The crisis has given rise to a range of new ideas and theories to replace the discredited view of the economy. The newest and most imaginative of these is known as Modern Monetary Theory (MMT) and is one of the first theories to owe its growth to the internet. Without a doubt MMT is radical and completely turns established economic thinking on its head. If it is correct then it would change the way we think about the economy forever.
As surprising as it may seem to an ordinary person, economists rarely discuss money or banking, the two topics that most come to mind when one thinks of economics. This is because most of mainstream economics has its roots in the 19th century when the financial sector was tiny and money was not seen as important (to the extent that economists would imagine barter economies for simplicity). MMT is the first theory to recognise the importance of the massive growth in the financial sector and the fundamental role money plays in the economy (especially since it is no longer backed by gold). It addresses head on the idea that perplexes most ordinary people, how is that paper money with no intrinsic value of its own is so valuable and how are banks able to create money “out of thin air”?
What Is Modern Monetary Theory?
Robert Nielsen
(h/t Clonal in the comments)
Not a good explanation of MMT, but at least MMT is being recognized as a player.
Much of the posts is a summary of Nielsen's previous exposition of hyperinflation as unrelated to government spending or "money printing," with which MMT economists would agree, of course.
The closer is pretty good though. :)
Robert Nielsen
(h/t Clonal in the comments)
Not a good explanation of MMT, but at least MMT is being recognized as a player.
Nor are higher interest rates a worry. This is because printing money increases the level of reserves in a bank which then has to offer a lower interest rate in order to lend out all this extra money. So contrary to a higher interest rate, MMT claims it would receive a lower interest rate and cites Japan as an example of a country with enormous levels of debt and low interest rates.That a real howler.
Much of the posts is a summary of Nielsen's previous exposition of hyperinflation as unrelated to government spending or "money printing," with which MMT economists would agree, of course.
The closer is pretty good though. :)
Trying to understand Modern Monetary Theory is a bit like the first people trying to understand flying. No matter how many logical arguments are made, something in your gut tells you it can’t be true. How could an aeroplane possibly stay in the air despite weighing so much? How could it not crash despite going at such speed? Can we really trust the pilot not to make a mistake? How can the government print all the money it needs? Are taxes really that irrelevant in funding the government? Can we really trust the government not to mess up? In many ways MMT seems too good to be true. However, if it does work then it would be the miracle theory we have all been searching for. It’s so crazy, it might just work.
19 comments:
"Nor are higher interest rates a worry. This is because printing money increases the level of reserves in a bank which then has to offer a lower interest rate in order to lend out all this extra money. So contrary to a higher interest rate, MMT claims it would receive a lower interest rate and cites Japan as an example of a country with enormous levels of debt and low interest rates.
That a real howler."
Actually he is right. Banks with 'excess' reserves will try to lend out those excess reserves, and this will drive down the interbank lending rate, when the banking system as a whole has an excess of reserves due to 'money printing' by the CB.
There is nothing crazy about MMT. Is just most people have idealized the concept of "money" to a point they can't logically think about the concept matter.
If you aknowledge that money is an human invention and it's 'produced' by humans thought the use of law and institutions there is nothing weird about it.
But because people is stuck with magical thinking that money comes from "somewhere" in mother natrue and has to be "worked for" (generalizing micro behaviour to macro systems functioning) MMT seems crazy to some.
In this was is not 'intuitive' just like general relativity is not intuitive; until you can think clearly about it, then it makes perfect sense.
TL;DR: Learn to logic and think objectively about stuff. Detached from your own emotional impulses about whatever you are thinking about.
This has been linked to before hasn't it?
"something in your gut tells you it can’t be true."
I submit that for US, something in OUR "gut" tells US it IS true...
This is the key difference between "US" and "THEM".
I further submit that WE do NOT obtain this knowledge thru "creative thinking", WE have been just given to KNOW it...
someone just TELLS us (in my case Warren on Mike's show some years back...) and WE just BELIEVE it...
