MMT is not a theory about what should be done. It’s a road map of how the global fiat money system works. From the article:
MMT just describes the system that most countries in the world live under and have lived under since 1971.
There’s a whole bunch of things in this that I don’t agree with. But who am I to question an eminent economist. The final conclusion by Mitchell is a case in point. His words:
Budget deficits, independent of any monetary operations, drive interest rates down, not up. This is the complete opposite of what orthodox economists claim is the case, and it’s confirmed by the present combination of record low interest rates and very large budget deficits.
I think this is completely wrong. Yes we have low interest rates and huge deficits. But the reason for this is that the Fed is controlling interest rates at artificial levels.
Does Mitchell really believe that .25% Federal Funds rate is a fair market rate given that CPI-W is over 3.5% for the past year? Do MMT’ers believe that 5 year T-Notes at 1.1% are reasonably priced looking at Core Inflation north of 2%? Do these deep thinkers not understand that the Fed bought $2 trillion of paper and in the process wrote the check that covered the massive deficits that are occurring? These folks don’t get the fact that the entire credit curve is a measure of manipulation? Maybe they should start reading the Blogs.
To me, there is no evidence to support the MMT assumption that deficits drive interest rates lower. It's coincidental that the Fed is driving interest rates to zero while deficits are exploding. The “orthodox economists” have this one right. The MMT’ers are looking at the facts and drawing the wrong conclusion.
MMT is a 4-legged stool. One of the legs is wobbly (I would say missing). If you sit on it, you’ll fall.
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Saving the Taxpayers
The IRS issued the state of California a private letter ruling. They allowed Cali to re-market $132mm of 2010 BABs bonds. This wasn’t supposed to happen. Congress has let the BABs legislation lapse. But no one can argue with the IRS, so the bonds will be sold in the near future.
This is a, “no big deal”. But there was one aspect that gets me to comment. Tom Dresslar, a spokesman for Cali Treasurer Bill Lockyer had this to say about the IRS decision: (Bond Buyer link)
“The best part is that we are going to be able to save taxpayers money.”
Well, good old Tom is right. It will save the “taxpayers” money. The question is which taxpayers? The ones in Cali will pay less. But the taxpayers at the federal level will have to foot the bill. Uncle Sam will pay 35% of the interest on the re-marketed bonds.
The business of subsidizing Muni debt issuance with tax breaks or subsidies (BABs) has to end. The rallying point for this should be Dresslar’s words. I can’t think of better proof that the system is screwed up.
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Keynesianism seems almost rational by comparison to Bill Mitchell's wacko MMT theory!
ReplyDeleteBut like you said it Bill "who are we to question a reputable economics academic?!"
Deficits do NOT drive down interest rates. That concept is absurd. When interest rates are set by the Fed - as they are today - it is the Fed which can decide the direction.
ReplyDeleteAs a result, while we are having massive deficits, we have to review who is actually doing the purchase of the government debt.
It's the Fed! They are releasing tons of money to purchase government debt from banks and shore up their reserves. It is a modified Mississippi Bubble. They are artificially keeping interest rates low in an environment where, all things being equal and the Fed was not actually involved in the bid process, rates would probably be sky-high.
Recently, you wrote that savers were being punished by mortgage policies. Well, it's not just mortgage policies which are punishing savers, it's the Fed's desire to keep interest rates low and spur activity.
Problem is, if you're a Keynesian, that's called "pushing on a string".
If your of the Austrian School, you recognize the traditional view that investment and savings work at cross purposes is no longer in effect. Today, due to high levels of debt, we need more savings in order to jump start investment.
I have been trying to understand MMT for years. That I can't understand it isn't my fault. 100% of MMT articles say you just don't understand how the system works. And this so called professor uses that excuse again as a headline to a paragraph.
ReplyDeleteMMTers think the only way money is created is through central government deficits. They think that deficits create new money and new demand. It doesn't do either.
When a central government borrows to do deficit spending, the money comes from someone in the economy who now can't spend on goods and services. In other words, offsetting negative demand.
