution in your price-setting considerations, then you are still not using the stock of money as one of your inputs in the considerations.
You may be falling into a trap of circular logic here, where you assume that inflation is tied to the stock of money to support your argument that inflation is tied to the stock of money.
However, at least one of those inputs is a flow of money, i.e. the effective demand that has been seen previously.
Says who, and even if true, so what?
Pretty much all micro-economic textbooks say so, for example (what do you think is behind supply and demand curves?). And so what is that, to understand inflation, it may be better to look at flows of money than stocks.
1. If the sum of deposits (ie., the money supply) increases, there must be some entities who has more money than before. 2. Entities with more money tends to either use or invest money. Let's discount the investment, as that just moves the money to someone else. 3. When some entities use more money, demand increases. 4. Increased demand tends to increase prices.
This is the weak link of your argument. Because if your claim is that "$X can lead to a devaluation of the currency", I would actually agree with you.
But again, I remind you that you dismissed a policy tool that is available to the government by saying that "$X would just devaluate the currency", which is a much stronger claim, and your toned down version of point 4 above no longer supports it.
After all, increased demand tends first to increase production. Firms can also react by increasing prices - this is what you write - but then they risk losing market share to the competition. So whether increasing prices is feasible for them depends on a lot of factors.
So the most intellectually honest statement is something along the lines of "$X can lead to a devaluation the currency, but it can also cause real economic growth, and it may of course also cause a mix of those two things".
Remember that this part of the discussion was started because of your claim that "$X will just devaluate the currency". Well, turns out that apparently you agree that "$X can also grow the real size of the economy"
I am tired of your straw men. I never wrote that. Please quote me correctly, or not at all.
I'm not sure whether you understood me correctly. The first quote is something that you wrote here.
The second quote is not something you wrote explicitly, but I never intended to claim that - sorry if it came across that way. Instead, it is related to your example where you go from the situation M=V=P=Q=1 to the situation M=V=P=Q=2 as a reaction of an increase to M=2. If I interpreted you correctly as saying that this can actually happen in the economy, then it means y
No, it doesn't, at least not in the way that you think. Here's why: in regular goods markets, both demand and supply are essentially flows. Producers produce a certain amount of goods per time unit, whence the supply. Consumers demand a certain amount of good per time unit, whence the demand - both can be functions of price or whatever, but the point about flows is important. Prices change on the margin.
Of course the price as measured in goods doesn't change because you change the amount of money available: That is why it is inflation rather than an increase in the value of the goods.
I don't understand what you're trying to say there.
In the following, you butchered my reply in a way that allows you to miss the point, so I rearranged things a bit.
The "money supply" is a stock. It is something like the sum of all deposits, depending on the definition. How could that possibly affect inflation directly? Inflation is a measure of average price increases, so e.g. increase of prices set by supermarket bureaucrats. But the people who make decisions about how to set prices in supermarkets only see the flow of customer demand. They do not see the size of the stock of money. So how can their decision possibly depend on the latter?
More like a rhetorical question. Perhaps my rearranging of the quotes and the added emphasis already helps you to see my point, but let me reiterate in a different way just to be sure.
Think of the price-setting process of an individual supermarket (or other firm) as an algorithm. It has inputs (such as the cost of production, the effective demand seen by the firm, profit motive, behavior of competition, whatever), and it has an output (the price that is ultimately set). My point was that the stock of money is not one of those inputs. However, at least one of those inputs is a flow of money, i.e. the effective demand that has been seen previously.
You have not argued against that, just continued to claim some causality from an increase of stocks to an increase of flows as I predicted. I've cut out the majority of the rest, because I think the really important point is the following (and yes, I'm also a mathematician - but it's kind of lame of you to bring that up, considering that you really only need high-school arithmetic for these things; I on the other hand apologize for exaggerating about V, I got carried away).
Earlier you write something like "$X causes inflation", and since you have yet to really spell out what your X is, I assume you mean X = "increase of the money supply, i.e. M in the equation MV = PQ". If this assumption is wrong, I gladly stand corrected and we can discuss what you really mean. But given the assumption, the claim that "increase of M implies increase of P" denies the possibility that the adjustment in the equation happens via a change in V or Q.
No it does not. For instance, assume that M=V=P=Q=1. That us assume that M is increased to 2, then the equation would still be satisfied by V=P=Q=2. Note how nothing is constant with that solution.
Hey! Seems like you're conceding that the economy can quantity-adjust. I think we're getting somewhere:)
Remember that this part of the discussion was started because of your claim that "$X will just devaluate the currency". Well, turns out that apparently you agree that "$X can also grow the real size of the economy" (perhaps, I think we still haven't really settled on what you mean by X). Once you have realized that, one can obviously start discussions about whether the economy tends to adjust more by increasing production or whether it adjusts more by raising
You know, if I had a dollar for every time people asked me to read up on a fringe theory, I would be a rich man now. You seem reasonable enough that I read the criticism section, which convinced the theory was not solid.
I know. Who knows, two years ago I might have reacted in the same way that you do. Telling apart the fringe theories that have merit from those that don't is a difficult problem. I appreciate you checking out the Wikipedia Criticism section. You'll note that the points mentioned there have been addressed by MMT academics. I'm really not trying to sound paternalistic or something, but try putting yourself in my shoes. What if MMT really had some merits? What could possibly convince you?
If the government covers a deficit by printing money, it will increase inflation, because greater supply leads to lower prices. This also applies to money.
No, it doesn't, at least not in the way that you think. Here's why: in regular goods markets, both demand and supply are essentially flows. Producers produce a certain amount of goods per time unit, whence the supply. Consumers demand a certain amount of good per time unit, whence the demand - both can be functions of price or whatever, but the point about flows is important. Prices change on the margin.
The "money supply" is a stock. It is something like the sum of all deposits, depending on the definition. How could that possibly affect inflation directly? Inflation is a measure of average price increases, so e.g. increase of prices set by supermarket bureaucrats. But the people who make decisions about how to set prices in supermarkets only see the flow of customer demand. They do not see the size of the stock of money. So how can their decision possibly depend on the latter?