As opposed to pretty much everyone else on planet earth....
How do we get thru to these people who apparently have to "learn" this?
When WE did not have to "learn" this? We were just told this and believed it...
rsp,
Ignacio,
These simple truths we are asserting are in NO WAY as complicated as something like General Relativity (which may or may not be "true" btw...)
One either thinks "we're out of money" or one does not imo...
WE DO NOT.
rsp,
"What is Modern Monetary Theory"
Simple arithmetic applied to a real-world monetary system and it's interaction with an economic system.
This has been another edition of "simple answers to simple questions".
Paul,
This takes like 10 minutes to figure out...
rsp,
Actually he is right. Banks with 'excess' reserves will try to lend out those excess reserves, and this will drive down the interbank lending rate, when the banking system as a whole has an excess of reserves due to 'money printing' by the CB.
If the Fed were not conducting monetary policy using either OMO to regulate the level of excess reserves or paying IOR. The cb sets the rate, not the banks.
Yes, it was posted on Sep 8 and put up here then.
Ok, dumb question:
If reserves never circulate outside of banks, how are they loaned out?
Ok Tom thought I was going mad :)
Katie,
they are only "loaned out" to other banks who are short of required regulatory reserve levels..
"loans create deposits" but, if the deposits end up in a bank other than that which made the loan, then the lending bank has to "borrow the reserves" from the bank that has received the deposit balances... in order to meet regulatory reserve ratios...
rsp,
"If reserves never circulate outside of banks, how are they loaned out?"
bank reserves are basically just cash, i.e. currency. You have two types of bank reserves: physical cash held in bank vaults, and deposits at the Fed. Desposits at the Fed are basically just cash in electronic form.
When people withdraw cash from their bank, bank reserves go down and the amount of cash in circulation outside banks goes up.
This guy Nielson after what i understand of his presentation is a young student,and it seems he in an honest way try find out what economics is all about.No one could expect he should be a Randy Wray or Bill Mitchell after some first time reading.But he is worth some encourage for his efforts,no matter if he do some minor errors.
bank reserves are basically just cash, i.e. currency. You have two types of bank reserves: physical cash held in bank vaults, and deposits at the Fed. Desposits at the Fed are basically just cash in electronic form.
When people withdraw cash from their bank, bank reserves go down and the amount of cash in circulation outside banks goes up.
This is the best way to see in my view. Banks and governments deal in the highest form of money in the hierarchy of money with currency at the top in a non-convertible floating rate regime.
The rest of us get to deal mostly with credit, which is why in a time of uncertainty many people "cash out," creating cash flow issues and declining nominal prices. If these nominal prices are attached to assets, then debt-deflation on leveraged assets.
This guy Nielson after what i understand of his presentation is a young student,and it seems he in an honest way try find out what economics is all about.No one could expect he should be a Randy Wray or Bill Mitchell after some first time reading.But he is worth some encourage for his efforts,no matter if he do some minor errors.
Point taken. Thanks.
Tom,
also the reason reserves don't tend to leave the banking system in aggregate, is because when currency is withdrawn from a banks it inevitably gets redeposited soon after. There is a certain amount of currency which is perpetually held outside the banking system, but this doesn't vary much.
I think that if there was a large mass withdrawal of currency by the public from the banking system as a whole (a bank run), bank deposit interest rates would probably rise to attract people to redeposit the currency. What do you think?
y, depends in context. In a contraction with lending low, banks wouldn't need to attract much by way of deposits and it really doesn't make any difference to them whether the deposit settled in cash or reserves received from another bank.
Public holding of cash in this contraction is high, but it hasn't resulted in higher interest rates on deposits to attract it. Demand for loans is low and the overnight rate is negligible. So banks don't feel the need to offer higher rates on deposits and give out free toasters.
Free toasters. The solution to any bank run.
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