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Modern Monetary Theory

from Asad Zaman

This continues from the previous post on Post-Keynesian Response. A large number of contributions from different areas need to be integrated to build an economics for the 21st Century. For an acknowledgement of the failure of 20th Century Macro from one of its architects, see Romer’s Trouble With Macro. This post explains Modern Monetary Theory briefly.

Since the time of Keynes, major changes have taken place in the global financial system. Against wishes of Keynes, Bretton-Woods created a dollar centered system based on notional exchangeability of dollars for gold. The Nixon Shock in 1971 removed the gold backing from dollars, leading to the modern world of floating exchange rates. Dramatic changes in the monetary exchange systems and financial institution play no role in orthodox modern macroeconomics, since money and finance are not (supposedly) part of the real economy. Taking the nature of modern money and the financial institutions into serious considerations leads to many important insights which lie at the core of MMT. Three major innovations lie at the foundations of this theory. These are summarized below:

Endogenous Money: MMT reflects an institutional perspective on the creation of money. When Central Banks set discount rates, they lose control of the quantity of money, which must be issued in amounts required to equilibrate the demand/supply of money at the policy rate. Private creation of money depends on bank-lending, which in turn depends on the investment climate. Bank credit depends on expectations, sound collaterals, and also a keeping-up-with-the-Joneses effect – if everyone is lending, banks cannot afford to stay out. Theories of endogenous money underlie Minsky’s Financial Fragility Hypothesis, which suggests that the money creation process is inherently destabilizing because private credit is expanded at the top of the business cycle and contracted at the bottom, exactly the opposite of what is required for good economic management.

Functional Finance: read more

  1. postkeynesian spain
    September 22, 2020 at 11:53 pm

    the reality is that never a country practiced the mmt! But the mmters can do noise!

  2. Yoshinori Shiozawa
    September 23, 2020 at 12:35 am

    If Modern Money Theory (MMT) is a part of theories of Endogenous Money Creation/Supply and the latter is based on Minsky’s Financial Instability Hypothesis, I do not understand why MMT theorists can claim that there is no need to worry about Government spending. How can they claim that there is no Minsky Moment in budget deficit accumulation?

    I wonder why most posts in this blog support MMT and there are no counter-arguments against it. Is MMT such an established theory that no theoretical counter-examinations are requested? It is quite dangerous to justify a theory by the convenience for the economic policy.

    • Craig
      September 23, 2020 at 8:37 am

      @Yoshi

      You have to understand that the national “debt” is actually part of the obfuscatory prestidigitation that the FED and the banks foment. All monies created for the government can be and ought only to be owed TO OURSELVES. In other words there should be no need to pay such “debt” back. The creation of bonds is an arbitrary way of making it debt most of which is “purchased” by the banks so they have a secure investment. There should be no bond creation. The money can be simply created, accounted for and distributed for whatever the government decides it wants to spend it for. Now when MMTers say that there will not be high (as in more than 3%) inflation they are just “blowing smoke” especially if and when the huge private debt overhang we currently have is majorly eliminated. Then you’ll get higher single digit inflation {but never hyper-inflation because several disastrous circumstances must occur before you get high inflation, like 10-15%, before the final idiocy of a compliant central bank leveraging up speculators who short the currency occurs and that initiates the final hyperness}.

      In the mean time nothing is done about the Banks’ bamboozling monopoly paradigm because “the economy tends toward general equilibrium”, the “free” market and the business cycle are “real” (read the routine alternately goosed and yanked out from under monetary smothered financial chaos goes on with an occasional speculative run up of titanic private debt that results in a debt deflation.

      The only way we’ll ever eliminate inflation is to implement an individual monetary gifting-business revenue policy “offer that enterprise cannot refuse” like a 50% discount/rebate policy at retail sale that integrates beneficial price and asset deflation into profit making economic systems. And then regulate and tax the a$$ off of any anti-social CEOs who cannot seem to appreciate all of the more than doubled demand and re-distributive tax cost savings made possible by such policy….with “extreme prejuidice”.

    • Yoshinori Shiozawa
      September 23, 2020 at 11:19 am

      Craig,
      I cannot understand your logic.

      you’ll get higher single digit inflation {but never hyper-inflation because several disastrous circumstances must occur before you get high inflation, like 10-15%

      Suppose you are right. Do you think that several disastrous circumstances are better than high inflation? Even if we can avoid higher inflation, they are still disastrous, aren’t they?

      Dollars and Treasury Bonds are possessed by foreigners (Chinese, Japanese, Oil countries, etc.). If they think that dollars are dangerous to hold, what happens? There would be tremendous disinvestment. Do Government or FED have any effective countermeasures?

      • Craig
        September 23, 2020 at 10:59 pm

        Yoshi,

        “Do you think that several disastrous circumstances are better than high inflation? Even if we can avoid higher inflation, they are still disastrous, aren’t they?”

        The disastrous circumstances can be avoided by not getting involved in a long term war on the Asian continent in an age of modern weaponry where no one’s productive facilities are safe, by not allowing Finance to run up asset prices in a speculative frenzy or countering any embargo on modern economy’s major resource like petroleum with renewable energy sources aided by a 50% discount/rebate policy for any and all green big ticket items.

        So far as China or the Saudis cashing in their bonds or disinvesting I highly doubt they’d do that simply because it would not actually be in their interest to do so. Secondly we could just say that we will honor the payment of the bonds as they mature, and if they try some other strategy to destabilize our economy we could just declare it “null and void” and tell them that they can continue to trade with us, but if they attempt destabilization in any way we will simply not let them take advantage of our 50% discount/rebate policy and in the interim we will re-industrialize in all of the products they export…so never mind and have a nice day. That would probably be the best thing that could happen to them actually as it would undoubtedly make them consider the 50% discount/rebate policies in their own country thus making it stably prosperous without having to be an export platform. After all everything and everyone adapts to a new paradigm….not the other way around.

