tag:blogger.com,1999:blog-2761684730989137546.post3446981021848111670..comments2024-03-29T02:19:19.866-04:00Comments on Mike Norman Economics: Vincent Cate — CMMT - Cate's Modern Monetary Theorymike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger195125tag:blogger.com,1999:blog-2761684730989137546.post-39050479127731876982014-10-01T16:39:56.617-04:002014-10-01T16:39:56.617-04:00Do you agree that CMMT makes a testable hypothesis...<i>Do you agree that CMMT makes a testable hypothesis for hyperinflation?</i><br /><br />No, because it overlooks significant causal factors.<br /><br />It may be a necessary condition in that hyperinflation can't occur without government increasing the amount of currency but it may not in that turnover of the existing supply could greatly increase, or the amount of credit credit could vastly increase, since deposit accounts include deposit entries created by loans.<br /><br />It is certainly not a sufficient reason, since other factors need to be present as well, e.g., Y cannot rise commensurably with the increasing product of M and V.<br /><br />The fiscal position of a country can affect, as well as its monetary policy can affect the relative value of the currency and it is possible that currency aversion could take place because of the fiscal aspect. But a currency would have to become relatively worthless to provoke hyperinflation.<br /><br />I understand CMMT to be saying that if MV increases faster than Y then P will increase, which being an identity is simply a description of flow, and that if MV accelerates without Y also accelerating, it will lead to hyperinflation at some point. That is obvious and no one denies it. But how to interpret that is at issue, as I and others have been saying in this thread.<br /><br />The fact is that there is plenty of financial wealth easily convertible into spendable funds already in existence to create high inflation if the propensity to consume suddenly shifted relative to the propensity to save. And there are people who are concerned about this, too. Who wants to be holding financial assets denominated in a currency if high inflation looms. This leads to capital flight, high inflation, balance of payments issues and in weak nations can even lead to hyperinflation.<br /><br />But all this involves many factors and coming up with risk analysis based on probability functions is difficult to impossible. <br /><br />Of course, one can take a Bayesian approach and plug in subjective estimates and change them as conditions change. This is in essence what most people do heuristically and intuitively, if not formally.<br /><br />At a certain point the estimates shift upward in a shorter and shorter time frame and people head for the doors, setting off a stampede. <br /><br />But that is a general description that needs to be applied in context and context shapes the estimates (expectations), which are subjective.<br /><br />Most sophisticated participants, the big money, look at market behavior as the indication of the best available indication, presuming it to be rational and efficient. But booms and busts, and bubbles contradict that.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-36287301104533910062014-10-01T16:01:17.215-04:002014-10-01T16:01:17.215-04:00" When MMT says the CB buying bonds is "..." When MMT says the CB buying bonds is "just an asset swap".... that shouldn't be at all controversial. "<br /><br />When MMT people say this they mean it is not inflationary. In CMMT if it does not end up as excess reserves, it is inflationary. The reality of hyperinflation matches with CMMT.<br /><br />"Your scenario also implicitly assumes that the bond holders rule and if they demand higher interest rates they will be accommodated."<br /><br />I don't think so. In Japan I think bond holders are not happy with the interest rates and so are not rolling over their bonds. The central bank is able to buy bonds fast enough to keep interest rates down so far.<br /><br />"1) Savers suddenly decide to be consumers"<br /><br />When someone sells a JGB they don't have to become a consumer, they could just invest in something else. However, if they are investing in assets in Japan they are inflating those prices. If they invest outside of Japan they will tend to lower the value of the Yen, which over time will be inflationary. So even if they don't consume they extra money made to buy their JGB ends up contributing to inflation.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-27859190072987509762014-10-01T15:50:00.718-04:002014-10-01T15:50:00.718-04:00"It's very difficult formulating testable..."It's very difficult formulating testable hypotheses in social science, including economic because there are so many subjective factors involved."<br /><br />Do you agree that CMMT makes a testable hypothesis for hyperinflation?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-59377344671364193502014-10-01T14:31:14.813-04:002014-10-01T14:31:14.813-04:00"In CMMT hyperinflation is not due to ignoran..."In CMMT hyperinflation is not due to ignorance and irrationality. In mine it makes sense."<br /><br />You say that but earlier you admitted that if the Japaneses never panic there won't be hyperinflation.<br /><br />Hyperinflation IS a panic. Its too many people wanting to be on one side of a trade for fear they will lose everything if they don't get rid of what they have.