Friday, February 9, 2018

T Sabri Öncü — Miscommunicated Monetary Theory

The Modern Monetary Theory is described as an integration of endogenous money, state money, credit money, and functional finance theories. Despite departing from a faithful narration of what actually happens in the real world, the MMT arrives at a new world in which the government can spend as it pleases. Not only this and several other difficult-to-swallow claims, but also academic concepts such as vertical and horizontal components of money supply introduced along the way are what make MMT difficult to communicate to the general public and also difficult to fully appreciate.
Economic & Political Weekly
Miscommunicated Monetary Theory
T Sabri Öncü, economist based in Istanbul, Turkey

25 comments:

Neil Wilson said...

Possibly the most bizarre article ever written, and could only have been written by an economist.

It's like watching somebody translate English into Latin - even though Latin is missing words in common use - and then translate it back again and call it 'better English'.

The central point is completely missed in the technobabble. The first time a central bank tries to countermand the spending instructions of the legislature is the last time it will be called independent. Because as a matter of simple democracy, the legislature wins every time. We had this in the UK with the 'peoples budget' in 1911 and the aristocrats lost.

So instead we have this elaborate game that supposedly fools corporations into making long term investment decisions because that wonderful central bank will 'protect' them from the nasty government.

Do they honestly think business people are that stupid?

Matt Franko said...

No but they honestly think that people are that libertarian....

Matt Franko said...

This is backwards (“loanable funds” ):

“These TT&L accounts are the tools of the TT&L Program executed by the Fed and the Treasury, under which tax payments go to these accounts rather than directly to the TGA with the Fed in order to stabilise the reserves with the banking system. For, otherwise, all the tax payments made in red money should be erased from the bank accounts and an equal amount of blue money should be converted to black money, meaning reserves are drained by a huge amount. This is a major red money and blue money supply contraction that would harm not only the monetary policy the Fed is implementing, but also the economy immediately.”

Conclusion is correct as we have witnessed over the last 2 weeks and on fall of 2008 but it is backwards....

Neil Wilson said...

Why is it that economist can't get their head around the simple facts of banking?

For a transfer to happen from a source account to a destination account the destination bank must take the place of the depositor in the source bank.

Everything else is just netting off.

Matt Franko said...

Looks like they are going beyond the accounting Neil and into functional analysis and mixing the two concepts up a bit...

They think once a depository bank has reserves (a claim on the central bank) THEN that facilitates lending by the depository bank...

AXEC / E.K-H said...

Note on T Sabri Öncü’s ‘Miscommunicated Monetary Theory’

The problem of MMT is NOT that is miscommunicated but that it is positively false, i.e. a materially/formally inconsistent theory.

For the full-spectrum refutation see cross-references MMT
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html

MMT is promoted/communicated by the very nice people of Warren Mosler’s sales team who, as a matter of fact, are as incompetent as can be.* MMT has NO scientific merits whatsoever, it is just brain-dead political sloganeering.

Egmont Kakarot-Handtke

* https://commons.wikimedia.org/wiki/File:AXEC125d.png#{{int:filedesc}}

Brian Romanchuk said...

The last thing MMT backers need to do is to get into another pointless internet argument about the details of monetary operations.

Matt Franko said...

Well Brian MMT's 'taxes destroy money!' isnt reflective of the accounting either... a lot of MMT people remain confused by this imo...

Tom Hickey said...

Taxation "destroys" (reduces) M1 (spendable funds) and also reduces non-government net financial assets. The accounting is either 1) debit a customer deposit account and credit a TTL account, which doesn't affect the monetary base until the TTL account is drawn down, or 2) debit a customer deposit and debit the banks's reserve account at the cb, which does affect the monetary base.

Bank loan repayment also "destroys" (reduces) M1 but doesn't affect non-government net financial assets.

This is the law of reflux that regulates the amount of spendable funds relative to production capacity. If funds don't return in sufficient amount to their source, then spending power would increase to the point of inflation as capacity is reached. (In an open economy, domestic production would be supplemented by imports, saving to moderate inflationary pressure.)

Taxation and loan repayment serve to maintain balance between supply (production) and demand (spending power).

Matt Franko said...

If the taxation is in surplus (govt receipts exceed withdrawals) and the balances are credited to depository accounts it decreases the Leverage Ratio of the depositories perhaps to below threshold which is the only thing that matters.... (non risk assets increase the denominator)

“M”s are not regulated but the depository’s ratio of capital to total assets IS regulated...

