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MMT for Austrians

I was eavesdropping on a conversation about Credit Writedowns on another blog (Pragmatic Capitalism) and wanted to share some of my thoughts with you on the conversation.

One commenter, Mattay said:

Harrison is an MMTer. As I read him, he is making what amounts to a “moral” case that we should call QE “money printing” because it does not have any positive effects. But by inflating a temporary bubble, it has had negative effects, most of which are borne by ordinary citizens rather than well informed investors who realized that it was a bubble. But he’s not materially disagreeing with anything I have read here (found this blog a few weeks ago, great stuff!)

My response was:

Mattay,

That’s right, in essence I am an MMT’er in regards to the mechanics of how modern money works…

The question then goes to policy prescriptions where I am not in the same camp as most MMT’ers. I do believe they are coming to see my view of resource misallocation as fundamental – which is more from the Austrian School. I think of my views as a sort of non-ideological Kindleberger-Minsky-Mises blend…

QE is destructive because it pumps up asset prices artificially only to see fundamentals re-assert themselves in a way that is most destructive for ordinary citizens. We are living through a time which is fundamentally deflationary in nature. The monetary authorities will try to counteract this by ‘printing money’ but they will not be successful in stopping the deflationary forces (unless they are willing to go all-in). And yes, I use the phrase ‘printing money’ for a reason; QE will not create jobs. It is destructive – especially to ordinary working people.

CW is an eclectic blog. You see posts from hard core libertarians at Casey Research and from true advocates of fiscal policy like Marshall Auerback. Three years ago, you would have said I follow the Austrian School.  I saw the Monetarists and the Keynesians as limited, with their emphasis on flow models and inability to understand the centrality of debt accumulation to secular economic forces. And this is still true today. I should point out that both groups are interventionists – Keynesians on the fiscal side and Monetarists on the monetary side.  For that very reason, many see ‘statist’ tendencies in Milton Friedman’s prescriptions. Regarding the Austrians, the problem is three-fold.

  1. An Austrian prescription of lower aggregate demand and purging malinvestment works for an individual economy in isolation like Latvia or even Japan even if it creates a Depression temporarily. That was America’s experience in 1921. But, in my view, it won’t work across a broad swathe of the developed world, deleveraging and undergoing austerity at the same time. Invariably what would occur is a Depression with a capital D along with economic nationalism, protectionism, and so on. This is followed by riots and more muscular forms of government that lead to international military confrontation (see some of the thinking on this here – long post).
  2. Austrians are wedded to the gold standard. I like gold and silver too, but I don’t see them as some magic bullet that will make things better. All indications are that the gold standard actually made things worse during the Great Depression. Moreover, the gold standard was ineffective in its role at preventing external imbalances from building up pre-Depression. That’s what it is supposed to do, but it failed to do.
  3. The Austrians are too wedded to the inflationary thinking about money creation anchored in the gold standard. Quantitative easing is not inflationary in largest part because we still have a large output gap and the demand for credit is subdued. The money printing by the Fed will not pass through into the real economy. If the US government actually did a helicopter drop of money, it would do.

So, I find Modern Monetary Theory a refreshing change, in particular, because MMT isn’t really a theory. It is a description of how the fiat monetary system works. MMT explains what is different about fiat currency in terms of monetary or fiscal constraints. A lot of people are still anchored to a gold standard mentality and its inherent constraints 40 years later. Part of the objection to the phrase "money printing" comes from this – it is anchored in the gold standard. And, for the record, I have problems with fiat money but this is the system in which we operate.

I consider the economics of this blog "MMT for Austrians" because I come from an Austrian mind-set (suspicious of centralized planning and a strong advocate for individual liberty).  But since I understand the inherent logic in the MMT approach, particularly regarding the financial sector balances, I use this to describe the mechanics of how modern money works. I will present MMT with an Austrian framing for that very reason. See the post, "Out of control US deficit spending" for when I decided to take this tack. My hope is that it can facilitate a better understanding of the concerns and thinking on all sides of the ideological spectrum. For those wanting a true MMT perspective, I suggest you wait for Randall Wray, Rob Parenteau, Scott Fulwiler or Marshall Auerback to post. And I should point out that Marshall once worked with David Tice, a hard core Austrian, so some of the MMT’ers do understand and appreciate the Austrian view (sort of like George Soros and Jim Rogers, isn’t it?)

As for quantitative easing, I spelled it out yesterday. It is the closest thing to money printing the Fed can do.

Now, if the US had interest rates at 4 or 5 percent instead of zero percent or if fiscal policy weren’t dead, we wouldn’t see the Fed doing quantitative easing. Instead the Fed would be acting to supplement fiscal policy, using ‘conventional monetary policy’ to boost aggregate demand, which means lowering the Fed Funds interest rate. The effect on the exchange rate of this policy response is to weaken it. But, of course, rates are zero percent, not 4 or 5 percent. So the Fed is forced into QE.