Well yes, the someone who lends the money might not be spending now, or at least for a while. So there is demand where before there wasn't any. But IT IS ONLY BRINGING FUTURE DEMAND TO THE PRESENT.
That is the business cycle my friends. When you get to the future and the demand already happened, the economy has to adjust back the the demand that the economy can support based on the structure and circumstances of the economy.
Yes, MMTers are wacked.
Well, you can say what you want about MMT (I'm not sold myself), but it does offer an explanation of why JGB interest rates have been so low for so long while the Japanese government has run enormous deficits -- spending almost twice as much money as they take in--with no discernible intention of ever changing.
ReplyDeleteNot to get all Kuhnian here, but if the data doesn't make any sense in the current paradigm, we should look for a new one that can explain it.
The current data makes sense. It doesn't make sense in a Keynesian paradigm most especially because today's Keynesianism is bastardized Keyensianism.
ReplyDeleteNobody but bastardised Keynesianists are befuddled why the economy isn't booming after so much fiscal stimulus has been pumped into the economy.
The deficit spending doesn't create new demand, it only pulls future demand to the present. There has been so much future demand pulled to the present that the economy cannot pull it from the future anylonger. Not until things adjust. It is the same reason why low interest rates don't work either.
The there is the inefficieny of government which has become so much of the economy. There is the government malinvestment into industries that should be allowed to shrink, like housing construction among others. The there is the government created or supported industry cartels like education and health care which seem to want 35% each of the GDP. Then there is demographcis. And there is the wage and environmental arbitrade through so called free trade. And why would a company want to hire an employee unless they absolutely need to as the new employee is another potental law suit; social engineering using companies.
The whole MMT thing doesn't add to the knowledge. It is a false premise strawman that it isn't understood what is going on in the economy.
I thought the article made sense. It gave me a little more understanding of mmt, which i had previously been exposed to over at pragcap.
ReplyDeleteIt showed how inflation can diverge from interest rates, at least short term interest rates. No matter what inflation is, the fed just targets a certain interest rate on the short end. It kind of appears from market action that they can do it on the long end, too, with operation twist.
The academic that explained it is obviously a liberal who loves the idea of mmt so that the gov't can have fun playing with the economy via deficits. He gets giddy, if you ask me, over this method.
But the rub is, that the gov't will be tempted to overspend and cause inflation to go up while interest rates remain low, and this will drive investment to hard assets instead of stocks, and will lessen the earning power of a country.
Short term interest rates need to be higher, so that it will pay to put money in companies to employ people instead of putting money it somewhere else to protect it from inflation.
There are so many variables that nobody can completely understand what the heck is going on.
I Forgot: immigration policy and energy policy.
ReplyDeleteThe names for our economy: state run capitalism, neo-liberal capitalism, special interest capitalism, crony capitalism.
The MMT implication here is that deficit spending essentially floods the banking system with money chasing yield which drives interest rates lower (classic supply/demand). Yes, the Fed ultimately sets the level of rates, but deficit spending adds to the downward pressure on rates. This "only" works when there is significant slack in the economy (high unemployment, low capacity utilization). If the economy is running near full capacity, then deficit spending would be highly inflationary.
ReplyDeleteI think it's clear that deficits drive rates lower over time but in an indirect way. As deficits, and permanent debt levels, build and interest compounds, bond investors see money printing and debasement in the future, and are slowly but inevitably driven away from that country, leaving only the central bank as the sole bidder for that country's debt. And as the sole bidder it can offer any price it wants.
ReplyDeleteIf interest is just the price of money, then cash is currently priced as if it were trash. The Fed keeps short rates near zero because it wants people to move their money out of savings accounts and CDs and into the equity market to buoy asset values under the dubious "wealth effect" spending theory.
At the same time, it is manipulating long-term UST bond prices higher (rates lower) to allow foreign holders to sell them back to the Fed. Any foreign holder would be foolish not to avail themselves of this opportunity, and should buy gold with the proceeds. This reduces the amount of interest payments sent abroad and acts to internalize the US debt. If the Fed and US citizens holds all the long bond debt, then the govt can tell the Fed it is canceling ("defaulting") on the bonds it holds without hurting anybody else.