      • Yoshinori Shiozawa
        September 24, 2020 at 4:55 pm

        Craig, you put it:
        “several disastrous circumstances must occur before you get high inflation.”

        What do you want to say by this comment? You have not replied to my question. Is this a theoretical reasoning or your wish?

      • Craig
        September 24, 2020 at 6:47 pm

        Of course not. It’s a warning/historical observation, not a recommendation.

    • postkeynesian spain
      September 23, 2020 at 11:40 am

      “I wonder why most posts in this blog support MMT and there are no counter-arguments against it.”

      I reply their, and never they can answer me, so maybe i am correct!

      Here a example! https://rwer.wordpress.com/2019/08/22/who-is-to-blame-for-argentinas-economic-crisis/#comments

  3. September 23, 2020 at 10:12 am

    What Is MMT?
    Comment on Asad Zaman on ‘Modern Monetary Theory’

    MMT is the issuance of counterfeit currency in the form of deficit spending/money creation for the benefit of the one-percenters.

    Genuine currency and counterfeit currency are indistinguishable because they originate from the same source: the FED. It all depends on whether additional fiat money is injected on the supply or the demand side.

    MMTers are not scientists but political agenda pushers. MMT policy is to the disadvantage of the ninety-nine-percenters. The counterfeiter steals from the rest of society via the anonymous price mechanism.

    It is the ninety-nine-percenters who owes the public debt. And it is the one-percenters who owns the corresponding financial assets. Interest on public debt works like a regressive tax as long as the debt is rolled over.

    Because #PublicDeficitIsPrivateProfit, MMT is the biggest redistribution program ever.

    MMT is a political fraud.

    Egmont Kakarot-Handtke

    • Craig
      September 24, 2020 at 6:49 pm

      MMT is fine monetary research. Its problem is that it is a palliative reform instead of the paradigm change we require.

  4. September 23, 2020 at 12:56 pm

    One of the key insights of MMT is that NOBODY “owes” the public debt. The current US Trillion Dollar Deficit NEVER has to be paid BACK by anyone.

  5. Yoshinori Shiozawa
    September 24, 2020 at 5:07 pm

    Assad, it is all right that you think that “one of key insight of MMT is that Nobody owes the public debt.” But, does it prove that people continue to believe the value of dollars forever? How can you assure that the government can stop inflation before it becomes hyperinflation?

    How do you think about chronic inflation inflation in the past Latin American countries? People and politicians are not always wise enough to stop spending policy when it is necessary. This is one of precious lesson that we have learned in the second half of the 20th century.

    • Craig
      September 24, 2020 at 6:46 pm

      Yoshi,
      I recommend you read Stephen Zarlenga’s excellent book The Lost Science of Money, specifically chapter 21. It is very enlightening.

    • Yoshinori Shiozawa
      September 25, 2020 at 4:38 am

      I have read Zarlenga, S. (2004), “The lost science of money”, European Business Review, Vol. 16 No. 5, not the book. I was not so impressed by this digest by the author. The only point I have learned is that metal or commodity money was always depressive except in a rare case of history in which precious metal.was produced abundantly and it increased at the same pace with population growth.

      In modern times, this money metal problem was gradually solved by various ways: re-minting, depreciation of metals, gradual easing of the bank note issue restriction, lowering reserve requirement ratio, and abolition of gold standard system, etc. Now money system is based on endogenous money creation and there is no fear of the shortage of money quantity as a system.

      The term “lost science of money” seems to be too much exaggerated.

      • Craig
        September 25, 2020 at 5:22 am

        Read the book and chapter 21. It’s an excellent historical description of the Weimar hyperinflation that de-bunks the conservative kant that public control of the money system caused that sorry episode.

        The short historical analysis is that “normal” inflation is a smallish single digit percentage in the 1-3% range and is largely contained by competition between and amongst business models. High and consequential inflation (4-14%) generally results from war, lost wars and/or increases in the costs of major commodity prices due to political whim or reaction like the Arab oil embargo in the 70’s. Hyperinflations only occur when most or all of the aforementioned factors have already occurred and then a compliant central bank leverages up speculators who short the currency and initiate the hyper form of inflation.

        The point is that hyperinflations are extremely rare events and the first two forms and levels of inflation will continue whether conservatives believe in their beliefs or if MMTers believe in their beliefs. Only when we realize that money itself is at best a tertiary factor in inflation and decide that we no longer want to be dominated and manipulated by Finance’s monopolistic paradigm of Debt Only by implementing the new monetary and financial paradigm of Gifting with twin 50% discount/rebate policies at retail sale and at the point of note signing for “big ticket” items. That way we will not only rid ourselves of the economic vice of inflation, but will (almost miraculously for those whose minds are captured by convention and orthodoxy) beneficially integrate price and asset deflation into profit making economic systems.

      • Yoshinori Shiozawa
        September 25, 2020 at 3:47 pm

        Have you read the second paragraph of my comment on September 24, 2020 at 5:07 pm. It is not only hyperinflation but two-digit and three digit inflation that we should worry.

      • Craig
        September 25, 2020 at 8:33 pm

        Latin American inflation is both the result of having to borrow and pay in dollars and of the insensitively despotic and corrupt quality of most of their leaders. No one is disputing the latter. It’s just another factor. A factor that the policies and regulations of the new paradigm of Direct and Reciprocal Monetary Gifting would economically resolve….and no doubt end the worst part of the political aspect of the problem as well.

      • Yoshinori Shiozawa
        September 28, 2020 at 3:40 am

        How can you say that the day when everybody wants to receive foreign currency instead of dollars will not come?

        MMT people seem to be too optimistic with regards to what my happen.

    • Calgacus
      September 26, 2020 at 3:37 am

      @Yoshinori Shiozawa:

      I think I can set myself up as an authority on MMT here. The core insight of MMT is expressed by the sentence – from Alfred Mitchell Innes – “Money is credit and nothing but credit.” Thing is, you have to take that sentence, very, very seriously, and not let the commodity money theory unconsciously creep into one’s thinking. “Credit” is synonymous with “debt” – viewed from the opposite perspective. Credit or debt here mean a social relation between persons – and absolutely nothing else. Purely immaterial, moral, spiritual, whatever such word one likes. “The eye has never seen, the hand has never touched a dollar.” Again, the “nothing else”, “nothing but” is very important to keep in mind.

