Wednesday, December 5, 2012

Cullen Roche on Peter Schiff

I just read this at Euro Pacific Capital, Peter Schiff’s company. He says we should eliminate the debt ceiling so our creditors can cut us off:
“Such a development may be the shock therapy our creditors need to finally cut us off for good. If that occurs, interest rates in the United States could finally rise to more rational levels. A significant increase in the cost of borrowing will create the mother of all fiscal cliffs. It’s too bad that Tim Geithner can’t see that one coming.”

This is not correct. Schiff misunderstands the design of our monetary system....
Pragmatic Capitalism
Eliminating the Debt Ceiling Wouldn’t Cause Interest Rates to Surge
Cullen Roche

95 comments:

Mike Norman said...

Schiff is a laughing stock. Creditors cut us off. We need to borrow our own fiat. Come on.

But Roche comes out with this beauty:

"Our monetary system is different because the gov't harnesses the banks as funding agents."

Oh brother.

y said...

yes, we don't need foreigners to give us dollars, we need banks to give us dollars.

I have a new term for this "post-MMT" way of thinking - Neo-Schiff

geerussell said...

Hey now, start saying the government can fund itself and the next thing you know we'll be putting the state at center stage in an authoritarian nightmare where everyone has a job.

Let's just take a step back and get some praxeological analysis before this gets out of hand.



James said...

I'm glad I'm not the only one who's been bemused by some of the stuff Cullen is coming out with. The sad thing is, his view of things will probably get more traction with certain elements looking for a way to retain the status quo.

JK said...

Has there been a detailed MMT response to Cullen's assertions? My understanding so far is that MMT is correct in the theoretical sense, but Roche and MR seem correct in the operational sense.

i.e. although from a bird's eyeview "borrowing" is completely unnecessary, it seems like the reality is that banks create all of the "spendable" dollars in the economy via 'Loans Create Deposits' (endogenous money) …and the U.S. government then just recycles that money whenever it wants to spend more than tax revenue.

To me, this is all partly just semantics and a matter of framing and conception, but nevertheless there seems to be some operational truth to the way Cullen describes the process.

What am I missing?

y said...
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y said...

MMT is a bit too abstract for some. They see money going into the treasury account and coming out of the treasury account, they say "the money wasn't destroyed", because they ignore what money actually IS

JK said...

You can say I've got it wrong, but I still stand by the part of my first comment that the distinctions between MMT and MR seem to be largely just a matter of framing and conception. In my mind, technically either can be correct… they each just frame and conceive it differently.

For example, one can choose to conceive the Treasury and the Fed as one entity (MMT). That's fine. It works. My hand and my elbow are both part of my arm. Or, one can choose to conceive them as separate, but working in conjunction (MR). That's fine, too. It works.

Again, conception.

As always I'm open to being convinced one way or the other is more accurate.

Adrian Janschek said...
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Greg said...

Lets not let this degenerate into a MR/MMT critique okay guys? Those guys are more friends than enemies of MMT

A lot of this MR/MMT stuff is being addressed by Randy in his latest series of posts. Framing is important.

MMT seems to put government at the center while MR puts banks at the center.

I dont fear the MMT view as many do because I dont fear my govt.....yet! I still (perhaps naively) believe WE... CAN... get our govt to do great things, for us or by us. As much as almost any country in the world, the USA has harnessed the best of human spirit on this planet.....its also created some of the worst too(witness our gun culture) . Must those two go together? Maybe. In a truly free society, maybe the expression of the best elements of human nature will necessarily bring out the worst as well. Any way I mostly view our experiment in govt as very successful.

I appreciate the MR view without taking it as *truer*.
It reflects the truth from our private banks point of view, and this is helpful to undersatnd. Its not necessary to view banking as a scourge to get it to change, just deprive banking of willing borrowers and it will seek change. Of course it might take a while longer for banking (as a whole)to figure out that it is its own collection of academics and CEOs who are spouting the nonsense, which is driving the policies, which are choking their own customer base.

Putting everyone in debt to you and then supporting policies which make it harder or impossible for them to pay you back would seem, to most outside observers, an obvious dead end idea but we are talking about people with a very developed sense of self. Their sense of self is so large they cant step outside of it. Another product of the American experiment!!!

I also view our private money system as mostly effective at encouraging our countries development. Its just that whats not included in the *mostly* can get very very ugly. We are way out of balance now.

I think Cullen, Carlos and Mike Sankowski know this as well and are being very strong advocates (in their own ways) for virtually every MMT proposal except the JG. Regarding the JG, Cullen has even explicitly stated that while he wont directly advocate for it he also would not revolt against it if it were something that our politicians decided to try. He would evaluate it with as open of a mind as he evaluates every other econ policy we try. He simply thinks it will NEVER get a start ............ I'm not so sure... and interestingly I think a form of a JG is likely to come from the non progressive wing of our political spectrum.

Oh..... and Peter Schiff is an idiot!

But I did enjoy watching Peter Schiff take down Art Laffer a few years ago.

Dan Kervick said...

Rather than saying that the government harnesses the banks as funding agents, it would be more accurate to say that the banks have harnessed the government as sugar daddy. The current operational framework violates Abba Lerner's Second Law of Functional Finance:

"The government should borrow money only if it is desirable that the public should have less money and more government bonds."

Unfortunately, we have set up a system in this country in which deficit spending automatically triggers bond sales to the public. This is functionally inefficient. While in some cases, the bond sales serve a useful public purpose, in other cases they don't, and people with a monetary surplus are able to profit needlessly on governmental operations.

y said...
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y said...

"the distinctions between MMT and MR seem to be largely just a matter of framing "

I'd agree with that

"one can choose to conceive the Treasury and the Fed as one entity (MMT). That's fine. It works. My hand and my elbow are both part of my arm. Or, one can choose to conceive them as separate (MR)."

This is a false dichotomy really.