Bruce, I am an MMTer, and in part, you're right. It's the Fed that controls the FFR and thus interest rates. The Fed is holding the FFR low and has signaled it will stay low in the near to mid term. That's why interest rates are low.
ReplyDeleteWhat Bill is trying to say, I imagine, but is being very sloppy about it, is that IF the government spent money and did not offset the deficit by bond sales (i.e., "independent of any monetary operations"), the FFR would in fact fall to to the support rate (interest rate on reserves, which before the crisis was zero). There would be excess reserves in the system beyond what banks desire. This is one function of bond sales- to mop up excess reserves to defend the FFR.
"Budget deficits, independent of any monetary operations, drive interest rates down, not up. This is the complete opposite of what orthodox economists claim is the case, and it’s confirmed by the present combination of record low interest rates and very large budget deficits."
So everything said there is correct, but I agree, I don't think the last clause fits, (other than an "I told you so" to the majority of economists and laymen who have been anticipating large deficits/debt to drive up interest rates).
I can assure you that MMTers such as Scott Fullwiler and Warren Mosler know this better than anyone. They will take any economist or trader to school on this, no doubt.
Bruce, the reason for the decline in interest rates is actually central banking 101. When the Tsy spends it creates reserves in the banking system. If the Fed does not control the amount of reserves then their target rate drops as banks compete to rid the reserves. This is why reserves create downward pressure on the FFR. This is the only reason for paying IOR currently. This is all well documented over the last few years as the Fed's balance sheet has exploded.
ReplyDeleteThe point is, the Fed always controls the price of its debt via monetary policy. They are the price setter as the monoply supplier of reserves. You call artificially low rates manipulated, but that's false as well. The natural rate of interest on govt debt is zero as is evidenced by the fact that the Fed has to manipulate the amount of reserves in the banking system to keep the rate from dropping to zero. This is 100% proven by now. Not even debatable.
If the Fed didn't manipulate rates by paying IOR the rate would drop to zero and everyone would see that deficits create reserves in the banking system and result in a 0% FFR. The FFR is actually manipulated HIGHER 100% of the time. Again, there's no theory here. All you have to do is look at the balance sheet expansion in the last few years and the Fed's response.....
Email me or come on over to pragcap if you're interested in continuing the debate. We don't claim to have all the answers, but we've been awfully accurate in recent years and I attribute that in large part to a better understanding of the monetary system than most....
I always enjoy your work.
Cullen
Bruce,
ReplyDeleteThank you for the post--much appreciated.
You're misinterpreting Bill. In fact, you're both right since you're both saying the same thing. What Bill is saying is that if the Fed doesn't intervene to drain reserve balances or set a support rate then the deficit will send the rate to zero. So, the existence of any rate above zero means the Fed put it there--and the existence of a zero rate means the Fed let the rate go there.
So, when you write, "Yes we have low interest rates and huge deficits. But the reason for this is that the Fed is controlling interest rates at artificial levels," Bill would completely agree. Wherever the rate is at is because the Fed put it there, not the deficit. That's a core MMT point. We would disagree with your point about "artificial levels" a bit--the rate is a policy variable and cannot be otherwise, so there is no price discovery role and thus where the rate is set is by definition always "artificial."
Perhaps you think that the current setting for the variable is "artificial" since it can't stay there for too long without stoking inflation--that's fine (or at least that's another discussion for another day), but that's not at all related to the point Bill was making.
Best,
Scott Fullwiler
Hi Bruce,
ReplyDeleteI also enjoy your work.
I have a one word comment: Japan.
Also, for all those out there that think MMT is about taking demand from the future and bringing it to the present, note this is impossible. The real economy can only produce so much, no matter how much we spend.
If it gets produced today, that means we can in fact produce it today.
We might be producing the wrong things - like housing in the 2000's - but that doesn't mean we cannot produce it.