You could argue that there is some relationship between the stock of money and the flows of money, i.e. that increasing the stock of money will also increase the flow of money. In terms of Quantity Theory of Money, this is the claim that V (the "velocity" of money) is constant. Empirically, this claim is false, and V varies all over the place. So now you have two choices: one is to insist on using the stock of money to explain inflation, in which case you have to complicate your models to account for changes of the velocity of money. Or you cut through the bullshit, forget about the stocks, and just concentrate on the flow of money. The latter is why I put an emphasis on aggregate demand, because that's one way to look at such flows.
Conversely, when the government issues more bonds than it deficit spends, the interest rate goes up.
Which interest rate, exactly? And once you tell me this, could you outline why the (market) interest rate would increase?
The interbank interest rate is most directly affected. When the government issues more bonds than it deficit spends, this means that the total amount of reserves held by banks shrinks. This increases the demand for reserves for refinancing purposes, which means that those banks who hold excess reserves can lend them out at higher interest rates. Of course, the lending rate (or discount rate in the US) of the central bank is an upper bound to how high this interest rate can rise.
This is why the central bank, as an arm of government, acts to sell and buy bonds on the open market to control the interest rate. Note how the interest rate is a policy target of the central bank, whereas the total amount of reserves is a policy tool: by buying and selling bonds (or doing repo agreements or whatever), the central bank holds the level of reserves at a level that is compatible with its interest rate target. In particular, the central bank cannot target both interest rate and level of reserves.
I first refrained from this because I didn't want to be overly pedantic, but it gnawed at me, since it's a pet peeve of mine. You mentioned "printing money" in your comment. Clearly, you cannot actually have meant printing money, in the sense of putting ink on carrier substance. So what is it that you really meant?
In the sentence "$X would just devalue the currency", X = "Printing money" does not make sense in the literal meaning. So what should X really be?
This may seem overly pedantic on the one hand - after all, we both know it's a metaphor. But on the other hand: a metaphor for what, exactly? I'm convinced that if you truly, genuinely try to answer this question for yourself, it will help you significantly in understanding the MMT-based analysis of inflation and other macroeconomic phenomena.
You really should read up on MMT, since all of your points are addressed there. Let me reply with some pointers anyway even though I don't have much time, since you do sound like a reasonable person - but please excuse the fact that some of the following may become a bit badly-edited stream-of-consciousness:
Not quite. Printing more money would just devaluate the currency, meaning that everything the government buys would be more expensive, and the taxes it gathers would be worth less. On the other hand, a better rate for the bonds (that is, people invests in bonds) translates directly into more buying power.
Please read up on how bond sales and open market operations by the government interact to set the interest rate. The fact is that if the government deficit spends without issuing bonds, the interest rate goes down. Conversely, when the government issues more bonds than it deficit spends, the interest rate goes up. So the government can just give itself a better rate for the bonds if it wants to. This clearly contradicts your understanding of how inflation works.
In fact, inflation is a mixture of different actors in the economy fighting for shares of real income, and a result of the interplay of supply and demand: if aggregate demand is too high for the productive capacity of the economy, this conflict will be resolved via increasing prices. If aggregate demand is too low for productive capacity, the conflict will typically be resolved via unemployment, and factories being idle.
So when private spending collapses and the government props up aggregate demand with its deficit, this is not inflationary. Whether the government issues bonds or not is irrelevant as far as inflation is concerned, it only affects the interest rate (yes, yes, monetarists claim that the interest rate is super important for inflation, and yes, there probably is some linkage there; but it's very indirect, and much weaker than the obvious link between aggregate demand and inflation).
I mentioned this further up: When you find yourself disagreeing with a great majority of experts, it is time to recheck your facts. Odds are that you are mistaken:)
Believe me, you're not the first person to engage me or the MMT academics on this topic. Suffice to say, what it eventually ends up being is that you concede all points, but declare them irrelevant by clinging to an extreme interpretation of the Quantity Theory of Money. The latter doesn't hold up to empirical evidence and not even to common sense, but if you refuse to even consider the possibility that you're wrong about it, I can't help you.
Note that you have already taken the first step of this type: First you said, people will buy more bonds, which allows the government to spend more. Then I said, that's false, because the capacity of (sovereign) government to spend is independent of bond issue. You conceded that point (at least I assume so) but evaded by claiming that it would necessarily be inflationary, irrespective of what else is going on in the economy. That's Quantity Theory of Money, and it's nonsense because it implicitly assumes that the size of the real economy is constant (i.e. the Q in MV = PQ cannot change) -- but that is so obviously false, it's not even funny anymore.
Again, not quite. Your point about deposits is rather silly, as the loaner will probably immediately withdraw the loaned amount from the bank. This money will come from deposits to the bank, or from loans from other banks. Due to the fractional reserve system, some money is created in the process, but only a certain multiple of the money originally issued by the state bank. The exactly factor depends on the locals laws. I suggest you read the Wikipedia article on the fractional reserve system to see how this process works.
Not necessarily. "The money" could be used to pay down debts, in which case you just get shrinking balance sheets, but no spending; or it could be saved, e.g. by buying government bonds.
Well, sure, but that would lead to the bank having more money to lend out, and the government having more money to spend, respectively. If they are lost, it is because of bad investments... companies or states that crash or at least diminish in value.
As far as the US federal government is concerned: do you really believe yourself what you are writing? I mean, think about it: The US federal government creates the money. Saying that they "have more money to spend" is like saying that Blizzard has more gold to issue inside World of Warcraft. The US government can spend as many US$ as they like or, to be more precise, as many as sellers are willing to take in exchange for goods. The only constraints are political, not technical. So to say that "they can spend more money If you buy their bonds" is simply false. (It's funny how obviously false it is, but how widespread the belief is that it's true - kind of an "emperor's new clothes" thing.)
