My title is a bit of an exaggeration, of course. But it’s intended to inspire you to head on over to the opinion pages of the Financial Times and read Cullen Roche’s excellent article on the contributions of the modern monetary approach to our understanding of economics in the 21st century.
Roche, a ridiculously prolific guy who runs two must-read websites (Pragmatic Capitalism and Monetary Realism), while also trading for himself and his clients, provides a very concise summary of the practical consequences of the theoretical insights of modern monetary economics.
I’ll sum them up quickly but I encourage you to read Roche’s FT article.
Read it at CNBC NetNet
by John Carney | Senior Editor
Look like Cullen was right. The financial world will listen to the advances made in the understanding contemporary monetary economics — as long as it is minus the "socialism" that it enables.
I am not sure that this is necessarily going to result the advance that most of us expect once this understanding becomes widespread. I suspect that the understanding is already implicit, in that everyone in finance knows that by definition a fiat currency is operationally unconstrained in the amount of fiat that can be generated through "printing."
What they assume, however, is that adequate limits have been imposed legally to establish political restrains requiring taxing and borrowing for instead of unlimited issuance. To the degree it is discovered that this may not be the case, then there will be a strong political push tighten the political restraints. This is what Ron Paul's monetary and financial reform is all about, although his concern is more specifically about the Fed providing unlimited liquidity to the financial sector.
That is to say, a correct understanding of monetary economics under the present system reveals that it creates much more policy space than a convertible fixed rate system, for example. Politicians will naturally use this space on policies that push their favorite programs. The right, to expand the military and provide subsidies to "job creators." The left, to the garner the votes of the "great unwashed" by extending popular social programs.
The masters of finance do not like extra policy space, however, so count on a push from their side to tighten the reins, should a push in the other direction come from greater understanding of how the present system actually works.
16 comments:
No need to give up so easily. It's a foot in the door.
I posted this at Carney's blog:
For further information on Modern Monetary Theory of MMT, the body of economic thinking Cullen Roche described in his FT article, I recommend Warren Mosler's collection of "mandatory readings". They can be found at this web address:
http://moslereconomics.com/mandatory-readings/
Mosler is the primary developer of MMT, so this collection goes right to the source. Especially recommended: "Full Employment and Price Stability" and "The Seven Deadly Innocent Frauds of Economic Policy."
Dan K: "No need to give up so easily. It's a foot in the door."
Of course, I am not giving up. Just saying that eliminating the socialism from monetary economics to get cred in the financial community is unlikely to work as well as some expect. Financial types understand fiat and policy space, and how they need to act to counteract policy that they perceive as not in their interests.
It's simply a caution to get ready for the push back rather than expecting to hear sighs of relief.
Of course, it moves the debate forward in that it puts it on the ground of reality rather than myth. It puts the ball back in the court, where it belongs, but it's is still far from the goal, with a formidable team in opposition.
Fiat system is very bad business for bankers if they don't control it directly or indirectly.
Because current political dominant system does not allow them to totally control it, they fight for indirect control of it via propaganda.
Fiat system in indirect control of bankers is very good for business: banks always will be saved after they loot the economy and there is little else to extract.
Maybe Ron Paul is right after all, the only problem is his solutions favour capital too. So one way or an other the 99% lose always.
Tom,
I think if the truth in these matters were to truly become widespread, the faith community would have to weigh in fully but now from a properly informed position...
For instance this operation at the Vatican would have to be shut down as it would be shown to be a complete misguided waste of time leading nowhere:
http://mikenormaneconomics.blogspot.com/2011/10/monetarists-surface-at-vatican.html
Not claiming that it would be a slam dunk, but it would sure help if the faith community were fully in paradigm.... it would be a lot easier for the "sheep" to be separated from the "goats" so to speak...
Resp,
You are underestimating by several orders of magnitude the amount of progress Post-K/MMT/MMR would be over the status quo.
If MMR was widely accepted in the finance community, our world would be very, very different.
Most people in finance are not psychopaths and genuinely want the world to be a better place. They also very genuinely believe we need to borrow in order to spend and we're all constrained.
They are literally shocked the U.S. can borrow money at all during the current times considering the size of the deficit. It's only a huge amount of cognitie dissonance which can keep them functioning at all. The lack of a viable alternative theory of how the economy works serves to keep this cognitive dissonance extremely strong.
How do can we know Post-K is making headway? When it enters into the CFA program. Until it does, expect the entire investment community to be focused on debt/GDP levels.
For example, most financial people would look at what I call the Godley Theorem and change their minds about government spending entirely.
Outside of approximately 10 economists, nobody knows about this gem but me, Cullen, Carlos, and a few people on this site.
"Most people in finance are not psychopaths and genuinely want the world to be a better place."
10% is certainly not most people, but very high percentage. You only need a fraction of these 10% in power and wrting the checks, and cowardice will do the rest.
I don't doubt most people in finance are good people, but I'm 99% certain that 99.9% of them are cowards and "sheep", and will BELIEVE what they boss tell them to believe.
Boss is a banker who writes the checks, and a lot of them are psychopaths (and very smart psychopaths, the sort of psychopath who can lie and make you believe that they are not). The same is true for academics who teach these things (positive feedback loop), policy makers, etc.
Now, here is your anwer why P-K/MMT/etc. chance of ending in a CFA program by accident are close to nil. Because money is involved, and money here is power.
