Newman: “in my own book the explanation starts the cycle with government spending, thus adding to the money supply, and then issuing treasuries for roughly equivalent amount. The bond vigilantes really have it backwards.
Tag: Modern Monetary Theory
Finally, a prominent “mainstreamer” Keynesian gets MMT. Over the past couple of years, Paul Krugman has got close, but he keeps claiming that MMT believes “deficits don’t matter”. He refuses to cite any MMTer who has ever said such a silly thing. One doubts he’s actually read any serious piece by any proponent of MMT. I suspect he is just reacting to comments made on his blog—likely by anonymous supporters of MMT who might not have got it quite right.
Here’s a very good video on MMT with Stephanie Kelton, the chair of the Economics department at the University of Missouri at Kansas City talking to Lauren Lyster of RT’s Capital Account. As you know, despite my Austrian bias and my remaining allegiance to what Marshall Auerback calls “deficit terrorism”, I think MMT’s descriptive framework is compelling in many regards. […]
We have reached end-of-paradigm – the final failure of microeconomics masquerading as macro. The solution, the new macro paradigm, requires monetary literacy and numeracy. And this can only be achieved by removing the conceptual blinders by which micro models encircle the minds and cover the intellectual eyes of all the economics professionals and policy makers who mistakenly believe they are seeing in macro.
Many orthodox economists ironically adopt something close to a “loan pusher” argument: the excess global saving pushed interest rates down, leading to excessive borrowing by debtor nations that consumed beyond their means. Although the framework is somewhat different from the current account imbalance story, the conclusion is the same: too many imports flowing to heavily indebted profligate consumers. This can be supplemented with the mercantilist story—Germany is also guilty because it pushed cheap exports onto the importers. As I have tried to make clear, there is something to that but it is far too simple. The EMU could easily have self-destructed even with no current account deficits anywhere. And the US does not self-destruct in spite of current account deficits everywhere (internally and externally).
The problem cannot simply be a problem of current account imbalances—we’ve got them all across the US states. And the US, itself, runs a chronic current account deficit. But the US federal government is sovereign, it issues its own currency. It helps to offset current account deficits among states through fiscal transfers; and it can never run out of its own currency no matter how big its budget deficit. It can set its overnight interest rate target wherever it wants—at zero if desired—and hold it there forever, if it wants. That lowers short term treasury rates, and Uncle Sam can—if he wants—issue only short term treasuries. All of these options are fully within the federal government’s sovereign power, although it can choose to do something else. Individual EMU nations are in a wholly different pickle.
My friend Steve Keen recently presented a “primer” on Hyman Minsky. In his piece, Steve criticized the methodology used by Paul Krugman and argued that Krugman could learn a lot from Minsky. In particular Krugman’s equilibrium approach and primitive dynamics was contrasted to Minsky’s rich analysis. Finally, Krugman’s model of debt deflation dynamics left out banks–while banks always played an important role in Minsky’s approach. This post is to help explain why Hyman Minsky matters by quickly summarizing Minsky’s main areas of research. Next week I will post up more on Minsky’s view of “money and banking”.
Germany and Papademos have ended Greece’s political sovereignty, but Greece gave up its economic sovereignty long ago when it adopted the euro. Two aspects of national economic sovereignty were inherently lost with nations that gave up their own currency and adopted the euro. A member nation could no longer have a monetary policy and it could no longer revalue its currency. The designers of the euro required a measure sharply curtailing the member nations’ remaining economic sovereignty. The demand that the euro nations surrender the last vestige of their economic sovereignty was deliberate. The euro’s designers viewed national economic sovereignty as the gravest threat to the euro’s success. Their great fear was that inflation could lead to a weak euro, so they adopted the “Stability and Growth” Pact to sharply limit the member states’ ability to control their fiscal policies. The Pact forbade member nations from running material budgetary deficits even during a severe recession or depression.
We (also) do not want black helicopters flying around dropping bags of cash; and we (also) oppose government “pump-priming” demand stimulus—the libertarians and Austrians and even Milton Friedman are correct in their argument that this would generate inflation. Come to think of it, MMTers have more in common with Austerians than with “military Keynesianism” that supposes that high enough spending on the defence sector will cause full employment to “trickle down”. Most MMTers believe we’d get intolerable inflation before the jobs trickle down to Harlem. But can we “afford” full employment?
Consider the statements by the UK leadership that the UK has “run out of money.” Does anyone think that the UK financial leaders believe that statement? If Germany declared war on the UK tomorrow would the UK surrender because it had “run out of money” and could not “afford” to increase expenditures to defend the nation? The point is that nations, when faced with the need to make enormous, emergency expenditures, rediscover through necessity the knowledge of how monetary operations actually work even if they previously were captured by economic dogmas that asserted the opposit
In conclusion, while there are links between the “twin deficits”, they are not the links usually imagined. US trade and budget deficits are linked, but they do not put the US in an unsustainable position vis a vis the Chinese. If the Chinese and other net exporters (such as Japan) decide they prefer fewer dollar assets, this will be linked to a desire to sell fewer products to America. This is a particularly likely scenario for the Chinese, who are rapidly developing their economy and creating a nation of consumers. But the transition will not be abrupt.
Last week we examined Milton Friedman’s version of Functional Finance, which we found to be remarkably similar to Abba Lerner’s. The only problem with Friedman’s analysis is that he did not account for the external sector: he wanted a balanced budget at full employment, but if a country tends to run a trade deficit at full employment, then it must have a government budget deficit to allow the private sector to run a balanced budget—which is the minimum we should normally expect. Somehow all this understanding was lost over the course of the postwar period, replaced by “sound finance” which is anything but sound. It was based on an inappropriate extension of the household “budget constraint” to government.