<br /><br />I in no way shape or form can speak for MMT but in my understanding about what it teaches I think I can address this;<br /><br />"If over the next year the Japanese central bank monetizes bonds at a faster rate as people get out of Bonds and Japan has inflation spiralling out of control, would that contradict MMT and "it is just an asset swap"?<br /><br />Short answer.... No!<br /><br />Its kind of a weird question to be honest. When MMT says the CB buying bonds is "just an asset swap".... that shouldn't be at all controversial. They take one type of asset (a bond) and swap it for cash.... another type of asset. Actually cash is the wrong word since that implies paper money but I think you know what the MMT argument about the assets are. <br /><br />Now you and many many others believe that somehow these people who had bonds and now have cash are suddenly going to become consumers instead of savers (They were obviously saving with bonds no?). That is a necessary step in your theory is it not? Certainly you would concede that if all the bond holders just decided to save in a 0% interest vehicle instead of a 1% interest vehicle that nothing of note would change, except interest income to the private sector.<br /><br />So what I think you must explain is how your theory can incorporate two necessary conditions<br /><br />1) Savers suddenly decide to be consumers<br /><br />2) Sovereign CBs give up interest rate control<br /><br />Your scenario also implicitly assumes that the bond holders rule and if they demand higher interest rates they will be accommodated.<br /><br />What about monetizing their bonds at a faster and faster rate in and of itself, leads to inflation? Someone still has to decide to spend the fruits of the monetization. A real person has to decide to take money and go buy a consumption good and be willing AND able to pay higher and higher prices. Money doesn't spend itself. <br /><br />MMT has never said hyperinflations aren't possible but it does suggest that when you are truly in control of your currency and you have a productive economy (with room to increase production) the odds are extremely low. It will unlikely be the result of spending too much money on healthcare or transferring the equivalent of 1% of GDP to poor people.<br /><br /><br />Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-60648326908872812202014-10-01T14:19:13.889-04:002014-10-01T14:19:13.889-04:00In CMMT hyperinflation is not due to ignorance and...<i>In CMMT hyperinflation is not due to ignorance and irrationality. In mine it makes sense.</i><br /><br />Yes, and that is a problem with it from a Keynesian POV. Social sciences, including econ, are not natural sciences. And in finance, bubbles and panics are generally characterized by irrational behavior, either irrational confidence driven by expectation of gain and irrational Angst driven by fear of loss.<br /><br />Could events in Japan lead to a loss of confidence that result in sudden extreme yen aversion? Whatever is not logically impossible is possible. But then the question is one of probability and risk. What is the probability function? Or is uncertainty to great to formulate one? Then it is just guessing at likelihood subjectively.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-68391944415561047172014-10-01T14:07:47.704-04:002014-10-01T14:07:47.704-04:00Vince, theories are neither true nor false, confir...Vince, theories are neither true nor false, confirmable or falsifiable. Hypotheses generate as theorems from the axioms/postulates are, and in economic modeling the starting points are assumptions, which may not be inductive (empirically based) but rather based on a formal system like accounting, institutional arrangements, or taken as self-evident.<br /><br />It's not always simple to state hypotheses and check them rigorously, as medical research shows for example.<br /><br />I have given a reason why the Japan bond situation is not a hypothesis that actually test MMT claims about monetary operations, since there are expectations and behavioral factors that are more causal than the operations themselves, that is, people misconstruing causality because they subscribe to a wrong theory.<br /><br />It's very difficult formulating testable hypotheses in social science, including economic because there are so many subjective factors involved. If it were simple, social science and psychology would have evolved theories as normal paradigms defining research and identifying the boundary conditions at the cutting edge that need further investigation. Instead, the social sciences lack normal paradigms and there is a lot debate over foundations, assumptions, and modeling, in addition to issue with data collection and handling.<br /><br />The issue over whether MMT operational description of bonds and reserves as asset swaps is a matter of how the accounting is interpreted.<br /><br />The other issue, which involves causality, is the interpretation of the identity MV = PY, as I have already said. Specifically, M in this identity is the money spent times the turnover must equal NGDP. The money that is used for spending is the money available for spending less the amount unspent, that is, saved. This varies with the changing ratio of saving/spending desire.