An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
My interview on Capital Account with Lauren Lyster
Pretty good interview, I thought!
31 comments:
wh10
said...
What is this destruction of the space-time continuum bit? I mean, even if you have problems with the Fed, why would you discredit your position by using such irrelevant and hyperbolic language? Oh, entertainment.
Great job Mike! A lot of info. dispensed there in a short amount of time... glad LL kept you on for 2 segments.
She seems a bit caught up (let's face it many are) in the view that a state currency can be 'destroyed' by central bank actions vice focusing on the real economy and fiscal... but she was a gracious moderator and I think at least it looks like she is close to understanding MMT.
Mike did a very good job of attempting to answer Laura's questions; unfortunately, Laura does not appear to understand/ accept the logic of MMR/MMT. However, she/her sponsor are to be congratulated for entertaining non-conventional/non-neoliberal guests [in some past interviews, she has appeared to comprehend the rantings of several Austrian economics types].
The MMR/MMT advocates have yet to get the message to the general public in a form which can be comprehended. As pointed out in the earlier post wrt Warren Mosler's analysis of/comments on Obama's recent political rantings, those pronouncements suggest that the POTUS continues to depend upon the usual suspects for background information and, thus, does not understand macroeconomics any better than he indicated several years ago.
The challenge continues - how might one imagine communicating an understanding of macroeconomics to the general public unless a very much simpler methodological approach of information transfer is employed?
Has capital Account staff and Lauren Lyster (pretty woman btw) fallen off the goldbug camp? Or they still interview a lot of goldbugs & 'we are broken' propagandists?
The entire focus of her comments was on THE CURRENCY!! What is it with these people that they think an economy is ABOUT the currency. Its about people using a currency to create output, economic activity...... sales!
Currency is a tool. We can literally use anything as a currency. Focusing on the tool and not on the job the tool does is stupid beyond words.
"private savings = government deficit to the penny"
How then is it that (on the sectoral balance graph) between 2002-2008 the government ran a huge deficit but the private sector balance was still negative?
Ok so the government deficit is not necessarily the domestic private sector's surplus, but both the domestic and foreign private sector's surplus' combined.
So between 2002 and 2008 the US current account deficit expanded massively meaning the private sector became increasingly leveraged as the government's deficit wasn't large enough to ensure a domestic private sector surplus in the face of so much leakage abroad. ?
So the government could potentially have cut taxes massively or increased spending massively during that period?
How about the fact that inflation was already above the target rate of 2% that whole time (often above 4%)? Wouldn't the extra demand have pushed it up even (a lot) higher?
If a main cause of cost-push inflation at the time was oil prices, even more deficit spending would presumably have greatly exacerbated this problem?
Anon, People can spend current income, savings or borrowed money. If the deficit was greater (say less taxes) during the 2002-2008 period, private spending would have been more from current income versus borrowed. If that spending outpaced productive output, inflation would have been higher. If spending caused more demand that was within productive capacity, GDP would have been that much higher.
Good job Mike, even better than the last appearance I think. Lauren and Max Keiser both seem to be heavily focused on the quantity of money, but I must say she does let the guest speak freely unlike many hosts. Thom Hartman seems a little closer to paradigm in my opinion.
OT, but I was just listening to a Wealthtrack podcast with Paul McCulley and Bill Miller where I heard Bill very calmly state that the government deficit was the private sector's wealth. I almost fell off my chair. How close are these guys to being in paradigm?
I imagine much of the private indebtedness in that period was due to the real estate bubble. An increased government deficit would not have stopped that from happening, in fact it probably would have fueled it further (real estate is a classic 'bottle neck' situation). So additional measures would have had to be introduced to control that...?
Ok so the government deficit is not necessarily the domestic private sector's surplus, but both the domestic and foreign private sector's surplus' combined.
Yes. Government deficit = non-govt (consolidated domestic private sector and external sector) surplus, and vice versa.
Yes. Add domestic private saving and external saving to get necessary deficit offset to maintain full employment.
So the government could potentially have cut taxes massively or increased spending massively during that period?
Yes. Taxes were too high. FICA is a killer, for example.
How about the fact that inflation was already above the target rate of 2% that whole time (often above 4%)? Wouldn't the extra demand have pushed it up even (a lot) higher?
If a main cause of cost-push inflation at the time was oil prices, even more deficit spending would presumably have greatly exacerbated this problem?
Possibly. But more likely the higher oil price acted as a tax, diminishing purchasing power and created a drag. Asset price appreciation is not considered inflation, and energy price fluctuations are excluded from CPI.