"I dont fear my govt"

It's a strangely American thing to either fear the government, or think that it's sort of normal to fear the government.

"also view our private money system as mostly effective at encouraging our countries development"

What does that mean? The government budget deficit is something to be worked out (basically) mathematically, it's not some moral thing. Banks need to be seriously reformed so they can't destroy the economy and hold everyone to ransom again.

paul said...

"What am I missing?" - JK

Bank lending depends on the government creating NFA. If the ratio of NFA to credit is 10 to 1, banks can't function (create the 10) if the government doesn't create the 1.

Who is dependent upon whom?

Roche frames this in reverse and says that credit, not government spending drives growth. I suppose you could look at it like that but if government doesn't let out the leash nothing much can happen.

An amplifier takes a signal and amplifies it by say, 100 to 1. How much amplification takes place if it isn't plugged in?

Matt Franko said...

I believe the FRS (which INCLUDES depository institutions) is legally defined as our US Treasury's FISCAL agent vice FUNDING agent...

If the semantics within our actual civil law are paramount in meaning to any of us... (myself not included)

rsp,

y said...

"banks create all of the "spendable" dollars in the economy via 'Loans Create Deposits' (endogenous money) …and the U.S. government then just recycles that money whenever it wants to spend more than tax revenue."

The government doesn't borrow bank created money, that's a mistake. The government doesn't "recycle" money either, though the Treasury may.

Also the Treasury may not be able under current circumstances to create money other than coins, but that's irrelevant to the MMT argument that taxes and borrowing destroy money and spending creates it. I can try to explain that in more detail if you like. (I bodged it a bit above)

Banks don't create all the "spendable dollars" in the economy. Don't you ever use cash? What they call "inside money" is basically bank credit. Bank credit is a promise to pay cash. That's it. The fact that most people don't ask for those promises to be redeemed is irrelevant. That's the whole basis of "fractional reserve" banking and it has been since the beginning of banking.

paul said...

"The government doesn't "recycle" money either"

The tax/spend cycle is functionally equivalent to a recirculation pump for a swimming pool…it keeps a fixed stock of NFA circulating. When a pool is enlarged to accommodate more swimmers the "pool authority" adds more water.

As far as what banks create, it is limited by the level of NFA, and above all, banks create anti-money simultaneously, which almost never seems to enter the discussion.

Credit (debt) is the mathematical equivalent of spending savings that haven't been saved yet. Savings (MMT) is the stock of net money in existence at any moment in time.

Credit CANNOT add to this stock, it can only leverage it.

modernmoney said...

MR seems to be somewhat of a reinvention of Circuit Theory.

MR, I made a particular point early on is specific to the US only.

MR is too specific. It cannot be applied across borders as you have to go and look up all the micro-details of legislation.

If the accounting works out the same in the abstract as it does in the specific (which in one example I've seen it does) what does it matter?

paul said...

"If the accounting works out the same in the abstract as it does in the specific (which in one example I've seen it does) what does it matter?" - modernmoney

I agree with your comments and add that it matters wrt causation.

MR has causation backwards.

y said...
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Dan Kervick said...

The fact that most people don't ask for those promises to be redeemed is irrelevant.

y, I agree with you on this. But I would also say that in some sense most people do routinely redeem most of their bank credit as government money. The government's money comes in two forms, cash and electronic reserve balances. Every time some bank depositor pays some depositor at another bank, the payment requires a payment of reserve balances from the first bank to the second bank.

y said...
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y said...

"The government doesn't "recycle" money either, though the Treasury may."

Ok, I’m going to explain what I mean by that:


Let's say you pay some tax with a dollar note. That note goes to the Treasury.

Let's say the Treasury doesn't shred the note, and instead spends the note. (ok they don't actually do this but just imagine).

What just happened? The Treasury "recycled" a note, it got somoe money and then spent that money, right?

Too simplistic.
-----------------

The Treasury is a department of the US government and the Fed is an agency of the US government. The Fed issues liabilities, which are money. In physical form Fed liabilties are called Federal Reserve notes.

When the Treasury receives payment, Fed liabilities are debited from a commercial bank reserve account at the Fed, and credited to the Treasury’s account at the Fed. These Fed liabilities are then assets of the Treasury.

Under current rules the Treasury needs a positive balance in its Fed account in order to spend. It could spend without this but the rules say please don't do that (or so I’ve been told as I’ve never actually seen the rules).

When the Tresury has a positive balance in its Fed account, this means the Treasury has an asset. That asset is a Fed liability, i.e. money.

However, Fed liabilities are US government liabilities. In the US Code they are described as US government obligations. And Treasury assets are US government assets.

So when the Treasury has a positive balance in its Fed account, the US government has both an asset and an equal liability. The liability is the asset and vice versa. So the asset and liability necessarily cancel each other out, netting to zero.

As such, when the Treasury has money, say $100, the US government has $0.

Ponder that for a moment. How can the US government spend if it has $0?

The answer is simple: tax destroys money, US government spending creates money.


y said...

"Every time some bank depositor pays some depositor at another bank, the payment requires a payment of reserve balances from the first bank to the second bank."

True but they net out payments and just settle the difference most of the time.

With the Treasury it's a bit different.

paul said...

"The fact that most people don't ask for those promises to be redeemed is irrelevant."

This is a common and recurring pattern in system dynamics. It is the basis of leverage, so it is relevant. It is the basis of the entire system.

Everyone will not need their money at the same time, everyone will not need to sell their real estate at the same time, everyone doesn't need to cash in their pension plans at the same time. If they did there would have to be enough NFA in the system to satisfy that demand.

The way it is If they tried it would create an event similar to a bank run. The entire financial system is built around this concept. The concept is not trivial.

A home electrical system never needs all circuits under load at the same time...that's why your panel can have 600 amps worth of breakers while your service is limited to 200 amps.

Try using them all at once.

paul said...

"The answer is simple: tax destroys money, US government spending creates money."

