Modern Monetary Theory

Discussion in 'Markets & Economies' started by mmm....shiney!, Sep 14, 2019.

  1. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    I think Sanders and AOC lean toward MMT but I'm of the opinion that they don't understand why they advocate it. For example their claim that the Trump tax cuts cost the Federal government more than forgiving student debt (https://www.theguardian.com/news/datablog/2019/jun/30/student-debt-loan-forgiveness-bernie-sanders) is really based on a fallacious understanding of tax.

    According to MMT, the government does not need to tax in order to spend. It spends firsts and then taxes. Costs are spending, taxes are just the means by which governments control inflation. When someone pays taxes there is no real exchange of value, all that happens is that one side of the balance sheet is debited whilst the other side is credited. The government didn't get anything, just the numbers changed. As far as I understand it choosing not to tax one group of people in the form of tax cuts is not an opportunity cost as the government creates money out of nothing anyway. There's an opportunity cost to the individual taxpayer because they can't print their own money, but not to the public.

    The MMT debate is really a debate between monetary policy, the type that we see when Central Banks manipulate cash rates and UMPs, as advocated by Friedman et al versus fiscal policy, which means tax cuts/raises and government spending as advocated by Keynes et al.

    What we tend to see nowadays is monetary policy being implemented firstly and when that fails governments enacting fiscal policies until the perceived threat is over (or thy get threatened with losing office) when they switch back to monetary policies. We jump from being Monetarists to Keynesians and back again. Simply because it's politically advantageous for our public representatives and bureaucrats to do so. Something about the State and democracy being a sham springs to mind. :cool:
     
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  2. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    The left says they will give free health care and forgive student debts.
    The right says we need to cut everything including social security yet they dont say what they will do about all the money that people have already paid in.
    Do they think people wont want that back?
    I smell something shifty.
     
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  3. leo25

    leo25 Well-Known Member Silver Stacker

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    I think the US being the reserve currency makes it more complicated. If it wasn't for that, then it would work like how it's written in the text books. Having a country's currency as a global reserve currency really messes things up and a stupid idea, hopefully that will end soon.
     
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  4. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Is that from the perspective of a US or non-US citizen?

    I would say having the USD as the reserve currency certainly advantages US consumers more than non-US, but not enough to discount the benefits of comparative advantage which global trade also brings to non-US consumers.

    In other words the advantages US consumers have doesn’t come at a complete cost to non-US consumers.
     
  5. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Still wading through the MMT literature.

    Here’s an interesting one: public deficit (surplus) = private surplus (deficit).

    As money originates from the government, if the government is in deficit ie hasn’t collected all of its money back in the form of taxes, then that surplus is in the hands of private individuals and entities and is used to meet their needs and desires. The economy ticks along nicely for most. Conversely, if the government is in surplus, private individuals and entities have a deficit of funds to spend in meeting their needs and wants, this can cause recessions. MMT proposes that governments should remain in deficit in order to promote consumption in the private realm. It controls how much surplus credit is in the private realm through taxation. lowering taxes during deflationary periods and raising them during inflationary periods.

    The upshot of that is that monetary policy is an ineffective tool in managing the economy and governments should utilise the fiscal tools at their disposal. In particular, the tax regime.
     
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  6. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    They dont need to manage a free market. This is the whole problem. They need to stay out of the way.
     
    Last edited: Dec 11, 2019
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  7. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    I agree.

    But MMT is built around the concept that the State’s function is to enhance the public good. I guess they dismiss the notion that an anarcho-capitalist society would function more effectively and that there really is no consensus on what constitutes the public good, maybe beyond defence and law. The way I see it then, is that if we’re going to be stuck with a centralised fiat system, we may as well adopt strategies that reduce our reliance on monetary policy (Central Banks) by focussing on fiscal policy (taxes and gov’t spending).

    MM theorists don’t have any time for Austrians, they reckon we’re scaremongers. :p
     
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  8. leo25

    leo25 Well-Known Member Silver Stacker

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    Both, but more so America. If the US didn't have the reserve currency it would be impossible to run a massive trade deficit long term.

    In a normal system if America ran a trade deficit it wouldn't really matter as the other countries would eventually use the $ savings and spend it back in America, this will naturally balance the trade (more important, create jobs in America). This is what Friedman & Mosler talked about and in that world they are correct. The issue is that isn't the world we live in and both of them should know better.

    In reality Americas will buy from the world, but the $ savings never have to come back to America. Since the dollar is the reserve currency it can now be spent in any other country or just saved for rainy day. This over time will put less demand in the American market and over long periods of time will cause social issue, the very issues you are seeing in America today.