<br /><br />If funds available for spending increase and the saving/spending ratio shifts and so does velocity then NGDP can increase or decrease quickly. Saving/spending desire is influenced strongly by expectations and expectations are influenced by subjective and objective factors. Subjective factors can be and often are wrong, that is, deviate from the actual implications of changing objective factors due to a misapprehension of causality.<br /><br />Where MMT could be called into question as a theory is regarding its major imputations of causality, which involve SFC modeling based on sectoral balances, as well as consequences of applying functional finance. But macro situations are often so complex as to make rigorous hypothesis formulation and testing difficult. If this were not the case, economic would undisputedly be science similar to the natural sciences, and there would no longer be clashes of different POV's.<br /><br />There would also be less polarity in finance, where parties take different sides of trades. If outcomes were highly predictable based on a single dominant theory that always generated positive results, who would take the other side?Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-30580924036107209382014-10-01T13:07:13.170-04:002014-10-01T13:07:13.170-04:00"Ignorance is also a factor in behavior, and ..."Ignorance is also a factor in behavior, and irrationality induced by fear in a panic."<br /><br />In CMMT hyperinflation is not due to ignorance and irrationality. In mine it makes sense.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-38313937101043557282014-10-01T13:01:46.087-04:002014-10-01T13:01:46.087-04:00"No, that scenario doesn't contradict MMT..."No, that scenario doesn't contradict MMT. It would simply show that markets and people don/t understand monetary operations."<br /><br />Tom, if nothing contradicts MMT then it is not acting like a scientific theory. It also is not making predictions if nothing that happens can go against it. <br /><br />Maybe it is MMT that does not understand monetary operations?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-62524018071364866352014-10-01T09:04:55.721-04:002014-10-01T09:04:55.721-04:00No, that scenario doesn't contradict MMT. It w...No, that scenario doesn't contradict MMT. It would simply show that markets and people don/t understand monetary operations. Like widespread misinterpretation of the effects of QE resulting in inflation in the US because the Fed was "printing money" and the monetary base was rising. Ignorance is also a factor in behavior, and irrationality induced by fear in a panic.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-72003325000611927432014-10-01T07:07:41.967-04:002014-10-01T07:07:41.967-04:00If over the next year the Japanese central bank mo...If over the next year the Japanese central bank monetizes bonds at a faster rate as people get out of Bonds and Japan has inflation spiralling out of control, would that contradict MMT and "it is just an asset swap"?<br /><br />Assume there are no new natural disasters or "supply shocks" or wars. Would hyperinflation in Japan prove MMT wrong?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-41962415704295570702014-10-01T07:02:59.786-04:002014-10-01T07:02:59.786-04:00"How about if there isn't ever a panic? &..."How about if there isn't ever a panic? "<br /><br />Yes, if Japan keeps running a high deficit and people never get out of bonds that would also contradict my theory.<br /><br />What sorts of things happening in Japan would contradict MMT?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-8544296629998067592014-10-01T06:01:00.222-04:002014-10-01T06:01:00.222-04:00"Greg, if there is a panic out of Japanese bo..."Greg, if there is a panic out of Japanese bonds and it did not cause inflation or change the value of the Yen, that would contradict my theory"<br /><br /><br />How about if there isn't ever a panic? Hyperinflations as you describe them, require a panic. Seems to me that people will panic ONLY if they sense a supply problem, not just because there are "too many" bonds out there. If people are scared they won't be able to get the food they need, or some other necessity, there will be a panic. Seems to me panics are in response to real factors not financial ones.<br /><br />You do some great math to show how these factors could in theory work together and result in a currency crash. I think you underestimate what other factors can work to keep it from happening. Lots of people have great interest in keeping things relatively stable and banks can and will do a lot of things to keep your scenarios from happening. <br /><br />There can be small panics that can get out of control for short periods in relatively small currency areas but I think cooler heads would prevail in the event of some world crashing event you describe. Too many people stand to lose too much. <br /><br />Any hyperinfaltion in a large and important currency area will be because someone is trying to profit not just because some govt is providing too much health care or transfers to its citizens. It will be a choice not an accident.... in my view.<br />And the larger the area they try to bring down the more resistance there will be.<br />Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-55929589120284160812014-09-30T11:59:08.850-04:002014-09-30T11:59:08.850-04:00"Do you ignore productive capacity?"