This is true but it gives no insight into the system dynamic. It is simple arithmetic that doesn't explain how the flow affects the system.

The operation takes saving and converts it to spending. That is a big deal.

Tom Hickey said...

To me, this is all partly just semantics and a matter of framing and conception, but nevertheless there seems to be some operational truth to the way Cullen describes the process.

As I understand it, in the view of the MMT economists MR is correct operationally and they are in agreement over the operations. The disagreements is over how MMT generalizes as a theory.

The MMT economists response is that the MR folks are operational types and don't get how theory works, e.g., macro is based on aggregates rather than specifics. The point of theories is to simply a lot of data through generalizations.

The generalizations still have to be stock-flow consistent, and the MMT economists maintain that theirs are. Details inside the black box are not important in the theory, although when deconstructed, the details have to be understood correctly. The MMT economists hold that this is a true of their analysis.

They feel unfairly criticized when people point out that they did not mention details, get them wrong, or are unaware of them, when details are not relevant to the case. The MMT economists point out that they have set forth the operational details elsewhere but people don't seem to know about this or forget it in their criticism.

There may be some minor disagreement about fact and logic (math) here and there, but that is to be expected in a complex subject, and that is what debate is supposed to iron out. Factual disagreement can be decided empirically and logical disagreement by the rules.

The big disagreement between MR and MMT from the MR side is that MMT economists assume that their preferred operational system is already in place (Fed and Treasury consolidated) whereas this is not the case.

MMT economists respond that it is the case informally but not yet formally as they advocate. Formalization would not make a huge difference in what actually goes on at present.

What I have said here is my own impression, and I am not sophisticated enough in this field to completely understand the issues. But that's how it comes across to me.

geerussell said...

If the accounting works out the same in the abstract as it does in the specific (which in one example I've seen it does) what does it matter?

It matters when you've logically tree'd yourself with the need to create a description of reality that can't allow for a JG. Afraid to climb down and scratch & hiss at anyone who tries to help.

That aspect is being downplayed a bit here, which I can understand. However, it is necessary context to understand how "MR" ended up as what it is.

The end result is a bit of a jumbled mess, MMT without most of the insights and understandings. A snapshot of how one country works coupled with the idea that snapshot actually refutes the abstract principles.


frlbane said...

Every time some bank depositor pays some depositor at another bank, the payment requires a payment of reserve balances from the first bank to the second bank. Dan K

But the banking system as a whole rarely has to redeem its liabilities to any large extent since physically holding cash is not risk-free while bank deposits are insured by the monetary sovereign. But the monetary sovereign itself, as a normal service to its money users, should provide a risk-free fiat storage and transaction service that pays no interest and makes no loans and NOT insure deposits at private institutions NOR provide a lender of last resort should a bank overextend itself with credit creation.

Tom Hickey said...

MMT seems to put government at the center while MR puts banks at the center

Not sure that this is the case. First, MR claims to be "diagonalist." MMT was developed in part because the Horizontalist endogenous analysis developed by Basil Moore and MCT focused chiefly on inside money.

MMT set out to complement that with an investigation of outside money. MMT economists have said that they presumed the Horizontalist endogenous approach and they do not claim that MMT is in opposition to it. A complete understanding of endogeneity requires an understanding of the complementarity of inside and outside money.

MMT economists have shown that outside money is central in modern endogenous system due to the public monopoly. Polling has shown that the majority would prefer the government to control the monetary system rather than the financial sector.

In fact, most people have no idea about how much of the circulating medium comes from credit money as opposed to state currency issuance. When this is understood by the public, I would expect voters to react negatively. Voters are open to the framing that a country's money should be a public utility rather than being privately controlled and debt-inducing.

Dan Kervick said...

"True but they net out payments and just settle the difference most of the time."

True enough, but that's no different than recognizing that if you owe me $100 and I owe you $110 dollars, I need only give you $10 in cash. To me the point is that if the bank credit were not a liability for the government's money, other banks and their depositors would be unlikely to accept it in the first place. If the a bank simply issued money that was nothing other than a negative number on its own balance sheet and a positive number on its depositors balance sheet - like dollars on the Fed's balance sheet - and did not legally represent a claim against its reserve assets, then the ability to get people to accept that balance sheet entry in exchange for real goods and services would be quite iffy.

JK said...

Tom Hickey just said, more eloquently (as always), what I was trying to say.

MMT generalizes as a THEORY, and that's fine. I think it's really important to do that. (I go to UMKC and came here speficially because of MMT). Generalizing as a theory makes MMT available for Italy, for Greece, etc…. for a countries in general.

MR, on the other hand, only discussses operations, and it only describes the United States.

Again… this is all conception. At what level of exactness do you want to discuss it? I find that I often use the MMT/sector balance apporach with newbies…. but for those wanting to get into the nitty gritty, I turn to some of Cullen's MR concepts.

It just depends on what exactly I'm trying to explain. In the end, MMT and MR agree on the most important "effects"… e.g. inflation, not solvency, is the true constraint, etc.

Greg said...

What I meant Y, but was probably unclear in conveying,
is that for the most part, our bank driven system has worked to facilitate an overall improvement of American living standards over the last 40 years since the Gold window was closed.

As MR has made clear the abundance of "money" in our system is private credit and I think it has worked to most of ours benefit....... for the most part.

Where I think I and many in MMT part ways with MR is that *most of ours* and *most part* is not good enough. We not only CAN do better, we SHOULD do better.

The *should* clearly is a moral statement. Some dont think we should do anything more for those that are currently left behind by our system. I think they are wrong. But even many who might agree we should do more disagree on what to do.

The problem, in my view, arises when people say we CANT do better. That is the lie that too many are hiding behind. The TINA crowd.

This, to me, was the power (and why its scary to many opponents) of the MMT paradigm as I explored it. Getting past the mind dizzying numbers with 12 zeros and realizing that its only about real stuff...ever. The numbers could all go away tomorrow and no ones world would change materially. The numbers can be useful but lets not let them dominate us. We invented them. We own them.

