UKC

There is no magic money tree or where is the money coming from, are common retorts governments fail to support businesses in global pandemics or indeed feed hungry children. However, the fiscal stimulus following the 2008/2009 global downturn and to an extent actions during the Covid-19 pandemic have shown that sometimes governments are happy to apply principles of Modern Economic Theory with their fiat currencies, even if they talk in terms of household budgets and act like the Gold Standard is still in place.

Could Modern Economic Theory be a model for future prosperity, not just something that is wheeled out and not talked about in times of crisis.

I think Osborne's austerity regime is pretty well discredited these days.

The same old lines are being trotted out though.

I don't think they are. Osborne had the opportunity to borrow for infrastructure spending at what were then record low interest rates, but declined to do so. Sunak has pledged £600 billion for infrastructure spending.

Are you suggesting Sunak is follower of Knapp, Michell-Innes or Lerner and Minsky?

The current trend of low interest rates helps beef up all these ideas.

But I do wonder what would happen if say they rose just by say a few percentage points.

To me that is the killer issue.

And at the stage when it does happen will all economic theory change again saying debt is a bad thing becuase of the interest rate payments.

Apologies all, I just noticed a huge error in my OP, which is perhaps leading to some confusion. I am referring to Modern Monetary Theory, I really don't know why I wrote Modern Economic Theory.

I am suggesting that he is practising modern monetary theory - the use of fiat money to fund state investment.

I suspect that you obtained those names from Wikipedia, which states, 'MMT synthesizes ideas from the State Theory of Money of Georg Friedrich Knapp (also known as chartalism) and Credit Theory of Money of Alfred Mitchell-Innes, the functional finance proposals of Abba Lerner' so it makes little sense to ask me which one of them I think he is infuenced by.

No, I didn't get them from a Wikipedia article. However the article is correct in suggesting that they are influential in our understanding of MMT.

Your rebuttal of my suggestion that Government likes us to think we are still in a gold standard world, seemed to suggest that Osbourne was unwilling to borrow and that Sunak is, whilst I would question that assumption, that is based on fairly standard Keynesian principles, rather than MMT. The fiat money approach isn't always borrowing in reality, which both Osbourne and Sunak know.

I'm probably missing something, this isn't my field by any stretch. There would presumably be a real world cause for that rate rise? If it were real economic growth then if economic growth and interest growth remained broadly in balance presumable there would be no immediate need to reconsider everything, just a gradual shift in the way we view debt.

There are some significant presumptions and ifs in that.

jk

The money created by MMT isn't actually debt, which has to be repaid. It is created by someone at the Bank of England pressing a button. The main danger of this approach is that if too much money is created, then hyperinflation will ensue (see Zimbabwe).

With inflation being controlled through taxation, ie. taking money out of the system. MMT is often aligned with full employment objectives, although not alway. If it is, it is argued that a shift between private and public funded employment, either way, dependent on the needs of the economy, acts as a stabiliser on inflation.

No ideas. what the event would be--- China invading Taiwad springs to mind..But I do think that current thinking which helps justifies borrowing vast sums is based on the premise that low interest rates continue. Wisdom suggests that that premise might change and throw govt spending into chaos and at the same time thesemodern theories are confined to the bin.

As always there are ifs and buts.

The shameful thing is the way government has no problem with central bank purchasing of financial assets but it treats printing money to spend on useful things as anathema.

Purchasing financial assets to protect the price is the inverse of progressive taxation.  If you have nothing you get nothing if you have billions you are effectively getting hundreds of millions or billions from the state by being shielded from losses.

I'd recommend Stephanie Kelton's 'The Deficit Myth'  and also check out David Graeber's 'Debt: The First 5000 Years' - or his excellent R4 program 'A History of Debt' (https://www.bbc.co.uk/programmes/b054zdp6)

If there was no government debt there would be no money. Their red ink is our black ink.

The problem we have is that household finances clouds our understanding of money and its national socio-economic function (something I've argued with Summo about, consistently for nearly a decade).

I've read an overview of 'The Deficit Myth' but not in full, it is on list.

Welcome back, I guess you have been lurking!

I'd strongly recommend the Graeber R4 series. It is fascinating not least its explanation of why fiat money evolved (basically to help support armies).

Kelton's book is very good and worth reading along side that of Richard Murphy's 'Joy of Tax' (and his blog). Some parts of MMT are tempered by Simon Wren Lewis (his is another excellent blog), but fundamentally it is sound model with incredible insights; MMT helped me understand why we could bail out the bankers for £435bn and no one worried about where it came from.

Yep, I've been lurking! UKC = UK California. 

'The shameful thing is the way government has no problem with central bank purchasing of financial assets but it treats printing money to spend on useful things as anathema'

You are, I think, describing quantitative easing. This is when a central bank prints money which it uses to buy bonds from commercial banks. The idea is that the commercial banks will then lend the money to companies, which will then presumably invest it in useful things.

Some central banks directly purchase assets. 

Some do it indirectly by injecting money into banks which then purchase assets.  Doesn't really matter how it is done the net effect is that the price of assets is kept high as a result of government printing money and as a result people who own assets do not lose money.