Basically inflation in the economic sense boils down to wage inflation. There was no wage inflation during this period.
How would MMT deal with that?
I would suggest that the government use the strategic oil reserves as a buffer stock to moderate energy price volatility, which seems to be exacerbated by speculation. That would drive speculators out.
MikeB "Paul McCulley and Bill Miller where I heard Bill very calmly state that the government deficit was the private sector's wealth. I almost fell off my chair. How close are these guys to being in paradigm?"
Don't know about Miller but McCulley is fully aware of MMT and has attended Levy Institute conferences. Notice what happened at PIMCO when he retired.
Is there any way that speculators could be targetted directly? It seems to be a recurring problem.
Also, defining inflation as wage inflation isn't very helpful. The CPI is also just a partial description of inflation. Asset price appreciation is a form of price inflation.
The main problem with real estate bubbles is the personal indebtedness they create (in a self-fueling cycle of increased prices, increased debt, increased prices, etc), as well as the fact that they basically impoverish younger generations.
That needs to be controlled in some way, it seems to me. Just more government deficit spending won't do it, and it might make it even worse.
Anon, The human condition is fickle. Irrational exuberance and all that. People used their home equity as an ATM during that period. Consumerism was out of control. So if during that time we had zero tax liability, would there have still been a real estate bubble? I think so, but it might have lasted a bit longer before it burst. So government can only do so much. Its the teeming masses and their spending zeitgeist of the time that dictates the boom and bust cycle. I think MMT has the best "solution" to handle the back and forth of those cycles.
What about returning to stricter lending rules, the kind of permissable ratios we used to have between income and mortage, and possibly the taxing of real-estate profits? Personally I think that real estate bubbles are a real evil, though I can see why those who benefit the most from them wouldn't see it that way.
Only after we have "the big one" and learn the hard way that the system is too failure-prone as presently configured will action finally be taken. But Thatcherism has a way to play out yet.
I don't think that the present system can be reformed. It needs to be overhauled. The existing institutional arrangements and incentives are perverse.
What is needed is a redesign for the global economy sustainability and distributed prosperity. Distributed prosperity means a bigger pie for everyone to share. Sustainability is now being forced by resource depletion, environmental degradation, and climate change.
Warren Mosler doesn't think so. The interest rate is related to investment. An overnight rate of zero would put the prime rate at 0 plus about 3% banks costs plus bank profit. This would be the rate to the most creditworthy borrowers and adjustments for risk would determine rates for others.
One reason that it would increase speculation in assets is that tsys are already being used as collateral for that. Nothing really changes on that front.
This would give a constantly low rate for investment and a modest return for savers on default-free savings. Win/win instead of monetary policy that either favors investors and disadvantages savers with low rates and vice versa with high.
Mosler's point is that this all fits together in an MMT world, in which fiscal policy is used to achieve full employment and price stability.
According to MMT,interest rate setting is ineffective for inflation control other than by forcing economic contraction and an expansion of the buffer stock of unemployed. MMT eschews that approach. Even though the interest rate is set at zero, bank rates and securities yields would still fluctuate with changing circumstances.
"interest rate setting is ineffective for inflation control other than by forcing economic contraction and an expansion of the buffer stock of unemployed."
Doesn't inflation control through changes in taxation have the same effect - i.e. forcing economic contraction and an expansion of the buffer stock of 'employed'. An employed buffer stock policy could be combined with an interest rate setting policy.
I've yet to understand how MMT proposes to control inflation through taxation in practical terms.
"Doesn't inflation control through changes in taxation have the same effect - i.e. forcing economic contraction and an expansion of the buffer stock of 'employed'. An employed buffer stock policy could be combined with an interest rate setting policy."
Doesn't force economic contraction, but rather brings effective demand in consonance with capacity to maintain full employment. The BSE is a mop up operation for residual unemployment. Appropriate fiscal policy (sectoral balance approach to determine appropriate size of deficit for saving desire coupled with automatic stabilization) should be able to stabilize the economy at optimal capacity and close to full employment. The MMT JG picks up the residual, since operating at full capacity is not optimal.
"I've yet to understand how MMT proposes to control inflation through taxation in practical terms." Adjusting tax rate. According to Warren Mosler, it's too high for the size of government, and according to Michael Hudson, doesn't tax either economic rent or negative externality, encouraging parasitic rent-seeking and capitalizing gain while socializing loss at the expense of productive contribution and sustainability.