    Wealth/happiness is not just what you can buy. There is a reason why so many people are on antidepressants today even though they have more stuff to consume then in all of human history. People need a (real) purpose and the USD being a reserve currency removes purpose from the majority. (why make something when you can buy it cheaper) Not everyone is creative to think of other things to do and there are only so many fake government jobs you can create to keep the masses fooled and occupied.
     
    Last edited: Dec 11, 2019
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  9. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    I don't understand how taxes would combat inflation.
    What kind of crazy idea is that. When people are suffering from inflation last thing they will want to do is pay more taxes.

    Its concepts like this that will see failure and cause misery.
     
  10. leo25

    leo25 Well-Known Member Silver Stacker

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    Simple, taxes removes money from the system. Since inflation is due to having more money in a system, removing money through taxation reduces inflation.

    Moot point. When has government ever cared what the people want. Plus when people are "suffering" from inflation, the last thing they want is more inflation.

    Also don't forget inflation is a hidden tax.
     
    Last edited: Dec 11, 2019
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  11. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Sounds easy on paper at least. We will see if enough people choose to pay extra taxes and let their kids go hungry when they cant afford food.
     
  12. leo25

    leo25 Well-Known Member Silver Stacker

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    They wouldn't choose to pay extra tax, it will be mandatory. Just like paying any tax, levy or GST is mandatory now. Good lucky telling the government you don't want to pay.
     
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  13. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Well it would be funny to see them try to explain it while trying not to squirm haha.
    Sounds like a recipe for disaster!
     
  14. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Under gold standard Kings hoarded gold. Trading goods to satisfy domestic consumption ran a poor third to the “wealth of nations” and mercantilists. A trade deficit is a good thing because it means consumers are paying less for the goods they import than the goods they export. And the end goal of all production is consumption.

    What’s your alternative to the USD?

    Can you expand on that a little? In particular how hoarding USD creates less demand in the US domestic market.

    I think you’re drawing a long bow there implying there is a correlation between the USD as a reserve currency and the loss of purpose in society. It’s probably more complicated than that, eg declining individual freedom which creates a loss of identity, the decline in religion, rise in nationalism etc all probably play a part. But nonetheless, I really don’t want to go down that path in this thread. ;)

    Our demands are infinite. I am of the opinion that the jobs crisis to address a very real issue you raise, particularly for the unskilled, is a result of labour policy (both deliberate and well-meaning) and the disincentivisaiton of entrepreneurialism as opposed to the reality of global trade based on an individual sovereign nation’s currency.
     
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  15. leo25

    leo25 Well-Known Member Silver Stacker

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    Anything that is not a single countries currency. It can be SDR or Bitcoin for all i care.

    Sorry, i meant to say less demand for US labor.

    Yes you are correct, i was stretching it.:) It is more complicated then any one thing.
     
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  16. Silver260

    Silver260 Well-Known Member Silver Stacker

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    Great summation.

    I think most people would agree that monetary policy has run out of tools, and that fiscal policy is required to get things moving again.

    My biggest concern about MMT, and handing so much power over to fiscal policy, is.... Politicians. I don't think I need to say much more about that point, lol.

    Such a system would require a very rigorous and non partisan, management committee.

    Edit : I should have said Multipartisan. As there is no such thing as Non partisan in economics :)
     
    Last edited: Dec 11, 2019
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  17. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    A management committee like the federal reserve......seperate from government.
     
  18. leo25

    leo25 Well-Known Member Silver Stacker

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    Relevant talk for this thread.
     
    Last edited: Dec 11, 2019
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  19. Silver260

    Silver260 Well-Known Member Silver Stacker

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    Great discussion, only half way through. But the point made regarding "productive debt" is something that will be very relevant to MMT ( should it come to be). They're clearly misusing their debt under the current regime, but I'm concerned that the paradigm shift required to use debt "productively" maybe more politically challenging than they ( proponents) think.

    Also, the book Superhubs has gone onto my buy list :)
     
    Last edited: Dec 11, 2019
  20. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    @leo25 are you saying that MM theorists are arguing that we can have our cake and eat it too? If so, and we accept their position, is that such a bad thing?

    I don't think we can just for the record. We're constrained by demand on the one hand versus resource constraints on the other and I would argue that government intervention in the market sends false price signals and encourages waste. I haven't come across anything as of yet by either Warren Mosler or Bill Mitchell challenging the premise that humans are fallible therefore intervention by central planners creates distortions in the market place and these magnify booms and busts, as say put forward by schools such as the Austrians.

    MM theorists seem to avoid discussing the morality around State issued fiat accepting it as an inevitable, immutable fact of life. As a very good example have you seen any opinion or piece by MM theorists discussing cryptos?
     

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