Do we have within our borders enough land to produce enough food to feed everyone 5,000 calories a day? If yes then its clearly only a distribution problem. If no what would we need to trade to use someone elses land?

Do we have enough raw material to build every house we would need to house everyone adequately?
If yes then its a distribution issue if no then we can figure if we can get it from someone else.

Do we have trained workers and building space/materials to care for every person that might need medical attention. If yes... blah blah blah, if no can we find people interested in receiving the training?

Start with these three and weve eliminated the major sources of human misery. Much of the other sources might go away too once people dont live in fear of starvation, freezing and going broke on medical bills. A less stressed out society would look a lot different than this one

frlbane said...

If the a bank simply issued money that was nothing other than a negative number on its own balance sheet and a positive number on its depositors balance sheet - like dollars on the Fed's balance sheet - and did not legally represent a claim against its reserve assets, then the ability to get people to accept that balance sheet entry in exchange for real goods and services would be quite iffy. Dan K

Yep but once a bank has managed to get people indebted to it then its money is backed by the real collateral of its debtors too. So at some point, a bank (if legally allowed) could suspend redemption of its deposits and still have them be acceptable since debtors would have to secure them to avoid losing their collateral to banks.

The banks have run a clever bait-n-switch game on the human race for centuries. It's time we wise up and reduce them to economic insignificance.

frlbane said...

Amen to what Greg said.

Tom Hickey said...

As MR has made clear the abundance of "money" in our system is private credit and I think it has worked to most of ours benefit....... for the most part.

Two points here:

1. The existing arrangement has not worked to "our benefit for the most part" (distributed prosperity). It has resulted in extraordinary privilege of a few and has also resulted in financial instability that still threatens to bring down the financial system and take the economy with it.

2. On the Minsky-MMT analysis of financial instability, the ratio of public to private debt needs to be more heavily weighted toward public debt rather than reducing public debt relative to private debt ‚ as the push is now with deficit reduction in the name of "fiscal responsibility."

The existing system is way too unstable and fixing it involves not only financial reform (see Mosler proposal) but also the debt structure.

There is just too much private debt in the system, which has greatly amplified systemic risk. It has also promoted rent-seeking over productive contribution. But cutting back private debt without increasing outside money, which gets saved in aggregate as nongovt NFA, would cramp flow and affect growth (production and productivity) adversely by curtailing aggregate demand.

frlbane said...

But cutting back private debt without increasing outside money, which gets saved in aggregate as nongovt NFA, would cramp flow and affect growth (production and productivity) adversely by curtailing aggregate demand. Tom Hickey

Which is why a universal bailout is ideal; it would enable debtors to more easily pay down their debts, leaving more money for consumption and provide non-debtors with an equal amount of new fiat too. And morally speaking, credit creation has cheated both debtors and non-debtors so both deserve restitution.

y said...

"MR, on the other hand, only discussses operations, and it only describes the United States."

Pragcap MR goes further and says "this is the system we have... therefore this is the system we should have... That's just the way it is..."

Pragcap MR argues that banks like Goldman Sachs and JP Morgan defend our liberty by controlling the money system and the Fed is their slave and the Treasury can only spend by borrowing money created by JP Morgan and Goldman Sachs and thats all fantastic because "that's the system we have, the system we designed.... that's just the way it is..."

Therefore there is no reason to change anything, and there is definitely no rationale for the JG, because that would turn us into Zimbabwe because output is the most important thing and anyway JP Morgan would never stand for it and hyperinflation won't happen because JP Morgan will cut off funding to the Treasury, though the Treasury can always spend as much as it wants to but that's not good because it's like dropping nuclear bombs all over the place, but there is definitely no rationale for the JG whatsoever for the reasons outlined above.

Pragcap MR is gibberish, a lame attempt at providing some justification for Pragcap's opinions about stuff.

Pragcap usually goes on to say some sort of sanctimonious thing like "we just want to tell people how things work and let them decide for themselves... we just describe things objectively, like for example describing the fact that there is no rationale for the JG because the importance of private equity is proven by the equation 1+1=2... that's just the way it is, and Time should be the ultimate goal of economic policy... " etc etc




y said...

"for those wanting to get into the nitty gritty, I turn to some of Cullen's MR concepts"

Like which ones for example?

Dan Kervick said...

frlbane, I know what kind of system you want. But I don't know why you want it. You never make any kind of economic argument for it, other than that it seems to square with certain a priori moral principles you hold. You want the government's monetary system and private sector monetary systems to be absolutely independent. Got it. But don't know why you want it that way.

It doesn't matter whether the banking system "redeems" its reserve balances for cash. Reserve balances are just another form of the government's money.

Greg said...

Tom

You are preaching to the choir with me.

You are correct that we have much "financial" instability and the inequality at many levels is staggering, but I think the fact remains that even the poorest of Americans can look pretty good today compared to many other places AND against our own place 60 years ago. But that isnt good enough. It doesnt give me comfort knowing that we arent screwing with a certain portion of our population as bad as we used to nor as bad as some other people do. Some take solace in that.... I dont. We need to stop screwing with them at all.

I guess what it comes down to with me is while I think its important to develop a fighting spirit, so to speak, to develop a will to succeed to achieve and to try, I dont think one should have to fight for their food, fight for their shelter nor fight for their access to health care. There are plenty of other ways we can develop that. And if, in achieving that we end up with 20-25% of the population who finds their life situation adequate, and wishes nothing more than warmth and three meals, why should the rest of us care? As long as they arent hurting us we should just be happy for them ( or if you prefer to pity them for their lack of gumption thats okay). There will still be lots of opportunities for those of us who wish to, to be the *best* at lots of things.

But the problem is the TINA crowd and the reliance upon our own made up numbers.

Dan Kervick said...

So at some point, a bank (if legally allowed) could suspend redemption ...

