[jeffkrol]

Modern Monetary Theory is an unconventional take on economic strategy - The Washington Post

Ahhh. the dawn of the enlightenment...

According to Galbraith and the others, monetary policy as currently conducted by the Fed does not work. The Fed generally uses one of two levers to increase growth and employment. It can lower short-term interest rates by buying up short-term government bonds on the open market. If short-term rates are near-zero, as they are now, the Fed can try “quantitative easing,” or large-scale purchases of assets (such as bonds) from the private sector including longer-term Treasuries using money the Fed creates. This is what the Fed did in 2008 and 2010, in an emergency effort to boost the economy.

According to Modern Monetary Theory, the Fed buying up Treasuries is just, in Galbraith’s words, a “bookkeeping operation” that does not add income to American households and thus cannot be inflationary.

“It seemed clear to me that . . . flooding the economy with money by buying up government bonds . . . is not going to change anybody’s behavior,” Galbraith says. “They would just end up with cash reserves which would sit idle in the banking system, and that is exactly what in fact happened.”

The theorists just “have no idea how quantitative easing works,” says Joe Gagnon, an economist at the Peterson Institute who managed the Fed’s first round of quantitative easing in 2008. Even if the money the Fed uses to buy bonds stays in bank reserves — or money that’s held in reserve — increasing those reserves should still lead to increased borrowing and ripple throughout the system.

soooooooooooo which one was correct-ist...

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Last edited by jeffkrol; 08-15-2012 at 10:18 AM.

[GeneV]

Modern Monetary Theory is an unconventional take on economic strategy - The Washington Post

Ahhh. the dawn of the enlightenment...

soooooooooooo which one was correct-ist...

A very interesting and well-explained article followed by some of the most intelligent and well informed comments I've seen (at least the first 20 or so which were as far as I read).

[jeffkrol]

A very interesting and well-explained article followed by some of the most intelligent and well informed comments I've seen (at least the first 20 or so which were as far as I read).

hmm............I will get to that in a minute but first for our Aussie and Canadian friends:

MilesLong1
2/21/2012 2:55 PM CST
Two things popped out at me.

1) Galbraith says that "when the government runs a surplus, it is a net saver, which means that the private sector is a net debtor. The government is, in effect, taking money from private pockets and forcing them to make that up by going deeper into debt."

To which one of his detractors responds "I have two words to answer that: Australia and Canada. If Jamie Galbraith would look them up, he would see immediate proof he’s wrong. Australia has had a long-running budget surplus now, they actually have no national debt whatsoever, they’re the fastest-growing, healthiest economy in the world. Canada, similarly, has run consistent surpluses while achieving high growth."

I looked it up. Australia and Canada's private sector debt has increased dramatically as public debt has decreased, basically proving Galbraith right.

2) MMT detractors say "When the government deficit spends, it issues bonds to be bought on the open market. If its debt load grows too large, mainstream economists say, bond purchasers will demand higher interest rates, and the government will have to pay more in interest payments, which in turn adds to the debt load" and "...the Fed would buy the bonds with money it prints, which means the money supply would increase. With it, inflation would rise, and so would the prospects of hyperinflation."

Except the article never mentions Japan which has a debt to GDP ratio somewhere near 225% but has a 0% interest rate and little or no inflation.

I'm not saying MMT is right and mainstream economics is wrong, but that the MMT detractors in this article are unwittingly proving MMT to be correct by pointing out examples they think disprove it or leaving out entirely examples that don't fit their models.

MilesLong1
2/22/2012 8:40 AM CST
Additionally, Canada and Australia run trade surpluses, meaning they may have a net inflow of money even if their governments run surpluses.

now I hope you weren't referring to this one, which always pops at first for me;

Texan7
2/23/2012 1:54 PM CST
It all comes down to a delusion that "someone else's" lunch is a free lunch.
It all comes down to inflation.
Condescendingly abstract those all you want. Gather Nobel winners and Harvard righteous pontificators all you want, and abstract away. Or get real and get Austrian.

[jeffkrol]

simple.................
tjfxh
2/19/2012 11:50 AM CST

The article omits the basic MMT rationale on deficit and debt, so it is not really at all evident why MMT economists claim what they do. MMT is based on Wynne Godley's sectoral balance approach to fiscal balance based on government offsetting saving desire of non-government (households, firms, and external sector). The balances of the government, private domestic sector and external sector sum to zero as an accounting identity. As non-government savings desire changes and the government deficit does not shift to offset it at full employment, then either economic contraction will result if there is is shortfall in the government deficit, or inflation if there is an overshoot. The national debt is the accumulated deficits, which inject net financial assets into non-government, hence represent national savings of net financial assets, i.e., accumulated financial wealth. When government runs a surplus, it withdraws net financial assets from non-government and draws down national saving of net financial assets, i.e., national financial wealth decreases. By targeting the appropriate deficit to offset non-government saving desire, the economy can be stabilized at close to full employment, and a job guarantee for anyone willing and able to work can mop up the residual of unemployed. MMT shows how to achieve full employment (less frictional) and price stability, which is the "holy grail" of macroeconomics, thought to be unachievable other than by redefining unemployment by increasing the so-called "natural rate." However, idle resources, especially human resources, are national resources going to waste and that waste can never be recaptured. This is hugely inefficient and MMT shows how to obviate this inefficiency through Godley's sectoral balance approach for determining the appropriate size of the deficit and Abba Lerner's functional finance, for adjusting the deficit through fiscal policy. The job guarantee, derived from Hyman Minsky, is used to establish a buffer stock of employed instead of the present buffer stock of unemployed, and the basic wage serves as a price anchor against inflation. Very simple. Wish the article had explained it.

[GeneV]

hmm............I will get to that in a minute but first for our Aussie and Canadian friends:

now I hope you weren't referring to this one, which always pops at first for me;

I was referring to the Mileslong1 post. It was surprising to me to see someone go to the trouble in a blog comment to do research.

[jeffkrol]

I was referring to the Mileslong1 post. It was surprising to me to see someone go to the trouble in a blog comment to do research.

i know, a pointless and frustrating task........

[jeffkrol]

VERY interesting choice of words in this article.. think carefully:
Simon Johnson: Mitt Romney and Extreme Fiscal Policy - NYTimes.com

Mr. Romney has mentioned cutting tax expenditures – i.e., ways in which the government spends through giving various kinds of tax breaks

The reasoning is straightforward. At present the federal government buys health care for about 100 million Americans.

Doesn't give them...

addendum on QE:
http://www.businessinsider.com/why-qe-is-not-working-2012-8
And because QE works primarily through the lending channels (as monetary policy always does) it hasn’t had much of an impact. There are a few other side effects of QE (like portfolio rebalancing, wealth effects and mythical psychological effects on economic actors), but the big factor is that it doesn’t induce more lending (because it doesn’t have a transmission mechanism through which it makes credit more attractive – not to mention, in a balance sheet recession, consumers are already shunning credit), but it also doesn’t alter the net financial assets of the private sector. So the net result – QE just doesn’t do much. It is, as I said many years ago, “the great monetary non-event”.

Read more: http://www.businessinsider.com/why-qe-is-not-working-2012-8#ixzz23iO2voDx
http://pragcap.com/why-qe-is-not-working

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Last edited by jeffkrol; 08-16-2012 at 06:20 AM.