Monday, February 20, 2012

Michael Hudson comments on Dylan Matthews MMT post

Dear Stephanie at al.,
    I was appalled at the ignorant article in the Washington Post on MMT. It repeated the usual canards.
Most serious are the following:
With it (a federal budget deficit), inflation would rise, and so would the prospects of hyperinflation. Me: No. Look at the mental switch here: Inflating BOND prices by bidding them up (thus lowering interest rates) is assumed to inflate CONSUMER prices and COMMODITY prices. But interest rates are an ELEMENT of price, so this element of their cost comes DOWN.
            The past 30 years – since interest rates peaked at over 20% in 1980 – have seen the largest bond market rally in history. But consumer and commodity prices have NOT followed suit.
            The Bailout created the greatest jump in public debt in American history. But again, consumer prices and wages did NOT rise. The aim of the bailout was to support the price of real estate, and especially that of packaged junk mortgages.
            That is the basic failure of MV=PT. The “P” refers to consumer prices. Where are asset-prices? Where is the role of asset-price inflation? There is no market in financial securities, no WEALTH in the junk-Keynesian, crypto-neoclassical view of Samuelson etc. He is applauded precisely for NOT understanding that there is a financial sector and that 99% of money is spent on financial instruments (bonds, mortgages, packaged bank loans, stocks, and now derivatives). He focuses on 1% of the money supply, and acts as if the economy indeed still operates on barter.
            But even in the Stone Age and Bronze Age it operated on credit, not barter. So we are not even talking of an anachronistic theory here, but a parallel universe that never existed – and when you think about it, never COULD have come into being. I think Milton Friedman once said that his theory really would work only for a Communist economy – that is, one without speculation in financial claims on wealth.
             “You can’t just fund any level of government that you want from spending money, because you’ll get runaway inflation and eventually the rate of inflation will increase faster than the rate that you’re extracting resources from the economy,” says Karl Smith, an economist at the University of North Carolina. “This is the classic hyperinflation problem that happened in Zimbabwe and the Weimar Republic.”
Me: Wrong again. The Weimar inflation stemmed from the balance of payments. The Reichsbank created deutsche marks and threw them onto the foreign exchange markets to raise the money to pay reparations to the Allies (who turned around and paid the United States for arms purchases made prior to U.S. entry into the Great War).
    These issues may come up in Italy — or are they too complex for the audience, Paolo?
Michael Hudson


Matt Franko said...

"I was appalled at the ignorant article in the Washington Post on MMT."

I wonder how he feels about the many so-called "progressive" responses to it?


Ben said...

There's another response here from Matt Yglesias - "Inflation Denialism":

FFS as we say in the UK

Matt Franko said...


Looks like Yglesias is another faux Progressive. He values "wealth preservation" over employment with his primary focus on his view of so-called "inflation". Must be auditioning to ghost write for a goldbug newsletter...

And he looks younger than I am and I in no way think I was old enough to have observed accurately what was happening in the 1970s.

How the hell does he know what was going on back then? Does he have a time machine?

He looks at some FRED chart that isolates one variable, takes a narrow set of data and thinks that is enough to tell him how to dictate our entire US fiscal policy when we have 10s of millions of unemployed? What a moron!

No value added.