[Steve_American]

The US may not be able to default, but that doesn't mean there's such thing as a free lunch. Money is only worth what you can buy for it. Printing money doesn't create more "stuff" aka wealth.

The world has seen concurrent demand shocks and supply shocks.
When the pandemic is contained, there will be price changes. It will be impossible to say that they were caused by the increasing money supply or by the decreased supply of things to buy. Remember, a decreasing supply of essential stuff always leads to inflation even without more money in the economy.

People, when the Fed. buys back a bond the day after it was sold, it is as if, it was sold directlly to the Fed. So, Sue is right. Much or even most of the spending for covid over the last year by the US has been funded by 'selling' bonds to the Fed. which is just another arm of the Gov. This is certainly true, because 97% of its income (aka 'receipts') is paid into the US Treasury's account at the Fed. Note, not profiits, receipts.
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[wat0n]

What I said then.

Most of the covid relief spending - not to mention most since 2008 - has been QE. Central banks repurchase the bonds, usually the next morning, by issuing reserves ex nihilo, which they are authorised by their govts to do. As MMT describes and most central banks have literature confirming.

It's what they do in normal times to reduce interest rates, just on a far larger scale because they want to keep interest rates near zero, and are likely to for a long time.

Sure, but that doesn't mean there is no private sector contribution either.

In the meantime, as long as inflation expectations don't change, that's no problem. And indeed, that's precisely the issue: MMTers don't understand why this policy is fine for the meantime.

With whom? Almost none of the QE since 2008 has been "unwound", i.e bonds resold to the private sector, and no one thinks it ever will be. Never mind the Covid QE spending.

What they'll almost certainly do is keep the bonds on central bank balance sheets and "refinance" them upon maturity with very long term, very low interest rate bonds and just forget about them.

Well, if they'll do that then why not refinance outstanding debt that has higher interest rates?

[Steve_American]

Sure, but that doesn't mean there is no private sector contribution either.

In the meantime, as long as inflation expectations don't change, that's no problem. And indeed, that's precisely the issue: MMTers don't understand why this policy is fine for the meantime.



Well, if they'll do that then why not refinance outstanding debt that has higher interest rates?

I think it is sort of the same reason that a bank can't call the loan on a house, just because it wants to change the interest rate.
That is, a contract is a contract.
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[SueDeNîmes]

Sure, but that doesn't mean there is no private sector contribution either.

It pretty much does. When the govt "deficit" spends $x, it's legally obligated to issue $x worth of bonds. If the central bank buys them straight back by crediting an intermediary bank's reserve account, where's the private sector contribution?

In the meantime, as long as inflation expectations don't change, that's no problem. And indeed, that's precisely the issue: MMTers don't understand why this policy is fine for the meantime.

If you read the MMT lit, it's all about that. A central tenet being that the sign of excessive public spending is inflation, not a govt budget deficit.

Well, if they'll do that then why not refinance outstanding debt that has higher interest rates?

Because it wouldn't really make any difference while the central bank holds it. Govt both pays and receives the interest. The debt effectively cancels out, but the bonds persist as legal and accounting entities.

If you mean outstanding debt held by the private sector, what Steve American said.

The govt doesn't really need to issue bonds at all and should probably relax the stricture that net spending be matched by bond issuance. It wasn't rigidly enforced until the 1980s, neoliberalism etc.

[wat0n]

I think it is sort of the same reason that a bank can't call the loan on a house, just because it wants to change the interest rate.
That is, a contract is a contract.
.

Not in this case. The government could issue low interest rates bonds, and buy high interest ones in this case. It's the same as when you refinance a mortgage: Get a new, cheaper loan from some bank (other than the one you have your mortgage with) to pay the outstanding mortgage. I think the law does allow you to pre-pay as well.

@SueDeNîmes there can also be private investors buying government bonds in the auctions. It's not literally just the Fed.

As for MMTers and inflation, they usually disregard the latter. Again, this is a temporary (but perhaps long) situation in which the US government can spend without increasing inflation expectations, MMTers will often say inflation is never an issue. Thankfully, it's easy to have a good real time estimate of the market's inflation expectations by comparing nominal and inflation adjusted yields, and surveys can be performed for slower yet more precise measures, but for now expectations seem to be subdued.

[Steve_American]

Not in this case. The government could issue low interest rates bonds, and buy high interest ones in this case. It's the same as when you refinance a mortgage: Get a new, cheaper loan from some bank (other than the one you have your mortgage with) to pay the outstanding mortgage. I think the law does allow you to pre-pay as well.

@SueDeNîmes there can also be private investors buying government bonds in the auctions. It's not literally just the Fed.

