Tuesday, April 7, 2015

In response to Brad DeLong's recent on MMT

In response to Brad DeLong's recent on MMT linked to here to catch him up on the MMT view, which he criticized with out citing references. 

Scott Fullwiler
Functional Finance and the Debt Ratio (in five parts)

Interest Rates and Fiscal Sustainability

Here is Scott's response to Brad (This comment has since disappeared from Brad's site):
Dear Brad

I don't know what you are trying to explain here, but it's not MMT.

Beginning with this sentence, you aren't even in the ballpark in terms of discussing MMT--"Anything that pushes the government out of fiscal balance and requires raising taxes to avoid default . . . "

You need to first explain why a government that issues its own currency would be forced to default. That's where MMT goes with this.

Also, you are assuming that private bond holders necessarily set interest on the national debt. MMT says no. Consider this--what if the TSy simply issued 3m tbills? These would arbitrage rather tightly with the Fed's target rate because they can always be paid off (again, currency issuer . . .). And if you don't agree there, the CB can simply do QE to buy the govt's debt at whatever rate it wants to target, just as it did during WWII. The reserve balances created from such purchases would earn the Fed's IOR or 0 if there is no IOR. In any of these cases, the bond market isn't setting the rate on govt debt, and thus your hypotheticals don't even exist in "MMT world."

Further explanation by Scott in MMT terms. Refer to the links above.
At any rate, the issue from our perspective isn't about default or bondholders, etc., it's about if the Fed raises rates you may get on the wrong side of the Kelton Curve and have inflation from the debt service or need to default to avoid inflation.

So, MMT replaces "fiscal sustainability" with "sustainable monetary policy" for two reasons--first, govt deficits are necessary for pvt sector financial stability per the sector financial balances (unless you have a persistent trade surplus), and second, given the first point you cannot simply set monetary policy via a Taylor type rule without first considering the effects on debt service via the Kelton Curve.
The New Consensus view thinks fiscal policy should balance its intertermporal budget constraint so that Taylor's rule will work as desired. MMT says that approach (aside from the fact that Taylor's rule probably doesn't work) can [become] financially unsustainable because either the pvt sector or the govt sector is running a deficit (unless you have a permanent trade surplus--which not every country can, and certainly the reserve currency nation cannot) and you will either put the govt sector on the wrong side of the Kelton curve eventually or you will force the pvt sector to default.


A said...

Brad is referring to unexpected inflation when he says 'real default', I think.

NeilW said...

Another failed assumption here is that the central bank is magnificently independent of anything else that is happening in the economy and can operate like some Deus Ex Machina.

In the real world is it politically influenced, politically controlled and has at all times to maintain the functioning of the payment system.

It would struggle to stop a determined elected government (constitutional crisis, similar to 1910 UK constitutional crisis over 'who rules') and of course as the Swiss have shown it makes irrational decisions based upon things other than what is in Brad's textbook.

This is back to the nonsense of that 'perfect model' and how these characters are desperate to implement even more Procrustean Economics to smash the real world further into the constraints they have invented.

Meanwhile real people continue to suffer, and debt and asset bubbles continue to blow.

Roger Erickson said...

Only thing that blows here is DeLong, people that listen to him, and the entire system that fixates on nominal metrics while forgetting what the damn metrics were invented for in the 1st place!

Human cultures. Ya gotta love 'em. Someday they'll grow up.

Even though they may be the death of us by the time they do. :)

The Just Gatekeeper said...

Folks may notice that this comment does not appear on Brad's blog. That's because he deleted it shortly after Scott posted it, like the intelligent, mature man that he is. Thankfully, Scott saved his comment in a word document which is what we are seeing here.

In addition to Brad's lazy analysis of MMT, he is now on Twitter, spouting his usual claim that "printing money" is the same thing as defaulting on debt. Clearly he is doing his best to demonstrate how little he or his lover Noah Smith understand about modern economics.

NeilW said...

Get him to explain the difference between a zero interest perpetual bond and any other perpetual bond.

Bonds are redeemed by issuing other bonds. They are rolled over and alway will be - since they are the financial savings of the world population in that currency.

How is it default to replace one bond with another, when that refinancing happens every day of the week?

The UK has refinanced its entire war loan of perpetual debt. Is that default?

Roger Erickson said...

All depends on who's in bondage, Neil. :)

Tom Hickey said...

Brad tweeted that he deleted Scott's comment to "protect his readers."

Tom Hickey said...

he is now on Twitter, spouting his usual claim that "printing money" is the same thing as defaulting on debt.

I guess he picked it up from the Austrians.

BTW, Brad is married to Ann Marie Marciarille, Associate Professor of Law at the University of Missouri--Kansas City. As Scott pointed out to Brad on Twitter, "default" is a legal term. Maybe Brad needs to ask his wife what it means.

Default occurs when a financial contract is not fulfilled on schedule. The US government assumes no financial obligation with respect to price stability, and as Alan Greenspan testified to a House committee when asked by Paul Ryan, the US government can always meet its financial obligations since it is the currency issuer.

We already went through government insolvency with Paul Krugman, and he conceded the point. I don't think he even realized at that time the difference between the US government as currency issuer with a floating rate, and EZ nations as currency users. That was a couple of years ago IIRC. Brad needs to catch up.

Matt Franko said...

maybe he thinks "MMT" is Monetarist Meathead Theory ?

A said...

Even if you don't define unexpected inflation as default, bond holders might well see it like that, especially if it is due to fiscal policy being too loose.

NeilW said...

"Even if you don't define unexpected inflation as default, bond holders might well see it like that, especially if it is due to fiscal policy being too loose"

So what?

What else are they going to do with the money? Spend it and increase taxation thereby reducing the need for bond issuance in the first place?

To have 'unexpected inflation' somebody has to do some spending to increase the demand. Prices don't rise on a whim or because some dodgy mathematics says so.

Nobody cares, or should care, what bond investors think because their only alternative is to leave the cash on deposit, transitively, at the central bank.

And then the central bank has to step in to maintain aggregate demand - which as we have seen it does by *buying bonds*.

Unless you're in the Eurozone, in which case it buys the wrong bonds.

Roger Erickson said...

Right on Neil!

Just carry on euthanizing the rentiers.

Evolution shows there's no point in hoarding fiat. :)

Unless you're a bear, transiently hibernating, or a fungal spore - waiting on more hospitable times.

Humans hoarding fiat don't match either of those analogies. They're just rentiers holding back Aggregate Demand, and slowing aggregate Adaptive Rate.