But they are not legally allowed. In the monetary system we actually live in, bank money is a liability for government money. It's an IOU for something else.

JK said...

Y,

For example…

When dicussing sector balances, endogenous money creation is COMPLETELY left out of the general story. nd there's a reason MMT does that I think… it's more digestible that way, also, it is the broader theory. But this is somewhat misleading because most of the spendable money in the economy has been created through credit creation/loans create deposits.

So, if someone is looking to get into the nitty gritty details, I shift gears and talk about 'inside money' and 'outside money'…. and how current law has the U.S. government "borrowing" money, but I'll shift back again into how, in the big picture, it doesn't make much sense to think of borrowing in the traditional sense of the word….and so on.

Look, again, all of this is a matter of conception. I find it useful to conceive of things in both how MMT and MR describe it. It helps me fit all the little pieces of the puzzle together.

With that said, MMT and Circuit Theory literature may have accurately covered everything that MR is saying and I'm just not familiar with the literature. If that's the case then I just don't know of it. In the end I'm not interested in picking sides and being a loyal supporter of one and hater of the other. I'm interested in how it all "works" and how it can be used to better inform people and maker better public policy., etc.

paul said...

"MMT generalizes as a THEORY, and that's fine." - JK

The theory part in MMT is somewhat of a misnomer, MMT is based on hard mathmatical fact. The sectoral balance identity is hard-wired into the system, Wynne Godley and others dicovered that fact.

It follows from the sectoral balances that many other relationships within the system are also hard-wired, so those things are not debatable, unless one can find an arithmetic error. This part is pretty easy.

A lot of the things attributed to MMT are simply conclusions that different people come to based on the hard evidence. Those things are not really integral to MMT. For example "deficits don't matter" or "inflation is not a problem until we reach full employment" are not integral to MMT. Those things are debatable.

What does MR add that doesn't fall within this last paragraph?

The operational aspects of how new net money is entered into the system is unimportant…what matters is how much and where.

MMT is math. People add the human/political elements to it.

Analysis from the perspective of both requires that we analyze them separately and then analyze the interaction between them.

There's no unique solution if we try to combine the two first and then analyze the problem, it becomes indeterminate.

Scientists, mathemeticians and engineers learn this from the get-go, otherwise they could never get anywhere.

(Most) Economists have never learned this.

Greg said...

Y

Im pretty sure Cullen has NEVER claimed the JG would turn us into Zimbabwe. Thats not his style

He has expressed his anti JG position fairly well I think.

I agree with you though that his talk about production and time need a little more developing. Production happens for a reason. You dont just produce, especially at the macro level we are examining, to have something. You produce to SELL something.... and the govt can be a very willing and able buyer....... and they dont need to get the money from you first. So stimulating production can happen in many ways.

paul said...

"When dicussing sector balances, endogenous money creation is COMPLETELY left out of the general story. nd there's a reason MMT does that I think… it's more digestible that way, also, it is the broader theory. But this is somewhat misleading because most of the spendable money in the economy has been created through credit creation/loans create deposits."

It is left out because MMT analyzes the economy wrt net money, credit is a second-order element, since it adds no net money, and is in fact dependent upon the creation of net money for the credit circuit to even function.

The ratio between credit and NFA remains within a very narrow range if you look at the relationship between them. When the ratio leaves that range bad things happen.

The driving force is net money creation, credit allows entrepreneurs to take risks to capture some of that net money in anticipatin of monetization by th efiscal authority.

If the fiscal authority doesn't follow through any perceived "gains" will vaporize in the aggregate.

There is also a huge difference between houshold and business debt but I don't want to get into that here.

Suffice to say that household debt accounts for only about 25% of total private debt but that's the spending that is of the most importance. That spending comes mainly from big-ticket items like housing and automobiles.

To say that 95% of the money in existence is private debt misses the point completely. All money is not created equal. Each different class or use of money has it's place but one is above all others in the hierarchy of importance…NFA.

geerussell said...

It is left out because...

I'd also add the point that Tom and others have made in the past about how post-keynesian work addresses endogenous money in great detail and MMT economists for the most part stipulate to that work and don't see a need to duplicate it.

In spite of that having been brought up time and again, the zombie argument that MMT "overlooks" inside money gets right back up and shambles on.

JK said...

Paul: "The theory part in MMT is somewhat of a misnomer, MMT is based on hard mathmatical fact. The sectoral balance identity is hard-wired into the system…"

I'm not disagreeing with the mathematical relationship of sector balances. But the three sectors is a conception (admittedly a very useful one). With that said, the sector balance approach does downplay (and often leave out of the story) the role of endogenous money.

I'm not sure why some of you have difficulty appreciating the concept of conception :)

In my mind, MMT covers most of the bases. But it does tend to downplay the significance of what Cullen calls 'inside money' … likewise, I think Cullen downplays the signifiance of what he calls 'outside money' …and MMT at times seems to overemphasize it. But I think I understand why MMT does that, and it's because MMT is usually talking about general economic theory in the abstract. If you were to get into the nitty gritty with any of the main MMT economists on the nitty gritty details, I think you'd find what Tom said: "As I understand it, in the view of the MMT economists MR is correct operationally and they are in agreement over the operations."

Again, depending on what aspects, or angle, of analysis is being discussed, sometimes I find MMT concepts more useful, and sometimes I find MR concepts more useful.

paul said...

"I'm not sure why some of you have difficulty appreciating the concept of conception :)"

JK, I have no problem with the concept, in fact I'm fully aware of it as I'm sure most everyone here is. I just think MR chases the tail rather than the dog. YMMV.

The fact remains that credit is a function of, ie follows NFA. If NFA is the dependent variable, why would one focus on the result, since once the dependent variable is known we know the other?

The benefit of credit is that businesses can take risks knowing that the fiscal authority will follow through and fund their success (by observing the ex-post outcome, ie the deficit). Without this commitment by the government credit wouldn't be so important.