      After that, with that point of view, MMT is just super-Bourbakic reasoning. There really isn’t anything one can criticize about it if you understand it. Like a fully developed mathematical theory or theorem, it is trivially true, an application of definitions. But the trivial things, simple in themselves, obvious once they are thought of – are always the least obvious, the hardest to get to from the things which are simple to us.

      Historically, MMT is just Keynesian economics – particularly the genuine thing of Keynes and the first Keynesians during the Great Depression and WWII (or Kaleckian or Lernerian or Minskian) economics. But cleaned up, made more consistent and clear, with much more attention to the foundations. Pays attention to both Keynes’s Treatise on Money and the General Theory. Gets rid of the many massive postwar botches made by “Keynesians” – but tries to steal their good stuff of course. :-)

      That basic idea above encompasses the PK endogeneous money theories, which of course are much older than post-Keynesianism. In particular, and that is what Mitchell Innes got exactly right a hundred years ago, and which the modern MMTers follow, is that one uses the same theory to treat state money and “credit money” meaning bank money – on the same footing, with the same concepts. And one should note that the usual economists story of the development of money is exactly backwards – credit, credit money is the ancient thing. Barter, “commodity money”, precious metals are the innovations – a superficial overlay on top of a structure of credit money.

      On this view state currency and state bonds are basically the same thing – tax credits, usable at face value now, or at some set time in the future. Like making loans and repaying them, spending and taxation are both processes of the efflux and reflux (Tooke) of credit/ money. The exchange of bonds for currency misnamed “government borrowing” is a usually meaningless sideshow, a distraction from what is really happening.

      So one sees that statements like nobody owes the public debt or that it never has to be paid back are incomplete, not exactly right. The public debt of a country is owed by that country to its creditors. It’s the realest and debtiest debt there is. And the proper measure of the public debt is the size of what is usually called the National Debt plus the currency outstanding, which is just as much debt as a bond, just as bonds are money to all intents and purposes.

      But the public debt is constantly paid back, when people pay taxes. That’s what financial taxation is – people are using their tax credit/ money to purchase the state of affairs of “not owing tax” from the state. On rare occasions, governments run surpluses, properly calculated. That is the only time that it gets paid back in total. And especially for a reserve currency issuer like the USA, that is when you get financial instability as secure government debt becomes scarcer. Minsky – who taught leading MMTer Wray – held that government debt was a stabilizing factor. So his financial instability hypothesis doesn’t really apply to mad money printing.

      I do not understand why MMT theorists can claim that there is no need to worry about Government spending.

      They never say that. Anybody who says that does not understand MMT. The MMTers are well aware of inflation and have written imo the most solid and extensive theory on how to deal with it. Their point is that Inflation is the ONLY constraint on spending. There simply isn’t and can’t be a nominal one. That being said, the standard state of a capitalist economy is deflation. Almost all capitalist economies are demand-constrained almost all the time. And this is a disease of civilization that gets ever worse as technology and society progress.

      Latin American chronic inflation comes from different causes are a separate case from a country like Japan, the UK or the USA. One thing that MMT ( & Craig above) point out is the foreign debt situation (similar to post WWI Germany) – as well as usage of absurdly high interest rates to “fight” inflation, when they are actually feeding it!

      Finally, the MMTers propose much more rigorously targeted spending than the “Keynesian” remedies used now – and would very often, maybe usually spend less, while having a much superior effect on unemployment.

  6. Yoshinori Shiozawa
    September 28, 2020 at 4:24 am

    Calgacus.

    Thank you for detailed explanations. Your explanations were very clear. I hope this kind of informative and useful discussion continues. I almost understand what MMTers are claiming. I have still some doubts or objections.

    I know that MInsky pointed that government spending is stabilizing because it provides a rather stable demand. However, how did he said of the cumulative effects on the accumulation of government debt increase? If the debt is not absorbed by the central bank, the quantity of money (money supply) will increase. It is a strong factor that may engender financial instability. Have MMT people studied this problem?

    > Their point is that Inflation is the ONLY constraint on spending.

    Suppose the government was successful until time 0 to keep price levels stable (or decreasing). At time 0, one notices a sign of inflation? Full employment is almost realized. Is it possible for the government to stop spending? People who had profited from government spending are sure to demand continuing spending policy. The real teaching of Latin American countries in the third quarter of the 20th century is the existence of populist power. The government could not stop inconsistent policies that may cause disaster afterwards. I wonder why many economists forget quite recent history that happened.

    If the inflation is the ONLY constraint, MMT people must have a theory of inflation. But I hear little about MMT people’s inflation theory. How are they thinking about this part of economics. It is possible that inflation theory is not yet constructed in a firm way. If so, they should emphasize it. If they do not, they are not loyal to economists. I do not condemn that their theory is not complete or perfect. But if they see a lacking part in their economics, they should be (1) aware of this fact, and (2) warn other people (economists in particular) that this and this parts lack a firmly constructed theory.

  7. September 28, 2020 at 7:15 am

    For the MMT theory of inflation, see: https://weapedagogy.wordpress.com/2018/12/27/class-conflict-theory-of-inflation/ This theory has been extracted from a recent MMT textbook

  8. Yoshinori Shiozawa
    September 28, 2020 at 10:54 am

    Thank you, Asad. I have read your article on Class-Conflict Theory of Inflation.

    Tarullo says — quite clearly and explicitly — that current theories of inflation are NOT of use for real-time monetary policy.

