Home > Uncategorized > MMT Macro Final (2/3)

MMT Macro Final (2/3)

from Asad Zaman

Last semester I taught an MMT-based Macro course which attempted to re-integrate history into economics. The course was based on the premise that economic theories cannot be understood outside the historical context in which they were born. Standard graduate macro courses attempt to teach a body of theory which has been empirically falsified. My course had the goal of giving the student the ability to understand major economic events of the past century.  A previous post on  MMT Macro Final (1/3)  provided the first 4 questions and answers for the Final Exam, as a sample of what was taught. This post provides questions 5 to 8, together with the answers.  read more

  1. Mike Ryan
    July 19, 2019 at 5:08 pm

    I think your answer is incorrect. Expanding credit does not increase the money supply. This misunderstanding can be traced back to Paul Samuelson and his Neoclassical econ theories.

    Part of the historical mission of the first textbooks on economics was a cultural response to communism – basically weed killer for any socialist ideas in the USA. With respect to credit and banking, the goal was to confuse the public about the risk of bank failure when a credit crisis strikes – such as the great depression. The banking community wanted to stomp out fear and prevent any future runs on a bank.

    They were very successful as most people are clueless about how the money supply expands. And clueless about fractional reserves and how reducing the reserve requirement increases risk of bank failure. (see 2008 financial crisis)

    Credit is simply loaning someone money. The same money that is loaned is immediately spent and re-enters the banking system. No increase in actual dollars.

    What does happen is there is now an entanglement of balance sheets between the bank and the creditor. Along with the entanglement is a “promise” of future cash flow from the debtor back to the bank. This promise is like a black hole for future earnings on the part of the debtor. The wages are immediately transferred to the bank in order to meet the promise and are not available to contribute to GDP or the individuals welfare. As long as the loan is for something that provides future value (like a house) and the debtor’s income stream is not at risk – all is good.

    As for the government running a deficit – this should be viewed as the current generation spending money that the next generation will have to repay. It is morally wrong and should balance out over a 10-15 year cycle to avoid inflation and ripping off the next generation.

    It is Unethical for a society to allow their government to run a deficit on a regular basis. The adults in power from 1985- current should have 100% tax on any family estates over $10 million. If the rich didn’t allow the government to balance the budget while they prospered, they need to pay off “their” debt.

  2. July 20, 2019 at 2:03 pm

    See William Vickrey – Fifteen Fatal Fallacies of Financial Fundamentalism – for an answer to your questions — http://www.columbia.edu/dlc/wp/econ/vickrey.html

  3. Mike Ryan
    July 20, 2019 at 6:00 pm

    I agree with some of his points. But none of them address the complete false idea that credit expands the money supply. It definitely expands spending – but money supply does not change.

    Once again – the reason for this misinformation is to confuse people about the risk a bank assumes when it loans out “your” money. The fundamental mechanism of making a loan is critical for capitalism to work. The reason Samuelson and most every other economist lies about money creation (if not lying – just doesn’t understand the reserve system) is to assuage the fear of depositors. Think back to the 30’s and the unwillingness of people to deposit their money in a bank for fear of losing it. Given the great depression – well founded fears.

    This false “keystone” of economic thought prevents most people from properly understanding debt/loans and the appropriate way to use debt. Borrowing money for operating costs is ridiculous. See Puerto Rico. Borrowing money for building capital infrastructure (freeways etc) is proper.

    The US deficit is driven by two things – Military spending which is an “operating cost” to a large degree and lack of taxation at the appropriate level.

    Failing to tax generation A for spending on operating expenses for their benefit is unethical regardless of what Vickrey says.

    As for Puerto Rico – the key lesson learned should be moral hazard. Banks made tons of money issuing loans that they knew were going to be questionable. They passed the bonds off to the market so they had no risk in the transaction. But why should the care?

    That leads to what should be the first law of Economics….

    Greed is the most persistent force in economic systems. Corporations or other economic entities will strive to maximize their return with little to no concern for other parties.

    Second law of Economics

    Economic entities must be regulated by either religious concepts such as the ten commandments or by laws that explicitly define what is right or wrong. Otherwise anarchy will become the norm and trust will be lost. Economic systems are based upon trust and will fail unless trust is upheld by the rule of law.

    • Calgacus
      July 20, 2019 at 9:23 pm

      It’s not clear to me what you are responding to. But when discussing MMT, one should try to understand a major theme in it- the most major and most important thing – the relation of money to credit. It is pretty clear that you have a absorbed a very different understanding, that is entirely inconsistent with MMT’s correct understanding. MMT is correct, because the common beliefs you are espousing are not consistent internally nor with the real world, while MMT is consistent both ways.

      for the government running a deficit – this should be viewed as the current generation spending money that the next generation will have to repay. It is morally wrong and should balance out over a 10-15 year cycle to avoid inflation and ripping off the next generation

      This is not true. Deficit spending is not spending money that the next generation will have to repay, is not ripping them off, does not necessarily create inflation etc. If it is morally wrong, then perforce money – period is morally wrong. For the only source of money is somebody’s deficit spending, period. That is where all money comes from, now and in the past and future.

      The key conceptual error is confusion about money and credit – and which is primary. The concept “money” is based on “credit”. Not the other way around as the modern mainstream, neoclassical theory has it. MMT says money is credit and nothing but credit. The “credit” there is understood in an anthropological, sociological way – not in a financial or economic way – because that would be circular.

      “Credit is simply loaning someone money”.- is just plain wrong. That is not how MMT uses those words and the MMT usage corresponds to the real world of finance, not the false “Credit is simply loaning someone money.” narrative.

      Money and credit are not things which can be loaned as someone loans you their car. Money and credit are interpersonal relationships (which may be treated locally as “things”, but cannot be understood that way if you think macroeconomically).