As far as banks are concerned, you're also simply wrong, although the points are less obvious because you really need to know at least a few technical details of how banking works. Banks do not lend out money, they give their borrowers access to a deposit. To put it another way: banks do not need money to make loans. They simply grow their balance sheet, adding your IOU as an asset, and your deposit as a liability. They then may have to refinance themselves as part of the settlement system, but the people who actually make the loan decision are quite disconnected from the people who worry about refinancing. The corresponding departments in banks are separate.
Think about the term "deleveraging" applied to the economy as a whole. It means that balance sheets are shrinking in the financial sector, which is exactly what happens when loans are paid back without new loans being created. This has happened in the last few years before our very eyes. The empirical reality contradicts the belief that "then the bank will lend out more money" (which I think is what you implicitly claimed, and which is what really ultimately matters anyway). There's really nothing more to say.
When the pay goes down, individuals have less disposable income, but the money has not left the economy. It could go to other employers, or perhaps the owners gets richer and spends more money, or something else. Or perhaps the produce gets cheaper, which means said workers will be able to purchase as much with the same money.
Not necessarily. "The money" could be used to pay down debts, in which case you just get shrinking balance sheets, but no spending; or it could be saved, e.g. by buying government bonds. In fact, the latter point is part of where this whole crisis comes from in the first place: income has shifted, over the course of many decades, towards the rich, who have a higher savings rate. This would have caused a recession much earlier, if not for the fact that the financial sector got creative and managed to give out more and more loans to less and less credit-worthy customers - that's what enabled them to keep up the spending stream for the time being, but of course private debt is not sustainable indefinitely, and the shit hit the fan at some point.
If you are disagreeing with an entire field of experts, it is often a good idea to ask yourself if you are really *that* clever:)
Well, unfortunately I am not such a creative thinker. It's just that I listen to what those in the subfield of Modern Monetary Theory have to say. Yes, they disagree with the majority of the rest of their profession, but given how politicized economics is, that alone is not enough to discredit them.
When there is surplus employees, the pay should go down, which in turn leads to increased economic growth and thus less unemployment. So it will balance itself out, eventually.
That's the theory anyway.
And it doesn't work like that in practice, because aggregate demand has got to come from somewhere. When pay goes down, people have less disposable income, so they spend less, so economic growth decreases. Of course this process doesn't necessarily go on forever, but the fact remains that "equilibria" can exist at almost any rate of unemployment. Market forces alone do not lead to full employment - the ideologists who would tell you otherwise conveniently ignore the effect of income on spending.
It's amazing how the majority of economists seem to be entirely oblivious (whether out of ignorance or willfully, I don't know) to the fact that in the end, the economy is a giant life support machine that produces things for consumers. Yes, investment plays an important role in the bowels of the beast, but investment only makes sense when there are potential customers with disposable income. Aggregate demand is what it's all about in the end.
It's easy to say this, but inflation actually plays a vital role in the economy because of how prices change. For the economy to work well, prices need to reflect the real costs of producing stuff, and how that stuff is valued by consumers. Now if the real value that some item should have decreases, then without inflation, its nominal price would have to decrease as well. But prices are sticky: it is quite easy for vendors to keep them at the same level.
Inflation helps this process, because when the general price level rises, the real price of individual items decrease as long as their nominal price stays constant. So for sellers and employees to maintain the same level of real income, they somehow need to justify nominal price rises. You could think of it as the Red Queen hypothesis applied to economics.
And, just to put things into perspective, the boom years of the 1950s and 1960s saw inflation around 4% and higher in most Western economies, with nobody (at least not the 99%) complaining about inflation, whereas recently, inflation has crept around the 2% level. That should provide some food for thought as well.
Take a step back to think about how deeply you accept the neoliberal framing of work. You implicitly accept the premise that welfare recipients are (to exaggerate to make a point) lazy, useless slobs who have decided to just not work. That premise is both incorrect and poisonous, and you should reject it outright.
The fact of the matter is that there are roughly two groups of people living off social welfare. One group is honestly disabled and simply cannot work for whatever reason, such as an unusual illness or an accident. It is a matter of basic human decency that we as a society support them. (It is especially ironic that those who want the US to be a Christian nation often do not have the empathy to think like Jesus would in this case.)
The other group is both willing and able to work, but simply cannot find a decent job because of macroeconomic problems, i.e. ultimately the government having a too contractionary stance in economic policy. Crushing the spirits of this group using workfare schemes or even forced labor is evil. What we really should do here is to ensure, using macro-economic policy, that enough work is demanded by employers so that they can find a job. We also have to demand of employers that they do not discriminate against the unemployed, and that they contribute their fair share to retraining potential employees whose skills do not exactly match the requirements.
Finally, keep in mind that the reason for the pervasiveness of the anti-social framing that I mentioned initially lies in the fact that a (small, but influential due to lack of position) number of people want unemployment to be high, because creating unemployment undermines the bargaining position of workers.
Slashdot Mirror
Given that they don't even have the same dimensions, I fail to see why some arbitrary and suspiciously round (in decimal) value of their ratio has such magical significance.
You're right to be sceptical about this. All these debt limit numbers, whether it's the GP's 100%, or the Maastricht treaty 60% for the Eurozone are really just pulled out of thin air. There is no solid research to substantiate them. For a bit of perspective, consider that Japan has been running with a debt level of way more than 100% of GDP for over a decade, and they haven't fared worse than most Western countries.
The key thing that people need to understand in this debate is how currencies even work. This is amazingly badly understood, even by academic economists (this is very slowly changing, but as they say, progress in the sciences happens one funeral at a time). If you have some time, you may be interested in this Modern Money Primer, or the somewhat shorter article of PragCap.
The tl;dr version is this: monetary sovereignty matters. The US federal government, being a currency issuer, simply cannot be reasoned about in the same way as we reason about our own personal, currency user, finances. In particular, the US federal government will never be unable to make US$ payments, and it will never be unable to service its debt obligations. In fact, it could start deficit spending immediately without even issuing matching treasury bonds, and nothing much at all would happen.
