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Weekly Commentary: Dudley on Debt and MMT

Weekly Commentary: Dudley on Debt and MMT

December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”

There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”

And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy.

 …click on the above link to read the rest of the article…

But We Need the Eggs

But We Need the Eggs

ALVY SINGER: This guy goes to a psychiatrist and says, “Doc, my brother’s crazy; he thinks he’s a chicken.” And the doctor says, “Well, why don’t you turn him in?” The guy says, “I would, but I need the eggs.” Well, I guess that’s pretty much how I feel about relationships; y’know, they’re totally irrational, and crazy, and absurd … but, I guess we keep going through it because most of us … need the eggs. Annie Hall (1977)

I realize that we must un-person Woody Allen today, but Annie Hall is a great movie regardless. That’s Duane Hall in the picture above, Annie’s brother, as he drives Alvy and Annie to the airport after confessing to Alvy that his secret fantasy is to slam the car into the oncoming headlights. No one does crazy better than Christopher Walken.

We’re all passengers in the backseat of the State-driven car, and we all suspect that our drivers might be high-functioning lunatics, and we’re all terrified about what they might do next.

But we need the eggs.

We need a stock market that only goes up. 

We need to consume more healthcare. We need to consume more education. We need to consume more travel. We need to consume more Netflix on more devices. We need to consume more social media. We need to consume more “experiences”.

And we need the credit to do all of that NOW.

I was thinking about that Annie Hall scene a lot in the past week, what with the Green New Deal ™ and the Modern Monetary Theory ™ proposals in the news, replacing the Tax Cuts ™ and Supply-Side Economic Theory ™ of just last year.

If there’s one oldie-but-goodie ET note I’d want everyone to read, it’s Magical Thinking, published in September 2016.

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New Monetary Theory is Like Sleepwalking

New Monetary Theory is Like Sleepwalking 

QUESTION: Bernie Sanders was basing his whole economic proposal to just keep spending and make everything free. They seem to be teaching this in school now. This macroeconomic theory whereby a country’s spending is only constrained not by revenue in taxes but by inflation when it creates a sovereign currency. It seems too good to be true, but some economists were teaching this to my son. Would you care to comment on this theory?


ANSWER: The problem with what many call “new” or “modern” monetary theory is that it is like sleepwalking. You walk, creating GDP, while you are also dreaming. It reminds me of Shakespeare:

“To die, to sleep–To sleep–perchance to dream: ay, there’s the rub, for in that sleep of death what dreams may come when we have shuffled off this mortal coil, must give us pause.”

This economic theory is the same old incantation — how to prosper with other people’s money. Rome had no national debt and no central bank. It created money to fund itself. In hard times, they used the law to confiscate the property of people as they are doing today with their civil asset forfeitures.

What is missing in this theory is the question of debt. They assume they can borrow without end and never have to account for what they have done. They fail to understand that concept and try to regulate pension funds, which requires them to obtain government debt that they never pay off.

Yes, you can just create money to fund the government and it is confined by inflation. That is a true statement if taken by itself. However, you cannot then borrow with no intention of paying down the debt because the accumulative interest payments will end up representing 100% of the debt. This theory fails for it ignores dealing with the debt.

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‘Modern Monetary Theory’ Is a Joke That’s Not Funny

‘Modern Monetary Theory’ Is a Joke That’s Not Funny

Yes, a government that issues its own currency can pay its bills. But piling up debt for no urgent reason is lunacy.

There’s a theory behind it.     Photographer: Eva Hambach/AFP/Getty Images

If you follow the debates over U.S. economic policy, you had probably heard of modern monetary theory well before freshman Democratic Representative Alexandria Ocasio-Cortez spoke favorably about it earlier this month.

If you thought from the start that the whole idea sounded like lunacy, you were right, even if it’s possible to admit some sliver of sympathy for it. So why is MMT, as it is known for short, generating such intense interest now?

First, let’s start with the confusion over what it is. The answer seems to depend on which advocate of MMT is being asked. It is sometimes a theory of money. MMT is also being discussed in the context of a political program to justify huge increases in social spending. Finally, there is its role as a prescription for macroeconomic policy.

Even as just an economic theory, it is not settled or fully developed. This makes engaging with it challenging — even, at times, frustrating.

The bedrock observation of MMT is correct: Any government that issues its own currency can always pay its bills. This observation allows policy makers to show less concern about the budget deficit than is typically the case.

In fact, MMT is growing in prominence precisely because of its relative lackof concern about the size of the deficit. In the years immediately after the Great Recession, which started in December 2007, this aspect of MMT stood in favorable contrast to the position of fiscal-policy centrists and many Republican politicians who called for significant reductions in the deficit at a time of very high unemployment.

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Don’t Be So Sure Hyperinflation Can’t Hit the U.S.

Don’t Be So Sure Hyperinflation Can’t Hit the U.S.

Some progressives back piling on even more debt to pay for social programs. That could be risky.

Marking time.  Photographer: Ramin Talaie/Getty Images North America

Discussions of big government spending programs often revolve around the question of how to pay for them. For example, Representative Alexandria Ocasio-Cortez touted her proposal for a 70 percent tax rate on income above $10 million by saying it would help pay for the Green New Deal, a broad package of environmental and economic initiatives.

