Thursday, January 26, 2012

It's On: Time for a Market Monetarist-MMT Smackdown

     Of course as Cullen Roche already has a schism with MMT-his new school is Monetary Realism-who can keep up? Still I do think that comparing and contrasting these two systems that have made a big enough name for themselves on the Internet that the Economist wrote a featured story about them would be fruitful, a real learning opportunity.

     While I have given Sumner a hard time lately-he to my mind deserves it as he keeps being so snarky about the Keynesians and "fiscalists"-his blog has a huge following and I think it's deserved even though I question some of his commitments.

     Sumner did try a few times last year to have a meeting of minds of a sort between the MMTers and his Market Monetarists.

     One try was a post he wrote about the Quantity Theory of Money (QTM). The point of this post was that there is no way to think about the price level without the QTM. This lead to some quite lively debates in the comments section.

      "This is sort of a response to some Keynesian/fiscal theory/Post Keynesian/MMT theories I’ve seen floating around on the Internet.  Theories that deny open market purchases are inflationary, because you are just exchanging one form of government debt for another."

       So we see that Scott is already biting off quite a lot, trying to paint with a pretty wide brush. He wants to knock them all off with one punch.
       His approach for knocking all these theories out is already indicated in the title "Are there any non-QTM explanations of the price level?" Sorry to give the punchline but his answer is no.

       "Here’s my problem with all non-QTM models.  Suppose I’m right that only the QTM can explain the current price level.  Then it stands to reason that only the QTM can explain the price level in 2021.  Then it stands to reason that only the QTM can explain the inflation rate between 2011 and 2021.  Now it is true that a change in the money supply will have certain effects on nominal interest rates, economic slack, etc, depending on whether the monetary injections were expected or not.  And you can try to model the inflation rate using those changes in interest rates, economic slack, inflation expectations, etc.  But that’s really a roundabout way of getting at the problem.  If the QTM says that the price level in 2012 will be 47% higher due to changes in the monetary base, plus changes in the public’s desire to hold currency as a ratio or NGDP, then either the non-QTM approaches also give you the 47% answer, or they are wrong."

     So notice that Sumner has made some significant leaps and assumptions. His entire approach in showing up these various fiscalist, Keynesian and MMT theories is predicated on the idea that they are all non-QTM models.

     In the comments section as always when he has written about MMT he was inundated with comments. One MMTer who went toe to toe with all comers including Market Monetarist extraordinaire Lars Christensen-Lars created the phrase Market Monetarist-was Mark S.

    Lars declares, "Scott, It is simply unbelievable that so many economists do not accept QTM as it is not only logically the only valid price level and inflation theory, but probably also the best empirically documented economic relationship in global history."

    "To not accept QTM is like not accepting the law of supply and demand. If more money is printed then the value of money of course drops. As the value of money is the inverse of the general price level – prices will go up when the money supply growth faster than money demand. How could anybody believe otherwise???"

    "Keynesian economic – New and Old – has led to a serious misunderstanding of money and prices and there is a need to restate some facts:

      1) Interest rates are not the price of money, but of loanable funds
      2) GDP growth and lower unemployment does not lead to inflation
     3) Rising oil prices is an increase in a relative price and not in the general price level
     4) Inflation is always and everywhere a monetary phenomenon…
     5) And if you fear deflation then just appoint Gideon Gono of ECB chief or Fed governor…

     Mark S fires back "Lots wrong here as usual. The QTM assumes that an increase in bank reserves will lead to increased lending and an increase in the money supply. But I’ve already taught you that banks never ever lend their reserves. That is simply not how modern banking works. Now, I know you’ve admitted that you don’t understand banking very well, but you need to stop making this assumption that more reserves = more money in the economy. It’s simply not true. "

     "How do I know this? I work at a friggin bank. I know exactly how and why we loan money. And it has nothing to do with how many reserves the Fed fires into the economy. It has only to do with our capital position."

     "MarkS, What if you put 1 trillion dollars on Time Square every day won’t you get inflation? And if not, why not just put 100 trillion there every hour…And why do you obsess about the banking sector? There is no reason to assume that the injection of money into the economy happens through the banking sector…"

   " And if QTM is wrong, then what is your inflation theory? Magic??"

     Mark replies to Lars,

     "Lars, You clearly don’t understand modern banking either. The Fed does not have the power to “put 1 trillion dollars on Time Square”. The Fed only has the power to alter reserve balances WITHIN the banking system. Now, people like Scott falsely assume that more reserves = more lending = more money, but it’s totally dead wrong. Banks don’t lend their reserves. That’s just not how it works."

     "So, the only way for the Federal government to “put 1 trillion dollars on Time Square” would be through deficit spending. Would that be inflationary. Hell yes it would."

