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Wednesday, December 16, 2015

You can go buy gold, oil and commodities now. The Fed has just raised prices.

Fed raises rates

The Fed, in its statement (and it's endless wisdom) says that inflation expectations are "well anchored." Well, yeah, maybe they have been, but that's because the Fed itself has been setting prices lower. The cost of money and credit--the interest rate--is a price. A very important price. All other prices tend ot hinge off that price. So if the Fed is so concerned about keeping inflation expectations well anchored why did it just raise prices today?

Totally stupid.

Uh, boys and girls, you can probably start buying gold, oil and commodities now. The Fed has just given you the green light.

112 comments:

  1. What do you guys make of this? I find Cullen Roche interesting because be demolishes Austrian school economics so well, and uses a lot of MMT in his arguments. But he is also very critical of MMT where he says it Marxism. With the importance placed on government, and how the government can give everyone a job and I can see how someone might call this Marxist, although it isn't as the free market is still of prime importance in MMT. I thought I would post for everyone to see. I'm interested in your views.


    I got into an argument with someone on YouTube recently when I said the private banks print nearly all the money. I got ticked off by some MMTers for getting it wrong, but Cullen Roche agrees with me on this. He says that private banks create most of the dollars.

    Modern Monetary Theory (MMT) Critique

    http://www.pragcap.com/modern-monetary-theory-mmt-critique/

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  2. Nivekvb,

    I agree: the idea that MMT equals Marxism is BS. Re the proportion of money that is created by private banks, Positive Money (which is a UK organization opposed to private money creation)always puts the proportion at 97%. Personally I think it's nearer 96%. And just at the moment, as a result of QE, those 96/7% figures are way out. I've seen 85% cited which is roughly right far as I can see.

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  3. The monetary base (gov't money) is $4T and total bank credit is $8.5T, so banks currently create about 68% of all money. Ultimately, though, it's the government's promise to provide its money (reserves) that allows the banks to expand their balance sheets and create credit, at least under current arrangements.

    I agree a lot with Cullen Roche and the MMT guys have been wrong on many things, like Mosler's focus on the deficit and the whole, "making the euro hard to get" garbage.

    As far as labels--Marxist, communist, Socialist--I couldn't care less about those things. Call me whatever you want.

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    1. This is a very progressive site, Mike, and I find lots of interesting stuff here that I don't see elsewhere. Many thanks.

      Tomorrow I have another interesting article to post. I nearly posted it today but I thought I better let this one run out first.

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    2. I get it now, although some people argue that banks can create as much money as they like, it's the central bank reserves that safeguards them. If there is ever a problem at the bank, they can call in this reserve money to get them out of difficulty.

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    3. Actually, Cullen Roche says that private don't rely on central reserves to create money. I have just downloaded a pdf off his to read, and I will return to this topic again later.

      Delete
  4. Banks do not create dollars they create bank IOUs denominated in dollars. You have to be very careful with the terms utilized to describe this.

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  5. Also, Roche will have to explain how MMT's description of fiat currency squares with Marx's description of money-as-commodity (he can't).

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  6. Banks create bank deposits. A bank deposit is a debt of the bank. If you own a bank deposit it means the bank owes you money. The money the bank owes you is base money, i.e. money issued by the government/central bank.

    People call bank deposits 'money' because you can use them as a means of payment. If you own a bank deposit you can give it to someone else as a form of payment. The bank then owes that other person base money instead of you.

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  7. Ben,

    it seems to me MMT maybe solves that error made by Marx by explaining how the basic value of fiat money is determined by the amount of labour you need to perform in order to acquire it from the issuer, the state.

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  8. Ben,

    Peter Cooper has written about this: http://heteconomist.com/value-of-fiat-money-on-the-basis-of-marx-in-light-of-mmt/

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  9. It is possible in many circumstances for banks to expand their balance sheets via lending without any corresponding expansion of the central bank balance sheet. Since the M1 and M2 money supplies - the money most of us use for all of our everyday transactions - consists largely in a portion of the liability side of bank balance sheets, that means banks can sometimes increase the amount of money in the economy without any change in the supply of the government's money.