As for MMTers and inflation, they usually disregard the latter. Again, this is a temporary (but perhaps long) situation in which the US government can spend without increasing inflation expectations, MMTers will often say inflation is never an issue. Thankfully, it's easy to have a good real time estimate of the market's inflation expectations by comparing nominal and inflation adjusted yields, and surveys can be performed for slower yet more precise measures, but for now expectations seem to be subdued.

You wrote, "As for MMTers and inflation, they usually disregard the latter."
I have read and watched posts and videos by MMTers for about 10 years. Every one said that inflation is the constraint. Every one. Many also said that if there is inflation, then the Gov. can easily contain it by increasing taxes or cutting back on spennding. Maybe you understood this to mean, that it is no big deal.
. . . They all also point out that as currently measured inflation is and has been below the 2% target of almost all central banks for 2 decdaes. In Japan close to 0% for many years. Only the housing and stock price bubbles are exceptions.

Yes, the Gov. or Fed. could offer to buy back high interest bonds, if there are any out there to buy. However, it would have to pay more for them than buying back low interest bonds. I'm not sure it would make much difference. Pay now or pay later.
Also, you don't seem to grok that the US has always paid the interest by selling more bonds, except when Clinton had his surplus, but that, that surplus led to and caused the dot com bubble, which was not a good result.
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[SueDeNîmes]

@SueDeNîmes there can also be private investors buying government bonds in the auctions. It's not literally just the Fed.

But a great deal of it has been. IOW monetarily sovereign govts have spent huge amounts which they've neither taxed nor borrowed from the private sector.

As for MMTers and inflation, they usually disregard the latter. Again, this is a temporary (but perhaps long) situation in which the US government can spend without increasing inflation expectations, MMTers will often say inflation is never an issue.

There might be people on the internet saying that but it's definitely not what the MMT literature says. Quite the opposite.

[Fasces]

MMT is more right than the economic theories most people who vilify it tend to believe in. Anyone that still believes in supply-side trickle down nonsense is being deliberately ignorant.

I remember discussing it with an economics student at a university here, and maybe someone with more expertise could say, but the general view among academic economists is that MMT has a lot of things right with it, but its more of a scaffold that will undergo some refinement here or there in the next few decades than a "finalized" (as far as any theory can be) economic theory?

Like the Keynesians vs the Neo-Keynesians vs the New Keynesians, for example.

[wat0n]

@Steve_American @Steve_American good to know, in my experience MMTers tend to disregard inflation as a concern rather reflexively. If so, although the mechanisms are different (mainstream economists will generally also look at how monetary policy is being conducted to explain inflation dynamics, and particularly at inflation expectations more than past inflation), at least for now there seems to be a consensus that public spending is okay. For mainstream economists, I'd say it's because bond yields are low (so the government has an easy time issuing debt, and it's cheap) and inflation expectations are subdued.

But tell me, what will happen when eventually inflation expectations go up? I mean, it will happen sooner or later, even if several years from now.

[Rancid]

But tell me, what will happen when eventually inflation expectations go up? I mean, it will happen sooner or later, even if several years from now.

The way inflation is managed is through taxation. My understanding is MMT requires a flexible tax rate. When inflation goes up, taxes go up to suck up excess money supply which should reign in inflation. This is the sticking point that I think why MMT will never take off.

Companies and people do not like the idea of ever changing taxes. Even if it's for their own good.

I think MMT is sound, but I don't believe it is practical.

[wat0n]

The way inflation is managed is through taxation. My understanding is MMT requires a flexible tax rate. When inflation goes up, taxes go up to suck up excess money supply which should reign in inflation. This is the sticking point that I think why MMT will never take off.

Companies and people do not like the idea of ever changing taxes. Even if it's for their own good.

Yes, that's what they claim. They also claim that you can do it through government spending. But that's, as you mentioned, not how it works in practice for the most part or at least not the only way (or the main one) governments have to control inflation (and deflation). Nowadays it's all about keeping inflation expectations in a desirable range, no matter what.

[SueDeNîmes]

Yes, that's what they claim.

As does pretty much everyone. The criticism is that tax raises are too politically difficult to enact.

They also claim that you can do it through government spending. But that's, as you mentioned, not how it works in practice for the most part or at least not the only way (or the main one) governments have to control inflation (and deflation).

Because the fiscal multiplier for changes to government spending was estimated to be typically <1.

But the adverse effects of post-GFC fiscal consolidations forced even the IMF to revise that to >1.

So it does appear to work that way in practice.

[wat0n]

The multiplier is about the effects of fiscal spending on GDP growth, not inflation. I'm not sure why would you bring that out when we're speaking about how inflation control is done in practice.

[SueDeNîmes]

Because they aren't separate things. The public spending multiplier is assumed to be via the effect on aggregate demand, which obviously affects prices.

[wat0n]

Indeed, shifts in aggregate demand affect prices but the multiplier alone doesn't give you enough information about the slope of the aggregate supply curve.

