Modern Monetary Theory: The Last Progressive Left Standing

[girl gone mad]

Modern Monetary Theory: The Last Progressive Left Standing
Warren Mosler

http://www.huffingtonpost.com/warren-mosler/modern-monetary-theory-th_b_872449.html

The headline progressives are in full retreat. They have found out the hard way that their bleeding heart pleadings -- 'yes, the financial markets might destroy us, but how can we cut this or that worthy cause' -- don't cut it. They have fallen into the out of paradigm world that takes it as gospel that the U.S. is at imminent risk of becoming the next Greece; where financial markets can cut off funding and ability to spend and force the giving up of national sovereignty and begging for an IMF bailout, or else, face the option of default or printing money, which launches one down that slippery slope to hyperinflation... bla bla bla...

And so to show they too are indeed fiscally responsible grownups who wouldn't think of instigating such a financial crisis, the headline progressives more than agree that the federal deficit is indeed a very dangerous long term menace that demands appropriate attention. Accordingly, President Obama, on behalf of the Democrats, has proposed over $4 trillion of his version of deficit reduction over the next ten years, with "everything on the table" including Social Security and Medicare. The main difference seems to be that the Democrats include tax hikes, while the Republicans only support spending cuts.

The great irony is that with productivity at an all-time high, and with no actual shortage of the real resources needed to take care of our seniors at a level that makes us feel proud to be Americans, to care for the sick, to educate our children, and to provide for the public infrastructure and institutional structure that facilitates and fosters private sector output and employment, there has never been a better time for the progressive agenda.

The few lonely progressives, who do understand all this and have stayed the course with the progressive agenda, are those who recognize what has come to be known as Modern Monetary Theory (MMT). It is these MMT progressives who realize that a currency like the U.S. dollar is a simple public monopoly, and that the following are facts of actual monetary operations:

1. Federal taxes serve to regulate aggregate demand, not to raise revenue per se.
2. Federal borrowing serves to regulate the term structure of interest rates, and not to fund expenditures.

In other words MMT teaches us there is no such thing as the U.S. Government running out of dollars, that the U.S. Government is not dependent on foreign borrowing to be able to spend, and that hyperinflation comes only from sustained over spending far beyond full employment and our capacity to produce. Nor can the U.S. government become the next Greece or Ireland. MMT teaches that financially, joining the euro zone put those nations into the positions of U.S. states. So while California or Illinois can become the next Greece or Ireland, and need a federal bailout to avoid default, just like Greece and Ireland needed a bailout from the European Central Bank, the widely proclaimed analogy of Greece and the U.S. Government is entirely false, and tragically counterproductive.

http://www.huffingtonpost.com/warren-mosler/modern-monetary-theory-th_b_872449.html">more...

[BzaDem]

1. The dollar's status as world reserve currency is not some universal law that can't be changed.

If the government decided to adhere to MMT, they might soon find that the dollars they are using won't be very valuable in terms of being able to purchase real goods/services. A giant government-central-bank-hybrid can only play around with money if the money they are throwing around is relevant.

[orwell]

2. Except you forgot one thing...

...we have proven time and again that we treat threats to our reserve status as an attack against our nation.

Ask Iraq how that worked out...

[Hawkowl]

6. Or Libya

"As a result, the Libyan government, up to now, could create its own money, the Libyan Dinar, through the facilities of its own central bank and insist that trade in oil must take place in its national currency (and not in dollars, as is the case with all the other major oil producers).
This has placed Libya in the same advantageous position as the US, who, as custodian of the global currency of trade, the dollar, can merely print money to expand its trade capacity without, as in the case of Zimbabwe, incurring disastrous inflationary consequences. In order to do business with Libya, banking cartels, oil barons and so on, have had to go through the Libyan Central Bank and its national currency.

So Gaddafi’s Libya was indeed special -- a small player, but suddenly a significant player given the global power plays over the dollar, as the world’s reserve currency and medium of exchange."

Oh, but enter the rebels:

"In a statement, the Libyan rebels reported on the results of a meeting held on March 19. Among other things, the supposed “pro-democracy forces” announced the "designation of the Central Bank of Benghazi as a monetary authority competent in monetary policies in Libya and appointment of a Governor to the Central Bank of Libya, with a temporary headquarters in Benghazi."