    Tarullo ia an integral person as far as inflation theory is concerned. I know the existence of class-conflict theory of inflation. In my young days, mainly in 1970’s, I myself worked on inflation inspired by class conflict idea. Non-Simultaneous Mark-up Pricing Process is a part of my research made at that time. However, I estimate now that class-conflict theory of inflation indicates only a special aspect of all spectrum of inflation phenomena. In this sense, we cannot say that heterodox economics has a theory of inflation. A more plausible expression would be “Heterodox theory of inflation is still in a germinating phase”.

    Of course, inflation theory of heterodox economics is not restricted to class-conflict theory. If Zaman and others have or know different theories, I am happy to hear about them.

    My original question to Calgacus or others on September 28, 2020 at 4:24 am was this:

    If the inflation is the ONLY constraint, MMT people must have a theory of inflation. But I hear little about MMT people’s inflation theory. How are they thinking about this part of economics. It is possible that inflation theory is not yet constructed in a firm way. If so, they should emphasize it. If they do not, they are not loyal to economists.

    There is one sure thing. Class-conflict theory of inflation cannot be an answer for MMT people when they assert that “There is no worry about inflation. When it happens to occur, we can stop it.” The class-conflict theory shows they cannot, because class conflict continues even the economy passes the inflation point. We must face a chronic inflation at best and hyperinflation at worst.

    The class-conflict theory of inflation is no theoretical answer to my question.  

  9. Yoshinori Shiozawa
    September 28, 2020 at 11:00 am

    Sorry. I have missed to insert a closing block quotation mark in the above post. I pots it again to make it more readable.

    Thank you, Asad. I have read your article on Class-Conflict Theory of Inflation.

    Tarullo says — quite clearly and explicitly — that current theories of inflation are NOT of use for real-time monetary policy.

    Tarullo ia an integral person as far as inflation theory is concerned. I know the existence of class-conflict theory of inflation. In my young days, mainly in 1970’s, I myself worked on inflation inspired by class conflict idea. Non-Simultaneous Mark-up Pricing Process is a part of my research made at that time. However, I estimate now that class-conflict theory of inflation indicates only a special aspect of all spectrum of inflation phenomena. In this sense, we cannot say that heterodox economics has a theory of inflation. A more plausible expression would be “Heterodox theory of inflation is still in a germinating phase”.

    Of course, inflation theory of heterodox economics is not restricted to class-conflict theory. If Zaman and others have or know different theories, I am happy to hear about them.

    My original question to Calgacus or others on September 28, 2020 at 4:24 am was this:

    If the inflation is the ONLY constraint, MMT people must have a theory of inflation. But I hear little about MMT people’s inflation theory. How are they thinking about this part of economics. It is possible that inflation theory is not yet constructed in a firm way. If so, they should emphasize it. If they do not, they are not loyal to economists.

    There is one sure thing. Class-conflict theory of inflation cannot be an answer for MMT people when they assert that “There is no worry about inflation. When it happens to occur, we can stop it.” The class-conflict theory shows they cannot, because class conflict continues even the economy passes the inflation point. We must face a chronic inflation at best and hyperinflation at worst.

    The class-conflict theory of inflation is no theoretical answer to my question.

  10. September 28, 2020 at 12:13 pm

    I have never heard any MMTer say that “there is no worry about inflation”. The Mitchell Wray Watts textbook contains a detailed discussion of inflation, how difficult it is to resolve, and some episodes to illustrate

  11. September 28, 2020 at 8:47 pm

    Yoshinori Shiozawa

    The lethal defect of the MMT policy of deficit-spending/money-creation is on distribution, not on inflation. The observable distribution of income and financial wealth between the 1% and the 99% is the outcome of MMT policy.#1

    The inflation discussion is a smokescreen.#2

    The macroeconomic price formula states for the elementary case P=ρW/R. ρ>1 represents private/public deficit-spending/money-creation and this implies that a period deficit produces a one-off price hike and NOT inflation.#3

    Egmont Kakarot-Handtke

    #1 Keynes, Lerner, MMT, Trump and exploding profit
    https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html

    #2 Gosh! the One Percent have gotten $21 trillion richer: Links on Distribution
    https://axecorg.blogspot.com/2019/11/gosh-one-percent-have-gotten-21.html

    #3 Links on Inflation
    https://axecorg.blogspot.com/2020/09/links-on-inflation.html

  12. Yoshinori Shiozawa
    September 28, 2020 at 9:14 pm

    Asad, do not deviate into a minor point of rhetoric. Do you think that you have answered my question? I have explained why you have not in my previous comment..

    Why have you cited your article? Is class-conflict theory of inflation a part of Modern Money Theory? There is a strange deviation of argument.

  13. September 29, 2020 at 5:06 am

    Read the MMT textbook to find out the MMT theory of inflation

  14. September 29, 2020 at 9:02 am

    Asad Zaman

    The MMT textbook gets the foundational macroeconomics sectoral balances equation wrong. For details see

    Refuting MMT’s new Macroeconomics Textbook
    https://axecorg.blogspot.com/2019/03/refuting-mmts-new-macroeconomics.html

    Because of this, the analytical superstructure (inflation, employment, etc.) is provably false.

    Egmont Kakarot-Handtke

  15. Yoshinori Shiozawa
    September 29, 2020 at 10:49 am

    Mitchell, Wray and Watts’s Mcroeconomics published in 2019. I have read Wray’s Modern Money Theory published in 2012. I read it (or more correctly skimmed it over) not very later than it was first published, probably around 2014.

    If their new book is much improved than Wray’s book, it should be felicitated. In Wray’s Modern Money Theory, the question of inflation is mainly discussed in Chapter 7 “Policy of Full Employment and Price Stability.” I have read this chapter again, but my impression is not changed. In defending his policy (JG/ELR or Job Guarantee/Employer of Last Resort), Wray talks much about inflation and hyper inflation. He even say that “Yes, MMTers fear inflation, too. Indeed ‘price stability’ is always been one of the two key missions of UMKC’s Center for Full Employment and Price Stability.” I admit that he is sincerely thinking about price stability. But, I am questioning how his price stability promise is guaranteed as a part of economics (not just as mere verbal consolation) .