Most honest people accept that after a while, but the implications always take a while to sink in. There are no free lunches, but the current austerity obsession is needlessly throwing away lots of food that's on the table. It's also an uphill battle because there are so many misconceptions on how inflation works. Food for thought: the highest rate of inflation in the US in the last 80 or so years was in a year when the government ran a surplus!
Actually, the US Federal government is also only a currency user, ever since 1913. The US Dept of the Treasury has no legal authority to create new US Dollars
The so-called independence of the Fed is all smoke and mirrors. The Fed was created by Congress, it has to operate under the rules set by Congress, and it can be undone by Congress. More importantly, even today the Fed does not operate independently from the Treasury. The Fed and Treasury coordinate their transactions to enable the Fed to manage the bonds market. Seriously, read up on it.
a pseudo-private/public institution whose owners are US banks but who is somewhat answerable to the US Congress and the President
That is quite misleading. Outside of regulatory capture (which is unfortunately a very real thing), the banks have exactly zero influence over the politics of the Fed. They are formally owners, but even the profit of the Fed is largely paid out to the Treasury.
This last point highlights just how absurd the institutional setup is, by the way. The profit of the Fed is in large part due to interest that the Treasury pays to the Fed for the bonds that the Fed owns. The profit is then paid back to the Treasury. Hooray for smoke and mirrors bureaucracy!
should Congress remove that authority from the Federal Reserve (...) in the middle of the mess we're seeing, it would bring about an economic panic that would dwarf any we've heretofore witnessed.
Oh, really. Never mind the fact that such an action wouldn't even be necessary, what form do you imagine this economic panic would take? I assume it'll be like the panic that happened after Treasuries were downgraded to AA+?
Greece, Ireland, and others are all perfectly able to coin their own money at will. They need only abdicate treaties prohibiting it and fire up the printing presses. The reason they haven't done so is that it's economic suicide.
Bad comparison, because Greece and Ireland are in a very different situation. Their problem, especially in the case of Greece, is that its currency should have devalued significantly relatively to currencies of the rest of the world, but that was prevented because Greece tied itself to the Euro. Countries that do not have pegged currencies don't suffer from the same problem, because their exchange rates never go that far off-kilter.
That said, I would say that reintroducing their own currency is in fact the best thing Greece can do economically. Better to have a very painful but short cut followed by a swift recovery, than to suffer many years of economic depression. Argentina is a good example that this can work.
We've seen in Germany, Zimbabwe, and many others what happens when you attempt to coin your way out of a massive fiscal debt.
I was wondering when the inflation bogeyman would show up. Hyperinflation in Germany and Zimbabwe was never about printing too much money; that was just the spectacular side effect of other, very different problems. This is a good introductory paper. Tl;dr: in both cases, a collapse of productive capacity combined with foreign currency-denominated debts created an impossible situation. Printing money was a symptom rather than a cause.
What happens when the US pays more in debt servicing than its entire annual revenue combined and we begin borrowing for 100% of spending plus x% of the debt servicing?
Since that can only happen due to the interest that the government pays on the debt, the answer is very simple: decrease the interest rate. The interest rate is a political choice set by the Fed, after all.
If the decreasing interest rate should cause people to buy and invest instead of saving, even better: This will cause tax r
I'm former Greek Prime Minister George Papandreou and I approve this message.
What's with all the sarcasm attempts these days?
Anyway, just like your sibling comment, you have to understand the difference between a monetarily sovereign government like the US federal government, and a government that is only a currency users, such as the Greek government. And just like your sibling comment, you may find a look at the Eurozone situation from an MMT perspective interesting.
Also see my reply to the sibling comment.
The government has grown wildly under all parties.
I have not questioned that.
What I'm saying is that the question of big vs. small government is orthogonal to the question of the government's budget balance. That may seem like hair splitting, but it's really not. When you take a look at Modern Monetary Theory economists, you'll see a very wide variety of political opinion on the question of where they stand on big or small government (Warren Mosler is a good example, but of course their opinions are usually much more subtle).
But they all agree that the deficit and debt hysteria is a red herring.
Perhaps that's not what you want to have a debate about, and you would rather debate the question of the size of government. Fine with me. I'd just thought I should point out that you're confusing categories: size of government is more or less equal to the total size of government spending. The deficit and resulting debt are something different.
All I want is that the distinction is appreciated, because it would elevate the quality of the discussion. That you believe this to be trolling is surprising (and a bit depressing).
It's bizarre how perverted the discussion has become due to the focus on deficit and debt. ...
Stop worrying about the deficit or the debt. They are meaningless, red herrings.
Dear Sir,
Your ideas are intriguing to me, and I wish to subscribe to your newsletter.
Sincerely
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Deutsche Bundesbank
I appreciate the sarcasm, but it mostly shows that you have either not read about or not understood the implications of MMT. The situation of the Eurozone countries is more like that of US states, since they are currency users, not issuers. They are not monetary sovereigns. In fact, US states have much less debt relative to GDP than the Eurozone countries, and as non-sovereigns, they have to have low levels of debt. The problem is that within a currency, there must be someone with growing levels of debt to allow growing levels of private savings. In the US, the federal government typically plays this role (the only reason there was a surplus under Clinton was that, during that time, the financial sector successfully convinced the rest of the private sector to take on more and more debt, i.e. the savings rate of the private sector was negative - historically an extremely atypical situation, which was unsustainable and lead to the GFC). In the Eurozone, nobody can play this role. That is why there is a crisis in Europe: the Eurozone was doomed to fail from the start.
I admittedly did not mention the importance of monetary sovereignty in my earlier post, but one cannot always write everything. Since the discussion was clearly about the US situation, I left it out for brevity.
So, what is the national debt again?
Funny how distorted the discussion has become. The GP was talking about the size of the government, not the size of the national debt. You can have high deficit small government, and small deficit big government.
You have to understand that the government deficit is really just the mirror image of the private surplus plus the external surplus. Once you understand the sectoral balances (as explained in the linked article), you can chill out about the deficit and debt and start worrying about the things that really matter.