-On Printing Money and Debasing The Currency

The Federal Reserve can create dollar credits and buy existing financial assets like Treasuries; that’s what QE is. With Congressional approval, it could even buy other assets by the way (see here). But the Federal Reserve is not permitted to print physical dollar bills. Nor is the Fed permitted to buy Treasuries directly from the US Treasury – precisely because it is supposed to be independent and not a facilitator of money printing and currency debasement. I should also point out that the Treasury is also forbidden from printing money to cover deficits and must actually go through the process of issuing bonds equivalent in value to its cash deficit (see here).

I think the point here is that libertarians like myself are suspicious of centralized planning. They don’t want the Fed monetising debt or printing money. They don’t want the Fed expanding its balance sheet. That’s why you hear terms like debasing the currency and money printing a lot in these circles. You would never hear a ‘real’ MMT’er using those terms. The Pragmatic Capitalist, for example, objects to this terminology. But many MMT’ers like Randall Wray don’t want an activist Fed either because the Fed has already shown over the past generation what happens when it intervenes asymmetrically by supporting asset prices. The key distinction is fiscal policy.  I laid out the ideological boundaries last November in "A few thoughts about the limitations of government." The question is whether to allow an ‘activist’ government fiscal policy in a deep downturn. 

My view is that fiscal policy is a more legitimate way of dealing with a deep downturn than monetary policy. However, we have seen the Obama Administration use fiscal policy with incomplete results. The conclusion for some like Paul Krugman is that Obama has not done enough. The conclusion by others is that he has done too much. Either way you look at it, the Obama Administration’s inability to get the economy fully re-started has called the legitimacy of fiscal policy into question. And with the economy still operating well below capacity, battle lines have hardened.

I am tired of this ideological debate. I think most people are too. They just want a better economy. As I said last month there will be less policy advocacy and more policy forecasting at Credit Writedowns. Politically, Americans seem to have sided with the ‘fiscal policy doesn’t work’ school of thought for now. The mid-term elections suggest this. At a minimum, the incoming Congress is going to be less pre-disposed to fiscal policy. So what does that mean from a forecasting perspective?  To me, it means wrangles over the debt ceiling, over tax cuts, spending and unemployment benefits. And it means a more austere future for the US.

Anyway, those are my thoughts on MMT for Austrians.

P.S. – I am toying with how to update the thinking from Paul Brodsky and Lee Quantaince from their post. QE3: A plan to stabilize the global monetary system. While they are essentially Austrian-types, this proposal is a monetarist one that calls for a simultaneous and across the board depreciation in all currencies against hard assets. It is very intriguing because it is designed to prevent a deflationary spiral and to prevent a ‘gaming’ of the system as all prices adjust in concert. It is kind of like Barry Eichengreen, who keeps saying (if I understand him correctly) everyone should be printing money or trying to depreciate their currencies, but that this is the preferred approach. The logic I believe is that this crisis is not a fiscal crisis but a monetary one and thus mandates a monetary solution.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

15 Comments

  1. jimh009 says:

    On a totally unrelated note, just letting you know that I’m getting this error message when I click on your author page:The page isn’t redirecting properlyFirefox has detected that the server is redirecting the request for this address in a way that will never complete.I see this message when I click on your name under any of the articles you’ve written on the home page.Just letting you know.(Also happens when I click on the “Visit Website” link under the Author Information on this particular page, too)

    (second edit…it is happening for all authors on this site, not just you!. Seems the links to the “authors page” is broken)

  2. Great post, Ed. Have you thought about doing “Austrianism for MMT’ers”? I’d like to see your take on that. As you’ve noted, we are not necessarily hostile to significant parts of Austrianism–Minsky (who did his dissertation under Schumpeter) and Rob P. integrate Austrian analysis rather seamlessly. Anyway, thanks for all your great work. You’ve been an extremely positive force in these troubled times, and you’ve been a great help to MMT.

  3. Chad S says:

    Edward,

    I more or less share your hybrid view, though I just call it capitalism. But to the point, I have discussed this type of thing with a few MMT and Keynesian types, and my continual beef with many of them is their marriage to flows models that ignore the structural, long term effects related to the stock of assets and liabilities, labor and capital allocation, already embedded in the economy. Basically, I think they are near fatally focused on short term flows at the expense of “investment.” It is self evident that deficits will prop up GDP and allow the private sector to increase their financial assets. But it is not evident that the manner in which the money is allocated will produce positive ROI over time. This is precisely why I would prefer some sort of payroll tax cut as the form the deficits take, rather than being controlled by the 2 and 20 firm of Pelosi LP. Fiscal policy is the only lever to resolve a liquidity trap at the zero bound.

    Also, I sense a major ideological component to the majority of MMTers in the form of managed socialism. Most of the time I hear philosophical policy recommendations that leave the MMT station long ago, with subjective value judgments taking over. Thus, I see massive central planning at the core.

    • Matt Stiles says:

      I’d have to agree with that entirely.

      My primary opposition to most Austrians is the belief that the business cycle can only be caused by interventionism. I do believe that it tends toward stability, yet is never actually stable. The only constant as perpetual change. Thus I am attracted to Minsky’s instability hypothesis and even Prechter’s model of social causation.