    As far as I read his book, there is no theoretical treatment of inflation. This is almost evident if we see the Table of Contents. That may be a reason that Asad could cite his class-conflict theory of inflation as something that may help fill the lack of theories. But as I have argued in my previous comment above (September 28, 2020 at 11:00 am), class-conflict theory of inflation can be no assurance. Instead, it reveals that it is quite difficult to suppress inflation (say chronic inflation of two or three digits) once it emerged out of class conflict.

    What Wray does in defending his policy is to criticize older theories: commodity money, metalists, proponents for gold-standard system (he calls them goldbugs), quantity theory of money, monetarism, and supporters of fixed exchange rate system. I think these criticisms are all right. I also believe that endogenous money theory is right. I do not criticize him on this ground. The second approach he takes in his defense is to talk about past experiences, mainly two typical cases of hyperinflation: Weimar Republic and Zimbabwe. He briefly mention Brazil (1,000% in 1992 and 2,000% in 1993) and measures taken by Luis Carlos Bresser-Pereira, whom I respect not only as finance minister but also as economist. But I do not think these examinations (Weimar Republic, Zimbabwe, and Brazil) are sufficient. Hyperinflation by a classical definition by Philip Cagan 1956 (adopted by Wray p.246, i.e. 50% or more inflation per month) is too extreme a case. The inflation rate per year by this definition must exceed 12,975%. Latin American countries never suffered such exorbitant inflation. Inflation that many LA countries suffered in the third quarter of the 20th century was an inflation of two to three digits. Are these cases of inflation can be neglected? I could find no mention to be learned from these experiences.

    In sum, Randall Wray uses a rhetoric like this. The monetary theories before him were wrong (he is correct), Historical experience shows that there were no hyperinflation except in exceptional cases like civil war (he is correct). Therefore, he assures us, there is nothing to worry. But, the trouble with Wray’s reasoning is that he is proposing a new radical policy scheme (prescriptive level) and a new theory (no limit to government debt, descriptive level). In both levels, he is proposing what has never tried sufficiently in the past. The past experience has little value of assurance. Criticizing older theory does not imply he has a good theory of inflation. As far as I see, there is no theory of inflation in MMT.

    Asad seems to come to know MMT after 2019 book. He was much impressed of it (it is good) and is now advocating its policy. I am afraid he is preaching it with no deep reflections.

    • Yoshinori Shiozawa
      October 2, 2020 at 2:58 am

      I wonder why Asad Zaman comments nothing on my Reply above on September 29, 2020 at 10:49 am Reply. Thee are three possibilities. He has not read it. He has read it but could nor respond because he is too busy to do so. The third possibility is that he has read my comment, thinks difficult to refute it easily. If the third possibility is the case, he is advocating MMT without deep reflection. It is not fortunate for MMT.

      MMT contains a good insight but it has a defect to be politically misused. There are so many people who judge an economic theory based on whether a theory is favorable or not for his or her predetermined policy. The real role of economic theory lies in giving advice. Among the advice must be included the one that warns the bad side-effects of a policy.

      • Calgacus
        October 16, 2020 at 10:55 am

        YS: Thanks for your kind comments & apologies for the very delayed reply. I’ll reply with a new comment at the end of the comments of this thread, as it is very long.

      • Yoshinori Shiozawa
        October 16, 2020 at 1:43 pm

        Calgacus, thank you for reminding me this discussion. A half month has passed since I have posted my comment on September 29, 2020 at 10:49 am. I wonder why Asad Zaman could not answer to my objection. Is he a person who escape from the argument when it becomes unfavorable for him? What I expect is only a sincere argument, because I believe this is what is lacking even among heterodox economists.

        I will read your comments at the end of this thread.

  16. September 29, 2020 at 7:12 pm

    class-conflict theory of inflation can be no assurance. Instead, it reveals that it is quite difficult to suppress inflation (say chronic inflation of two or three digits) once it emerged out of class conflict.

    • September 29, 2020 at 7:14 pm

      Don’t know where this came from.

    • Yoshinori Shiozawa
      September 29, 2020 at 8:57 pm

      Dave, please read the whole sentence. I have written as follows:

      But as I have argued in my previous comment above (September 28, 2020 at 11:00 am), class-conflict theory of inflation can be no assurance. Instead, it reveals that it is quite difficult to suppress inflation (say chronic inflation of two or three digits) once it emerged out of class conflict.

      The main phrase is a summery of what I have argued in my comment on September 28, 2020 at 11:00 am. As for class-conflict theory of inflation, please see Asad Zaman’s article that is indicated in his Reply on September 28, 2020 at 7:15 am.

  17. September 30, 2020 at 1:08 pm

    Yoshinori, what I didn’t know was how a considered reply it had taken me two hours to construct had become reduced on sending to a part of one of my quotations.

    Why I even bothered in the first place has been put eloquently by Iconoclast:

    “But can I or should I expect everyone to know these obscure parts of literary and cultural history and analysis because I do? If one has obscure knowledge that does not mean one can expect everyone to have it. Obscure economic knowledge is percolating out of this blog to those whose specialties are in other arenas. That’s one point of this blog in my view”.

    Another is that the only way to convey obscure knowledge is to point to it: here verbally. As Iconoclast is university educated I don’t suppose he has studied the literature of modest polymath G K Chesterton, which is why I keep pointing to it – though I haven’t here, since his interests were in personality differences and political economics rather than money making. Here I had pointed rather to money being (in defiance of Innes) not credit but a representation of credit, and to an interest-free personal credit card generating representations of credit we personally have been given (what Craig is asking for as against what he is offering). What I also add is that our debts to each other and Nature need to be paid back systematically in real terms, as in doing cooperatively the necessary work of reorganisation, redistribution and renewal. Iconoclast seems to grasp that where Craig doesn’t. I have been disappointed by his not imagining for himself the working of a credit card system wherein the local banker is merely our personal accountant (feeding only statistics, not our personal details, to merely advisory governments). Yoshinori’s imagination doesn’t seem to stretch that far.