MMT tries to use what we know must be true about accounting to maximize output at any given moment.
Because it avoids debt, we won't have debt bubbles. We can and should watch inflation, but we shouldn't let inflation get in the way of maximizing output.
At some point, inflation becomes counterproductive and hurts output. We don't want that to happen. But in U.S. history, this hasn't been the problem at all. Instead, the problem has been with lower than maximum production and demand.
The difference between 3% and 4% real growth over one lifetime is absolutely gigantic for real people living real lives. Inflation shouldn't stop us from maximizing that real rate of growth.
I'm an average Jane. I'm not an economist or a student of economics. I read Mitchell's interview before finding your response. How does white collar crime factor into the MMT? How much inequality would exists if perpetrators of the S&L crisis, Milken's junk bond schemes, naked short selling, etc were punished? Unlike Milken, they would also get their lifelong pensions and bonuses taken away when they go to jail and their victims would get their money returned. Where does manipulation of the interest rate by the FED factor into the MMT?
ReplyDeleteI'm a not so average Joe, because I do read Mosler's blog (and other MMT stuff). Like men with a hammer looking for nails, Mosler and Bill Mitchell seem to have a monomania about aggregate demand. So, according to this view, when the private sector makes "bad" investments, the government just spends some more money into existence and everything will be hunky-dory. Well, yes, I can accept the logic of the MMTers' position, but the continual creation of public money to wipe out losses arising from "bad" private sector investment is the ultimate moral hazard.
ReplyDeleteThere is another problem here, as the continual creation of public money offends our general human desire that money acts as a store of value - in MMT it quite clearly doesn't.
The dichotomy of what we want of money (a store of value) and what we get from fiat money is something that MMTers don't really address.
Are you up to it (MMT) guys?
I have never heard of such nonsense. Please ask Mitchell to study the Indian economy. It is an economy which has had deficit financing ever since 5 year plans were commissioned and that was in Nehru's time. Because of which India suffered high rates of interest.
ReplyDeleteAfter the 1991 fiscal and balance of payment crises when India had to hawk its gold with the IMF, that the economy was partially liberalised. The Reserve Bank subsequently formulated a road map for the economy to achieve capital account convertibility, one of the preconditions of which was balancing the budget or limiting deficits within sustainable levels.
Then during the BJP regime, the fiscal responsibility act was passed limiting fiscal deficits to a certain % of GDP with a view to curtailing government's tendencies to fiscal imprudence via wasteful social spending. Interest rates started falling.
Unfortunately the Congress came to power in 2004 on a populist mandate and fiscal prudence has been thrown to the winds. And India is suffering high inflation which even the Reserve Bank's rate hikes are unable to curtail. If interest rates are not hiked, the real rate of interest would be negative.
Ask Mitchell to study the Indian economy.
The reason the US has so far avoided high interest rates is because
1. the USD is the reserve currency for the world and has the largest consumer market to support it
2. therefore it can export inflation to every other country without harming itself for sometime but not forever
3. the Fed deliberately follows a low interest rate policy despite the real interest rate being negative
Anonymous @5:18am
ReplyDeleteIf that's why the US has low interest rates, then please explain why Japan and the UK also have low interest rates with large deficits.
This comment has been removed by the author.
ReplyDeleteThough I should mention I agree with your number 3. But 1 and 2 do not apply to Japan and the UK.
ReplyDeleteJeremiah on “usury”: 15:9 She [America] that hath borne seven languisheth: she hath given up the ghost; her sun is gone down while it was yet day: she hath been ashamed and confounded: and the residue of them will I deliver to the sword before their enemies, saith the LORD.
ReplyDelete15:10 Woe is me, my mother [the Federal government], that thou hast borne me a man of strife [United States debt] and a man of contention [Central banks without fiscal discipline] to the whole earth! I [the U.S. citizens not responsible for the reprehensible actions of the Federal Reserve] have neither lent on usury, nor men have lent to me on usury; yet every one of them doth curse me.
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