Modern Monetary Theory, very simply, looks at how the government spends. How the government spends, how it interacts with the central bank. How the central bank interacts with the Treasury, interacts with the banking system. So the first part of MMT is really descriptive. It’s how the system actually works. In the second part of MMT, they have policy conclusions, which you can debate one way or the other, but the descriptive work is what I find most valuable.
This is because for most people, the way they think the system works, it’s not the way the system actually works.…
The Daily Reckoning
The Number One Misconception About the Banking System — and Why You Should Care
Chris Mayer | managing editor of the Capital and Crisis and Mayer's Special Situations newsletters
QE is only deflationary through the interest channel if government spending shrinks as the interest channel shrinks.
ReplyDeleteIf government spending stays the same, i.e. the lack of interest payments/higher bond yields releases the pressure on government to be 'austere' then there is no deflationary impact - just a redistribution from interest earners to those receiving govt spending/tax cuts.
"Modern Monetary Theory, very simply, looks at how the government spends."
ReplyDeleteNOT...TRUE...
QE not deflationary in practice until the casinos, sorry, financial markets, see that the emperor has no clothes and this is set as the new reality/normal (like in Japan the last decades).
ReplyDeleteThis may not happen until there is QE but deficits shrink and balanced budgets. Until hen the asset bubbles created by QE (even if it's only throught irrational expectations-of-exuberance channel) more than make up any reduction of income through interests payments.
Chris Mayer is repeating Warren Mosler on QE being deflationary rather than inflationary.
ReplyDeleteTom that view is unreal: the major asset holders are rich people (and each day more), this includes (more than anything!) bonds.
ReplyDeleteAnd QE creates exuberance in equity + real estate markets, so even if it's not realized wealth and it's only nominal it creates a wealth effect amongst the asset holding classes.
This people is the ones who say that the economy is doing better than any other time in history, because for them is true as long as those valuations hold (and because there are CB puts all over the place, it's true).
It starves pension funds (those on fixed income) of some flows, but more than makes up appreciation. hell, T-Bonds are more expensive than ever, who cares if you are earning 1% less if your assets are appreciated 10%.
So in practice, right now, at least until it's shown the emperor has no cloths (ala japanese), it's not really deflationary. Call it market irrational exuberance, manic markets, selffulfilling prophecy but it's what it is.
Ignacio, the Fed was expecting the wealth effect in asset valuation to be passed on to goods prices and that didn't happen.
ReplyDeleteThe reason it didn't happen, in my view, was not owing to the interest channel, but the housing channel and the high level of private debt.
Housing prices didn't rise enough to make up for the losses and many people are still underwater on their mortgages. Moreover, a lot of private credit was borrowing against rise in housing values that since collapsed.
There will be no inflation or substantial recovery without a recovery in housing values and residential construction. Neither look very promising right now in the US.
So I would say it is rather the credit channel that the interest channel, and residential RE is a major driver of credit since so much consumer purchasing is home related. With residential RE dead in the water, so is the economy and therefore goods inflation, too, in spite of a run up in equities.
Moreover, the run up in equities hasn't benefited most middle class people who see their retirement funds well below what is needed and desired.