    • Yoshinori Shiozawa
      September 30, 2020 at 3:13 pm

      I have only responded to your question on September 29, 2020 at 7:14 pm. What you say “a part of one of my citation” that you have wrote in the Reply on September 29, 2020 at 7:12 pm is a part of my sentence I have written in the third paragraph of my comment on September 29, 2020 at 10:49 am Reply.

      You wrote ” a considered reply it had taken me two hours to construct “. Have you posted any other comments that I can read above? I can find it nowhere.

      • October 1, 2020 at 9:29 am

        I had largely agreed with you, Yoshinori, but argued that the problem was at the personality level rather than the empirical. My cursory remark expressed my frustration at not being able to remember what I had said, the copy of the whole I had taken before sending it having pasted back in the reduced form.

        Doubtless I have made other comments relevant to yours, but it may be better to offer you someone else’s:

        Stahel, Andri W. (2020) “Why are the rich getting richer while the poor stay poor?” real-world economics review,
        issue no. 93, 28 September, pp. 2-17, http://www.paecon.net/PAEReview/issue93/Stahel93.pdf

        Stahel emphasises the distinction between [real] economics and chrematism [money making], the latter (what so-called economists now call economics) excluding the social and environmental consequences of its gaming. That has always been my main reservation about Craig’s proposal and MMT.

    • Craig
      September 30, 2020 at 5:22 pm

      I’m afraid it’s you who doesn’t understand me or the real problem Dave. A credit card, even at 0% interest not only doesn’t solve the paradigmatic problem it doesn’t solve the individual’s scarce flow of income problem, not to mention the consequent commercial agent’s and the system’s problem.

      If your debt service costs, even at 0% interest, exceed your income you’re bankrupt. Ask Donald Trump, the king of ponzi finance as elucidated by Steve Keen, has faced that problem at least six times. And if you don’t have any income or a very small income you’re not going to get any additional credit. The debt problem is not going to be resolved without MONETARY GIFTING, FREE monetary gifting. And we’ll still have loans, we just won’t have debt slavery and paradigmatic blindness.

      I don’t understand the ecological problems we face? I’m the only one here who has shown how we “get off the dime” and begin a bottom up sane ecological consumer and industrial policy with the 50% discount/debt jubilee policy at note signing for big ticket green items. I’m the only one who has shown how we bring a sense of systemic ethics to the economy by regulating and punitively taxing the business CEOs for indulging in creeping price inflation…just because they can in an economy that has mistaken freedom for alternately goosed and smothered financial chaos. NO, I’m the only one here who understands that if you eliminate any possibility of inflation with the retail discount/rebate policy that you free up virtually an unlimited fiscal ability to fund the mega projects that are necessary to survive the existential problem of climate change. C’mon.

      • October 1, 2020 at 12:36 pm

        Craig, a paradigm is an example, Kuhn’s point being that practitioners don’t work from theory so much as by modifying already working examples (so next year’s car will be very much like last years). The credit card is a paradigm which (contrary to what you have just said), does solve the individual’s scarce flow of income problem – and for everyone, not just those whom others are willing to employ. The modification needed is everyone receiving their income the same way – even bankers and CEO’s – with their spending being credited to suppliers to provide for restocking, and written off the spender’s account (given) insofar as it is reasonable given the necessary work they are doing to maintain themselves, reskill and restock. Income not spent merely adds to one’s credit limit; excessive gambling and real estate stays on account as debt.

        In the first point lost above, I now remember (responding to Iconoclast, who gets the real but not the monetary problem), I disagreed with Innes’ “Money is credit and nothing but credit.” Money is a REPRESENTATION of credit, which is what a banknote is and a credit card generates. The real credit is given by our suppliers, who trust the system if not us.

        Your 50% discount seems to be a proposal – not a working example – which still takes for granted the present money-grubbing and wage slavery. It seems you have a lot to learn from Robert Locke about German industrial and academic organisation, and his use (as I was doing in 2005) of the Mondragon co-operatives as a paradigm of this supply side of the problem. If you can find Race Mathews’ “Jobs of Our Own: Building a Stakeholder Society”, I can strongly recommend it.

      • Craig
        October 1, 2020 at 10:02 pm

        “The credit card is a paradigm which (contrary to what you have just said), does solve the individual’s scarce flow of income problem – and for everyone, not just those whom others are willing to employ.”

        It is a tool (not a paradigm) of the present paradigm of Debt Only, i.e. simply more debt that the individual receiving it has to pay back. Hence it doesn’t solve the problems created by the present paradigm. It may temporarily remedy a scarcity of actual income and/or put off commercial bankruptcy, but it’s still just a stop gap, a palliative and a missing of the mark of GIFTING that is the new paradigm and pattern resolution of the monopolistic present paradigm.

        Now I’m not saying there won’t be loans in the new paradigm, of course there will be, it’s just that there will be BOTH loans AND monetary gifts.

        Hopefully we’re smart and honest enough to realize that all loans will be at 0% interest because for profit finance adds costs over and above the cost of repaying the amount loaned, post retail sale. which is the exiting point from the economy for any good or service including finance, and so exposes for profit finance as an illegitimate wholly exterior parasite to the legitimate economy.

        “Your 50% discount seems to be a proposal – not a working example”

        It’s an imminently workable policy solution because it utilizes the debit-credit convention of accounting which as I have posited here many times is probably the most basic aspect of money.

        “…which still takes for granted the present money-grubbing and wage slavery.”

        Of course it doesn’t and won’t. You’ll probably always have a small percentage of flawed individuals who end up worshipping money, but guaranteeing relatively abundant monetary and financial security for life will largely free one from that tendency, especially if society finally wakes up and emphasizes love and its active form AKA grace in the whole of existence, and specifically if we experience its economic form continually and often in every day of our lives whenever we purchase something.