Welcome to topsy-turvy land. We've actually been here for awhile, with "fiscal conservative" presidents and legislatures growing the national debt and supposedly "tax and spend liberal" presidents actually shrinking debt.
It's bizarre how perverted the discussion has become due to the focus on deficit and debt. There is a reasonable political debate to be had on the question of whether government should be small or large. Should the government be responsible for maintaining basic infrastructure? For education? And so on.
But these questions should not be confused with discussions about the deficit and debt, at least on the federal level. The deficit is mostly endogenous. That is economist-speak for saying that the deficit is not directly controlled by political decision. Instead, it is largely the result of what happens in the private sector. If the private sector produces a lot of activity, this automatically results in higher tax payments and therefore a lower government deficit. If the private sector is running idle, tax revenue drops while at the same time federal outlays in social programs increase, hence the government deficit increases. Therefore, it is best to just let the deficit be whatever it needs to be. That is the approach of Functional Finance, which greatly influenced Modern Monetary Theory.
Stop worrying about the deficit or the debt. They are meaningless, red herrings. Start worrying about real things instead, like crumbling infrastructure or high unemployment - both are things that can very easily be fixed simultaneously at the federal level, if the deficit terrorists are finally silenced.
Thank you for your comment. It's always nice to see a fellow MMT-aware human spreading some useful links. Keep it up and keep calm in the inevitable debates that erupt ;)
You're confusing the economic "strength" of a country with the value of its currency.
Also, you seem to be of the belief that there is a strict inverse relationship between the amount of dollars in circulation and the value of the dollar on currency markets. This is also incorrect. What's worth, it is not even a coherent statement. What do you mean by the "amount of dollars"? Well, literally you talked about "print(ing) more dollars". So perhaps you are setting "amount of dollars" = "amount of physical currency printed".
With that definition of amount, it is obvious that your belief cannot possibly be correct. After all, the Fed could decide to print trillions of new dollar bills without putting them into circulation. It is clear that there would be exactly zero effect on the exchange rate.
So what definition of amount of dollars do you want to use?
It turns out that there are many economists who share your belief. During their search for the proper definition of "amount of dollars", they were forced to reject many such definitions, and consequently they came up with many subtly different definitions. In the end, none of them "works". Unfortunately, economics is so dominated by ideology that those economists refuse to abandon their belief, preferring to continue to misinform the public.
Note that high frequency trading is a subset of algorithmic trading. Algorithmic trading per se doesn't necessarily have to be bad. It can help to facilitate market making, i.e. you get people who have both buy and sell orders standing by, which makes it easier to sell or buy stocks at any particular point in time.
On the other hand you have HFT, which is a subset of algorithmic trading, which basically asks questions like "Can we predict the value that company X will have in 30 seconds?". That is about the most ridiculously wasteful activity you could think of.
There is the "supply/demand curve" and a few other general formulas, but you can't really predict anything other than general trends with those concepts.
And even those supply/demand curves, as presented by typical introductions to microeconomics, are full of bullshit. Steve Keen (Aussie econ prof and author of Debunking Economics) has uploaded some of his lectures to YouTube, and the first few installments here deal with those issues. Well worth the time to watch IMHO.
Amazing how far selective quotations can get you, isn't it? You left out the sentence that immediately followed - that wasn't an accident.
(4) is not false - and I have not claimed it is. It is simply too weak to support the claim that you wanted to support, which is that a certain event necessarily leads to inflation. I have tried to make it increasingly obvious in the last few posts that my position is that it may or may not lead to inflation, and can in fact also lead to better real economic outcomes (via growth and increased employment) - it depends on the circumstances. But you have consistently ignored those subtleties.
It's funny, because I really don't think you're being thick on purpose. I originally had the impression that you are a very reasonable person, and your posting history supports that as well, but something seems to have gone seriously wrong and things have gone down-hill. Perhaps you're taking things too personal. Who knows. So I'm going to just disengage from the discussion now, no matter what you write next (if anything). That's probably better for both our sanity.
You are continuing your straw man arguments, and I have had enough of that. Not once have you actually answered the point I made, (...)
Talk about the pot calling the kettle black. Where the hell did you even get the idea that I claim that "increased demand does not increase prices, everything else being equal" (*)? You claimed that I make that claim in your earlier post, and I have addressed that in my previous post - pointing out what I actually said instead. Yet you do not address that, and continue with your straw men. If you truly believe that I made the claim (*), you should at least have the intellectual decency to explain where you got that idea from.
Or perhaps the problem is that you have a radically different interpretation of the quantifiers that are involved in those statements, or are not considering quantifiers at all? Perhaps you think that I am arguing that "increasing demand never raises prices", while you claim that "increasing demand always raises prices"? There's a middle ground, you know.
What I have tried to make increasingly explicit in the last three posts (admittedly I should have done that sooner, I just thought that it was obvious) is the statement that whether an increase in demand leads to increased prices (and if so, by how much) depends on additional factors. Sometimes you will get an increase in prices, and sometimes the prices will stay the same. (There is no force at work that would prevent suppliers from lowering their prices in reaction, but it's fairly safe to say that that would be extremely unusual.)
Do you agree with the preceding paragraph or not?
Here's a hint to help yourself against embarrassing yourself: I have yet to read an economist who seriously argues against the statement made there - it's perfectly in line with "basic economic theory". A second hint: perhaps you should consider the difference between monotonically increasing functions and strictly monotonically increasing functions.
(Yes, I have also made some tentative statements about how the link between demand and prices works based on additional factors, but I'd be happy if we could at least reach an agreement on the above. One step at a time ;))
I am quoting the key points on this topic from my last comment (with some emphasis added):
So the most intellectually honest statement is something along the lines of "$X can lead to a devaluation the currency, but it can also cause real economic growth, and it may of course also cause a mix of those two things".
(...)
All I'm really saying at that level is that it is in fact much more likely that the economy reacts by increasing Q, especially in the current situation where there is high unemployment and a large output gap.