No..."Do you ignore productive capacity?"<br /><br />No, productive capacity going down is always part of the cycle. You can see it in my description with the equation of exchange and in my simulation. Government's increase taxes (like Japan has done) and it hurts the economy. They put in price controls when inflation gets high and it hurts the economy. But it does not work as a general explanation for hyperinflation for several reasons. First, hyperinflation needs a government spending much more than it gets in taxes but this is often not because taxes have gone down. Second, there is clearly a death spiral to hyperinflation. You get factors of 10, 100, and 1000 in prices. Even if the real economy were to cut in half that only justifies a factor of 2 change in price, not an ongoing spiral. Also, the same shock that can tip one country into hyperinflation would not tip another. So the real explanation of what is going on is in the spending far more than taxes and being forced to print money when nobody is buying the bonds. This is the key. <br /><br />http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html<br />http://howfiatdies.blogspot.com/2013/03/simulating-hyperinflation.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-56886520923822816742014-09-30T11:52:32.437-04:002014-09-30T11:52:32.437-04:00"Oh, the global collapse scenario due to fiat..."Oh, the global collapse scenario due to fiat money. Right. "<br /><br />It seems like you can sort of see how the Yen may collapse but you find it ridiculous that the Dollar, Euro, and Pound could collapse if these are printed to try to prop up the Yen? Domino things like this happen. I hope they are not so foolish as to risk their currencies to try to make up for Japan's deficit spending. We will see.<br />Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-57761185299572838682014-09-29T16:09:51.195-04:002014-09-29T16:09:51.195-04:00VC,
Do you ignore productive capacity?
Somethin...VC,<br /><br />Do you ignore productive capacity?<br /><br /> Something I've often heard about the various hyperinflations is that they all occurred in regions where either productive capacity was destroyed, or it was appropriated to people who weren't skilled to utilize it, or political uncertainty lead to a lack of trust in the governing institutions, etc. or combinations of these and other things.<br /><br />The money printing correlation to hyperinflation ends up being a "monetary" reaction to a "real" situation. Money printing exacerbates hyperinflation, but does cause of it.<br /><br />What too much money printing can do - so long as the these dangerous "real" factors are not present (so no hyperinflation) - is higher price level inflations either from too much aggregate demand, or price level inflation from exchange rate devaluations.JKhttps://www.blogger.com/profile/10304508322452669073noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-79852171234866851642014-09-29T11:32:37.797-04:002014-09-29T11:32:37.797-04:00Oh, the global collapse scenario due to fiat money...Oh, the global collapse scenario due to fiat money. Right. Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-17058687668860254872014-09-29T10:06:28.378-04:002014-09-29T10:06:28.378-04:00"If a sudden panic developed that threatened ..."If a sudden panic developed that threatened to destabilize Japan, then the other developed countries with a stake in global stability would likely arrange currency swaps and other stabilizing measures to counter market forces."<br /><br />If the other developed countries print money and buy up yen the quantities needed are so large that they risk destabilizing their own currencies. Imagine the US, UK, and EuroZone start printing money and buying yen. A smart macro investor then shorts those currencies and buys real things or gold and silver. The more they do this, the more those 3 currencies will also go down. And if there is a rush to get out of bonds in those 3 countries then they get hyperinflation too.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-29395269917732572202014-09-29T09:21:09.495-04:002014-09-29T09:21:09.495-04:00When bonds are sold in the market and bought by th...When bonds are sold in the market and bought by the cb, banks' reserve accounts are marked up in the payments system. In quantity this generates excess reserves that will drop the policy rate unless the cb pays interest on excess reserves to set the policy rate.<br /><br />The distribution of sellers determines which accounts the banks receiving the reserve balances. Bonds owned by banks increase the reserve balances of the banks and are not credited to deposit account that count toward M1. Bonds owned by non-bank sellers increase the deposit accounts of these sellers and add to M1.<br /><br />Non-bank owners of bonds include pension funds, hedge funds, money market funds, corporations and private individuals. All but some private individuals can be expected to seek other savings vehicles, presumably "safe assets." This would increase the price of other non-Japanese government securities. However, if inflation where perceived as increasing the value of equities the Nikkei would also benefit, as would real assets like real estate. <br /><br />There is reason to assume that either firm investment or private domestic consumption would balloon, resulting in a continuous rise in the price level. That would require a shift in the propensities to save/spend.