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  10. If you really want to understand things, you shouldn't depend on Cullen Roche. He makes up vague and nonsensical arguments which he mixes up with political rhetoric and all sorts of confused and meaningless stuff. He used to agree with the basic MMT explanation of things, but then he decided that the political positions of MMT economists were too left-wing sounding for his liking and he started writing all sorts of nonsense, which he kept changing on a weekly basis. He doesn't actually have any sort of coherent, alternative theory ,he just has empty rhetoric which some people prefer because they think it sounds more pro-capitalist or something.

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    1. Cullen Roche says that most economic theories are really about politics. He says that most economists have a political viewpoint which they try to make their economic theories fit. He calls his economic theory, Monetary Realism, which he describes as an understanding of what would make capitalism completely efficient because it is free from political bias.

      I shuddered at the thought of this. Nazism was very efficient too. Do we really want a capitalist system that was super efficient taking everyone out that fell behind, or short. Our present system is super efficiently destroying everything on the planet, and the rain forests are fast disappearing.

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  11. "private don't rely on central reserves to create money"

    As I said, bank deposits are bank debts. Banks can issue as much debt as they want (i.e. go into debt) if people are willing to hold it, i.e. become creditors to the bank. You can do the same thing - you can issue debt to whoever is willing to become your creditor. However your debt is not considered to be a type of 'money' because your creditors will in most cases not be able to give it to others in exchange for goods.

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  12. The problem, from an epistemic pov, is that as Matt Franko has pointed in this blog several times money is a metonym.

    All money is credit, but not all credit is money. We shall speak of credit and the worthiness of who is doing the credit. Notice here that money is NOT a commodity because is, by it's own nature, credit. Hence gold or silver NEVER will be money, they are assets, but not money (gold bugs and certain flavours of libertarians struggle with this probably because they are pathologically unable to trust people/society, when not denying that 'society' doesn't exist, which is bollocks).

    Different credit instruments/securities can acquire the quality of "moneyness" or loss it, depending on circumstances. In our current system 'cash' and 'bank deposits' have the highest degree of moneyness because they have the most credit credibility (as their value is by fiat promised by the state). Banks have a charter to create this credit instruments that are "as good as money" (again the term money in this phrase is being misused because it's a metonym), and the state guarantees their value.

    This can change rapidly, as a good example see all the Greek drama in the firs thalf of this year, because it's all subject to the ongoing power structure. For example, on regime collapse/change, usually old money is made worthless (happened a lot during the USSR collapse and proxy regimes), as it's a lot of the existing credit relationships (this is what happens in a systemic default).

    "Shadow" money can be created, in the form of different securities and through financial leverage, by the private sector. In 2008 what happened was a collapse of shadow money because a lot of financial instruments lost their "moneyness", those instruments were being used to leverage and collateralize a growth in the credit stock. That's when an enormous expansion of the CB's balance sheets happened to make to ground and put a floor on the value of those assets.

    OFC all of it it's backed by a theoretical capacity of the economy to provide and service future goods in excess of the claim on wealth those credit securities are. When there is a mismatch and friction between the 'consumption' of those claims and the capacity to serve those claims, inflation happens (in extreme cases where the dislocation is brutal hyperinflation happens). This can also change swiftly as most of our current system has no resilience and depends on absurd amount of raw material consumption and the Earth to provide trillions of value which are not being accounted for, all done in a 'specialization' of the world wide economy through international trade creating a series of interdependencies such that certain urbanized regions would collapse and starve in weeks if there were any serious supply shocks.

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  13. CR is an idiot who, at one point in time, to make himself relevant chose to attack MMT through straw-man arguments. I don't agree with MMT on many things, but I don't attack it through straw-man or politically dubious arguments.

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  14. Mike, you're wrong on this. Equilibration of the budgetary balance puts downward pressure on velocity.

    You're basing your topline spending argument on revisions to GDP estimation implemented specifically because they can be gamed. Were we calculating growth as we did four years ago growth would be in the range of 1%.

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  15. Systemic Default: The word itself was created when the Empire collapsed (and its numismatic system with it...) and people just called the various things then used "money" in all the resultant chaos... "money" a figure of speech derived from the name of the Roman matriarchical goddess Juno-Moneta whose temple was the old HQ from which the old Roman numismatic system was administered...

    Surviving pre-default manuscripts do not contain the word "money" or any word that could be accurately translated into it....

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  16. Cullen Roche doesn't have an economic theory. And the idea that he's unbiased is laughable.