If you read those statements as "increased demand does not increase prices, everything else being equal", then I feel that reasonable communication with you is no longer possible.
My hope is that this is simply you lashing out one last time because you fail to defend a point that is too much part of your identify. It's a shame, because I already told you that I would agree to a weaker form of the claim you originally made, and this could perhaps have led to a synthesis we could both agree on. Oh well.
The "money supply" is a stock. It is something like the sum of all deposits, depending on the definition. How could that possibly affect inflation directly?
Who cares if it affected "directly", whatever that means. You are changing the question, which is : "Will increased money supply increase inflation (or decrease deflation, if you like)"
I care. Because bringing up the valid point that there is no direct impact forced you to explain your chain of thinking, which allows us to look at where the weaknesses are.
My point was that the stock of money is not one of those inputs.
Says who? It is a pretty common practice to simply adjust all prices to account for inflation. Not a perfect method, to be sure, but easy and simple.
The stock of money is not a priori equal to inflation. So if you account for the inflation numbers published by whatever institution in your price-setting considerations, then you are still not using the stock of money as one of your inputs in the considerations.
You may be falling into a trap of circular logic here, where you assume that inflation is tied to the stock of money to support your argument that inflation is tied to the stock of money.
However, at least one of those inputs is a flow of money, i.e. the effective demand that has been seen previously.
Says who, and even if true, so what?
Pretty much all micro-economic textbooks say so, for example (what do you think is behind supply and demand curves?). And so what is that, to understand inflation, it may be better to look at flows of money than stocks.
1. If the sum of deposits (ie., the money supply) increases, there must be some entities who has more money than before.
2. Entities with more money tends to either use or invest money. Let's discount the investment, as that just moves the money to someone else.
3. When some entities use more money, demand increases.
4. Increased demand tends to increase prices.
This is the weak link of your argument. Because if your claim is that "$X can lead to a devaluation of the currency", I would actually agree with you.
But again, I remind you that you dismissed a policy tool that is available to the government by saying that "$X would just devaluate the currency", which is a much stronger claim, and your toned down version of point 4 above no longer supports it.
After all, increased demand tends first to increase production. Firms can also react by increasing prices - this is what you write - but then they risk losing market share to the competition. So whether increasing prices is feasible for them depends on a lot of factors.
So the most intellectually honest statement is something along the lines of "$X can lead to a devaluation the currency, but it can also cause real economic growth, and it may of course also cause a mix of those two things".
Remember that this part of the discussion was started because of your claim that "$X will just devaluate the currency". Well, turns out that apparently you agree that "$X can also grow the real size of the economy"
I am tired of your straw men. I never wrote that. Please quote me correctly, or not at all.
I'm not sure whether you understood me correctly. The first quote is something that you wrote here.
The second quote is not something you wrote explicitly, but I never intended to claim that - sorry if it came across that way. Instead, it is related to your example where you go from the situation M=V=P=Q=1 to the situation M=V=P=Q=2 as a reaction of an increase to M=2. If I interpreted you correctly as saying that this can actually happen in the economy, then it means y
No, it doesn't, at least not in the way that you think. Here's why: in regular goods markets, both demand and supply are essentially flows. Producers produce a certain amount of goods per time unit, whence the supply. Consumers demand a certain amount of good per time unit, whence the demand - both can be functions of price or whatever, but the point about flows is important. Prices change on the margin.
Of course the price as measured in goods doesn't change because you change the amount of money available: That is why it is inflation rather than an increase in the value of the goods.
I don't understand what you're trying to say there.
In the following, you butchered my reply in a way that allows you to miss the point, so I rearranged things a bit.
The "money supply" is a stock. It is something like the sum of all deposits, depending on the definition. How could that possibly affect inflation directly? Inflation is a measure of average price increases, so e.g. increase of prices set by supermarket bureaucrats. But the people who make decisions about how to set prices in supermarkets only see the flow of customer demand. They do not see the size of the stock of money. So how can their decision possibly depend on the latter?
Ah, argument from personal incredulity.. (...)
More like a rhetorical question. Perhaps my rearranging of the quotes and the added emphasis already helps you to see my point, but let me reiterate in a different way just to be sure.
Think of the price-setting process of an individual supermarket (or other firm) as an algorithm. It has inputs (such as the cost of production, the effective demand seen by the firm, profit motive, behavior of competition, whatever), and it has an output (the price that is ultimately set). My point was that the stock of money is not one of those inputs. However, at least one of those inputs is a flow of money, i.e. the effective demand that has been seen previously.
You have not argued against that, just continued to claim some causality from an increase of stocks to an increase of flows as I predicted. I've cut out the majority of the rest, because I think the really important point is the following (and yes, I'm also a mathematician - but it's kind of lame of you to bring that up, considering that you really only need high-school arithmetic for these things; I on the other hand apologize for exaggerating about V, I got carried away).
Earlier you write something like "$X causes inflation", and since you have yet to really spell out what your X is, I assume you mean X = "increase of the money supply, i.e. M in the equation MV = PQ". If this assumption is wrong, I gladly stand corrected and we can discuss what you really mean. But given the assumption, the claim that "increase of M implies increase of P" denies the possibility that the adjustment in the equation happens via a change in V or Q.
No it does not. For instance, assume that M=V=P=Q=1. That us assume that M is increased to 2, then the equation would still be satisfied by V=P=Q=2. Note how nothing is constant with that solution.
Hey! Seems like you're conceding that the economy can quantity-adjust. I think we're getting somewhere :)
Remember that this part of the discussion was started because of your claim that "$X will just devaluate the currency". Well, turns out that apparently you agree that "$X can also grow the real size of the economy" (perhaps, I think we still haven't really settled on what you mean by X). Once you have realized that, one can obviously start discussions about whether the economy tends to adjust more by increasing production or whether it adjusts more by raising
Thank you, thank you, thank you. You are a voice of reason in a sea of inflation insanity.
You know, if I had a dollar for every time people asked me to read up on a fringe theory, I would be a rich man now. You seem reasonable enough that I read the criticism section, which convinced the theory was not solid.