When government props up assets people with lots of assets benefit a lot and people with no assets get nothing.  It is a handout to the rich and the richer you are the more you get.

Look at the US NASDAQ index over the last year.  How does that  happen during a pandemic?  

I've been following Richard Murphy's blog for a few years. I will look at the others. Thanks.

The Nasdaq index has not risen over the past year because central banks have been buying Nasdaq shares. It has risen because investors, some wealthy and some not so wealthy, have been buying shares in companies such as Apple, Microsoft and Zoom that operate in areas which benefit from the Covid lockdown. There is also Tesla, though why that has gone up so greatly is rather more of a matter for speculation. 

I'm sure a substantial amount of the money that small investors put into Nasdaq shares came from the $1200 grants that were distributed by the government, but the central bank did not purchase these shares itself.

I’m quite interested in Modern Monetary Theory too but I haven’t quite gotten round to reading Kelton’s book yet.

The thing that I struggle to understand is how its possible to achieve full employment consistently without triggering an inflationary spiral.

From what I’ve read so far the argument seems to be that the Government could increase employment permanently by running a succession of stimulus programs.  Quite what this entails is less important, the key point being that any level of stimulus could be financed indefinitely by printing more money.

In a purely descriptive sense I accept that this is true.  But then the conventional wisdom holds that printing lots of money results in inflation, and doing this successively risks runaway inflation.  Kelton’s argument appears to be either that high and persistent inflation doesn’t have a real cost to the economy, or that runaway inflation isn’t likely.  This is the bit which really needs some convincing argument, only I haven’t come across it yet.  Although admittedly I haven’t actually read her book yet! 

It’s then suggested that if inflation really took hold the Government could always increase taxes to bring it down.  Yet increasing taxes would also be expected to reduce the size of the real economy, reducing employment also.  So if the initial aim was to achieve stable full employment, I don’t really see how this solves anything.  Anyone got the answer?

QE did indeed lead to inflation - in art, the stock market, and property. Credit is cheap but few want it. The rich don't need cheap money. Most of us have lived in a low-inflation world since 2012. (Brexit will likely change this - at least in the short term.)

'Brexit will likely change this'

It probably will. Life became more expensive when we joined the EU, and it will become more expensive when we leave. Where has all out money gone?

Isn't that the point, you'd vary taxation and QE to keep almost full employment and inflation down.  Though this is a nice theory, implementing the policy, of having the political willingness to increase taxes in reality might be the issue.

Sunak seems to be a bog standard deficit averse Conservative, which is why the economic response to Covid has run contrary to the health response, by providing insufficient support for people to isolate in the local lockdowns.  This, in part, is why the UK has hit the sweet spot of a large number of deaths with a big economic hit.  The libertarian Tories wanking off about Sweden wouldn't like providing the same level of social security, such at sick pay at 80% of salary.

I've just listened to the ground-breaking (for me) R4 programs, and I can say without hesitation that Graeber is Commander Data of the Starship Enterprise, and someone owes me £5, but I'm no longer sure who. In fact I may owe myself £5...

I really don’t understand economics. I used to think it was just mass psychology causing highs and lows against a benchmark set by things like access to natural resources, reserves of gold and stuff like that. As far as I understand it now, people just click a mouse and make more money. It’s completely abstract. 

Our currency was formerly set against gold. It is not anymore. It was detatched from gold (willingly) to allow ourselves to more effectively wield resources - this is the true, real-world constraint of currency.

Currency is created when govt spends in as it requires - think infrastructure, education, military. Even the NHS, though they do their best to tell us an old man must do laps of the garden to raise money. This is a horrendous misrepresentation. They can afford it, and they do when they want to. They dont worry about spending to fund a war because they know they don't need to.

So if govt create the currency (and they do all the time) it follows they don't need tax money to achieve this - because they create it in the first place. So taxes do not pay for govt spending. Think about that! When they tax, they remove money from circulation in the open economy and that's it - it doesn't go anywhere. Ceases to exist. 

The basic concepts of MMT are relatively simple (really!) but the implications become complex not least because it turns popular understanding utterly upside down. If anything has come of Covid, it is showing those popular understandings as falsehoods - our politicians are still thinking in gold standard terms. 

As someone else said, governments red is our black.

The Defecit Myth comes recommended. Stephanie Kelton is also a good speaker. Warren Mosler, Bill Mitchell all a bit more dense but worth searching out. 

And Nathan Tankus.

I think that’s the point.

Within the MMT model it is possible to bring the economy towards full employment by increasing government spending.  But then if inflation takes off, raise taxes to reign things back in.

To me, rather than saying that there is no constraint to government spending, this would suggest that the constraint in this case is inflation.

Would the constraint prevent the government from maintaining the economy at full employment?  Possibly, possibly not.  It would depend on how inflation originates in the economy.  I don’t know how its dealt with in MMT. 

I think you do!  That all sounds pretty reasonable to me.