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  17. Even Bill has been taking incoming shots over his left flank...

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  18. Bravo Phillippe.

    You cant understand money without thinking about it as an IOU. Hell, I just created money at Menards yesterday when I bought my Dad a $100 gift card for Xmas. As I walked into the store before the transaction, there was $100 in the Auburn\Menards economy (in my pocket). After I gave them my $100 they swiped the card and entered $100 into the computer. And like magic there is now $200 in the Auburn\Menards economy, the $100 I gave them in cash (Govt IOUs) and the $100 they created for me (Menards IOUs). So what does menards owe me? Well they owe me $100 in goods from Menards. Just like how the bank owes me $100 in payment settlement or cash if I have $100 in a checking account. I could easily sell the $100 Gift card in the market (most likely at a discount because nobody's IOUs are more valuable than Govt IOUs).

    This is the problem with the positive money people, they think we can keep the private sector from creating money. But if money is just an IOU, then how can we prevent private citizens and corporations from creating their own IOUs? Well, you cant. Which is why Postivie money is a bankrupt idea.

    So when thinking about money, always think about who owes you and what do they owe you. What does the Govt owe me? The bank? Menards? my insurance company? etc etc.

    Just about all entities pay off their liabilities with their assets. Menards owes me their merchandise (inventroy asset) banks owe me reserves (bank assets), Govt owes me services or tax credits.

    One caveat to note here is that both banks and the Govt pay off their term deposit liabilities with their own checking accounts liabilities, but they are generally the only two entities that can do this, which is one the important things that separates commercial banks from shadow banks.

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  19. 'banks pay off their term deposit liabilities with their own checking accounts liabilities'

    they're basically just rolling over the debt they owe, issuing short term liabilities in place of longer term liabilities.

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  20. Was there any justification for the FFR increase other than to enrich the big banks at the expense of the little guys and their borrowers?


    "...Prior to today’s Fed announcement, the interbank borrowing rate was averaging 0.13% over the period since the beginning of Quantitative Easing. In other words, there has not been enough demand from banks for the available liquidity to push the rate up to the 0.25% limit..."

    More here:

    http://www.paulcraigroberts.org/2015/12/16/what-does-todays-rate-hike-mean-paul-craig-roberts/

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  21. He calls his economic theory, Monetary Realism, which he describes as an understanding of what would make capitalism completely efficient because it is free from political bias.

    In the same vein of the "Very Serious People", central bank lovers, "technocrats" and all the useless types who manage our system currently.

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    1. Yes, they're setting up TTIP for even more improved efficiency at scamming everyone. And the neoliberal politicians are signing it giving our democracy away, because democracies mess up the never ending wheels of industry.

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  22. "As far as labels--Marxist, communist, Socialist--I couldn't care less about those things."

    I feel the same way, Mike. I'd much rather hear people's plans than their titles.

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  23. If I were a bank that could create money, I'd never make a single loan. And I'd be the only customer ;)

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    1. Yeah, you wouldn't want any one to catch into the idea.

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  24. Cullen tries to keep it simple, and that is one of his big contributions to MMT at large (his MMR is a corner of the MMT at large world - he disagrees with other corners of that larger world but he is still of it). For example, you may want to argue that a bank deposit isn't really "money," but I'm pretty sure most people rightfully believe they can use their bank deposits to buy a beach vacation and leave you to argue with yourself about angels-on-the-head-of-a-pin.

    Cullen is about double-entry accounting and accurately describing how money is created and flows in the economy and in the monetary system. He is about the descriptive power of MMT, as further refined by his MMR (i.e. banks create most money), and is suspicious of the proscriptive aspects that are pushed by others of MMT world. Of particular note in that regard is his battles with Randall Wray, who, as a Minsky student, pushes the Jobs Guarantee Program (JGP). There are others, such as Rodger Malcolm Mitchell, who suspect the JGP as primarily being ideologically motivated, but who haven't elicited the internal battles that Cullen has stimulated. This is where the Marx insults get bantered around - these arguments get pretty hot and these folks are all human after all.

    Cullen's fights over the JGP are derived from an earlier bigger fight against what he sees as a govt centric viewpoint in most of MMT world. His viewpoint comes from the same place as those here who believe that some MMTers put too much emphasis on central govt deficit spending - you'd get more of a fight about than from someone like Mitchell than you would from Cullen.