Implicit in this concern is the idea is that government debt shouldn’t get too big. This is a common belief — polls regularly find that Americans are worried about the national debt. The national debt clock in Manhattan is a famous symbol of this anxiety. The idea is also formalized in mainstream economic models, which tend to assume that in the long run the government has to balance its books. Writing at Brookings Institution, David Wessel expresses this conventional wisdom when he declares that “federal debt cannot grow faster than the economy forever.”

But what if this is a fallacy? What if the government doesn’t have to pay back what it borrows, now or ever? This is the provocative thesis of an unorthodox economic theory that is rapidly gaining credence on the political left called modern monetary theory, or MMT. The concept isn’t new — economist Abba Lerner endorsed something similar in the 1940s, under the name of “functional finance.” But the theory has enjoyed a popular resurgence since it was embraced by some progressives, who want to enact a federal job guarantee and other ambitious economic plans paid for by government borrowing.

…click on the above link to read the rest of the article…

How mainstream economics has led to clueless governments

It’s time to consider a better economic plan (Image edited by Dan Jensen)

Governments of all stripes base their policies on mainstream economics. Powerful challenges to the mainstream, especially from ecological economics and modern monetary theory, explain why we are in a hole and can’t seem to get out.

If this article is largely correct, we can conclude that the economics profession is a major cause – directly or indirectly – of most modern evils.

In saying that, I draw heavily on the work of Australian academic economists Professor Robert Costanza, Associate Professor Philip Lawn, Professor Bill Mitchell and Dr Steven Hail.

Taken together, their work – in conjunction with colleagues overseas – claims that mainstream economics is fundamentally wrong left, right and centre — although I don’t mean to imply that these four scholars agree on every point.

Mitchell – a co-originator of modern monetary theory (MMT) – shows that we could have full employment quickly with a job guarantee, that federal budget deficits are normal and desirable, that the federal government never needs to borrow money, and that federal taxes do not fund anything.

The Federal Government should focus on non-inflationary full employment and not budget outcomes, because we can run deficits forever without borrowing.

In short, the Federal Government does not have the budget constraints of a household, business, or state government, because it can create unlimited money — but should spend prudently to avoid inflation and ecological overshoot.

For ecological economists like Lawn, increasing the size of high-GDP economies is now producing uneconomic growth rather than economic growth, because these economies are past their optimum size, as measured by a marginal cost-benefit analysis.

…click on the above link to read the rest of the article…

Massive Deficit Spending Greenlights Waste, Fraud, Profiteering and Dysfunction

Massive Deficit Spending Greenlights Waste, Fraud, Profiteering and Dysfunction

America’s problem isn’t a lack of deficit spending/consumption. America’s problems are profoundly structural.

The nice thing about free to me money from any source is the recipients don’t have to change anything. Free money is the ultimate free-pass from consequence and adaptation: instead of having to make difficult trade-offs or suffer the consequences of profligacy, the recipients of free money are saved: they can continue on their merry way, ignoring the monumental dysfunction of their lifestyle.

This explains the appeal of Modern Monetary Theory (MMT), which holds that deficit spending is the “solution” to all our problems because governments can’t go broke–they can always emit whatever currency they need via printing or borrowing.

The problem with government deficit spending is it’s free money to the recipients: there are no feedback mechanisms to enforce any consequences for spending that’s wasteful, fraudulent or inefficient/ineffective.

Deficit spending simply enables the wasteful, corrupt, rewarding-insiders profiteering state-cartel kleptocracy to continue gorging on public spending.So what desperately needed efficiencies and improvements are imposed on the higher education cartel by handing the cartel another trillion dollars of public spending? None.

What desperately needed efficiencies and improvements are imposed on the healthcare cartel by handing the cartel trillions of dollars in publicly funded “Medicare for all”? None.

What desperately needed efficiencies and improvements are imposed on the national defense cartel by handing the cartel additional trillions of public spending? None.

What kind of sense does it make to encourage wasteful consumption on a finite planet with limited resources? The entire rationale of Modern Monetary Theory (MMT) is that the productive capacity of the economy isn’t being maxed out because we’re not consuming enough.

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Modern Monetary Theory and Strong Towns

Last year I read Debt: The First 5,000 Years by David Graeber. I found it compelling and included it in an article I wrote about Puerto Rico (“The Spooky Nature of Debt“), mentioned it in a podcast and included it in the list of books I published in December. Apparently, this was a signal to many of you that I am, or at the very least might be, interested in a strain of economic thinking called Modern Monetary Theory.

“If you discover a magic pill that is said to solve some complex and ancient problem human societies continually struggle with, you might want to pause before taking it.”

The reality is that I’m a deep skeptic of the theory. In fact, I think we should all be reflexively skeptical of any theory that purports to remove burdensome economic constraints and make our lives instantly easier if only society can find the required cultural enlightenment. If you discover a magic pill that is said to solve some complex and ancient problem human societies continually struggle with, you might want to pause before taking it.

My skepticism aside, my goal here is not to convince the passionate supporters of endless federal money printing that this is a bad idea – you’ve got your thing and you really believe it and I don’t want to quarrel over it in this piece – but to point out to you, and especially those sympathetic to the ends if not the means of what you advocate for, that Modern Monetary Theory is not going to solve the problems we are trying to address at Strong Towns.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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