Michael,
If the finance community were fully up to speed on MMT, wouldn't they just switch from fear-mongering over solvency and borrowing costs to fear-mongering over inflation? Although a monetarily sovereign country can always meet its obligations in its own currency, obligations to the private sector represent commitments to inject money on a specific time schedule. If the balance of injections over extractions grows too large, there will be inflation pressure without mechanisms to relieve that pressure. The main mechanisms, as I see it are (i) some kind of increased specialized borrowing to replace liquid with illiquid assets, (ii) taxes, (iii) spending decreases, or (iv) wage level moderation via the job guarantee program.
@ Mike S
I don't share your trust.. The financial sector realizes full well that every dollar the government creates is a dollar that the financial sector could have created instead if government had not been involved. That is how the financial sector looks at govt money creation, and that is why they want to limit it. It cuts into their vig.
If the financial sector had its way, the game would structured so that the government could not create money at all, but had to borrow it from the credit money pool created by the financial sector.
Greenspan admitted that he sincerely believed that the financial sector would be upstanding and not risk killing the goose that lays the golden egg for short term gain and that he was terribly wrong about it.
Trust those people? Not in a million years. How many resigned in protest when they knew what was going down? How many whistleblowers were there? A handfull at most.
I don't share your trust.
Mike,
In the general population, roughly 2% are born psycho/sociopaths. These 2% infect (by their actions) another 6% so that roughly 8% end up with psychopathic tendencies. See Ponerology
However, from published studies, roughly 10% of the people in finance are true psycho/sociopaths.
So if I was to take the same infection rate as the general population, that would give the result of 40% of people in finance having psychopathic tendencies. I would contend that it would be higher, because in order to survive in that "dog eat dog" world, you would have to adopt those same psycho/sociopathic behaviors.
Clonal's data here is pretty damning.
resp,
"you would have to adopt those same psycho/sociopathic behaviors." Or you keep your mouth shut.
Check out Michael Hudson's personal story from when he entered Wall Street fifty years ago. He got out quickly and became a fierce critic from that time.
Read Wendell Potter's story as a propagandist for the health insurance industry until he attended a free clinic to collect notes and experienced a "come to Jesus" moment. Since then he is a fierce critic.
How many stories like this are there, though, in comparison with all who decided to turn the other way?
No, the real benefit of MMR to financial types is it shows how they buy off public antipathy essentially for free. If we had universal Medicare and a negative income tax system that quietly redistributed economic gains as the economy grows more productive, Wall Street would be left alone to do whatever it wants without anyone else caring (the castle is not safe if the cottage is unhappy).
That simple two part agenda isn't new of course, its the two major programs Nixon would have enacted if he'd not been forced to resign. His Secretary of Health, Education & Welfare, Cap Weinberger was working on both simultaneously in 1974.
Since I haven't melted everyone's brain enough, I'll just add, Weinberger would later write two books with... Peter Schweizer.
beo,
" Wall Street would be left alone to do whatever it wants without anyone else caring (the castle is not safe if the cottage is unhappy)."
Yep. There is no competing philosophy in finance, so we're left with one which defines any government action as literally stealing from production.
If the widely held believe revolved around other ideas, we'd have an entirely different situations.
1. My work on the strong positive empirical relationship between government spending levels and corporate profits.
if this work was widely known, we'd have wide spread calls for increased government spending to drive corporate profits higher.
2. My work and John Harvey's on the relationship between currencies and currency levels.
The relationship is stronger than PPP. John Harvey has laid out an entirely awesome theory of currency values. If these relationships were widely known, the financial community would focus on government spending as the driver of currency values rather than interest rates or price equivalence.
3. The Godley/Christ theorem of economic growth. An economy with balanced sectors is one which is not growing, by definition.
If this was widely known, financial people would be clamoring for government spending.
4. The I lay out in Money like instruments part II: Credit worthiness isn't based on the security. Gorton wrote entire papers on this without seeing the major trigger of how low information assets get transformed into high information assets.
5. Steve Waldmans work. He's done so much and it's practical finance. I know you don't see it, but his work is a series of body blows to everyone who isn't thinking like him. I mean, he's crushing the market monetarists and they don't even realize it. Hes also crushing modern finance with his posts about banks.
These are world changing ideas. Let me assure you once the risk managers get hold of them, it doesn't matter what the psychopaths try to do or want to do. The risk managers rule wall street and only allow the inmates out of the asylum when they think it's safe.
And remember, if these predators don't go into finance, where will they go? The Army? Politics?
Mike, I hope you are correct in this prediction. It seems like a no brainer to me, but from what I can tell the brains in that neck of the woods are infected with brain worms that blind their vision regarding anything that they can't grab directly and cause to flow to them.
The notion of growing a bigger pie so that everyone has more is so simple as not to need stating, but their whole project is cutting a larger piece for themselves, even if it shrinks the pie for everyone.
Mike,
You said "The risk managers rule wall street and only allow the inmates out of the asylum when they think it's safe."
I wish that was true. The deregulation, and the incentive structure of Wall street has put the wolves in charge of the hen house. The psychopaths are the ones promoted and put in charge and not the real risk managers.
That has to change before your prediction has any chance of coming true. I do not see any sign that the incentive structures will change. But "hope springs eternal."
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