El-Erian nails MMT

Via Bloomie comes  on MMT:

The current window for the MMT debate has been opened by the protracted period of reliance on unconventional central bank policies that has followed the global financial crisis and the European debt crisis. Despite the initial concerns expressed by some economists, this period of ultra-low interest rates and ballooning central bank balance sheets has not led to any meaningful inflation scare or the crowding out of private sector activity.

…The debate has merit in stimulating greater discussion of whether the global economy’s changed structural parameters, including a permanently lower “r-star,” or natural rate of interest, allows governments to run larger economically sustainable deficits than was previously thought possible. (Additional structural influences include the disinflationary effects of technological innovations and demographic changes.) It comes at a time of concerns about a declining global growth rate, shrinking potential, and a deep inequality trifecta (of income, wealth and opportunity).

The main risk – those “analytical excesses” that I worry about — is that MMT proponents may go too far in building a secular case for fiscal priorities to dictate monetary policy and for printing money to enable ever growing government deficits. More generally, this would also erode central bank autonomy and undermine confidence in the policymaking process, especially during periods of economic/financial volatility and uncertainty.

Spot on. So you take a middle path of cautious experimentation and guarantee central bank independence to ensure any MMT excesses are contained by monetary policy.

For the world of secular stagnation it is a no-brainer.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. El-Erian nails MMT
    BS! It wasn’t even a discussion. He said nothing!

    “Spot on. So you take a middle path of cautious experimentation and guarantee central bank independence to ensure any MMT excesses are contained by monetary policy.”

    BS!!!Maybe I missed a /sarc somewhere.
    – No mentionof the rate of use of the planet’s sources as a result of this toxic combination – he wasn’t saying that,
    in response to unlimited money printing through the fiscal process, we should run IR’s at +5% RAT in order to reduce our excess consumption and conserve the planet
    – no mention of the problem of excesses and distortions in the external account
    – no mention of the foreign debt so generated.
    – no mention of the resultant inevitable TOTAL debasement of the currency

    Nuts!

      • Energy, health, property, education, transport – pretty much all essential services have been captured by private global (American) interests and are seeing double digit inflationary aspects- but Asia with its insane over production is countering that with negative inflation leading to a low inflation system.

        Therefore MMT must be brilliant.

        Here is the theory explained by Kirk Cameron – using the same logic

        https://www.youtube.com/watch?v=2z-OLG0KyR4

    • Everyone’s currency is debasing – money is just a “unit of exchange” or a claim on society anyway and eventually all claims lose value. If it causes a currency adjustment it actually may improve the current account position as the dollar gets lower and we are forced to become more local. As long as you contain the maximum amount of debt issue-able per currency (i.e. bank debt caps, macro prudential) so the extra money doesn’t get leveraged up it might be doable. IMO we have already “debased” the currency by issuing ample amounts of “credit money” – it’s just that this form of money in a weird way actually improves our FX rate as articles (Deep T?) on this site have shown. The answers lie back in time; we’ve already deflated our currency by borrowing lots of money and there’s simply a lag until its measurable in the FX market.

      • Debasing thje currency does zip without reforming the economic and societal model. Id Venezuela’s currency debased enough? What is good about what happened there?

      • Oh yeah too much of anything and everything will blow up spectacularly (low IR’s, high IR’s, no credit, too much credit, etc). My point was in way that the damage is already done – what’s up for debate is where we put the burden of the eventual adjustment. Will it be on nominal dollars (inflation), on deflation (and the associated societal implications that many people will never recover from), on foreigners like other beggar-thy-neighbour countries are doing, etc. As someone who saves and mostly buys local I have to say I would prefer the adjustment hit the exchange rate and I imagine most Australian’s probably feel the same vs the alternatives. It will take a while for industry to respond to this sure (maybe another decade or two) but where there is money to be made it will be.

    • “No mentionof the rate of use of the planet’s sources as a result of this toxic combination – he wasn’t saying that,
      in response to unlimited money printing through the fiscal process, we should run IR’s at +5% RAT in order to reduce our excess consumption and conserve the planet”
      I see this stated repeatedly. How does supply of money effect resource consumption in any meaningful way? It affects absolute price to consume, but shouldn’t affect relative price except in small part due to how money printing is directed. Consumption of resources is dependant on labour and populace to consume what is produced. I see money supply as irrelevant in the grand scheme of things.