In practice, it's way more useful to monitor inflation expectations because prices will often be determined by contracts, and these will be signed by agents making assumptions about future inflation.

[Steve_American]

"The IMF is all at sea, stuck in its ways, and sending conflicting signals,
from Dr. Bill Mitchell's blog.

Last week, I wrote about how the IMF is presenting a somewhat nuanced view these days. See – IMF now claiming continued inequality risks opening a “social and political seismic crack” (April 21, 2021). But, there was a warning for those who might think this suggests the institution is leaving its mainstream macroeconomics past behind them though. Rather, I think what is going on is a series of ad hoc responses to the growing anomalies that the institution faces between the observed reality and the sort of predictions it has been making based on its core paradigmatic approach. We are observing a specific form of dissonance in many of the current contributions coming out of mainstream economics. This takes two forms: (a) an incomplete response to the current situation (pandemic, GFC aftermath, climate change) where there are conflicting signals being sent; and (b) a tortured attempt to absorb pragmatic narratives within a theoretical structure that cannot consistently accept that absorption. The IMF’s latest blog post (April 20, 2021) – A Future with High Public Debt: Low-for-Long Is Not Low Forever – is a good example of both forms of this dissonance.

...snip...

The other reality, that the IMF refrains from recognising, helps us understand why this agreed reality tells us that the mainstream macroeconomics is incapable of explaining these trends and their causal associations.

4. Central banks around the world are buying government debt in massive volumes using their unlimited currency issuing capacity. This has had two consequences: (a) it has demonstrated that the government (via its central bank) can set the yields on its debt at whatever level they chose and they can sustain those levels indefinitely; (b) there are no evident inflationary consequences arising from doing that.

Which has a third consequence of breaking the taboo that mainstream economists have placed on such behaviour.

http://bilbo.economicoutlook.net/blog/?p=47328

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[Steve_American]

The way inflation is managed is through taxation. My understanding is MMT requires a flexible tax rate. When inflation goes up, taxes go up to suck up excess money supply which should reign in inflation. This is the sticking point that I think why MMT will never take off.

Companies and people do not like the idea of ever changing taxes. Even if it's for their own good.

I think MMT is sound, but I don't believe it is practical.

The obvious solution (which is possible in many nations, like the UK) is to have it set up so that the Central Bank can adjust a percentage "surtax" on some tax final bills or rates.
. . . This may be unconstitutional in the US. But, his can be worked around, or it can be changed with an amendment.
Examples of the taxes effected are =>
1] The VAT tax rate can be changed.
. . . Increased or decreased.
2] The income tax final bill can be increased or decreased.
. . . IMHO, the surtax rate would be set at 5% normally, to provide room to decrease it.

I'm suggesting giving this power to the Central Bank, because economists have already tasked them with this duty. They just give the Central Banks an ineffecive tool (monetary policy) to do it with.


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[B0ycey]

MMT is more right than the economic theories most people who vilify it tend to believe in. Anyone that still believes in supply-side trickle down nonsense is being deliberately ignorant.

I remember discussing it with an economics student at a university here, and maybe someone with more expertise could say, but the general view among academic economists is that MMT has a lot of things right with it, but its more of a scaffold that will undergo some refinement here or there in the next few decades than a "finalized" (as far as any theory can be) economic theory?

I agree with this. I think MMT is mostly correct but I think too many people read it or come across it and think everything is going to be OK because we can have "unlimited spending" which is total bollocks. On the contrary, inflation is a huge part of the equation as it reflects what people can afford to spend. Taxation is a huge part of the equation as again it affects what people can afford to spend. Interest rates are basically nothing and may even have to be negative which then would mean more QE as nobody would buy bonds in the private sector which then has a knock on affect on the confidence of the Dollar. All these things increase the surplus currency circulating in the real economy. And we all knows what happens then... uh hum Weimar.

When I read MMT I don't read it the same way @Steve_American reads it. I read it in a way that says we can spend as much as we like as long as we have a plan to recoup that spending to control inflation (basically tax what you spend). Currently we are spending and not taxing. If anything tax has gone down. Which means we should expect to see some affect in the market when people begin spending again after Covid. In other words, we haven't seen the impact of our Covid borrowing yet and we might not see the impact for a few years yet. So anyone who is waving a flag saying that says MMT is correct because of our Covid spending is jumping the gun big time and misunderstanding MMT anyway. We haven't begun spending yet so how can you make that type of conclusion?

[Steve_American]

I agree with this. I think MMT is mostly correct but I think too many people read it or come across it and think everything is going to be OK because we can have "unlimited spending" which is total bollocks. On the contrary, inflation is a huge part of the equation as it reflects what people can afford to spend. Taxation is a huge part of the equation as again it affects what people can afford to spend. Interest rates are basically nothing and may even have to be negative which then would mean more QE as nobody would buy bonds in the private sector which then has a knock on affect on the confidence of the Dollar. All these things increase the surplus currency circulating in the real economy. And we all knows what happens then... uh hum Weimar.