        Unions and cooperatives will still be legitimate functions within the new paradigm, fairness and full consideration for the other being aspects of the philosophical concept of grace. That plus eliminating the domineering sting of “the reserve army of the unemployed” via relatively abundant monetary gifting empowers the individual and goes a very long way toward balancing the present dominance of employers.

      • October 1, 2020 at 10:46 pm

        Craig, did you understand what I meant by saying money is only a representation of credit? MMT at least recognises that giving ‘nothing’ gives nothing. What it and you aren’t taking account of is our debt to Mankind and Nature when we use real resources faster than they can renew and redistribute themselves.

        Gifts don’t have to be repaid in the monetary sense of returned. What they normally do is make us grateful, therefore happy and willing to continue the chain of giving gracefully what others (not just our employers or benefactors) need.

  18. Calgacus
    October 16, 2020 at 10:56 am

    Yoshinori Shiozawa:If the debt is not absorbed by the central bank, the quantity of money (money supply) will increase. It is a strong factor that may engender financial instability.

    Basically, MMT disagrees with this & considers it a myth. Government debt being absorbed by the central bank or not is rarely meaningful. The central bank doesn’t really have much economic effect in normal interest rate ranges. What is more meaningful is the total government debt outstanding – the calculation of which may require additions (the amount of currency or reserves outstanding should be added. Or subtractions_ One branch of government “owing” something to another branch – e.g. the US Social Security Trust Fund – does not have economic meaning & should not be counted as part of the National Debt. While there may be some effects of small but positive interest rates promoting financial stability, the basic MMT idea is to pick one short-term interest rate & keep it there forever.

    Suppose the government was successful until time 0 to keep price levels stable (or decreasing). At time 0, one notices a sign of inflation? Full employment is almost realized. Is it possible for the government to stop spending?

    This seems to me to invert the MMT sequence. So I think you may be interpreting MMT as postwar or 1960s demand management fine-tuning “Keynesianism”. But it isn’t. The MMT idea is to have full employment at all times- meaning 0% unemployment – by the Job Guarantee, the main “new” anti-inflation mechanism of MMT is the Job Guarantee. The most novel thing about MMT is the understanding that such full employment is not inflationary, but a powerful disinflationary tool. Spending on it decreases automatically and gradually as booms continue, with no government/political decision, as people leave the Job Guarantee for better paying jobs. The basic idea is that the JG pool acts as a price-of-labor – stabilizing buffer stock, just like a commodity buffer stock, but on a bigger scale. If necessary, if it shrinks to nothing, deflationary tools like tax increases or spending cuts or maybe interest rate increases are used. In an economy without a JG – with an unemployed buffer stock – these cause mass unemployment & misery as the cost of decreasing demand & inflation. In an MMT-guided economy, the Job Guarantee pool is replenished, people just change employers & maintain a decent living wage income, rather than being thrown on the street when they lose their job.

    As far as I know, they haven’t developed an entirely new theory of inflation, but just consider & clean up the theories of other anti-inflationary tools like price controls, etc. I wrote a long comment somewhere on their anti-inflation toolbox, but I don’t remember where. :-) The idea I believe is that they don’t particularly need a new theory of inflation, while they would like one, there are only so many hours in a day. I am not sure exactly what you mean by one – they are more providing tools, primarily the JG, embedded in their theory that will fight inflation better than the current ideas – which is all that one needs for practical policy. My impression is that they are utilisateurs of the microeconomics involved and would just follow their late Kansas City colleague Fred Lee. My further impression is similar to Marc Lavoie’s; your microeconomic work seems very important, to go beyond what has been done before and my mathematical gut feeling is that it should fit hand in glove with MMT.

    But, the trouble with Wray’s reasoning is that he is proposing a new radical policy scheme (prescriptive level) and a new theory (no limit to government debt, descriptive level). In both levels, he is proposing what has never tried sufficiently in the past

    This claim of unprecedentedness is also disputable. The criticisms or questions seem largely of the “Functional Finance” part of MMT – but this aspect was “tried out” in WWII in the USA. And spending of that size is NOT envisioned in the basic one-size-fits-all MMT prescription. By the late 40s, & for a few years longer – economists were as unanimous as they ever are that Abba Lerner’s Functional Finance was irrefutable & correct. A natural unanimity in that it clearly explained what had just happened – the economics of WWII & the New Deal, which were historical real world models of the theories – FF/ MMT, in both deflationary & inflationary conditions.

    The real teaching of Latin American countries in the third quarter of the 20th century is the existence of populist power. The government could not stop inconsistent policies that may cause disaster afterwards. I wonder why many economists forget quite recent history that happened.

    Yes, there has been a great deal of economic folly in Latin America. And everywhere else! But I don’t agree & I don’t think the MMT economists would agree exactly with that diagnosis applied now, rather than that specific earlier time. Rather than populist power, a greater cause in recent years was listening to very bad advice from the IMF (& sometimes from extremely misguided anti-IMF populist forces – that promoted bad IMF style policy, thinking it was against the IMF/USA! I’m thinking of most of Venezuela’s socialists/communists/Marxist activists, who fanatically supported a fixed exchange rate system, against good advice from Mark Weisbrot et al, in the belief that it was somehow “socialist” – while it was actually subsidizing the upper class opposition & was the primary cause of their (hyper)inflation. I & others cited above some of the craziest things done in Latin America – which being in the USA’s back yard, rational policies are sometimes met with brutality, subversion & economic warfare from the USA.