But, basically, according to MMT the budget is really a political matters and its the people who decide the size of government they want in terms of what they want government to do for public purpose. This determines not only specific appropriations, but also the balance of expenditure and taxation in achieving the appropriate size fiscal balance iaw sectoral balances.
However the fiscal balance is not a policy variable due to automatic stabilization. The more stable the economy can be made the more policy choices become available since there is less automatic stabilization and less volatility in revenue.
Rodger MItchell also observes that in the past few decades the inflation problem comes from the supply side rather than the demand, when there are shortages of a vital ressource like oil and the effects spread through the economy. This is not well addressed by addressing demand, either effective demand fiscally, or money demand through interest rates.
Doesn't force economic contraction, but rather brings effective demand in consonance with capacity to maintain full employment.
I don't understand the distinction between "force a contraction" and "bring effecting demand in consonance" in the context of excessive demand.
I had always assumed demand reduction was equivalent to contraction and contraction equivalent to bumping workers from private sector employment to buffer stock.
The goal of rating interest rates in boom is to shortcircuit the boom by making borrowing expensive. This generally contracts the economy and expands the buffer unemployed which takes pressure of wage increases. This is really the objective in the the cb sees wage increases as the true sign of inflation rather than price indexes like CPI. The strategy is to target inflation and use BSU expansion as a tool.
The goal of MMT is to control inflation while maintaing full employment. That means only extracting as much effective demand as needed to bring AD in line with capacity to expand supply, and then mop up the residual UE with the MMT JG, so there there is no voluntary UE. Automatic stabilization will still kick in to some degree, but not to the degree it would with monetary policy and expanding the BSU, which is basically financial repression of workers.
31 comments:
What is this destruction of the space-time continuum bit? I mean, even if you have problems with the Fed, why would you discredit your position by using such irrelevant and hyperbolic language? Oh, entertainment.
Great job Mike! A lot of info. dispensed there in a short amount of time... glad LL kept you on for 2 segments.
She seems a bit caught up (let's face it many are) in the view that a state currency can be 'destroyed' by central bank actions vice focusing on the real economy and fiscal... but she was a gracious moderator and I think at least it looks like she is close to understanding MMT.
Great work again... Resp,
Mike did a very good job of attempting to answer Laura's questions; unfortunately, Laura does not appear to understand/ accept the logic of MMR/MMT. However, she/her sponsor are to be congratulated for entertaining non-conventional/non-neoliberal guests [in some past interviews, she has appeared to comprehend the rantings of several Austrian economics types].
The MMR/MMT advocates have yet to get the message to the general public in a form which can be comprehended. As pointed out in the earlier post wrt Warren Mosler's analysis of/comments on Obama's recent political rantings, those pronouncements suggest that the POTUS continues to depend upon the usual suspects for background information and, thus, does not understand macroeconomics any better than he indicated several years ago.
The challenge continues - how might one imagine communicating an understanding of macroeconomics to the general public unless a very much simpler methodological approach of information transfer is employed?
Great job, Mike. Very clear in your message. Continue to keep it simple.
Great job as usual Mike. Was that the real Mike Norman or a temporal anomaly?
Has capital Account staff and Lauren Lyster (pretty woman btw) fallen off the goldbug camp? Or they still interview a lot of goldbugs & 'we are broken' propagandists?
The entire focus of her comments was on THE CURRENCY!! What is it with these people that they think an economy is ABOUT the currency. Its about people using a currency to create output, economic activity...... sales!
Currency is a tool. We can literally use anything as a currency. Focusing on the tool and not on the job the tool does is stupid beyond words.
These financial commentators drive me crazy.
Greg,
Agree. Mike tried to get the focus back on the real imo (as he usually does btw)... see if it sticks eventually with her...
resp,
Many MMTers are prolific writers, but not such great speakers. Mike, you are by far the best MMT spokesperson that I've heard. Keep up the good work.
"The entire focus of her comments was on THE CURRENCY!! What is it with these people that they think an economy is ABOUT the currency."
The hyperinflation meme sells, regardless of the fact that the world is in a debt-deflationary depression.
"private savings = government deficit to the penny"
How then is it that (on the sectoral balance graph) between 2002-2008 the government ran a huge deficit but the private sector balance was still negative?
http://www.levyinstitute.org/multipliereffect/wp-content/uploads/2011/11/US-Sectoral-Balances_Berlin.png
Deficit too small to offset non-govt saving desire, consolidating domestic private and external sectors.