And now Libya will fall in line and do business with the rest of the world with the world's currency: THE US DOLLAR.



http://ilrig.org/index.php?option=com_content&view=article&id=29:libya-and-the-brics-currency-wars-imperial-wars-and-popular-uprisings&catid=7:trade-and-investment&Itemid=9

[girl gone mad]

3. a reserve currency is nothing more than a foreign currency financial asset..

a government holds in reserve. A global reserve currency is not operationally necessary and this idea is not central in any way to MMT.

The international status of the US dollar is completely irrelevant to the ability of the US government to net spend in its own currency. All sovereign currency regimes can buy goods and services available for sale in their own currencies at any time they choose. The US government is no exception.

High demand for US Treasuries generates low yields, but any sovereign government can engineer low public debt through coordinated central bank operations. Japan, as a mere partial reserve currency, is a prime example.

[BzaDem]

4. Of course a government can buy goods and services for sale in their own currency.

The question is, what goods and/or services (if any) WILL be for sale in our own currency, and at what price, should MMT ever see the light of day. Unless the US government is going to confiscate gold and other currencies and stores of value, mandate that x person sell y good at z price, etc, the ability to buy goods in one's own currency could be rendered meaningless.

Of course a country with an aggregate demand shortfall can fill the aggregate demand shortfall without inflation, currency panics, etc. (And the fact that political constraints prevent this is a travesty.) No non-MMT Keynesian disagrees with this. This is precisely why Japan can borrow at low rates despite its large deficit -- it has a huge aggregate demand shortfall.

Where normal Keynesian economics and MMT start to diverge is in the long term. Keynesian economics says that we should fill temporary shortfalls in aggregate demand with a temporary boost in aggregate demand -- not a permanent one. MMT, on the other hand, suggests permanently and structurally increasing demand (increasing structural long-term benefits at the same time as decreasing taxes) in response to a temporary shortfall, in ways that are both politically and structurally difficult to reverse once the temporary shortfall is filled. It is this policy perscription that is not only silly but dangerous.

[girl gone mad]

7. Please show where..

"MMT, on the other hand, suggests permanently and structurally increasing demand (increasing structural long-term benefits at the same time as decreasing taxes) in response to a temporary shortfall, in ways that are both politically and structurally difficult to reverse once the temporary shortfall is filled."

Modern Monetary Theory isn't a fantasy economic system, it's largely a description of the monetary system currently in place in the US and other sovereign currency governments. I have no clue why you think gold would need to be confiscated or price controls would need to be put in place.

[BzaDem]

8. The article specifically says they are proposing SS benefit increases AND FICA cuts.

That is clearly a permanent increase in spending/deficits, in response to a temporary shortfall. A Keynesian would call for a temporary increase in spending (such as infrastructure spending, which has an end date once the project is complete) to respond to a temporary shortfall.

I am not arguing with or even talking about MMT's preferred accounting description of our system. I am talking about the policy prescriptions that go along with such descriptions. The policy prescriptions that go along with MMT involve large, permanent, unfunded spending, that is structurally and politically difficult to unwind once the temporary aggregate demand hole is filled.

[girl gone mad]

9. You still misunderstand.

The FICA cuts would be replaced by tax increases once real economic recovery is in place and inflation is an actual threat. Nobody is proposing permanent budget deficits, though you've also made that absurd claim about MMT in the past.

[napoleon_in_rags]

5. "spending far beyond full employment and our capacity to produce"

I have issue with this line, its spending beyond production that causes inflation, not spending beyond 'capacity to produce'. This is such a huge part of the issue: American's capacity to produce is much higher than its actual production, and remains that way even with money poured in like via QE2. If you can give money to working people to start circulating amongst themselves, then you will get a lot of work, a lot of production. But if those same working people all own vast amounts of debt and have high costs for non-discretionary items, than it gets sucked out, its going into a real black hole. (I almost wrote black gold, Freudian typo) The fundamental product of credit cards is unemployment: If an economy of 10 people each takes out $1000 dollars in debt and must eventually pay back $1400, then each of them must sell $1400 dollars of products. The creditor makes $4000, but spends only $1500 and puts the rest in the bank. This means that everybody cannot produce enough to pay back the creditor, there is simply not enough money in circulation: Somebody must default. Or they must downsize, do layoffs, find ways to survive so that the creditor can be paid to NOT produce anything but credit, remove money from circulation and thereby reduce the real value* of money in circulation. This is an example the capacity to produce not being realized. The real capacity to produce is what you would see if $1400 in labor resulted in that much profit for the producers, which they could use to increase production capacity.

*because for all producers, $1400 in labor resulted in only $1150 of monetary gain so the money they got at the register was worth less, a weird mutation of inflation.