      • If nobody saves thereby not consuming resources and everybody spends thereby consumingmore resources what are you doing. The original principle of savings that I forego my consumption so that you can consume more OR invest so that we will have more later.

        As per McLuhan (in another context) we are not sooo much different to a village. There is a limit to resources even if, on a planetary scale, it is much larger.
        Everyone thinks of money as some abstract thing that we can fiddle with and that will make everything right. It doesn’t. There are underlying real resources. Unfortunately, nowadays, this fact is almost totally ignored. It was not always thus.

      • I believe Zimbabwe did an experiment on spending more to consume more resources. How did that turn out.
        Money is merely a unit of account. We can choose to consume more or less, but money supply doesn’t affect amounts.

    • I sympathise with external account complaint. Seems to me that this enthusiasm for MMT is born of and focused on the US – and there I think it makes sense. But I don’t think it can be transplanted easily into a small open economy like Australia without some serious attention given to the CAD, foreign debt, FX, etc.

      • Thanks Babunda – but even for the US there is a limit and that limit might be reached abruptly. Do we think China is going to go on allowing the US to fund a gigantic military with printed fiat forever. Their getting rid of all the USD they accumulated over the last few years plus a bitmore might be just baby steps to the giant ones in heavy hobnails to follow.

      • Yes, we are not the US….no greenbacks for us…….Rentenmarks if we are lucky. One of the main justifications of those pushing this is to supply resources to those who are left behind in the current system, hence the rate of resource use will necessarily rise.

    • flawse – while you (for once) haven’t made the claim here today, you’ve carried on again and again ad nauseum over time about how you’ve essentially whipped the bitchy little arses of “the best of the MMT proponents” and apparently left them crying in their lattes, without any comeback for your razor-sharp arguments.

      Funny thing is, the one thing conspicuous by it’s absence from the blogs of “the best of the MMT proponents” – such as Bill Mitchell for instance…………..is you. So it makes it hard to take your claims credibly.

      For all your claimed utter demolishing of the silly idea, it’s nonetheless spreading like wildfire – which indicates that your arguments have been completely ineffective.

      So why don’t you take some action at stamping out this nonsense once and for all by taking your debate to said blog? After all, what could deliver a more staggering blow to the false prophets then humiliating them right there in their own temple for all the blogosphere to see? If your arguments are as solid as you claim, destroying people like Mitchell on their own turf should be a walk in the park.

      When you’ve done this, you might start to be taken seriously.

      I’ll keep an eye out for you

    • Great comment.
      Low interest rates train the population to have a high time preference.
      Training us to be the kid that grabs the one marshmallow on the table rather than wait for a second as a reward for patience. The litmus test of future success in an individual.

  2. “So you take a middle path of cautious experimentation and guarantee central bank independence to ensure any MMT excesses are contained by monetary policy.” Naive and foolish. These are the same institutions you call corrupt and incompetent on a daily basis.

    How do you ever unwind MMT????? The RBA can’t even raise rates.

    • kiwikarynMEMBER

      “Middle ground” LOL. Is there any such thing? Once its implemented, it will be extended out to its illogical conclusion, far beyond the realm of “middle ground”. It will fuel some new market bubble, and will become impossible to unwind without destroying the joint. Just like QE has been kept going far beyond any “emergency” and is now impossible to unwind. What should have happened is that the recession should have been allowed to play out, and the heavily indebted allowed to go bankrupt, so that debt was wiped out and new money could be directed into fresh productive investments, stimulating real growth, instead of continuing to pay off unproductive and pointless debts incurred a decade ago in the last bubble mania. Everything proposed since 2000 is simply delaying the inevitable fall out of interfering with the natural course of things, and the longer its delayed the worse that fall out will become.

    • Under MMT guided governance, national banks would have the option to create debt-based money (as private banks do now), or liability-free public money. People use all sorts of different names to refer to these two types of money: dynamic vs static, private vs public, low-power vs high-power, vertical vs horizontal, credit vs coin, etc.

