Thursday, June 6, 2019

Robert Dugger - Modern Monetary Inevitabilities

For all the talk of Modern Monetary Theory representing a brave new frontier, it is easy to forget that the United States has gone down this road before, when the US Federal Reserve financed the war effort in the 1940s. Then, as now, the question is not about government debt, but about the debt’s purpose and justification.

An excellent, concise article on MMT. 

In his book Principles for Navigating Big Debt Crises, Dalio documents the steps that central banks have historically taken when faced with a booming economy that suddenly crumples under the weight of debt. The first step (Monetary Policy 1, or MP1) is to cut overnight official rates to stimulate credit and investment expansion. The second (MP2) is to buy government debt (quantitative easing) to support asset prices and prevent uncontrollable waves of deleveraging. If MP1 and MP2 are insufficient to halt a downturn, central banks take step three (MMT, which Dalio calls MP3) and proceed to finance the spending priorities that political leaders deem most essential. The priorities can range from financing major national projects to “helicopter money” transfers directly to consumers.

New Economic Thinking


André said...

"But Galbraith does not explore what is perhaps the most important issue of all: the political conditions needed to implement MMT effectively."

Bill Mitchell says it again and again: you do not implement MMT, as MMT isn't something to be implemented. It is a lens to see the world how it already is.

It is as if you suddenly realise that the Earth is round, and flatearthers start going mad. They would say "the world you explode if you implement a round world" - well, surprise surprise, you cannot "implement" a round earth, you already live on it!

Ralph Musgrave said...

Andre: MMT isn't JUST a lens. It also involves running deficits (with the occasional surplus perhaps). Thus someone has to actually decide on the size of the deficit and get on and spend the relevant money.

That's not just a lens: it consists of actually doing something. And Robert Dugger's point (which is a very good one) is that MMTers are not too good at explaining exactly how politicians are to be made to spending the right amount.

André said...

"MMT isn't JUST a lens. It also involves running deficits".

Nope. Just read what Bill Mitchell, Warren Mosler, Randy Wray, Setphanie Kelto and etc write over and over again.

No matter whether you run a budget deficit or surplus, you are still in a MMT world, where the government isn't similar to a household, and taxes drive money and so on. Without doing a thing people would still be living in a MMT world, you cannot "change" it or act to exit from our current world and enter a "MMT world".

"MMTers are not too good at explaining exactly how politicians are to be made to spending the right amount". But that is the whole point of the JG policy proposal! Politicians create a JG and spending will automatically get to the right amount.