Ok so the government deficit is not necessarily the domestic private sector's surplus, but both the domestic and foreign private sector's surplus' combined.
So between 2002 and 2008 the US current account deficit expanded massively meaning the private sector became increasingly leveraged as the government's deficit wasn't large enough to ensure a domestic private sector surplus in the face of so much leakage abroad. ?
So the government could potentially have cut taxes massively or increased spending massively during that period?
How about the fact that inflation was already above the target rate of 2% that whole time (often above 4%)? Wouldn't the extra demand have pushed it up even (a lot) higher?
If a main cause of cost-push inflation at the time was oil prices, even more deficit spending would presumably have greatly exacerbated this problem?
How would MMT deal with that?
Anon,
People can spend current income, savings or borrowed money. If the deficit was greater (say less taxes) during the 2002-2008 period, private spending would have been more from current income versus borrowed. If that spending outpaced productive output, inflation would have been higher. If spending caused more demand that was within productive capacity, GDP would have been that much higher.
Good job Mike, even better than the last appearance I think. Lauren and Max Keiser both seem to be heavily focused on the quantity of money, but I must say she does let the guest speak freely unlike many hosts. Thom Hartman seems a little closer to paradigm in my opinion.
OT, but I was just listening to a Wealthtrack podcast with Paul McCulley and Bill Miller where I heard Bill very calmly state that the government deficit was the private sector's wealth. I almost fell off my chair. How close are these guys to being in paradigm?
Chewitup:
I imagine much of the private indebtedness in that period was due to the real estate bubble. An increased government deficit would not have stopped that from happening, in fact it probably would have fueled it further (real estate is a classic 'bottle neck' situation). So additional measures would have had to be introduced to control that...?
Ok so the government deficit is not necessarily the domestic private sector's surplus, but both the domestic and foreign private sector's surplus' combined.
Yes. Government deficit = non-govt (consolidated domestic private sector and external sector) surplus, and vice versa.
Yes. Add domestic private saving and external saving to get necessary deficit offset to maintain full employment.
So the government could potentially have cut taxes massively or increased spending massively during that period?
Yes. Taxes were too high. FICA is a killer, for example.
How about the fact that inflation was already above the target rate of 2% that whole time (often above 4%)? Wouldn't the extra demand have pushed it up even (a lot) higher?
If a main cause of cost-push inflation at the time was oil prices, even more deficit spending would presumably have greatly exacerbated this problem?
Possibly. But more likely the higher oil price acted as a tax, diminishing purchasing power and created a drag. Asset price appreciation is not considered inflation, and energy price fluctuations are excluded from CPI.
Basically inflation in the economic sense boils down to wage inflation. There was no wage inflation during this period.
How would MMT deal with that?
I would suggest that the government use the strategic oil reserves as a buffer stock to moderate energy price volatility, which seems to be exacerbated by speculation. That would drive speculators out.
MikeB "Paul McCulley and Bill Miller where I heard Bill very calmly state that the government deficit was the private sector's wealth. I almost fell off my chair. How close are these guys to being in paradigm?"
Don't know about Miller but McCulley is fully aware of MMT and has attended Levy Institute conferences. Notice what happened at PIMCO when he retired.
Is there any way that speculators could be targetted directly? It seems to be a recurring problem.
Also, defining inflation as wage inflation isn't very helpful. The CPI is also just a partial description of inflation. Asset price appreciation is a form of price inflation.
The main problem with real estate bubbles is the personal indebtedness they create (in a self-fueling cycle of increased prices, increased debt, increased prices, etc), as well as the fact that they basically impoverish younger generations.
That needs to be controlled in some way, it seems to me. Just more government deficit spending won't do it, and it might make it even worse.
Anon,
The human condition is fickle. Irrational exuberance and all that. People used their home equity as an ATM during that period. Consumerism was out of control. So if during that time we had zero tax liability, would there have still been a real estate bubble? I think so, but it might have lasted a bit longer before it burst. So government can only do so much. Its the teeming masses and their spending zeitgeist of the time that dictates the boom and bust cycle.
I think MMT has the best "solution" to handle the back and forth of those cycles.
What about returning to stricter lending rules, the kind of permissable ratios we used to have between income and mortage, and possibly the taxing of real-estate profits? Personally I think that real estate bubbles are a real evil, though I can see why those who benefit the most from them wouldn't see it that way.
Only after we have "the big one" and learn the hard way that the system is too failure-prone as presently configured will action finally be taken. But Thatcherism has a way to play out yet.
