The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

‘Shut Up!’ The Modern Monetary
Theorist Explained

Posted on | January 31, 2013 | 9 Comments

by Smitty

Essentially, there are four preconditions in Modern Monetary Theory:

  1. Money enters the economy through government spending, as the total amount of money is constrained not by gold but by the total output of the national economy;
  2. Government spending is speculative as it prints as much money as it needs to control production and, as a byproduct, employment, and spending beyond productive capacity leads to inflation;
  3. Taxes do not pay for expenditures but are instead a way to throttle private sector demand; and
  4. The government is the issuer of the currency, sovereign governments that issue their own currency are never insolvent, so debts essentially don’t matter.

I would submit we now meet those preconditions. With the Federal Reserve’s bond-buying program, beginning with Quantitative Easing “QE1? in November 2008, the US government is the de facto issuer of currency, as the Fed can, for the most part, purchase Treasury Bonds at will. The Federal Reserve is currently purchasing 61% of Bonds at auction, quickly approaching its 70% self-imposed limit, which was relaxed from 35% in 2010.

I would submit that the economic wreckage before you kinda shows that the capitalist/monetary theorist approaches are kinda like before/after chrystal meth pics.

Thus, until somebody articulates reform for the Federal Reserve, stand by for a steady stream of Hegelism. The private sector economy is the horse, the government is the cart. This Modern Monetary Theorist foolishness isn’t going to end well. But, hey, we’re celebrating the 100th anniversary of Woodrow Wilson’s inauguration, aren’t we?

via Mataconis


9 Responses to “‘Shut Up!’ The Modern Monetary
Theorist Explained”

  1. Adjoran
    January 31st, 2013 @ 4:02 pm

    Ever notice that no one bets on the Straw Man in these arguments?

    From the “source” at The Agonist your link relies upon:

    I’ll try to provide brief, working definitions to everything below. Before I dig in, I just want everyone reading to know that I’m not an economist, I am not an expert on anything pertaining to economics, and for all I know everything I’m about to tell you is dead wrong and I’m an idiot.

    At least he put a disclaimer.

  2. whig
    January 31st, 2013 @ 4:04 pm

    True, a nation can always print more fiat currency and not “technically” default. However, like Zimbabwe, eventually no one will accept fiat currency for goods and services. They will also refuse to accept it as repayment or interest on any debt. When you can’t buy the ink, hire the printer, and buy the paper with worthless currency, I believe that qualifies as defaulting.

    Best book on the subject is This Time It’s Different which is a historical study of economic defaults through the ages.

  3. McGehee
    January 31st, 2013 @ 5:06 pm

    Money has value only insofar as the economy is producing goods and services to buy with it — and those goods and services have value only insofar as people (a) want them, and (2) have the money to buy them. Prosperity only occurs when the supply side is free to meet the demand it has, not the demand Elmer Fed wants or wishes it had.

    The government can study the economy all it wants, and accumulate all the power it thinks it needs, but market demand is what drives the economy, not policy. The only input policymakers have or can ever have is to enact monumentally stupid policies that force the market to respond to the perverse incentives in ways the policymakers never intended. That’s the best-case scenario.

    “Modern” monetary theory is really just neo-mercantilism, adapted and made “neo” by the conversion from precious metals to fiat currency.

  4. antoinepgrew
    February 2nd, 2013 @ 11:15 am

    Smitty, you’re an idiot for writing this. You sound like someone defending our solar system as the sun orbiting around the earth. Suggest you do your homework. Suggest you ACTUALLY call your regional Fed (which I did), or better yet if you live in the same city as one, you ACTUALLY go over there and check out the facts. Not theory. Facts.

    Barring that, maybe you can read a Congressional Research Service report about how our monetary system works.