  4. Mike Ryan
    July 21, 2019 at 6:12 pm

    I guess MMT is only for a ship of fools. Here is why….

    Money and Credit are not the same thing.

    If I have money – I have a positive asset on my balance sheet. I have a positive net worth.

    If I have debt – I have a negative asset on my balance sheet. Hopefully I invested in a capital asset and my net worth is zero. If I spent the money on consumables such as food I have no positive asset and my net worth is negative.

    The MMT fantasy is simply a ridiculous argument for running a deficit. Look what that did for Puerto Rico. To think the USA or other large governments are immune from excessive debt is a recipe for disaster. How can the memory of Weimer Republic fade into oblivion so quickly.

    Money and positive net worth represents economic energy that can be converted into economic activity. Debt is exactly the opposite – the more debt you have, the more anemic the economy will be. You can hide the illness with deficit spending for a period of time, but the piper will be paid. Unfortunately by the next generation…

    The New Deal deficit spending was positive as the PWA, TVA and CCC were all capital investments. The USA deficit spending today is mostly military and should be considered a consumable. Nothing is constructed that helps society’s ability to make things. We would be better off building roads and hospitals around the world than blowing things up.

    Liberals that want to fund social programs without taxing corporations but instead run a deficit are fools.

    MMT pioneer Warren Mosler in his book The 7 Deadly Frauds of Economic Policy. “First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room, he’d take that hard-earned cash you just forked over and throw it in a shredder.”

    This is probably the most bizarre comment so far from what happens in real life it is ridiculous.

    Probably due to how mysterious money has become. Hardly anyone uses cash anymore – probably we should replace the phase “in god we trust” printed on our money to “in our banks we trust” as all that matters anymore is the balance the bank says you own. The physical element of money is gone and no longer matters.

    Economist need to understand this and recognize the reality of “digital” record keeping without losing the concept that these balances are real and important. If your net worth according to the bank is zero – you have zero economic power. And this rule applies to everyone, every business and every government.

    Deficits are dangerous.

    • Craig
      July 21, 2019 at 7:06 pm

      Mike and Calgacus, you’re both nascent advocates of the new paradigm of Monetary Gifting. Credit as in a loan is debt. Money is individual income/purchasing power that is both unencumbered by debt and yet is credit in that it is exchangeable for goods and services. For a variety of reasons (debt service, depreciation costs of high tech capital intensive economies, income inequality, re-investment of profits and savings which take money from the current financial cycle and transfer it into another one and that incurs costs in doing so etc.) there is a scarcity of total individual income in ratio to total costs/prices. Finding the most effective point in the economic/productive process to not only balance but to invert this ratio with monetary gifts will result in not only the rejuvenation of profit making economic systems (and by the way ethically saving it from itself) but usher in the new monetary, financial and economic paradigm of Abundantly Direct and Reciprocal Monetary Gifting.

      • Mike Ryan
        July 21, 2019 at 11:06 pm

        thanks for compliment – but nope – I haven’t said a word about gifting…. Have a great day…

      • Craig
        July 22, 2019 at 5:15 am

        Yes, that’s why I said you were a NASCENT advocate. You’ve recognized the difference between money as Debt Only and money as unencumbered available to spend purchasing power. Now all you have to realize is how you create an economy with a lot more of the latter and that breaks up the former which is an oppressive monopoly paradigm, and do it with basically two policies that resolve the two biggest problems of modern economies.

        MMTers are also nascent new paradigmers who are at least aligned with monetary abundance. They just haven’t cognited on the where, when and how of its temporal universe actualization.

        Please, if you’d both look at it….its simplicity and yet efficacy might settle into your minds.

    • Calgacus
      July 22, 2019 at 7:10 pm

      Mike Ryan:If I have money – I have a positive asset on my balance sheet. I have a positive net worth.

      If I have debt – I have a negative asset on my balance sheet.

      Right, so far. But money is credit. Credit is debt. Debt is credit. Your money/credit is somebody else’s negative asset/debt. They are two words for the same thing, seen from two different perspectives. Saying that there can be money or credit without debt or vice versa is like saying that someone can be parent without having a child, or a child without having a parent.

      Credit/debt is an asymmetric relation between two (legal, conceptual) persons, like the parent/child relation. Always and everywhere. God could not create money that is not credit/debt. As long as we use these words in their primary English meaning, that expresses concepts that are universal to humanity and prominently used in all languages.

      Nobody is saying that these balances are not real and important.
      Nobody is saying that US spending is sane and reasonable.
      No MMTer proposes Weimar Zimbabwe. MMT proposals are for the least spending to attain full employment. MMT guided money would be the least inflationary, hardest currency the world has ever seen.
      The problem is that people get diseducated by degrees when speaking about incredibly simple and basic things about money. They are skipped over because nobody wants to spend the time or admit to themselves that they don’t have a perfect grasp of these kindergarten things. But that’s what great intellectual revolutions are – new additions to the kindergarten curriculum.

      Without absorbing the kindergarten curriculum people are diseducated into speaking a language that is not English, that makes no logical sense, that nobody can or ever has understood, when talking about money, credit and debt.They tie themselves into knots trying to explain the simple in terms of the complicated.

      Proposing that there should be money – as you seem to – and arguing against deficits as if they were a plague makes no sense. Money, every dime that ever existed comes from deficits, by definition and accounting. Not from immaculate conceptions or virgin birth. Babies come from sex. That’s the way it works in reality. That’s the way it works in proper accounting.

      Above all. Slow down. Think how it works “in the beginning” – with whatever beginning you want. Don’t allow time travel and precognition, and insist on using addition and subtraction and language the way Earthlings do. Then you arrive ineluctably at MMT.

  5. Yoshinori Shiozawa
    July 30, 2019 at 11:47 am
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