I know. Who knows, two years ago I might have reacted in the same way that you do. Telling apart the fringe theories that have merit from those that don't is a difficult problem. I appreciate you checking out the Wikipedia Criticism section. You'll note that the points mentioned there have been addressed by MMT academics. I'm really not trying to sound paternalistic or something, but try putting yourself in my shoes. What if MMT really had some merits? What could possibly convince you?
If the government covers a deficit by printing money, it will increase inflation, because greater supply leads to lower prices. This also applies to money.
No, it doesn't, at least not in the way that you think. Here's why: in regular goods markets, both demand and supply are essentially flows. Producers produce a certain amount of goods per time unit, whence the supply. Consumers demand a certain amount of good per time unit, whence the demand - both can be functions of price or whatever, but the point about flows is important. Prices change on the margin.
The "money supply" is a stock. It is something like the sum of all deposits, depending on the definition. How could that possibly affect inflation directly? Inflation is a measure of average price increases, so e.g. increase of prices set by supermarket bureaucrats. But the people who make decisions about how to set prices in supermarkets only see the flow of customer demand. They do not see the size of the stock of money. So how can their decision possibly depend on the latter?
You could argue that there is some relationship between the stock of money and the flows of money, i.e. that increasing the stock of money will also increase the flow of money. In terms of Quantity Theory of Money, this is the claim that V (the "velocity" of money) is constant. Empirically, this claim is false, and V varies all over the place. So now you have two choices: one is to insist on using the stock of money to explain inflation, in which case you have to complicate your models to account for changes of the velocity of money. Or you cut through the bullshit, forget about the stocks, and just concentrate on the flow of money. The latter is why I put an emphasis on aggregate demand, because that's one way to look at such flows.
Conversely, when the government issues more bonds than it deficit spends, the interest rate goes up.
Which interest rate, exactly? And once you tell me this, could you outline why the (market) interest rate would increase?
The interbank interest rate is most directly affected. When the government issues more bonds than it deficit spends, this means that the total amount of reserves held by banks shrinks. This increases the demand for reserves for refinancing purposes, which means that those banks who hold excess reserves can lend them out at higher interest rates. Of course, the lending rate (or discount rate in the US) of the central bank is an upper bound to how high this interest rate can rise.
This is why the central bank, as an arm of government, acts to sell and buy bonds on the open market to control the interest rate. Note how the interest rate is a policy target of the central bank, whereas the total amount of reserves is a policy tool: by buying and selling bonds (or doing repo agreements or whatever), the central bank holds the level of reserves at a level that is compatible with its interest rate target. In particular, the central bank cannot target both interest rate and level of reserves.
Tell the Greeks that
I first refrained from this because I didn't want to be overly pedantic, but it gnawed at me, since it's a pet peeve of mine. You mentioned "printing money" in your comment. Clearly, you cannot actually have meant printing money, in the sense of putting ink on carrier substance. So what is it that you really meant?
In the sentence "$X would just devalue the currency", X = "Printing money" does not make sense in the literal meaning. So what should X really be?
This may seem overly pedantic on the one hand - after all, we both know it's a metaphor. But on the other hand: a metaphor for what, exactly? I'm convinced that if you truly, genuinely try to answer this question for yourself, it will help you significantly in understanding the MMT-based analysis of inflation and other macroeconomic phenomena.
You really should read up on MMT, since all of your points are addressed there. Let me reply with some pointers anyway even though I don't have much time, since you do sound like a reasonable person - but please excuse the fact that some of the following may become a bit badly-edited stream-of-consciousness:
Not quite. Printing more money would just devaluate the currency, meaning that everything the government buys would be more expensive, and the taxes it gathers would be worth less. On the other hand, a better rate for the bonds (that is, people invests in bonds) translates directly into more buying power.
Please read up on how bond sales and open market operations by the government interact to set the interest rate. The fact is that if the government deficit spends without issuing bonds, the interest rate goes down. Conversely, when the government issues more bonds than it deficit spends, the interest rate goes up. So the government can just give itself a better rate for the bonds if it wants to. This clearly contradicts your understanding of how inflation works.
In fact, inflation is a mixture of different actors in the economy fighting for shares of real income, and a result of the interplay of supply and demand: if aggregate demand is too high for the productive capacity of the economy, this conflict will be resolved via increasing prices. If aggregate demand is too low for productive capacity, the conflict will typically be resolved via unemployment, and factories being idle.
So when private spending collapses and the government props up aggregate demand with its deficit, this is not inflationary. Whether the government issues bonds or not is irrelevant as far as inflation is concerned, it only affects the interest rate (yes, yes, monetarists claim that the interest rate is super important for inflation, and yes, there probably is some linkage there; but it's very indirect, and much weaker than the obvious link between aggregate demand and inflation).
I mentioned this further up: When you find yourself disagreeing with a great majority of experts, it is time to recheck your facts. Odds are that you are mistaken :)
Believe me, you're not the first person to engage me or the MMT academics on this topic. Suffice to say, what it eventually ends up being is that you concede all points, but declare them irrelevant by clinging to an extreme interpretation of the Quantity Theory of Money. The latter doesn't hold up to empirical evidence and not even to common sense, but if you refuse to even consider the possibility that you're wrong about it, I can't help you.
Note that you have already taken the first step of this type: First you said, people will buy more bonds, which allows the government to spend more. Then I said, that's false, because the capacity of (sovereign) government to spend is independent of bond issue. You conceded that point (at least I assume so) but evaded by claiming that it would necessarily be inflationary, irrespective of what else is going on in the economy. That's Quantity Theory of Money, and it's nonsense because it implicitly assumes that the size of the real economy is constant (i.e. the Q in MV = PQ cannot change) -- but that is so obviously false, it's not even funny anymore.
