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Debasing the Baseless–Modern Monetary Theory
DEBASING THE BASELESS – MODERN MONETARY THEORY
- Populist politicians are turning to Modern Monetary Theory
- Fiscal stimulus has not led to significant inflation during the last decade
- MMT is too radical to be adopted in full but the allure of fiscal expansion is great
- Asset markets will benefit over the medium-term
A recent post from the Peterson Institute – Further Thinking on the Costs and Benefits of Deficits – follows on from the Presidential Lecture given by Olivier Blanchard at the annual gathering of the American Economic Association (AEA) Public Debt and Low Interest Rates. The article discusses a number of issues which are linked to Blanchard’s speech: –
- Is the political system so biased towards deficit increases that economists have a responsibility to overemphasize the cost of deficits?
- Do the changing economics of deficits mean that anything goes and we do not need to pay attention to fiscal constraints, as some have inferred from modern monetary theory (MMT)?
- You advocate doing no harm, but is that enough to stabilize the debt at a reasonable level?
- Isn’t action on the deficit urgent in order to reduce the risk of a fiscal crisis?
- Do you think anything about fiscal policy is urgent?
Their answers are 1. Sometimes, although they question whether it is the role of economists to lean against the political wind. 2. No, which is a relief to those of a more puritanical disposition towards debt. The authors’ argument, however, omits any discussion of the function of interest rates in an unfettered market, to act as a signal about the merit of an investment. When interest rates are manipulated, malinvestment flourishes. They propose: –
…click on the above link to read the rest of the article…
Think Different About Purchasing Power
Think Different About Purchasing Power
The Tip of the Iceberg
The dollar is always losing value. To measure the decline, people turn to the Consumer Price Index (CPI), or various alternative measures such as Shadow Stats or Billion Prices Project. They measure a basket of goods, and we can see how it changes every year.
However, companies are constantly cutting costs. If we see nominal – i.e. dollar – prices rising, it’s despite this relentless increase in efficiency.
Prices in perspective – click to enlarge.
This graphic illustrates the disparity (I credit Tom Selgas for a brilliant visualization, which I recreated from memory). CPI measures only the orange zone, the tip of the iceberg. Most people don’t see the gray zone, and that’s a result of the greatest sleight of hand ever.
We need an accurate way to measure monetary debasement. For example, in retirement planning it’s tempting to divide your net worth by the cost of consumer goods. This seems to show your purchasing power. For example, if you have $200,000 and the cost of groceries for a year is $20,000 then you can eat for ten years.
However, this approach is flawed. To see why, let’s briefly consider primitive times when there was no lending or banking. People had to set aside some of their income, to buy a durable good like salt or silver—hoarding. When they could no longer work, they sold a little bit every week to buy food—dishoarding. People accumulated wealth while working, and dissipated it in retirement.
Life got a lot better with the advent of lending, because interest enables people to live on the income generated by their savings. People no longer consumed their principal, worrying about outliving their savings.
…click on the above link to read the rest of the article…