    Cullen would not disagree with anyone that federal govt spending increases total aggregate demand and that can be either good or bad, as with any spending (private or public), depending on economic capacity utilization - he gets Keynes. Cullen's problem is with those that push that central govt spending is the centerpiece of an economy - he sees the private sector as being the penultimate dynamo of the economy with, of course, the occasional necessary Keynes nuge. Much of this disagreement gets hammered out in a pretty esoteric arguments about "savings" vis-a-vis "investment."

    These savings/investment arguments are highly nuanced but they are important differences, somewhat beyond the sophomoric grasp of most MMTers and certainly beyond nearly all non-MMTers. If you're not fully steeped in those nuances, you should NOT be attempting an opinion on the credibility of either the person or position of any of those directly engaged - you just look pretty silly to all of them regardless of where they fall on the gradient of their differences.

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    1. My point is, do we want economics without political bias? The question is, what sort of society do were want? I'm in the Micheal Hudson camp myself. I think a slightly less efficient but more humane one would be better. Loren Mosher seems like nice guy. Factory farms are incredibly efficient too, but they are hell I earth.

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  25. Bob - last I checked, banks are pretty heavily regulated by the govt (if not actually a part of govt). Oh, and you do have to pay yourself back, with interest.

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  26. Ben Johannsen (& others):Banks do not create dollars they create bank IOUs denominated in dollars. You have to be very careful with the terms utilized to describe this.

    Yes be careful, but the usual terminology is not misleading. Banks create bank money, bank dollars, like any other money they are credit, IOUs, relationships. They happen to be measured / denominated in government dollars nowadays, but that is not essential.

    It is a serious and dangerous error to differentiate too much between state money and bank money, which are both ultimately the same "thing", or to think that bank money is a "debt for" state money. That kind of thinking was intrinsic to the downfall of Keynesianism, and was the reason that Dan Kervick recapitulated this sad history and rejected MMT.

    Matt: I don't understand what is wrong with using the word "money" if that is what you have been saying - it has a perfectly good definition - negotiable credit. Thinking of "a commodity" as "something which can be exchanged for credit", then money is precisely credit which is also a commodity.

    Nivekvb:My point is, do we want economics without political bias? The point is that "economics" without "political bias" is not even logically possible, not even conceivable. Which is why decayed substitute theories like MMR are incoherent. Words like "efficiency" are unintelligible, meaningless without understanding them as "efficient towards some purpose (political bias)".

    That's why the JG is not an optional part of MMT, but integral to it. Not understanding that means not understanding MMT. Nobody in his right mind would set up a monetary economy without a job guarantee. People who are genuinely disemployed by such a society have every rational right to "rob" the insane state that is disemploying them - irrespective of whether they have (great) income or wealth already. This observation about the JG is hundreds of years old. In light of the recent threads at billyblog, most MMT fans don't actually understand the theory; about what I've been fearing and saying for years now.

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  27. Bob - last I checked, banks are pretty heavily regulated by the govt (if not actually a part of govt). Oh, and you do have to pay yourself back, with interest.

    Q. Why would I go through the song and dance of issuing a loan, collecting payments, and obtaining a profit through the interest? Why would I take a route that entails overhead, risk and possible loss?
    A. Government regulation.

    Is that like doing the Salsa with your shoelaces tied together?

    That's why the JG is not an optional part of MMT, but integral to it. Not understanding that means not understanding MMT.

    And that's why Cullen Roche does not understand MMT.

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  28. Bill has emphasized the macroeconomic role of the JG many times, but it falls on deaf ears.

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  29. Calgacus,

    "It is a serious and dangerous error to differentiate too much between state money and bank money, which are both ultimately the same "thing", or to think that bank money is a "debt for" state money."

    Technically, it is a debt 'for' state money. Why do you believe this is not the case?

    "That kind of thinking was intrinsic to the downfall of Keynesianism, and was the reason that Dan Kervick recapitulated this sad history and rejected MMT."

    Could you please explain what you are referring to here?

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  30. Calgacus,

    It's necessary to draw a distinction between bank money and currency because people think banks print cash, mint coins and loan government money. Once the special status of reserve accounts is made understood this erroneous thinking can be corrected.