Again, not quite. Your point about deposits is rather silly, as the loaner will probably immediately withdraw the loaned amount from the bank. This money will come from deposits to the bank, or from loans from other banks. Due to the fractional reserve system, some money is created in the process, but only a certain multiple of the money originally issued by the state bank. The exactly factor depends on the locals laws. I suggest you read the Wikipedia article on the fractional reserve system to see how this process works.
You're right about the withdr
Not necessarily. "The money" could be used to pay down debts, in which case you just get shrinking balance sheets, but no spending; or it could be saved, e.g. by buying government bonds.
Well, sure, but that would lead to the bank having more money to lend out, and the government having more money to spend, respectively. If they are lost, it is because of bad investments... companies or states that crash or at least diminish in value.
As far as the US federal government is concerned: do you really believe yourself what you are writing? I mean, think about it: The US federal government creates the money. Saying that they "have more money to spend" is like saying that Blizzard has more gold to issue inside World of Warcraft. The US government can spend as many US$ as they like or, to be more precise, as many as sellers are willing to take in exchange for goods. The only constraints are political, not technical. So to say that "they can spend more money If you buy their bonds" is simply false. (It's funny how obviously false it is, but how widespread the belief is that it's true - kind of an "emperor's new clothes" thing.)
As far as banks are concerned, you're also simply wrong, although the points are less obvious because you really need to know at least a few technical details of how banking works. Banks do not lend out money, they give their borrowers access to a deposit. To put it another way: banks do not need money to make loans. They simply grow their balance sheet, adding your IOU as an asset, and your deposit as a liability. They then may have to refinance themselves as part of the settlement system, but the people who actually make the loan decision are quite disconnected from the people who worry about refinancing. The corresponding departments in banks are separate.
Think about the term "deleveraging" applied to the economy as a whole. It means that balance sheets are shrinking in the financial sector, which is exactly what happens when loans are paid back without new loans being created. This has happened in the last few years before our very eyes. The empirical reality contradicts the belief that "then the bank will lend out more money" (which I think is what you implicitly claimed, and which is what really ultimately matters anyway). There's really nothing more to say.
When the pay goes down, individuals have less disposable income, but the money has not left the economy. It could go to other employers, or perhaps the owners gets richer and spends more money, or something else. Or perhaps the produce gets cheaper, which means said workers will be able to purchase as much with the same money.
Not necessarily. "The money" could be used to pay down debts, in which case you just get shrinking balance sheets, but no spending; or it could be saved, e.g. by buying government bonds. In fact, the latter point is part of where this whole crisis comes from in the first place: income has shifted, over the course of many decades, towards the rich, who have a higher savings rate. This would have caused a recession much earlier, if not for the fact that the financial sector got creative and managed to give out more and more loans to less and less credit-worthy customers - that's what enabled them to keep up the spending stream for the time being, but of course private debt is not sustainable indefinitely, and the shit hit the fan at some point.
If you are disagreeing with an entire field of experts, it is often a good idea to ask yourself if you are really *that* clever :)
Well, unfortunately I am not such a creative thinker. It's just that I listen to what those in the subfield of Modern Monetary Theory have to say. Yes, they disagree with the majority of the rest of their profession, but given how politicized economics is, that alone is not enough to discredit them.
When there is surplus employees, the pay should go down, which in turn leads to increased economic growth and thus less unemployment. So it will balance itself out, eventually.
That's the theory anyway.
And it doesn't work like that in practice, because aggregate demand has got to come from somewhere. When pay goes down, people have less disposable income, so they spend less, so economic growth decreases. Of course this process doesn't necessarily go on forever, but the fact remains that "equilibria" can exist at almost any rate of unemployment. Market forces alone do not lead to full employment - the ideologists who would tell you otherwise conveniently ignore the effect of income on spending.
It's amazing how the majority of economists seem to be entirely oblivious (whether out of ignorance or willfully, I don't know) to the fact that in the end, the economy is a giant life support machine that produces things for consumers. Yes, investment plays an important role in the bowels of the beast, but investment only makes sense when there are potential customers with disposable income. Aggregate demand is what it's all about in the end.
It's easy to say this, but inflation actually plays a vital role in the economy because of how prices change. For the economy to work well, prices need to reflect the real costs of producing stuff, and how that stuff is valued by consumers. Now if the real value that some item should have decreases, then without inflation, its nominal price would have to decrease as well. But prices are sticky: it is quite easy for vendors to keep them at the same level.
Inflation helps this process, because when the general price level rises, the real price of individual items decrease as long as their nominal price stays constant. So for sellers and employees to maintain the same level of real income, they somehow need to justify nominal price rises. You could think of it as the Red Queen hypothesis applied to economics.
And, just to put things into perspective, the boom years of the 1950s and 1960s saw inflation around 4% and higher in most Western economies, with nobody (at least not the 99%) complaining about inflation, whereas recently, inflation has crept around the 2% level. That should provide some food for thought as well.
Take a step back to think about how deeply you accept the neoliberal framing of work. You implicitly accept the premise that welfare recipients are (to exaggerate to make a point) lazy, useless slobs who have decided to just not work. That premise is both incorrect and poisonous, and you should reject it outright.
The fact of the matter is that there are roughly two groups of people living off social welfare. One group is honestly disabled and simply cannot work for whatever reason, such as an unusual illness or an accident. It is a matter of basic human decency that we as a society support them. (It is especially ironic that those who want the US to be a Christian nation often do not have the empathy to think like Jesus would in this case.)
The other group is both willing and able to work, but simply cannot find a decent job because of macroeconomic problems, i.e. ultimately the government having a too contractionary stance in economic policy. Crushing the spirits of this group using workfare schemes or even forced labor is evil. What we really should do here is to ensure, using macro-economic policy, that enough work is demanded by employers so that they can find a job. We also have to demand of employers that they do not discriminate against the unemployed, and that they contribute their fair share to retraining potential employees whose skills do not exactly match the requirements.
Finally, keep in mind that the reason for the pervasiveness of the anti-social framing that I mentioned initially lies in the fact that a (small, but influential due to lack of position) number of people want unemployment to be high, because creating unemployment undermines the bargaining position of workers.