I don't think that is true at present.  Half the cabinet are either current or past hedge fund employees.  They know that the popular understanding of money is not true but they exploit that popular understanding for their own ends.

Welcome back Shani.

Thanks neilh! Never thought i was that well known on UKC, so it's a nice surprise to be welcomed back.

This must be how DJViper felt when he returned a few years ago.

I've just finished reading Kelton's book. I'm not mathematically (economically and financially)  minded but I couldn't put it down. Its persuasively written and her analysis seems spot on (esp. ch. 7-8) Another impressive book questioning conventional economic views is Banerjee and Duflo's (2019) Good Economics for Hard Times. 

A book widely panned by actual economists as being full of factual errors. 
 

Can any MMT fans explain to me why the high tax era of the 60s and 70s had high inflation, given fiscal policy is the MMT method of curbing inflation. If you can then explain why monetary policy reduced inflation in the 80s and since, but can’t be used under MMT, that would be cool. 
 

The problem with the MMT debate is that many of the problems we face can be explained and dealt with using orthodox economics - but people confuse “what conservatives say” with “orthodox economics” which shows a limited understanding of modern conservatism!

I'm no economist, but I think at least part of the current enthusiasm for MMT can be explained by the fact that the widespread quantitative easing used to mitigate the effects of the 2008 financial crash did not result in increased inflation. I suspect that this has encouraged the proponents of MMT to believe that they can create large amounts of money in a severe crisis without an immediate increase in inflation, as orthodox economic theory would predict.

Do you mean high inflation in the UK?

That may be so, but I'm sceptical most MMT fans (rather than the originators) are particularly well-versed in orthodox economic theory! I tend to take it mostly as a palliative for Americans and British people who want a European style welfare state and worry about paying for it.

Both the UK and the US had high inflation in that period, as did plenty of other countries.

Increases in income tax reduce inflation by reducing money in the economy, indirect taxation increases such as with VAT rises temporarily cause inflation, but over the medium term reduce it. Historical comparisons rely on ceteris paribus, when generally all things are not equal.

In the current situation, we are trying to deal with an exceptionally severe financial crisis rather than addressing the long-term funding of the welfare state. Moreover, I don't think you can usefully conflate the American and British attitudes to a welfare state.

Okay, so we've had a nearly 40 year period when monetary policy has been used to deal with inflation, generally successfully. If you are suggesting we overthrow this consensus and go with a full employment economy in which inflation is controlled via fiscal policy, I think it's only fair that the onus is on you to say exactly what is different about the 2020s economy that means this policy won't be a failure as it was during the 20 years we tried it before. Obviously there are lots of things different about it - but what's key? How do we know we won't get the same results as we did previously?

Note that I am generally all for higher taxes in the UK. But that's because I believe that (a) the government budget constraint matters (which MMTers don't believe) and that (b) a functioning welfare state and the ability to deal with crises are important.

In reply to John:

Sorry if this was unclear, I was talking about the genesis of MMT as a popular theory on the left.

I tend to think that the covid crisis is at least partly a crisis of the welfare state, so the two issues aren't that far apart.

Are you making a blanket statement "Increases in income tax reduce inflation" with no evidence from historical data because things are generally not equal?

In the future we can be pretty sure all things will remain not equal. Hence there will never be any historical evidence and no economic theory can ever shown to be wrong.

It's handy when making predictions if you can never be shown to be wrong!

I'm warning against simplistic historical comparisons, rather then historical comparisons. The statement that increases in income tax reduce inflation is neither radical or controversial.

I thought is just sounds plain wrong as blanket statement as there is such an obvious counter example in history. During WW2 the US massively increased income tax and simultaneously imposed price control to reduce inflation. Inflation soared post-war when when price controls were reduced and income tax remained at the higher level.

WW2 is an extreme example of all things not being equal but a blanket statement is a bit useless if it can never be falsified now or in the future because all things will never be equal.

https://en.wikipedia.org/wiki/File:Federal,_State,_and_Local_income_tax_GDP...

"Between April 1942 and June 1946, the period of the most stringent federal controls on inflation, the annual rate of inflation was just 3.5 percent; the annual rate had been 10.3 percent in the six months before April 1942 and it soared to 28.0 percent in the six months after June 1946 (Rockoff, “Price and Wage Controls in Four Wartime Periods,” 382)"

https://eh.net/encyclopedia/the-american-economy-during-world-war-ii/#:~:te...,(Rockoff%2C%20%E2%80%9CPrice%20and%20Wage

Works better if you copy full URL rather than click on link.

It is certainly not straight forward. It has been suggested that commodity backed currency caused instability in inflation, such as during WW2 and that the move to a fiat currency stabilised inflation in exchange for a slightly higher average rate. Remember the dollar only became a fiat currency in 1971.

By contrast the pound has been fiat for more than three hundred years. Admittedly there has been some inflation in that time, with current pound only worth a tiny fraction of its commodity value in 1690 or whatever.

The pound floated in August 1971, at the same time as the dollar. Prior to that it had been pegged to the dollar. Prior to that it had been intermittently fixed to the gold standard.

I would have that that WW2 caused the instability all round....