As I've pointed out previously, for households, private debt is the act of spending savings one hasn't earned yet. This act is hard-limited by how much the government net spends each year.

Debt incurred by business is settled ultimately by household purchases, so that debt is less important…

…unless households can't afford to buy their products.

Inside money enables (encourages) businesses to take risks in anticipation of growth and profits.

Growth and profits are funded directly by net government spending, without those balances there would be not be enough sales to succeed and thus no profits or growth. If this wasn't guaranteed would businesses borrow?

Which is the tail and which is the dog?

MMT knows the answer, and therein lies it's focus.

Anyone that wants to (Steve Keen?) is welcome to focus on the other stuff.

The first thing I check when an appliance doesn't work is whether or not it's plugged in. NFA is the power source. If there is no power, it doesn't matter much if everything else works or not.

JK said...

"As I've pointed out previously, for households, private debt is the act of spending savings one hasn't earned yet. This act is hard-limited by how much the government net spends each year."

Wuold you say the reason there is a hard limit is because of the interest attached to loans? For example, if hypothetically all loans were created without interest attach, would your same reasoning apply?

Tom Hickey said...

The theory part in MMT is somewhat of a misnomer, MMT is based on hard mathmatical fact. The sectoral balance identity is hard-wired into the system, Wynne Godley and others dicovered that fact.

MMT is a "theory" not because it is "hypothetical" because it draws causal implications from generalized data constructed as model that is explanatory (subsumes particulars under the general in terms of causal relations of variables) and predictive (based on testable hypotheses). That is what "scientific theory" means in philosophy of science.

Accounting identities are tautologies that say nothing about how things stand. They only show how the mathematical and accounting rules apply to data due to technical definitions and other rules. E.g., economic models have to be stock-flow consistent due to the accounting relationships, as well as mathematically consistent.

Add the arrow of time to identities, for example, and the identities can be construed as saying something about causality that is testable. This is what MMT does.

E.g., all economists accept the identity MV = PQ, which is, of course, identical with PQ [= MV. But only QTM economists interpret this causally in a particular way that other economist show is incorrect.

Tom Hickey said...

MMT is math.

The math involves a choice of independent and dependent variable in putative causal relations as explanation that can be tested through prediction.

People add the human/political elements to it.

Macroeconomics is a policy science.

Tom Hickey said...

It is left out because MMT analyzes the economy wrt net money, credit is a second-order element, since it adds no net money, and is in fact dependent upon the creation of net money for the credit circuit to even function.

Yes, MMT specializes in articulating NFA and its consequences. That is it's contribution.

frlbane said...

It's an IOU for something else. Dan K

A near meaningless one since people have no 100% safe place outside the government backed banking cartel to store and transact with fiat. And even if the population did a run on the banks, the Fed would simply create new reserves for the banks to buy cash with.

frlbane said...

You never make any kind of economic argument for it, Dan K

The economic argument is that ethical money creation would eliminate the synchronized, nationwide boom-bust cycle and eliminate systematic exploitation of workers and the general population, which is wasteful in economic terms.

y said...

"endogenous money creation is COMPLETELY left out of the general story." What do you mean? Loans create deposits/ endogenous money was one of the first things I encountered when getting into MMT.

"if someone is looking to get into the nitty gritty details, I shift gears and talk about 'inside money' and 'outside money'." Those are old terms. I hope you don't think Cullen invented them. Perhaps you should read some economics by actual economists instead of stuff on a blog.

"how current law has the U.S. government "borrowing" money"
You don't need to read MMR to understand that.

"MMT and Circuit Theory literature may have accurately covered everything that MR is saying." MMR is a few articles on a blog, not some alternative school of economics.

"MMT covers most of the bases. But it does tend to downplay the significance of what Cullen calls 'inside money'." Inside money is an old term, not something Cullen invented. What do you mean by "downplay the significance"?

paul said...

"Wuold you say the reason there is a hard limit is because of the interest attached to loans? For example, if hypothetically all loans were created without interest attach, would your same reasoning apply?"

JK no, I don't believe the interest is the problem. It's the principal that is borrowed from future saving… how far can that go on? Borrowing more makes things worse for the individual borrower, so the argument that credit can always be expanded to pay off older debt seems silly to me. Th epayments never stop, they get bigger.

My claim comes from comparing a graph of NFA growth to growth in private debt. One could look at total NFA, domestic NFA, household debt or total debt…they all stay within a pretty narrow range, and you can see the GFC occurs at the breakout. There are some smaller breakouts in years past that I haven't compared to economic events yet.

If you are interested I will post the charts.

JK said...

y,

You're a stubburn one :) And you distort what is being said to answer it how it suits you.

"What do you mean? Loans create deposits/ endogenous money was one of the first things I encountered when getting into MMT."

When the Sectoral Balance approach is explained, often my Stephanie Kelton, if the listener doesn't know better, it SEEMS like government spending creates all the 'spendable money' in the economy that we have to spend amonst each other. I think its fine to explain the MMT macro perspective like that, and I do it, but it leaves out endogenous money. Is this even controversial? I was just emailing with her a few days ago about this and she agreed with what I'm saying here.

The story is simplified for layperson-consumption.

"Those are old terms. I hope you don't think Cullen invented them. Perhaps you should read some economics by actual economists instead of stuff on a blog."

haha. I'm not saying he invented them, but he uses them often. And I find the way he uses them… useful.

Also, I recently started the M.A. Economics program at UMKC. Give me some time on the 'actual economics.'

"MMR is a few articles on a blog, not some alternative school of economics"

Never said it was. Still doesn't change the fact that Cullen has useful information pertaining to "modern money"…

Can you link me to a good paper on inside money so that I can reference actual economics instead of a silly blog? Thanks in advance.

"What do you mean by "downplay the significance"? "

See my first response in this comment.

geerussell said...

Can you link me to a good paper on inside money so that I can reference actual economics instead of a silly blog? Thanks in advance.