      I like temporary vs permanent for now, so I’ll use those terms here.

      Temporary money: created when a loan is made, eliminated when a loan is repaid. Liabilities are matched by assets. Currently, ~95% of all money falls into this category and is created by private banks. There’s absolutely nothing to stop public banks from providing the exact same service (Commonwealth Bank used to be government owned), but decades of neoliberal ideology has convinced a generation that private banks operate in this service more efficiently than public banks (State or National), hence almost all public banks have been privatised. MMTers raise an eyebrow (rightly so) and say “oh really? GFC calls bullsh*t”. The Bank of North Dakota is a good example of one of the only remaining State banks in the USA, and it functions perfectly well.

      Permanent money: created liability-free when coined and spent into existence; eliminated by the creator when earned back (typically via taxation). Very little of this exists in the world today but there are plenty of historical examples of governments using it in the past with mixed results. Abraham Lincoln’s creation of Greenbacks is a good example of using permanent money to escape the grip of private creditors. As far as I’m aware, the only sovereign in the world today that uses permanent money (government issued) is Guernsey. Today, the way governments finance their operations is to borrow existing temporary money from the private sector and pay interest on the debt. This becomes deeply problematic if taxation revenue cannot cover the interest payments on the debt, meaning that private creditors essentially hold governments by the short and curlies. MMTers call into question the healthiness of this power dynamic pointing to the graveyard of national governments that have been wiped out by international creditors (typically with the blessing of the World Bank and IMF). Critics of MMT point to multiple instance of hyperinflation, but have a habit of doing so dishonestly, failing to mention that governments typically revert to permanent money as a last resort following instability that has all to often arisen as a consequence of using private, international, temporary money in the first place.

      The essential difference between MMT and the status quo is political. I don’t see either as having more critical flaws than the other (and I think that BOTH are critically flawed). It’s more about who holds the power to create money? Can they be trusted to manage money supply relative to the economy effectively (hence regulating inflation)? MMT puts the power more in the government’s hands, which, in a democracy, puts the power in the peoples hands (but in a dictatorship spells trouble). Neoliberalism puts the power in the hands of an unelected, globalised financial elite, hoping that the “animal spirits” of free markets will somehow, magically, make everyone work out fine and prevent abuse.

      As it stands, the power is heavily on the side of the private banking sector. Extreme MMTers would push it far to the government side. Personally, I’d like to see it return more towards the middle as it’s abundantly clear that neither side can be trusted with absolute power.

      All that really matters is inflation. A money supply must be able to expand and contract quickly, with a tight connection to the growth (or decay) of the underlying organic economy. This is why things like Bitcoin and gold are poor forms of money; they’re simply not elastic enough. Temporary money has proven over the years to have excellent elasticity and generally performs the job well. It runs into trouble when speculative bubbles expand money supply in excess of organic growth of the economy, or when panics terminate credit in an economy that’s otherwise healthy.

      Permanent money has a mixed history and I’m rather cold on it. It’s too easily abused by authoritarians during a period of political crisis, leading to inflation. There’s also a critical asymmetry between the political popularity of spending it into existence versus taxing it out of existence. Relying on taxation is also deeply flawed (particularly in an already contracting economy), as human beings are very clever creatures and will find six ways to Sunday to avoid tax. These reasons (amongst others) are why permanent money does not dominate money supply. It’s not just a public vs private thing, because if permanent money was superior, then, in a world dominated by the private financial system, the private sector would have found a way to take control of permanent money by now and would be using it with preference to temporary money.

      There’s an awful lot of hot air around the topic of MMT right now. We definitely need reform of the monetary system as there’s too much power in the hands of people who are f*cking things up, but we don’t actually need to use the term MMT to discuss such reforms. I’ve picked through MMT and extracted some things I like (there are some useful concepts, particularly the focus on Wynne Godley’s sectoral balances approach).