      I have a problem with any theory that calls for fiscal policy as the cure. I do not believe that it can be effectively used to improve an economy. While it can skew it in certain directions, there is no guarantee that those results will be more desirable than if no action were taken. There are always unintended consequences.

      I see no benefit to skewing an economy with either monetary or fiscal forces. Both are liable to continuously benefit certain groups over others. Both are liable to become politically influenced. Both tend to focus on the near term, neglecting long-term investments. The inequalities lamented by most leftists are a direct result of their inflationary biases.

      I also have a problem with fiat money. I would be far happier with multiple competing currencies, of which gold and silver would likely be a part. In today’s electronic age, I see no reason any commodity couldn’t serve as currency. A market for the means of exchange would likely develop systems that we have not yet considered.

  4. Tom Hickey says:

    Ed: “They don’t want the Fed monetising debt or printing money. They don’t want the Fed expanding its balance sheet. That’s why you hear terms like debasing the currency and money printing a lot in these circles. You would never hear a ‘real’ MMT’er using those terms. The Pragmatic Capitalist, for example, objects to this terminology.”

    The problem I have with such terms as “printing money” is that not only are they no longer relevant operationally under the current monetary system but also they are moralizing, hence, do not belong in an objective debate of issues on the merits. This falls into the category of the moralizing of the Cat Food Commission, the main argument of the chairs being that debt is “bad.” Use of moralizing terminology is typical of ideological policy advocacy, whereas the real issues involve efficiency and effectiveness. This is why MMT’ers don’t like terms like “printing money.” It prejudices the case.

    “Efficiency is doing things right and effectiveness is doing the right thing” — attributed to Peter F. Drucker, although I haven’t yet located the citation. Since effectiveness involves goals, there is room for ideological debate about proper objectives. Means involve efficiency.

    • I’ve had these conversations about terminology with some MMT folks and it cuts both ways. “Deficit terrorism,” “Austerians” and stuff like this is the kind of thing you sometimes hear. People use these words for a reason – because it also registers with real people.

      I was just speaking to my mother about this as well.

      And I asked her, “What do you think about quantitiative easing?”

      She said, “what is that?”

      I said “you know the Federal Reserve is conducting quantitative easing. What do you think of their policy?”

      She said, “No I didn’t hear about it?”

      I said, “you haven’t heard the Fed was printing money?”

      She said, “oh right, the Fed’s printing money now, yes.”

      • Tom Hickey says:

        Ed, while I agree that pejorative terminology like “deficit terrorism,” which some have changed to “deficit errorism” and “austerians” is rhetorical rather than descriptive, I would argue that it is not “moralizing” in the sense that it is independent of fact and even opposed to it. There are operational definitions of these terms that some MMT advocates use, whereas moralizing terminology like “printing money” perpetuates myths that have no operational basis and are confusing the real issues. There is a significant difference here between ideologically normative discourse and occasional use of rhetorical devices based on operational understanding, IMHO.

        The fundamental misunderstanding arises from the false analogy that government finance is like household finance. This is the primary myth that is preventing an operational approach to policy. It is false operationally because government is the currency issuer and households, firms, and states in the US are currency users. Under the present monetary system, the government is not operationally constrained, although it is politically restrained. MMT has a detailed policy proposals for using the operational advantage of the current monetary system. Such proposals are not being seriously considered owing to the myths and moralizing that skew perception and obscure the reality from the public, media, and politicians — and a lot of economists, too. This path is leading the country and world toward economic, political and social disaster.

        I understand and appreciate that the orientation of this blog is not toward either policy advocacy or even policy, but integrating understanding the policy implications on markets with other considerations. But the comparison and contrast of the Austrian School and MMT was brought up in this post, and I think that such issues as I have brought up need to be clarified. Terminology like “printing money” doesn’t do that, again, IMHO, and citing rhetoric that some MMT’ers have used doesn’t really address that. It’s essentially changing the subject instead.

        I am a philosopher, not an economist or financial type. A lot of what philosophers do nowadays is analyze language in order establish clarity and to show where confusion enters owing to imprecision. That’s why I harp on getting the terminology right in terms of operational definitions. The Fed is changing the composition of assets and altering the term structure of government liabilities through QE. It is not increasing nongovernment net financial assets, which is what “printing money implies” in the minds of many who are not familiar with monetary and fiscal operations.

        Note: If the Fed takes dreck on its books and eats it for a loss, this can be interpreted a quasi-fiscal operation. This may have been a feature of QE1 but not QE2.

  5. Vince cate says:

    The problem in the depression was not a real gold standard, it was the Fed’s Ponzi Gold Standard:
    http://howfiatdies.blogspot.com/2010/11/feds-ponzi-gold-standard.html

    I have written up MMT for Austrians:
    http://pair.offshore.ai/38yearcycle/#chartalism

    Also hyperinflation in MMT terms:
    http://pair.offshore.ai/38yearcycle/#hyperinflationmmt

    For anyone who does not like “money printing” I have over 100 euphemisms for that term:
    http://howfiatdies.blogspot.com/2010/11/euphemisms-for-printing-money.html