What is regulated?

It is what is actually regulated that matters... nothing else....

The “M”s are all Monetarist stuff... I don’t even think the MMT people are that far off the mark to believe that stuff...

Calgacus said...

Well Brian MMT's 'taxes destroy money!' isnt reflective of the accounting either... a lot of MMT people remain confused by this imo...

It is perfectly "reflective" of the accounting - or even closer. Maybe it is better to say it is the accounting.

Not understanding that = confusion. Just as in bank loan repayment, it is the cancellation (destruction, netting off, aufhebung, resolution) of one credit against an opposite one.

The destruction of money by taxation is the operation of a regulation, if you want. A very important one.

I think you are saying that all that matters is the regulation of banks, and that bank money and state money are perfect equivalents. Of course they aren't.

Matt Franko said...

Taxation during intervals of surplus can result in a left side asset entry in the depository’s books ... so how is that “destroying” anything?

Use of the world “destruction” objectifies what are properly abstractions and doesn’t help the situation... it dumbs it down...

Matt Franko said...

So they can’t handle the abstraction so they objectify the issue and then when it blows up, they say stupid shit like “stability creates instability!” or “its all a big neoliberal conspiracy! “ or wtf other BS...

Tom Hickey said...

Tax payments that are deposited temporarily in a TTL reduce M1, which is the primary instance of "money" in the private non-banking sector. They do not change the amount of bank reserves until drawn on, so this doesn't affect the leverage ratio.

However, funds in the TTL accounts are no longer spendable in the economy. Reduction in bank deposits and cash in circulation means less "money" (liquid funds) available to firms and households as a result of taxation.

"Money" can serve as a higher order abstraction rather than only a metaphor or figure of speech.

The use of higher order abstraction is a serious problem in econ owing to "terminological inexactitude."

Many so-called experts cannot deconstruct this level of abstraction properly, but the MMT economists have regarding "money."

Matt Franko said...

"but the MMT economists have regarding "money."

BS....

Matt Franko said...

"Tax payments that are deposited temporarily in a TTL reduce M1,"

"M1" is not an entry on a depository's books....

Look at it this way

Day 1 govt withdrawals = govt deposits , bank deposits unchanged...

Day 2 govt withdrawals > govt deposits, bank deposits go up and Leverage Ratio falls...

Here is an old out of paradigm article on TTLs, it reveals their thinking:

https://files.stlouisfed.org/files/htdocs/publications/review/79/10/Accounts_Oct1979.pdf

Here look at what happened in January they have been whipsawing these accounts by $100s of $B last months:

https://fred.stlouisfed.org/series/CASACBW027SBOG

so this is going up and down by $300B (banks have no control over this...) meanwhile Commercial & Industrial Loans has gone up only $50B the entire year...

Which component is dominating the regulatory equation? it aint the loans....




AXEC / E.K-H said...

Tom Hickey

You say “’Money’ can serve as a higher order abstraction rather than only a metaphor or figure of speech. The use of higher-order abstraction is a serious problem in econ owing to ‘terminological inexactitude.’ Many so-called experts cannot deconstruct this level of abstraction properly, but the MMT economists have regarding ‘money’.”

You claim that MMT is particularly good at higher order abstraction. Warren Mosler, though, told us just the opposite, viz. that the strong point of MMT is superior operational knowledge “So, how am I uniquely qualified to be promoting these proposals? My confidence comes from 40 years’ experience in the financial and economic realm. I would venture that I’m perhaps the only person who can answer the question: ‘How are you going to pay for it?’ My book takes on this issue and encourages the return of economics study to the operational realities of our monetary system.”#1

Fact is that MMT suffers from schizophrenia and the Fallacy of Insufficient Abstraction. The operational details of money creation/destruction can be gleaned from the PR brochures of the FED or any other central bank. Monetary theory, on the other hand, abstracts from the operational details and gives a functional account of money as a part of what Keynes called the “monetary theory of production.” In other words, the theory of money has to be developed in the space of a GENERAL macroeconomic framework.

MMT applies the Keynesian framework. Unfortunately, MMTers have not realized that Keynes is the poster boy for the Fallacy of Insufficient Abstraction. Keynes messed macro up.#2 MMT is based on the Keynesian balances equation which is provably false. As a consequence, the whole analytical superstructure of MMT is false, i.e. scientifically worthless. Correct operational descriptions cannot compensate for mistakes of higher order abstraction.

