Sunday, February 28, 2016

Neil Wilson — The Limits of understanding of MMT

I've got a good amount of time for LK's blog. It is my 'goto' blog for good sense on many a topic. But I have to say I'm somewhat disappointed at the latest missive on foreign trade. It still has the usual straw men in it. I really don't understand why PK people can't get their head around the dynamics of floating rate exchange systems and still stick to fixed exchange analysis based around apparent Kaldorian views.
Bill has already debunked the Kaldorian points in his post of a few weeks ago.
I'll take the points in LKs post one at a time.
3spoken
The Limits of understanding of MMT
Neil Wilson

11 comments:

Calgacus said...

Great, except for this overoptimistic comment of Neil:

That one nation view and RoW as a single entity acting as Deus Ex Machina is a powerful mental model that people seem to struggle to shift.

"That one nation view and RoW as a single entity" is a great advance to the usual way pattern of thought; it's roughly how Abba Lerner analyzed things, and I might say even Neil himself usually. The mainstream way is to look at it all as one unbreakable system, with everyone desperate for munnie (that the Chinese are taking from us) and of course, only concerted action (= everybody else doing something before I get off my ass) could defeat this universal omnipotent system.

Bill himself could have said a bit more:

If they lost that [saving] desire entirely, then the trade deficit gets squeezed down to zero. This might be painful to a nation that has grown accustomed to enjoying the excess of imports over exports.

Yes, but this could have been added to "The central bank has no necessary role to play in defending the currency and therefore has no particular need to amass foreign currency reserves as it did under the fixed exchange rate system." The "need to amass foreign currency" reserves is because nation might need/want those imports very much; they might be very difficult to obtain or substitute locally; the foreign currency reserves are not needed to defend some artificial exchange rate, but to maintain a buffer stock of imports in virtual form, to give some time because "It might also happen relatively quickly."

Going back, to think that the RoW never behaves "as a single entity acting as Deus Ex Machina", never acts concertedly against some country that the transnational power elite sees as prey, is to kid oneself. "It might also happen relatively quickly" is putting it nicely. How do you think that the "everybody scrabbling for munnie" zero-sum, war of all against all story line gets enforced, gets implanted into colonized minds?

The virtue of looking at it right, looking at it the FF/MMT/common sense/institutional/creditary way is that one can then understand the actual problems & act to forestall them. But above all, not exaggerate them, not indulge in the preposterous exaggeration of the foreign sector's importance. The rise and fall of nations does not depend on competitiveness in international markets. It depends on national domestic policy.

Realize that the main problem of these problems is the insane cures the mainstream prescribes for them - which is always starve the poor, those who work, feed the rich, those who live off others work. Far better to do nothing at all, have completely free trade & whatever & just decide to have a full employment / JG & let everything else take care of itself. It will.

Neil Wilson said...

"Going back, to think that the RoW never behaves "as a single entity acting as Deus Ex Machina", never acts concertedly against some country that the transnational power elite sees as prey, is to kid oneself."

If you think Russia and the USA are on the same side in anything, then you're probably kidding yourself.

Analysing the system from the viewpoint of a single economy is the wrong viewpoint and leads to all these sorts of arguments.

The correct view is currency zones growing and shrinking dynamically against each other.

"The "need to amass foreign currency" reserves is because nation might need/want those imports very much"

Don't see that at all. Generally foreign currency reserves are used for matters other than simply working capital. They are used effectively to bail out firms that have borrowed in a foreign currency but don't have the right foreign income. They then desperately try to get the foreign money with local money, push down the exchange rate, which the central bank then props back up by selling foreign reserves.

That is the wrong approach. The correct approach is to put such firms into administration, send the losses home to the foreign lenders and equity holders, and then offer refinancing in the local currency. That way you wipe out foreign money and demand for foreign money without hurting your own limited working capital supplies.

You come to that conclusion by looking at things *from the wider viewpoint*.

Single economy view is the wrong view to get a handle on how to manage the feedbacks across the FX boundary.

MRW said...

You guys must think that your commentary here are toss-offs, and not particularly valuable to newbies. But I beg to differ.

As much as a pain in the ass it is, you should be explaining your acronyms. RoW, FF, FX. [Mosler was guilty of this in his terse comments on his blog. Undercut him.]

Better yet = TOM?!? Why don’t you add an ACRONYMSor BUZZWORDS tab on the homepage? Quickie definitions for “aggregate demand” (sales, or total sales) and other stumbling blocks for kids and people new to these POVs (another one).

Unless, of course, Mike Norman prefers this blog to be a discussion among insiders, in which case I stand corrected.

But I think the quality of some of these comments should be valued for posterity.

Tom Hickey said...

Probably a matter of time. Many of us are busy.

As I am sure most of you have noticed, I rarely even preview my comments for typos since I am writing on the fly.

But people can always ask if they don't know the meaning of something.

MRW said...

Any way that you can add a tab as a blog entry to the right of the PODCASTS tab? I mean, is that technically feasible given whatever service you’re using...which I don’t know?

Then people here could add them as necessary, and let you off the hook of devoting time to something you need to do like a hole in the head.

MRW said...

I’m not saying this to be grammarian prick.

I send links to some of these stories all the time to people whom I have half convinced about MMT.

The ONE OVER-RIDING CONSTANT REACTION is that they get as far as a bunch of acronyms and switch off. Or when there’s a plethora of econ terms that are never explained.

And then the MMT people lament how they’re not being heard. Ya’ think?

But people can always ask if they don't know the meaning of something.

Of course, but then the explanation is lost within a comment thread. it’s not universal.

I mean, how hard is it to add a tab? You shouldn’t have to patrol or control it.

Calgacus said...