The Nature and Role of Monetary Policy When Money Is Endogenous

Malmo's Ghost said...

FWIW,

Cullen Roche claims that MR has very little in common with MMT. I read that response from him at one of his threads at his website a fortnight back. I wanted to ask him why, but didn't get the chance. Wish he would explain himself. That's a significant break from someone who was such a prominent supporter of MMT less than a year ago.

JK said...

geerussell, thanks!

Tom Hickey said...

Cullen Roche claims that MR has very little in common with MMT. I read that response from him at one of his threads at his website a fortnight back. I wanted to ask him why, but didn't get the chance. Wish he would explain himself. That's a significant break from someone who was such a prominent supporter of MMT less than a year ago.

I believe CR's position is that the work of JKH and Brett Fiebiger disproves the foundations of MMT. He has explained this in comments at MR, IIRC, but I didn't make a list. Probably simpler just to ask him directly over there.

Malmo's Ghost said...

Here's what CR said:

"MR has very little to do with MMT. In fact, it’s an almost entirely opposite view of the world starting from the private sector.",

http://pragcap.com/read-of-the-day-the-biggest-myth-about-the-fed#comments

y said...

"you distort what is being said"

lol.

"it SEEMS like government spending creates all the 'spendable money' in the economy." That's funny because MMT specifically explains that banks create money, and that's a central part of MMT.

"Cullen has useful information." Like what?

Re: iniside/outside money - just google and go from there.

"Roche claims that MR has very little in common with MMT." Roche claims all sorts of things.

JK said...

Y,

What are we disagreeing about?

As I said above, and you agreed: "the distinctions between MMT and MR seem to be largely just a matter of framing "

y said...

"Cullen has useful information." Like what?

JK said...

Y,

You lol'd at me saying you distort what is being said, and then your next line you distorted what was being said by conveniently leaving out the qualification from the line before (which I will now put in BOLD for you):

"When the Sectoral Balance approach is explained, often my Stephanie Kelton, IF THE LISTENER DOESN'T KNOW BETTER, it SEEMS like government spending creates all the 'spendable money' in the economy that we have to spend amonst each other."

Ya see??

I'm fully aware that endogenous money is a part of MMT. What I was saying is the significance of that aspect is downplayed when the sectoral balances are presented to the lay-person.

What's the significance? It's that most of the "spendable money" in circlation has been created via loans.

Then I commented that Cullen's framing emphasizes it, and I find that useful. He and his material at pragcap is very accessible for people that don't study economics.

But, in the end, as I repreated many times, both MMT and MR appear correct to me, they just frame and conceive it differently.

So again, what are we disagreeing about?

JK said...

"Cullen has useful information." Like what?

For example, the paper the geerussell just linked me to… that is not very accessible to a layperson. They are not going to read it.

Cullen offers material explaining 'inside money' that is very accessible.

This is also simple and straight forward in my comments above.

JK said...

Sorry, my last line "This is also simple and straight forward in my comments above."

should read: This is all simply put and straightforward in my coments above.

geerussell said...

JK,

You'll find plenty of company here and elsewhere in the notion that the differences are mostly framing and perspective. As Tom suggested, go try bouncing that idea off CR and see how far you get :)

I'll bet you a pile of buckaroos what you'll get is a screed about how MMT is full of lies and obfuscations to push a political agenda. If you don't get shut down right off the bat. YMMV.

Tom Hickey said...

"When the Sectoral Balance approach is explained, often my Stephanie Kelton, IF THE LISTENER DOESN'T KNOW BETTER, it SEEMS like government spending creates all the 'spendable money' in the economy that we have to spend amonst each other."

I think that there is merit to this. Most people think that "the money comes from the governement." They also think that the govt needs to tax and borrow from the private sector to fund itself. They don't see the contradiction and it is not all that easy to point it out to someone who believes it.

The other very common misconception is that govt borrows the money from the Federal Reserve, which is a privately owned bank, so the govt pays bankers to borrow its own money.

Virtually none of the public gets that most of the circulating medium is bank-created money. Moreover, even those few that may realize this have no idea that loans create deposits. They think that savings are lent out.

This definitely needs to be carefully explained.

JK said...

geerussell,

For Sure… Cullen reacts harshly when equivacation is made between MR and MMT. I see his point, I just disagree. And my disagreement isn't that he is wrong and MMT is right, but rather as I've been saying in a lot of my comments here… it's a matter of framing and conception.

Glad we agree! (I think)

SchittReport said...

y has made an excellent point here. someone needs to put together a presentation / video with schematics which detail the flows / processes / steps within the modern monetary system.

this would help people wrap their heads around the MMT framework.

we nominate mike to do this :)

and yes, from ancient times to now, people need manuals to teach them how to have good sex; kamasutra --> the ultimate love making guide. therefore, we need a guide for MMT too - an easy to read and understand one.

Matt Franko said...

"with schematics which detail the flows / processes / steps within the modern monetary system."

Paul,

This is what I am talking about...

rsp

paul said...

"Virtually none of the public gets that most of the circulating medium is bank-created money"

Once again, it's OK to point this out but included in the framing one must acknowledge that this bank-created money is disbursed as a function of NFA…net money…banks amplify the amount of net money in the system, and the amplification factor is limited.

Otherwise the quote above is just as misleading or more so, because none of this bank money can be issued without net government spending and lead to a stable economy…the system would collapse within a short-term time-frame.

In addition to dollars banks are creating equal dollar liabilities…which create a kind of "vacuum" in the system which demands to be "filled". There is a negative "force" inherent in this dynamic.

Finally, creation of this bank-created money is facilitated by the monetary authority, without it's consent and backing banks would be creating "BankBucks" that would have to succeed or fail on their own with no backing by the government. Good luck with that Bob Roddis' banking.

Without appropriate net money injections the credit circuit will fail, just like an amplifier will fail if it isn't plugged in or i the line voltage dropped from 115v to 90v. Amplification requires something to leverage off of, and a stable operating point must be maintained. An equilibrium state.