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  31. The academics behind MMT are very well aware that bank deposits are a multiple of the monetary base. The question is: so what? Ultimately, inter-bank transactions are settled by transferring deposits at the central bank (reserves), which is a component of the monetary base. During an expansion, "private money" does well. But in a crisis, there is a retreat to government money.

    This is because government money is the base of the system. Pretty well any exposition of MMT discusses the monetary system in these terms.

    If you are analyzing how government policy works - which is what MMT analysis is usually doing - saying "gee whiz, there's a lot of bank deposits!" is just a distraction from the matter at hand.

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  32. Salsabob,

    Cullen's problem is with those that push that central govt spending is the centerpiece of an economy - he sees the private sector as being the penultimate dynamo of the economy with, of course, the occasional necessary Keynes nuge.

    Roche can't claim a theory free of politics and then make an expressely political argument as a component. His thinking is contradictory.

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  33. There is no such thing as politic's free economics. This is what neolibs have been claiming for 40 years of 'technocracy', but their whole agenda IS driven by political goals.

    Economics IS politics, because economics deals with human organization and exploitation of resources, which is intrinsically political choice.

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    1. You're dead right. And what we have is an economic system that serves the few. What is better is an economic system that serves the majority. Then capitalism works better because people earn sufficient money to buy the products.


      If I was going to open a little Hi Fi shop, I would be better off opening it in wealthy suburbia rather than a run down low waged part of the country.

      Delete
  34. Calg,

    arguing about the definition of a blatant metonymy is womanish... leave it to the Kardashian sisters for their reality TV show...

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  35. The comments here were so informative, and it got thinking about money and banks in new ways.

    For one thing, it was mentioned here that banks just extend IOU's and Positive Money can't stop people giving IOU's to each other. Then I saw banks differently. A bank might lend someone $100,000, where it is just written in a piece of paper. If that person actually wanted the $100 grand in notes then the bank would have to go to the central bank to get it. So the IOU is backed by real money.

    Of course hardly anyone would want $100 grand in notes, and if they did the police would be interested. But people can get their money out of banks when there is a bank run. The lucky first few, that is.

    I still think that Positive Money have a good point about private money creation, but I now have much to ponder on because of the informative replies in this thread. Many thanks.

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  36. nivekvb,

    It's okay with me to view economics as a means to political ends. One should just be very careful when starting with the political end in mind when attempting to describe economic and monetary systems; there's plenty of room for bias to slip in - to the point that one should state up front, as a warning, that they are starting with the ends already in mind, e.g., 'I believe the govt should be the employer of last resort and now let me explain how economic and monetary systems work to support that view.'

    Cullen's argument is that you should first start with a description of how things ACTUALLY are (i.e MMReality), and then take that reality and talk prospectively about how things should be (i.e., MMTheory). For example, you may have not noticed that there is currently NO govt program for MMT's employer as last resort. Some believe that it is more credible to start with that FACT, then speculate (because it is, by definition, speculation) of how the economy, if not society, could be improved and, most importantly, how that could pragmatically come about since it is NOT the reality today.

    I not only understand that the JGP is part and parcel to MMT but because of my more Progressive political tendencies, I'm drawn to it. At the same time, I recognize Cullen/MMR's point that the JGP is not current reality and therefore, by definition, should not be part of any descriptive endeavor to lay out how our current economic/monetary system actually works. The JGP, by it's organic nature, is speculative economics and it is usually presented with a political objective already in mind - one that appeals to my heart but I'm not so sure the case has been made to my brain... because, to be honest, a lot of MMTers have gotten their panties in a wade and wasted everyone's time whining that the JGP is something more than speculative; they see that word as a value judgement when it actually is not.

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  37. Bob,

    And now you know why one would not own a bank and be its only customer.


    Cullen understands MMT, he's just playing at a higher level than you.

    If the JGP is part-and-parcel to MMT, then MMT has both descriptive and prescriptive elements - that would be a fact.

    Cullen goes farther, however, and makes the argument that the proscriptive elements of MMT (e.g., JGP) have biased the descriptive elements - in particular, not grasping the primary role of banks (relative to govt) in "printing money" when a willing/credible borrower walks into the bank's lobby (virtual or otherwise) - it's called double entry accounting. Without going into the reams of papers and arguments, that misunderstanding the primary role of banks in "printing money" helps set the stage for MMT overstating the role of govt in sustaining economic well-being relative to the real economic dynamo of the private sector - MMT's focus becomes federal programs and deficits rather than private sector investment.