      I advocate for the reformation of public banks, providing temporary money as private banks do. I don’t know what the optimal balance between public and private is, but 0% / 100% (as it is now) is certainly not the correct balance. I also advocate strongly for disincentivisation of equity insurers, banks and LLCs in favour of insurance mutuals, credit unions, and partnerships. The latter business structures move much more skin into the game, thereby outsourcing regulation very effectively, eliminating vast swathes of moral hazard, corruptibility, and international credit risk without requiring an explosion of ineffective government regulation and enforcement.

      Politically, on the Political Compass, this is a centre-libertarian perspective.

      • Also, please let me know how you find the use of the terms “permanent” vs “temporary” money. They’re not ideal, but I think they work better than what I typically use: either “public” vs “private” or “private credit money” vs “public liability-free money”.

        These are really two different dimensions. Permanent money can be public or private. Temporary money can also be public or private. I’m still looking for the ideal words…

  3. Spot on.

    Fking WOW !

    As Flawse said – where is the /s tag ? Is this for real ?

    Ummm – what the living actual fark – what alternate reality are we living in…

    this period of ultra-low interest rates and ballooning central bank balance sheets has not led to any meaningful inflation scare

    So asset prices are not inflated around the world, stock markets are not inflated around the world, house prices are not in insane territory, corporate bonds, literally EVERY SINGLE MEASURABLE CLASS affected by QE is in utterly ABSURD inflationary territory.

    not led to any meaningful inflation scare

    There are simply no words – the level of complete and utter denial of reality is beyond insanity – we are sitting in global economic situation of eye bleeding inflation in the classes where this money was directed.

    Now – we ALSO FAR KING KNOW that zero of this quantative easing was directed into wages – globally – wages are stagnant.

    The basic situation is wealthy capital holders and uber rich class of investors have seen insurmountable inflation in their assets – where the INFLATIONARY money was directed. And since NONE was directed into wages – there was minimal inflation in ummmmm – televisions.

    Despite the fact that essential items like accommodation, health, education, transport food have been seeing double digit inflation – but because we are seeing massive deflation in areas consumables such as electronics and clothing from RAMPANT over production in asia – there is low inflation.

    Its so farking insidious and corrupt.

    Now – lets see what happens when we pour printed money into a domestic economy – heres a tip – we have done this many, MANY times before and it always ends up the same – rampant inflation and rampant interest rates.

    Please stop with this lunacy – its worse than Alex Jones, Andrew Bolt and Mark Lathams three way love child – the stupidity just hurts.

  4. Umm… Yeah

    Anyone that did Macro 101 should remember there is a cool thing called the Solow growth model, which says that the population needs to save to achieve long-run economic growth.

    “including a permanently lower “r-star,” or natural rate of interest, allows governments to run larger economically sustainable deficits than was previously thought possible.

    Now let’s see. What does that do to the incentives for saving?

    • And anyone that did ECON202 should have learnt that Solow is actually rubbish. Empirically speaking.

      • I mean they clearly gave the Nobel prize to an idiot.

        No empirical proof eh?

        Do a bit of literature search. You’ll be surprised.

        Let me know if you need help.

  5. MathenomicMEMBER

    MMT itself only explains how the current system works; what’s being discussed here are policy initiatives (admittedly that without that understanding would not be considered).

  6. And the hard – commodity currency money cranks go wild ….

    Pro tip … MMT does not administrate the political aspect of state money, only provides insight to its architecture and potintial. Now in the MMT camp the policy of cyclical policy by removing NAIRU and with it the endless inflation hysteria.

    Then some are confused about Milton’s quasi gold standard 2% targeted IR.

    • Economists can only claim to be free of politics when they’re living in a world of pure theory. The moment their ideas get applied in the real world, it gets unavoidably political because they’re messing around with money and money is joined at the hip with power.

      Economics and politics are inseparable.

      Under neoliberalism, state money is completely off the table. That’s a political position. Just suggesting that state money should be considered is highly, highly political.

      Hence, high profile politicians start talking about MMT and the very mention of “state money” causes “SOCIALIST” to be thrown around all over the place by neolibs as they recoil in horror, clutch their pearls and fall towards the fainting couch.

      • Some confuse “I”deology with economics, Philip Mirowski does a good job of wrangling that bit of history.