Value of real assets that accrues as a result of credit leverage will contract if the government doesn't monetize the gains.

Businesses gain profits in the form of net dollars that populate their balance sheets…if these net dollars aren't provided the balance sheets cannot expand except by extraction from the existing stock held by households, that would have to pay down saving to accommodate.

Paying down savings cannot be counted on to drive the economy…it's like draining a battery, only works in the short term and eventually must be re-charged…by the fiscal authority.

This part of economics (monetary) is pretty simple…why are we spending so much time on it again?

y said...
This comment has been removed by the author.
Matt Franko said...

Paul,

Consider that total "Bank Credit" as reported in the Fed's H.8 report has not expanded in now 4 years... this number has remained stuck at about $7T since 2008.

Yet, $NFA has expanded.... begs the question: How could this have happened if "banks create most of the money"?

rsp,

y said...

"You lol'd at me saying you distort what is being said."

I was caricaturing CR's gibberishy arguments.

Oh and CR did claim that because banks create money there is no rationale for the JG. Then he said that because banks create money the only rationale for the JG is a "moral" or "political" one. Then he said that just because the government could implement a JG doesn't mean it should, just like it shouldn't drop nuclear bombs everywhere or murder everyone just because it could. Pure gibberish.

SchittReport said...

matt, since you think it's a good idea, you put it together please!

y said...

SchittReport.

All you really need is a page with a clear and comprehensive list of links to all online MMT papers, articles and books, ordered either by author or by category. It's all been written before, and much of it is available on line. I wouldn't be surprised if a lot of people simply haven't read much of it.

y said...

the wiki could do with some work too

paul said...

"Yet, $NFA has expanded.... " - Matt

Yep, it's been reducing the leverage bubble that had been built up, we're pretty much back to normal now as far as the ratio is concerned, but unemployment is holding us back. The NFA is filling a hole (the "vacuum") not increasing demand.

Total Debt to domestic NFA:

https://dl.dropbox.com/u/33741/TDvsNFAdom.png

Consumer Debt to domestic NFA:

https://dl.dropbox.com/u/33741/CDvsNFAdom.png

Note that the normal range is fairly narrow.

paul said...

"matt, since you think it's a good idea, you put it together please!"

We've been working on it but it's tougher than you might think…it's useless if it isn't kept simple.

y said...

JK,

As I said one of the first things I learnt when I got into MMT was that banks create money through double-entry accounting.

It's totally central to MMT.

Tom Hickey said...

the wiki could do with some work too

All are invited to contribute to its development. That is the way it was envision at the outset. Unfortunately, it has not materialized as anticipated yet. It's really quite simple to learn and there are instructions at the MMT Wiki. Just sign up, read over the instructions, and start adding stuff. If we all put fifteen minutes a week into it, it would grow quite nicely. And it also needs editing. And there is an MMT developers' forum as well. Warren has been generous in answering technical questions about MMT, too, if you aren't sure of something.

Tom Hickey said...

Consider that total "Bank Credit" as reported in the Fed's H.8 report has not expanded in now 4 years... this number has remained stuck at about $7T since 2008.

Yet, $NFA has expanded.... begs the question: How could this have happened if "banks create most of the money"?


The larger deficits/debt are enabling saving-delevering. Part of this is household balance sheet rebuilding through pay down debt and saving. Another part is firm saving (retained earnings). Another part goes to external saving due to net imports.

paul said...

Tom, yes.

The point of our conversation is to isolate the way credit (and NFA) fits into the system, rather than some vague notion of "95% of our money supply is created by banks", which is a horribly misleading statement.

I'm making an attempt at quantifying the relationship, at least in empirical terms.

SchittReport said...

y,

respectfully, no - it's not the same thing. why do you think management consulting firms charge millions for doing this type of work?

....because the presentations are MECE logically structured, pass the 30 second elevator test in delivering the message and sexy.

having said that, wouldn't hurt to have a foxy presenter in the video - mike not nominated.

y said...
This comment has been removed by the author.
y said...
This comment has been removed by the author.
y said...

SchittReport,

Is this the kind of thing you're talking about?:

https://www.youtube.com/watch?v=BGFY6Rg2uMg&list=UUGNC7ljMknMH0ffmCaDVDvQ&index=2






Matt Franko said...

SR,

Back channel Paul and I are looking at the current system operational parameters and trying to define the relevant intra-system interfaces and their relationships.... and also just starting to think about the architecture and some top level design parameters for a graphic representation that one could view to keep track of the operations from a visual perspective....

I was thinking about just trying to animate something in an HTML 6 tool but now am thinking that it should include input functions which might require some javascript, etc..

This may take a while ...

rsp,

SchittReport said...

y,

ummm..... no

you would trust right wingers to make a video with a girl with big jugs who looks so 60s.

a rational version of erin burnett or even lauren lyster would do fine.

y said...

i was kidding

MMTdebtkiller said...

I know there are conspiracy theorists who say the Fed is a private bank controlled by the Rothchilds. But have you read the Federal Reserve Act of 1913 as amended? That's a government agency. The Fed's FAQ's say as much. And the fiat money powers of the Fed are derived from Congress. So there is a procedure by which Treasury can deficit spend without debt: Treasury issues securities to pay a Debt. They are sold at public auction to banks. Treasury gets bank money and banks get securities. At this point the Treasury has a debt. But wait: The Fed comes along and buys these securities from the banks. Treasury has money from banks, banks have money from Fed, and the Fed as government agency with government money-creating powers has redeemed the government's debt obligation in these securities. That's how the Fed redeems the debt obligation of every Treasury security that comes into its possession. There is no debt at the Fed. As for foreign and private holders of T-bonds, these are like bank CD's at the Fed. If holder wants to cash in the bond, the Fed just credits its deposit account with the value of the bond, and holder withdraws cash or gets a bank check.