The problem of MMT is NOT that its operational descriptions are false or miscommunicated but (i) that it is based on false macroeconomic premises, and (ii), that it suffers from debilitating ‘terminological inexactitude’ with regard to the foundational concepts profit, income, sectoral balances etcetera.#3, #4

Egmont Kakarot-Handtke

#1 Seven Deadly Innocent Frauds of Economic Policy, p. 12
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

#2 How Keynes got macro wrong and Allais got it right
https://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html

#3 See, for example, Bill Mitchell
https://commons.wikimedia.org/wiki/File:AXEC125d.png#{{int:filedesc}}

#4 See, for example, Stephanie Kelton
http://axecorg.blogspot.de/2017/12/down-with-idiocy.html

Tom Hickey said...

In a tax payment in which the payment goes temporarily into a TTL instead of being booked in the payments system, the deposit is just moved from the customer's account to a TTL. There is no change in rb as there would be if the bank's rb acct at the Fed were debit as a result of the bank's making the payment by debiting the customer act (bank liability) and the Fed debiting the bank's reserve account (bank asset). That is, unless the bank has to obtain rb from the Fed by borrowing rather than getting the rb from the existing rb in the payments system. But even then borrowing from the Fed is generally short-term.

The whole point of the TTL account is to prevent the monetary based being affected by tax payments. This provides a buffer for the Fed and Treasury to work out their respective policies, in particular, the Fed hitting its target when not paying IOER.

AXEC / E.K-H said...

Tom Hickey

You are lost in irrelevant operational details. For the axiomatically correct approach see

Fixing the loanable funds blunder
https://axecorg.blogspot.de/2017/08/fixing-loanable-funds-blunder.html

Egmont Kakarot-Handtke

Calgacus said...

Matt - I am not dumbing anything down. What I said must be true, is tautologically true as a matter of logic and definitions. You aren't being precise enough. One should usually speak of money here as X-money meaning money issued by X (and held by Y) to avoid confusion. And never identify A-money and B-money (or payments to A & B) unless one explicitly consolidates A & B.

I am talking about the final tax payment to the issuing authority, the consolidated government if you don't want to cause yourself unnecessary pain. If I give money to my accountant to pay my taxes, and he absconds to Rio with it, his assets in Rio increase. But that has nothing to do with the fact that if he had sent the money to the government, it indeed would have been "destroyed".

As Tom says "The whole point of the TTL account is to prevent the monetary based being affected by tax payments. " If taxation didn't "destroy" (I gave a list of other synonyms) money, then there would be no effect for the TTL accounts to need to buffer against, no reason for complicated operational details.

EKH: As I have said, before, I don't think you understand MMT - you are focusing on irrelevant operational & other details and mistakenly call them "foundations" and dismissing and ignoring the genuine foundations.

"MMT is based on the Keynesian balances equation"

No. It. Isn't.

Really, studying any field whatsoever, don't you think that some attention should be paid to what those in that field say are the foundations? Even if just to say that they are wrong for such and such reason? I suggest you read Mitchell-Innes & his explicators.

Just because something is written with equations and symbols doesn't mean it is mathematical or foundational or precise or abstract or axiomatic. Just because it is all in simple words doesn't mean it is not 100% pure abstract mathematics. The first is very often an easy path to make things much more complicated than they really are, while the second can be much harder reading than the first.

Matt- you often used to correctly point something similar out - the mathematical maturity in MMT. And I often said that MMTers, unlike many other economists who decorate their works with fancy symbols think like mathematicians, and I stick by that.

AXEC / E.K-H said...

Calgacus

You claim “As I have said, before, I don’t think you understand MMT ― you are focusing on irrelevant operational & other details and mistakenly call them ‘foundations’ and dismissing and ignoring the genuine foundations.

‘MMT is based on the Keynesian balances equation’

No. It. Isn’t.”

Yes, it is.

(i) Go to the head of this blog, look up the section Links, click Modern Monetary Theory-Wikipedia
https://en.wikipedia.org/wiki/Modern_Monetary_Theory

go to the section Vertical Transactions, read:

“Therefore, budget deficits add net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is widely represented in macroeconomic theory by the national income identity: G − T = S − I − NX where G is government spending, T is taxes, S is savings, I is investment and NX is net exports.”