     "Scott’s whole framework is wrong because he doesn’t understand modern banking (something he has admitted to on this very site).

    Scott Fullwiler thoroughly crushes you here:

    Now whether or not Fullwiler crushes Sumner here is another question. What is clear though is that Fullwiler declares that, "Finally, just as an aside,Sumner concludes with, “So here’s my question: Are there any non-quantity theoretic models of the price level?” Of course, the price level itself can be anything depending on which year uses as a base year and the value at which the base year is set, so what’s really of interest is understanding changes in the price level instead of the level itself. Interestingly, MMT is also a quantity-theoretic model of changes in the price level. The differences are (1) net financial assets of the non-government sector, rather than traditional monetary aggregates, are the MMT’ers preferred measure of “money,” and (2) desired leveraging of the non-government sector is akin to what one might call “velocity.” In MMT, the two of those together (net financial assets of the non-government sector relative to leveraging of existing income) set aggregate demand and ultimately changes in the price level, at least the changes that are demand-driven."

    In other words, according to Fullwiler, MMT actually is itself a quantity-theoretic model. So Sumner spends a whole post insisting that there's no way to understand the price level without the QTM which is supposed to prove that this is the Achilles Heel of MMT, and it turns out that MMT actually does believe in the QTM.


  1. In the long run, The qtm theory holds true. the point is, money creation in itself does not affect the price level. Spending does. If you leave a trillion dollars on times square and nobody spends it does it affect teh price level. no. not until someone spends it. Thats why the fed cannot create inflation. It doesn't spend, it just swaps one form of asset for another. Bonds are money people are saving not spending so is it going to be inflationary. Probably not.

  2. Ok, so anyway Sumner was hitting the wrong spot-as MMT doesn't deny QTM in the long run though he made it sound like you do.

    If the Fed can't create inflaton does it have any positive role at all? Or are you saying "End the Fed?"

    If so should anything replace it or do you think what the Fed does can simply be assumed by the Treasury?

    The thing about the Fed is that it is true that since it's creation in 1913 we have seemed to have much more stable monetary policy-regardless of what Friedman said, we have seen the disappearance of the banking panics and we have had much fewer recessions-during the age of the gold standard from 1873 to 1913 the US was in recesson 20 years-half the time.

    1. MMT considers the Treasury and Fed to be informally consolidated at present. Yes, the Fed and Treasury could be formally consolidated under the Treasury Dept.

      Check out Warren Mosler, "Soft Currency Economics" (1994), and Scott T. Fullwiler, "Modern Central Bank Operations— The General Principles" (2008).

  3. This looks like a tedious if not also tedentious debate, and excuse my complete ignorance of QTM, but the way I see the economy is that the lower 9 deciles are getting increasingly boned by the money flows OUT of what I call the paycheck economy.

    The 600 billion/yr trade deficit, the trillion of economic rents being taken from the middle quintiles in both health and housing . . . these are massive deflationary and velocity-of-money killing dynamics.

    Quantity of money sitting in the 1%'s vaults is not going to cause inflation; for us to see inflation the money has to get into the 99's grubby little hands.

  4. I agree with you about money into the 99's hands though I don't agree there is anything tedious about the debate.

    Ideas do have consequences. I like economic analysis and it's necesary to understand most of all for the 99%.

    Saying you don't understand big words and they don't matter anyway solves nothing.

  5. The reason why this debate is tedious to me is that what happened 2003-2007 is simply obvious -- we blew ourselves up with bubble debt take-on, over $1T/yr at the peak:

    Now THAT was QUANTITY x VELOCITY hitting the middle class!

    Ignoring velocity, and ignoring exactly WHERE AND HOW money is coursing through the system is a common blindspot I see in modern economics today. Neoliberals and others think they can crank out an equation and it has any descriptiveness wrt the real world and its heterogenous actors. The QTM people are historically guilty of this too.

    The trade deficit is ripping $600B/yr right out of the paycheck economy. The $1T/yr+ fiscal deficit is just the system's attempt to backfill the massive cash-negative position the middle class is increasingly suffering.

    Most of the working class rents, and this is also an immense wealth tap on them, increasingly impoverishing them. Same thing with the medical system -- per capita health care costs are twice the global average, which works out to around $10,000 per household of rent extraction in this sector alone.

    Abstacting this stuff out with an equation just looks useless to me. You've gotta actually follow the money.

  6. OK. I mean I'm not a neoliberal nor do I do a lot of equations. I find this MMT stuff interesting though it's pretty new to me but they don't seem to make a fetish out of equations the way the Neoclassical economists do.

    I do agree this is kind of obvious, "what happened 2003-2007 is simply obvious -- we blew ourselves up with bubble debt take-on, over $1T/yr at the peak:"

    But it doesn't tell me anything new that I didn't already know. There's still a need to dig deeper into analysis. My point is not only to give an account of what happened in that period but to have an understanding of marcoeconomics in general-where we have been in the past and where we should go in the future.