    Geoffrey Ingham, a near-MMTer, in his Nature of Money, p. 217 – 227 “Argentina’s Monetary Disintegration” describes very well what you are saying about Latin America then, and I don’t think the MMTers would differ. e.g. “For at least half a century, no more than half of those Argentines legally required to pay income tax have done so (Manzetti 1993: 135; Lewis 1990: 362). The widespread non-payment does not involve surreptitious evasion so much as a widespread, blatant denial of the state’s authority to collect taxes.” What Ingham describes is nothing like the situation of Japan, the USA, Europe etc. Argentina suffered both from Peron’s unrealistic populist spending AND a very weak tax system. Wray & others helped design a quite successful JG-like program in Argentina during the Kirchner years, which were the beginning of a turnaround from the century of unrealism that Ingham describes. MMT absolutely fundamentally depends on a strong system of taxation. But it just discards fears of spending based on superstitious numerology. Peron’s Argentina is sort of the opposite

    I was just reading James Crotty’s Keynes Against Capitalism: His Economic Case for Liberal Socialism- Routledge (2019) p 353, where he notes
    “The longest section of Keynes’s note [On Postwar Economic Planning] is devoted to exposing the fallacy embodied in the report that full-employment planning entails substantial budget deficits.”

    and cites Keynes reply to that criticism of the economic proposals:

    But the latter part of the argument, which seems to suggest that the tendency of the proposals is to unstabilise the national budget, is surely topsy-turvy. It would be a failure to adopt a remedy for severe cyclical unemployment which might have that effect. There appears to be no glimmer of a recognition that measures to stabilise the national income are ipso facto measures to stabilise the national budget. The additional charges falling on the budget in years of bad employment as a result of the Committee’s proposals are, in fact, almost negligible; whilst the effect on the revenue of maintaining the national income should be obvious.

    Keynes Collected Works volume 27, p. 366

    There is a body of literature in the Keynesian & MMT literature (Domar to Fullwiler) following up on this, that Keynes / MMT / functional finance & its remedies for unemployment, like a JG, is “sounder” than “sound finance”, and leads to lower, not higher deficits overall, with the JG being almost tautologically being the least amount of spending necessary to ensure full employment.

    • Craig
      October 16, 2020 at 11:58 pm

      I like MMT. It philosophically aligns with grace as in abundance as does monetary gifting because it is also for an abundance of systemic money as opposed to scarcity and austerity.

      It will not however come without inflation, and likely higher than 3% per annum inflation. Why? Because the quantity theory of money is basically a fallacious orthodoxy and a financial fraud,. Money is at best a tertiary cause of inflation. What, does money sprout a mind and decide to inflate prices? Of course not. Price inflation is 90% a commercial DECISION made within an alternately goosed and smothered system of financial chaos. Chaos is a “system” of no or woefully inadequate and thus easily undone barriers and bounds, and thus there is NOTHING to stop commercial agents from committing the economic vice of garden variety inflation. In fact it is a semi-rational response by commercial decision makers….to the chronic systemic scarcity of demand/potential business revenue. And of course for profit finance is ecstatically happy to continue this system because they cannot lose due to their (idiotically granted) monopoly paradigm of Debt Only, and because if they f#%k things up they get bailed out and their slaves and enablers are left to suffer.

      The 50% Discount/Rebate policy at retail sale and the other policies and regulations of Wisdomics-Gracenomics of course ends the monopoly paradigm of for profit finance in a way that brings ethical control to the economic system and immediately and integratively resolves its deepest problems of systemic scarcity of demand and chronic inflation.

      By the way, a job guarantee fits seamlessly within Wisdomics-Gracenomics because when you not only eliminate inflation, but beneficially integrate price and asset deflation into profit making systems….for all practical purposes there is an infinity of up so far as fiscal policy is concerned. Lets have not only a new CCC and WPA but the off planeting of at least the most energy intensive means of production. The new industrial slogans should be: Made in Orbit and Made on the Moon.

  19. Yoshinori Shiozawa
    October 16, 2020 at 2:54 pm

    Thank you, Calgucus, for this really long answer. I like your sincere attitude toward discussion. You are more frank about the weak or lacking point of MMT. You admit that

    As far as I know, they haven’t developed an entirely new theory of inflation, but just consider & clean up the theories of other anti-inflationary tools like price controls, etc.

    We should not fear that a theory that we want to defend has some defects. We can advance when we admit them. As you know, I posed questions and counter questions mainly against Asad Zaman’s argument. On my question, he posted a brief comment on September 28, 2020 at 7:15 am in which he referred to his theory of inflation and he added that “the theory has been extracted from a recent MMT textbook.”

    I do not know if this comment is right or not. I also admit that class-conflict theory of inflation can have various contents and forms. As I have worked many years ago, in the 1970’s, in the strand of this theory, I argued that it may not be an answer to my concern and posed a counter-question to which Zaman answered on September 29, 2020 at 5:06 am simply writing “Read the MMT textbook to find out the MMT theory of inflation”. Was it done by fake authority? I do not know. But I do not like this style of argument.

    Thank to your explanation, I came to understand MMT much better than before. Although I still have some doubts if Job Guarantee system works well. I do not contend it never does. If workers understand the economy well, it is possible that it works. A necessary condition for that is to accept wage rise within the labor productivity growth. In the standard Marxist theory, this may be difficult, because it only considers that it is good that workers ask higher wage in any time because capitalists are exploiting them and it enforces class struggle. Of course, there are many Marxists who admit it is not the good policy. As a result of Productivity Center movement, Japanese trade unions now understand that it is necessary to raise labor productivity in order to raise real wage level.

    N.B. The concept of labor productivity is difficult one. Even in Japan I observe frequently an argument like “the wage of service sector is low because its productivity is low.” This is a wrong use of productivity concept but I do not enter in this question.

  20. Yoshinori Shiozawa
    October 16, 2020 at 6:09 pm

    Dear Calgacus,
    I have forgotten to thank you for reading Marc Lavoie’s book review of our book. I am happy to know that it is approaching to 1,000 reads.

    I am sad that Fred Lee was dead. He was six years younger than me and passed away six years ago. His posthumous book Microeconomics: A Heterodox Approach appeared two years ago, edited by Tae-Hee Jo who was one of last students of Fred Lee. He wrote a short obituary. I hope all readers of this page read it. It is titled Frederic S. Lee and His Fight for the Future of Heterodox Economics 2016. Lee was really a person who fought for the future of heterodox economics.

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