I'm not saying you're wrong Neil, I'm arguing with this way of characterizing things, your own ideas and the mainstream ideas. What you call currency zones is what more usually is called, what Abba Lerner (& MMT afaik) calls "countries". Basically, it's always been one country = one currency. There may be theoretical merit to the distinction, and it is certainly focusing on the right things, but practically speaking, IMHO, it is not necessary, or at least while it may help some, it is not necessary for some others to gain the correct understanding.

Generally foreign currency reserves are used for matters other than simply working capital.
Yes, generally. I agree entirely on your correct approach v. wrong approach. A good way to get rich is - don't pay what you don't owe. But when there is a Deus Ex Machina crisis, and they happen often enough to smaller, poorer countries, you might need some foreign money to tide you over for a while. What other reason, except for short term float management is there to accumulate it?

Me:Going back, to think that the RoW never behaves "as a single entity acting as Deus Ex Machina", never acts concertedly against some country that the transnational power elite sees as prey, is to kid oneself. "
Neil:If you think Russia and the USA are on the same side in anything, then you're probably kidding yourself.

I think this is the only real, important, substantial disagreement. You are a lucky man if you have a friend on whom you think you can rely. But there isn't always a stranger on whose kindness you can depend. So most learn, painfully, Them that's got shall have, Them that's not shall lose & that God bless the child that's got his own. Export-led countries don't always save those being beaten up by the big boys, who can be these same export-led countries. Russia doesn't and hasn't and can't and won't always ride to the rescue. The prey can't rely always on such active aid from the Rest of the World (RoW).

It did work a little bit that way in the old Cold War / postwar days. Developing nations could play the US/UNCLE/Control off of the SU/Thrush/Chaos, to their benefit, forcing both to be somewhat "Good Samaritans". But that's over with. Nowadays, alone among men, the transnational power elite, in particular the US establishment, covets with equal eagerness poverty and riches. Now, we're back in the era of the Deus Ex Machina = "Bad Samaritans" as Ha-Joon Chang puts it. Aside: Bill Mitchell is really right to deplore the colonization of the UN agency, by Bad Samaritanism, to the extent he got booed there when he called nonsense nonsense. Having official international forums where sanity & good manners is the rule is one of those things that look boring and meaningless until you realize they matter a lot.

Look at what's happening, what has happened so many times in the US's backyard, Latin America. Sure, progress, but the source of that has been from within. Slow progress against the US decision to beat up on small countries. But the ROW, the aggressive mercantilists, the export-led countries never come to their aid enough & rarely when it is really needed. Although trade deals with China etc provide some help, there is still too much reliance there on the fickle outside.

Thinking that the export-led countries are that desperate for demand is as mistaken internationally as it is nationally. In boom times, sure, capitalists and bankers are happy to extend credit to the workers (selling their soul to the company store). But come the crunch, the years of stagnation, they are even happier not to & they don't. The US economy before and after the Great Depression & before & after the Great Recession illustrate this perfectly.

Calgacus said...

Contrary to this, the real MMT /FF point is - so what if "the ROW behaves as a single entity acting as a Deus Ex Machina"? Nothing so bad will happen if a country decides to have full employment, no bad effects either domestically or internationally that could possibly outweigh the great good effects, and this decision is so powerful that Free Trade will only be an envigorating, gentle zephyr, not a destructive hurricane. Foreign investment, foreign saving of your currency is nice, but not necessary. As Lerner said, no sound finance country in the long run can compete against a country practising functional finance - (Which includes of course your "correct approach", not the crazy "wrong approach".) The opposite of the concerted action myth, not even the tiny trace of it that relying on foreign export desires represents. (Lerner's phrase for Lord K's "aggressive mercantilist" is "hostile gift".)

Single economy view is the wrong view to get a handle on how to manage the feedbacks across the FX boundary.

A view that contains a one country=currency zone v. ROW is not a "single economy view" that way, and handles feedbacks perfectly well. Again, I don't think I am disagreeing here on substance, but labelling. A correct, careful "single economy view" already contains the wider view, precisely because it makes the country v ROW distinction. Abba Lerner saw this: He said that Functional Finance (FF) needs no real modification for the open economy case because you just split it up into a single country with a domestic v ROW sector. (Economics of Employment). Of course "closed economy" is a special case of "open economy". But Lerner saw "open economy" is a special case of "closed economy", too! You just put the boundary "inside" the economy. The mainstream view is perhaps better described as a "one munnie to rule them all" view. Or something.

The reason to take such a Lernerian single economy view is obvious. Politicians (pre-Trump of course) are usually elected to be legislators or presidents or Prime Minister of one country at a time. Proposals for what a country should do should focus on what IT can do, not what it can convince others to do for it, and should not really care so much about the outside world.

I apologize to all for all the pop culture references. Had to get them out of my system. Would take too long to extract them, and write more careful replies, and maybe they could help people (like me) who don't like acronyms. :-)

Matt Franko said...

http://www.chemteam.info/Solutions/Osmosis.html

You cant just look at one side of the membrane at the bottom of the tube.... the whole thing is a regulated system...

Matt Franko said...

MRW here goes...

FF: Free Floating
FFNC: Free Floating non-convertible
RoW: rest of the world
FD: Full disclosure
RBS: Reserve Balances
FX: Foreign Exchange

last but not least:

FUBAR: Fucked up beyond all recognition... ;)

Seriously just ask what the acronym means if I see it I'll reply asap...

MRW said...

And FF: Functional Finance.

I just think we should be able to add them as they come up under a Buzzwords or Acronyms tab on the homepage. I don’t think Tom should be responsible. And a newbie can’t search for the word “Acronyms” on Mike’s homepage and find anything. Or your post for that matter. Jes’ sayin’.