I don't think that the present system can be reformed. It needs to be overhauled. The existing institutional arrangements and incentives are perverse.
What is needed is a redesign for the global economy sustainability and distributed prosperity. Distributed prosperity means a bigger pie for everyone to share. Sustainability is now being forced by resource depletion, environmental degradation, and climate change.
Do you not think that zero interest rates would fuel more crazy debt binges and real estate bubbles?
Warren Mosler doesn't think so. The interest rate is related to investment. An overnight rate of zero would put the prime rate at 0 plus about 3% banks costs plus bank profit. This would be the rate to the most creditworthy borrowers and adjustments for risk would determine rates for others.
One reason that it would increase speculation in assets is that tsys are already being used as collateral for that. Nothing really changes on that front.
This would give a constantly low rate for investment and a modest return for savers on default-free savings. Win/win instead of monetary policy that either favors investors and disadvantages savers with low rates and vice versa with high.
How would a zero rate provide a modest return for savers? Shouldn't interest at least keep pace with inflation?
Where does Mosler make that argument, have you got a link?
Mosler's point is that this all fits together in an MMT world, in which fiscal policy is used to achieve full employment and price stability.
According to MMT,interest rate setting is ineffective for inflation control other than by forcing economic contraction and an expansion of the buffer stock of unemployed. MMT eschews that approach. Even though the interest rate is set at zero, bank rates and securities yields would still fluctuate with changing circumstances.
See Mathew Forstater and Warren Mosler, The Natural Rate is Zero (2005).
"interest rate setting is ineffective for inflation control other than by forcing economic contraction and an expansion of the buffer stock of unemployed."
Doesn't inflation control through changes in taxation have the same effect - i.e. forcing economic contraction and an expansion of the buffer stock of 'employed'.
An employed buffer stock policy could be combined with an interest rate setting policy.
I've yet to understand how MMT proposes to control inflation through taxation in practical terms.
"Doesn't inflation control through changes in taxation have the same effect - i.e. forcing economic contraction and an expansion of the buffer stock of 'employed'.
An employed buffer stock policy could be combined with an interest rate setting policy."
Doesn't force economic contraction, but rather brings effective demand in consonance with capacity to maintain full employment. The BSE is a mop up operation for residual unemployment. Appropriate fiscal policy (sectoral balance approach to determine appropriate size of deficit for saving desire coupled with automatic stabilization) should be able to stabilize the economy at optimal capacity and close to full employment. The MMT JG picks up the residual, since operating at full capacity is not optimal.
"I've yet to understand how MMT proposes to control inflation through taxation in practical terms." Adjusting tax rate. According to Warren Mosler, it's too high for the size of government, and according to Michael Hudson, doesn't tax either economic rent or negative externality, encouraging parasitic rent-seeking and capitalizing gain while socializing loss at the expense of productive contribution and sustainability.
But, basically, according to MMT the budget is really a political matters and its the people who decide the size of government they want in terms of what they want government to do for public purpose. This determines not only specific appropriations, but also the balance of expenditure and taxation in achieving the appropriate size fiscal balance iaw sectoral balances.
However the fiscal balance is not a policy variable due to automatic stabilization. The more stable the economy can be made the more policy choices become available since there is less automatic stabilization and less volatility in revenue.
Rodger MItchell also observes that in the past few decades the inflation problem comes from the supply side rather than the demand, when there are shortages of a vital ressource like oil and the effects spread through the economy. This is not well addressed by addressing demand, either effective demand fiscally, or money demand through interest rates.
Doesn't force economic contraction, but rather brings effective demand in consonance with capacity to maintain full employment.
I don't understand the distinction between "force a contraction" and "bring effecting demand in consonance" in the context of excessive demand.
I had always assumed demand reduction was equivalent to contraction and contraction equivalent to bumping workers from private sector employment to buffer stock.
The goal of rating interest rates in boom is to shortcircuit the boom by making borrowing expensive. This generally contracts the economy and expands the buffer unemployed which takes pressure of wage increases. This is really the objective in the the cb sees wage increases as the true sign of inflation rather than price indexes like CPI. The strategy is to target inflation and use BSU expansion as a tool.
The goal of MMT is to control inflation while maintaing full employment. That means only extracting as much effective demand as needed to bring AD in line with capacity to expand supply, and then mop up the residual UE with the MMT JG, so there there is no voluntary UE. Automatic stabilization will still kick in to some degree, but not to the degree it would with monetary policy and expanding the BSU, which is basically financial repression of workers.
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