<br /><br />So what could be expected is a shift from saving in Japanese government bonds to other assets in Japan or the rest of the world. Capital flight from Japan would devalue the yen, making imports more expensive, which in an energy importing country could translate into a rise in the price level from the supply side.<br /><br />If there were a flight from the yen, the the value of the currency would fall relatively to other strong currencies in the fx market, such as the USD and euro. This would give Japan an export advantage so the Fed and ECB would defend their currencies from rising too rapidly by supporting the yen. Japan also has large foreign exchange reserves to do the same.<br /><br />If a sudden panic developed that threatened to destabilize Japan, then the other developed countries with a stake in global stability would likely arrange currency swaps and other stabilizing measures to counter market forces.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-70470866148093498932014-09-29T04:59:41.974-04:002014-09-29T04:59:41.974-04:00Greg, if there is a panic out of Japanese bonds an...Greg, if there is a panic out of Japanese bonds and it did not cause inflation or change the value of the Yen, that would contradict my theory. If there is lots of this "just an asset swap" and the value of the Yen goes down and they get high inflation, would that contradict MMT or will people just find some other explanation for once again the currency dropping and inflation as a big debt is monetized? I am assuming here it does not just end up as excess reserves, because CMMT agrees that excess reserves are just like bonds so that would be "just an asset swap". The interesting case is where MMT and CMMT differ. I bet that is what Japan gets.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-13336812873389849472014-09-28T18:01:40.993-04:002014-09-28T18:01:40.993-04:00Greg, another way to look at it.
If you put an op...Greg, another way to look at it.<br /><br />If you put an open can of gas next to a fire we can tell there is a risk of a dangerous chain reaction without being able to tell you exactly which spark will set it off. It is still good to understand this and explain it to your kids.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-13280030077530733312014-09-27T21:59:19.936-04:002014-09-27T21:59:19.936-04:00As for what would disprove it. I am saying it is ...As for what would disprove it. I am saying it is a positive feedback loop, that feeds on itself and grows. If the Japanese start getting out of bonds, and then suddenly stop when they are still holding them, that would go against my theory.<br /><br />What could Japan's inflation or hyperinflation do that would disprove MMT?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-67043589167491543502014-09-27T21:53:59.412-04:002014-09-27T21:53:59.412-04:00Greg, understanding the chain reaction of a volcan...Greg, understanding the chain reaction of a volcano or other positive feedback loop thing is not too hard (see link below for many). Predicting the timing is a much harder thing if possible at all. On its own, CMMT just helps you understand what is going on. This is similar to the descriptions of the other positive feedback loop phenomenon in the link. But CMMT does this much better than MMT in the case of hyperinflation.<br /><br />http://www.howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-67560123393262452672014-09-27T19:51:54.377-04:002014-09-27T19:51:54.377-04:00So would the absence of hyperinflation in Japan wi...So would the absence of hyperinflation in Japan within the next twelve months be a a huge strike against CMMT Vince?<br /><br />Tell us what would disprove CMMT.Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-32171671810450748582014-09-27T13:25:53.461-04:002014-09-27T13:25:53.461-04:00"The MMT position remains strong."
I am..."The MMT position remains strong."<br /><br />I am really a single issue guy. I am just fascinated by hyperinflation. I don't really argue other issues so won't try to even weigh in on how MMT does on other issues. However, on hyperinflation I think CMMT is an improvement over MMT. But I might be biased. :-)Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-69192624045126596722014-09-27T11:38:11.221-04:002014-09-27T11:38:11.221-04:00Domestic private balance (spending power times pro...Domestic private balance (spending power times propensity to consume and invest) plus government balance plus the current account balance = NGDP = PY.<br /><br />Changes in the amount of domestic private consumption are just one factor affecting flow in an income and expenditure model, and what happens wrt to the all factors interacting dynamically is determinative of changes in NGDP and price level.<br /><br />Swapping bonds for funds in banks' rb and customer deposit accounts doesn't increase income and doesn't increase spending power over what it was previously. In fact, it reduces interest income that would have been paid. So in this sense it is deflationary.<br /><br />Holding other factors constant by assuming cet par implies that increasing consumption will increase prices, but all factors don't remain equal. So there are many possible scenarios that have to be taken into consideration.<br /><br />The MMT position remains strong.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.com