    “Money and the Federal Reserve System: Myth and Reality”
    by G. Thomas Woodward, Specialist in Macroeconomics, Economics Division, July 31, 1996
    Congressional Research Service Library of Congress
    CRS Report for Congress, No. 96-672 E

  5. antoinepgrew
    February 2nd, 2013 @ 11:17 am

    Hey, whig,

    Everyone has been accepting our currency since we went off the gold standard in 1934 (domestically) and 1971 (internationally).

    Exactly when do you suppose “no one will accept [our] fiat currency for goods and services?” Got a date?

  6. antoinepgrew
    February 2nd, 2013 @ 11:33 am

    “but market demand is what drives the economy, not policy”

    You sound like the architects of our current demise, you sound like Greenspan, Rubin, Geithner, and Summers.

    “Modern” monetary theory is really just neo-mercantilism, adapted and made “neo” by the conversion from precious metals to fiat currency.

    Oh, wow. The double-digit-IQs are out in full force. Hey, einstein, the USA went off the gold standard in 1934. Our currency has been fiat, meaning by decree, ever since. (Check your Constitution.) If you hit the books, you would learn that it was the gold standard that helped create the Great Depression. The new “check money,” as it was called then, exceeded the metal backing it. BTW, gold is fiat money, but it is not stable. The value changes with supply. Each new gold mine discovered weakened the value of the dollar.

    We became completely sovereign monetarily in 1971 when Nixon took us off the gold standard internationally (because France was trying to drain our gold supply, and ruin us economically, at $35/oz).

  7. antoinepgrew
    February 2nd, 2013 @ 11:40 am

    From a commenter on Naked Capitalism:

    If you’re going to critique MMT, then you should at least inform yourself as to what it’s truth claims are.

    1) MMT Moral truth claim: price stability is good. Both inflation and deflation are bad.

    2) MMT Analytic truth claim: Inflation has two causes: a) demand-pull: too much money chasing too few goods, and b) cost-push: pressure on supply side, such as oil supply shocks

    3) MMT Moral truth claim: Unnecessary sacrifice is bad. Prosperity is good.

    4) MMT Analytic truth claim: Sacrifice is unnecessary when there is some artifically contrived shortage of money. Sacrifice is necessary when there is a shortage of real resources.

    5) MMT Moral truth claim: Debasing the currency is bad.

    6) MMT Analytic truth claim: The central bank can always set the interest rates.

    Can you show me a single incident where the central bank does not set short-term interest rates. As to long-term interest rates, which the Fed has only recently began dabbling in, can you cite a situation where the Fed would not be able to set long-term interest rates?

    7) MMT Moral claim: The ability of the central bank to set interest rates is good.

    Do you think that the situation that the European peripheral countries face is better, where the transnational bond markets set the interest rates? You assert there is a risk in the central bank setting interest rates, but don’t identify it. Could you spell out the risk involved in the Fed setting interest rates? Whatever this risk is, is it greater than the risks posed by having the transnational bond markets set the interest rates?

    8) MMT Analytic truth claim: The currency has value because you need it to pay your taxes.

    How are people to pay their taxes if they don’t have currency? And since the government can create and destroy currency, and taxes, at will, it completly controls the supply and demand for the currency.

    9) MMT Moral truth claim: Sovereign fiat currency regimes are good. They expand the policy space and create more policy options for the government, placing the responsibility for the economic well-being of the nation in the hands of elected officials accountable to the people, and taking it out of the hands of transnational bankers whose motives are totally self-serving and who are accountable to no one.

  8. McGehee
    February 2nd, 2013 @ 1:03 pm

    You sure spent a lot of words non-responding to things I didn’t say. How has that been working out for you, Mr. Single-Digit IQ?

  9. McGehee
    February 2nd, 2013 @ 2:24 pm

    Seriously, your argument started incoherent and went from there:

    You sound like the architects of our current demise, you sound like Greenspan, Rubin, Geithner, and Summers.

    If you believe policy does drive the economy rather than market demand, then your book l’arnin’ has failed you, and you need to change your major before you waste any more semesters.