    "The trade deficit is ripping $600B/yr right out of the paycheck economy. The $1T/yr+ fiscal deficit is just the system's attempt to backfill the massive cash-negative position the middle class is increasingly suffering."

    Not sure I buy all of this partiuclarly the idea that the fiscal deficit is something to worry about. I have long been skeptical about deficit hysteria and MMT seems to offer some theoretical basis why it is overdone.

    Though I don't know how much I agree with it yet-need to get into more of it-they also claim that trade deficits are not the occaison for worry most think it is.

    I'm curous Troy, are you coming from the point of view of any partiuclar economic school?

  7. By the way Troy, just so we're clear this post was not a defense. or lauding of QTM-it wasn't an atack either to be sure.

    The point wasn't really whether QTM is valid or not-if you forced me to answer that I'd have to say I'm not sure as yet.

    The reason I talk about QTM is the context of the "smackdown" between MMT and Market Monetarism. Scott Sumner had claimed that there is no way to expalin the price level without QTM and that since MMT denies QTM MMT can't explain the price level.

    My point is that Sumner was attacking a straw man as MMT does not deny QTM though they think it only holds in Keynes' "long run."

    On the face of it if you want to discredit QTM I'm not sure you do it in your comment. I think you can believe QTM and still explain 2003-2007 as the MMTers do that.

    Admittedly I don't think you were trying to give a comprehenseive disproving of QTM but just that from reading you I have no reason to think it's a waste of time.

    For me what's really interesting is my next post on this where I discover that MMT denies there was ever a barter economy.

    This assumption is in all monetarism and most mainsterma ecomoics period.

    To claim there never was a barter economy is fascinating and provocative.

  8. My thinking wrt economics was most deeply affected by discovering the Georgist/geolibertarian argument ~10 years ago.

    Once I understood that capitalism today is far from what capitalism should be, things became a lot clearer, unfortunately.

    The fiscal deficit is a symptom of systemic imbalance.

    What would happen to our economy if we raised taxes and/or cut spending $100B per month?

    $100B/mo is ~$1000 per household. We were supposed to be getting our decks squared away by now for the baby boom retirement wave of 2017-2030+, which is going to draw immense resources from current wage earners.

    We can't inflate our way out of these New Deal and Great Society promises of pension income and subsidized health care.

    And there are other flows being sucked OUT of the paycheck economy and only being backfilled with debt -- consumer debt 2001-2008 and fiscal debt 2008-now:

    The condition we're in is in no way cyclic, it's the entire structure of our economy that is rotten, and we won't fix anything until we eliminate the cancers at the core, much of which is unrestrained rent-seeking in land & natural resources, health care, and global wage arbitrage.

    Altogether these constitute a ~$3T/yr flow, much of it OUT of the paycheck economy never to return as wages.

    I don't really care about QTM and MMT and any other abstract discussion of the economy.

    The actual economy is visibly broken enough.

  9. "I don't really care about QTM and MMT and any other abstract discussion of the economy."

    "The actual economy is visibly broken enough."

    Maybe that's your problem though; what you see as "abstract" simply means adequate analysis to really understand what's going on. Your evaluation of the economy is lacking to be honest with you. Our problems are not about the New Deal and Great society chiefly. It was about the real estate bubble popping.

    And though you'd never guess it to here you say it things are getting better. A lot of the private debt has been worked through.

    There is some reason to hope.

  10. Our problems are not about the New Deal and Great society chiefly.

    Not the former but the latter is going to be an immense challenge for the system to run as-is.

    The chief problem is the inefficiency in our health care sector -- well, not inefficiency per se but sheer profits being extracted. Things are going to have to change if we're going to be able to pay 80% of 80 million peoples' medical bills -- we've got a $25T total unfunded liability here that's going to require service changes and/or significant payroll tax rises.

    It was about the real estate bubble popping.

    I see this is a common point of view, that our problems began with the financial crisis.

    The financial crisis was just a symptom of a system that had reached unsustainability much earlier.

    What was a normal real estate boom of 2002-2003 (in response to mortgage rates falling and somewhat lowered lending standards) became a full-on bubble 2004-2007.

    What was more was that in 2003-2006 the RE sector was recirculating well over $1T per year of cold hard cash from savers all over the world directly into the middle class economy, funding millions of real estate sector jobs and also millions of other jobs as this trillion dollars per year of debt take-on pinged around the wider consumer economy.

    A lot of the private debt has been worked through.

    We've got a start, yes:

    The systemic imbalances remain. As does the lack of work for all.

    I'm not saying MMT is wrong, I'm saying it's useless right now. The problems we need to fix are elsewhere.