(ii) Go to Google Images
https://www.google.de/search?rlz=1C1CHBF_deDE733DE733&biw=1600&bih=720&tbm=isch&sa=1&ei=7AlIWu7tCpDNkwXNg5KICw&q=MMT+Kelton+sectoral+balances&oq=MMT+Kelton+sectoral+balances&gs_l=psy-ab.3...67633.82223.0.82727.27.27.0.0.0.0.180.2036.24j3.27.0....0...1c.1.64.psy-ab..0.6.630...0j0i67k1j0i30k1j0i5i30k1j0i8i30k1.0.ghMwwj-DxPc#imgrc=_

Look intensively at this picture
https://www.google.de/search?rlz=1C1CHBF_deDE733DE733&biw=1600&bih=720&tbm=isch&sa=1&ei=7AlIWu7tCpDNkwXNg5KICw&q=MMT+Kelton+sectoral+balances&oq=MMT+Kelton+sectoral+balances&gs_l=psy-ab.3...67633.82223.0.82727.27.27.0.0.0.0.180.2036.24j3.27.0....0...1c.1.64.psy-ab..0.6.630...0j0i67k1j0i30k1j0i5i30k1j0i8i30k1.0.ghMwwj-DxPc#imgrc=Gog1FAtTd0pShM:

focus first on the sectoral balances formula, then take notice of the MMT actors.

Conclusion: The sectoral balances equation is tattooed on the forehead of every MMTer. It is provably false. Because of this, the rest of MMT is false. For a pertinent example see on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC131.png

There is NO miscommunication of MMT. The whole is genuine proto-scientific garbage.

Egmont Kakarot-Handtke

Six said...

Egmont,
The sectoral balances equation is not provably false and is not tattooed on anyone’s forehead. Grow the fuck up.

AXEC / E.K-H said...

Six

You say “The sectoral balances equation is not provably false and is not tattooed on anyone’s forehead.”

Warren Mosler, founder of MMT, says “Deadly Innocent Fraud No.3: Federal Government budget deficits take away savings. Fact: Federal Government budget deficits ADD to savings.” Or “Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us ― businesses and households, residents and non residents ― what is called the ‘non government’ sector. In other words, government deficits equal increased ‘monetary savings’ for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”

This “accounting fact” is no fact at all because you and the founding fathers/mothers of MMT and the rest of the MMT crowd is too stupid for the elementary mathematics of accounting.

You claim that what is presented on Wikipedia and all over the econoblogosphere by the spokespersons of MMT is actually not MMT but you cannot tell what the foundational propositions of MMT are.

Note that proposing better healthcare, education, full employment etc is NOT economics but politics and that the insight that the state can pay for everything by printing money is NOT exactly new “Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by political economy a branch of the science of the statesman or legislator, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt trough the conquest of her colonial Empire.” (Halévy)

The only thing that is new with MMT is to justify deficit spending, which had worked so fine for centuries in the military realm, for the social realm and to conceal the accounting fact that Public Deficit = Private Profit, no matter on what the printed money is spent on.

The mission of MMT is to lobotomize the general public (Debt does not matter) by promising social goodies. MMT is NOT economics and NOT a scientifically valid theory but a marketing relaunch of the age-old policy of stealth taxation/profit boosting.#1, #2

Egmont Kakarot-Handtke

#1 Keynes, Lerner, MMT, Trump and exploding profit
http://axecorg.blogspot.de/2017/12/keynes-lerner-mmt-trump-and-exploding.html

#2 MMT, money printing, stealth taxation, and redistribution
http://axecorg.blogspot.de/2017/11/mmt-money-printing-stealth-taxation-and.html

Six said...

Egmont,

Nothing you said proves the sectoral balances equation is false. In fact, you seemed to endorse it:

“the accounting fact that Public Deficit = Private Profit ...”

This is not some great new revelation, by the way. I studied it in the 80s and it was old news at the time.

AXEC / E.K-H said...

Six

You say “’the accounting fact that Public Deficit = Private Profit ...’ This is not some great new revelation, by the way. I studied it in the 80s and it was old news at the time.”

I wonder why you have not told this Warren Mosler, Stephanie Kelton, Bill Mitchell, Tom Hickey, Calgacus and the rest. They still suffer from the hallucination that Public Deficit = Saving of the private/non-government sector: “Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.” (Mosler)#1

It seems that the old news of the 80s has not yet reached the MMTers. These dull folks are 40+ years behind the curve.

Egmont Kakarot-Handtke

#1 See also Mitchell
https://commons.wikimedia.org/wiki/File:AXEC131.png