When I read MMT I don't read it the same way @Steve_American reads it. I read it in a way that says we can spend as much as we like as long as we have a plan to recoup that spending to control inflation (basically tax what you spend).Currently we are spending and not taxing. If anything tax has gone down. Which means we should expect to see some affect in the market when people begin spending again after Covid. In other words, we haven't seen the impact of our Covid borrowing yet and we might not see the impact for a few years yet. So anyone who is waving a flag saying that says MMT is correct because of our Covid spending is jumping the gun big time and misunderstanding MMT anyway. We haven't begun spending yet so how can you make that type of conclusion?

Clearly, you don't understand macroeconomics.
If by the part in yellow you mean that you will tax nough to have a surplus to pull the money spent back out of the economy, then when you have had your surplus for a max. of 3 years you will have a recession. I you keep the surplus you will have a depression.
If by the part in yellow you mean that you you will just tax more to reduce th deficit a lot, you will soon find that the economy will have anemic growth. This wll cause economic hardship for some citizens. Why not wait untl the predicted inflation starts?

IMHO, your theoory is wrong and if you never try MMT we will never learn that it is wrong. But, I have said and nobody has said otherwise, that almost all MS economic theory's predictions have not materialized, yet. In science, the 'proof' of a theory is the success of its predictions. AFAIK, here MS economics has been a dismal failure.

also, you ignore the other important thing, that is net savings. If the defiicit spending all soon ends up in savings it will not cause excess demand. And so, no inflation. But like I said, you ignore this.

PS, I notice that your argument is just a series of unsupported statements that are in fact what you are trying to prove. Do you know that in logic, you can't prove a proposition by simply assuming it's true?

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[B0ycey]

Clearly, you don't understand macroeconomics.
If by the part in yellow you mean that you will tax nough to have a surplus to pull the money spent back out of the economy, then when you have had your surplus for a max. of 3 years you will have a recession. I you keep the surplus you will have a depression.
If by the part in yellow you mean that you you will just tax more to reduce th deficit a lot, you will soon find that the economy will have anemic growth. This wll cause economic hardship for some citizens. Why not wait untl the predicted inflation starts?

IMHO, your theoory is wrong and if you never try MMT we will never learn that it is wrong. But, I have said and nobody has said otherwise, that almost all MS economic theory's predictions have not materialized, yet. In science, the 'proof' of a theory is the success of its predictions. AFAIK, here MS economics has been a dismal failure.

also, you ignore the other important thing, that is net savings. If the defiicit spending all soon ends up in savings it will not cause excess demand. And so, no inflation. But like I said, you ignore this.

PS, I notice that your argument is just a series of unsupported statements that are in fact what you are trying to prove. Do you know that in logic, you can't prove a proposition by simply assuming it's true?

.

What do you mean a series of unsupported statements??? Just look back in history (Germany, Zimbabwe, Argentina) and see what happens when you just print money to support the economy without taxation. You are just a user that backs MMT no matter what and has no clue what the fuck you are talking about most of the time. Just because you are the prime user who brings MMT threads to PoFo doesn't mean you are an expert on it. And yes, I am familiar with Macroeconomics as it happens. Clearly more informed than you. And no, I don't claim I know for certain the outcome of mass printing especially as I was to some extent wrong in 2008. Yet the situation is still different this time round and as such we shouldn't expect the same results anyway.

As for my argument, my argument is that we have just printed money for ZERO economic growth. That is to say we have just basically doubled the national debt for people to sit at home. They have not been productive and as such haven't produced anything with the money they have been given. They also have not been able to spend. Which means when they do start spending they will circulate this new printed money into the real economy and that is when we should see inflation. How high, I don't know. But if it is TOO HIGH, then the cost of living rises and as such people stop spending and that has a negative consequence in growth and in specific areas of the economy such as leisure and services. In other words, the affect of high borrowing will not be seen for a few years at least and could be catastrophic as it happens. Or it might not be like that at all. We simply do not know yet which was my initial point.

And finally currency. Money is nothing short of an IOU that you in essence pay back to the government via taxation. If the government doesn't have a plan to tax the money it has printed off then what happens is the government has deficit spending and that circulates more money in the economy which has consequence in confidence in it. That is to say that a currency is worth as much as someone is willing to exchange for it and if there is no confidence in it people sell it off and the currency deflates which in turn causes inflation or in some cases hyperinflation. In other words a government cannot get away with being a drunken sailor but I guess as America specifically has a strong economy they might get away with this more than most. But again, I wouldn't be confidence in this even so.