    While most MMTers are not supporters of command economies and probable agree with the primary role of the private sector, many MMTers still get their panties in a bunch over what Cullen, the young whippersnapper, points out - their mind's eye closes.

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  38. Salsabob,

    Cullen doesn't accurately describe how things acually are. His statements and arguments are incoherent, nonsensical and factually incorrect.

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    1. The more criticism I read of MMTers here the more I like them. They're not cold and clinical economists or capitalists, they're heart is in the right place.

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    2. I occasionally get my theres mixed up, when I'm tired. Their heart is in the right place

      Delete
  39. Calgacus,

    Where does Cullen/MMR make an "efficiency argument?" Are you referring to the traditional (I'd say "classic" but that might just make things more confusing) definition of "economic efficiency?"

    I'm not suggesting he didn't. It just seems it superfluous to the basic description of our economic/monetary system that Cullen/MMR tries to make. Seems weird. Source?

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  40. "the JGP is not current reality and therefore, by definition, should not be part of any descriptive endeavor to lay out how our current economic/monetary system actually works."

    When has any MMT economist said that the MMT JG currently exists?

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  41. "the basic description of our economic/monetary system that Cullen tries to make"

    Cullen doesn't make a 'basic description' of the economic monetary system. He writes a lot of vague waffle and political rhetoric and makes factually incorrect statements about the world.

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  42. Philippe,

    Part of me just wants to respond with - "so's your mama!" - but I think the MMT/MMR arguments have already done enough of that and I don't have much to add, and I don't actually know your mother.

    But can you be a tad more specific?

    Here' a pretty balance and reasonable post on the MMT/MMR difference that was not only previously provide on this forum but actually gives a deserved nod to this blog's fairness on the issues -

    http://monetaryrealism.com/jkh-on-the-recent-mmrmmt-debates-2/

    - exactly what do you (or your mother) have a problem with what is presented there?

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  43. If you see somebody trying to take the politics out of economics, then what they are trying to do is take all other politics *other than their own* out of economics.

    The rebranding of 'political economy' to 'economics' is one of the great PR coups of all time.

    There is no economics without politics. There never can be because it is the description of human relations - which is all about politics.

    "A bank might lend someone $100,000, where it is just written in a piece of paper. If that person actually wanted the $100 grand in notes then the bank would have to go to the central bank to get it."

    It's not quite like that. Essentially the commercial banks, by virtue of their banking licence, agree to create and destroy their own liabilities on the command of the central bank. In other words they are in a 'fixed exchange rate' regime with the central bank.

    That fixed exchange rate regime is the only reason that one bank's US dollar is worth the same as another bank's US dollar.

    So when Treasury spends it causes a commercial bank to 'lend' money to central bank (aka bank reserves) and create a deposit with whoever Treasury has paid. The commercial banks cannot refuse the instruction and retain their licence. Hence they are simply outsourcers of Treasury - able to do what they do because they are licensed to do it.

    When somebody withdraws that deposit as cash, all they have done is transferred it back to the central bank - destroying the reserve loan asset and the deposit in the process. In return you get some receipts from the central bank for your new deposit with the central bank - aka dollar bills. Again the bank has to execute that instruction because it is a licensed institution.

    When you pay money between banks, the bank you are paying to takes over your liability with the original bank. Technically you don't need the central bank to clear the system - you just need the commercial banks to trust each other.

    The central bank is there to reduce the liquidity requirements of clearing the system *and* to ensure clearing when the banks stop trusting each other (essentially the bank that are long make a deposit with the central bank and the central bank loans that deposit out to banks that are short. They take on the risk the commercial banks are refusing to take).

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  44. Philippe,

    "When has any MMT economist said that the MMT JG currently exists? "

    Oh, you're so tricky Philippe!

    What they do say is MMT cannot exist without JG. So, if JG doesn't currently exist, then...

    How's that for trickiness?!

    There are two categories of arguments surrounding the MMT/MMR chasm. The first is that MMR points out that MMT has both descriptive and proscriptive elements. For some reason, this makes advocates of MMT heads explode - some get angry, others get tricky.

    Then there's the more interesting category of differences regarding "savings" and "investments" but unfortunately the first category bleeds into this category and a lot of anger and trickiness ensues.

    Fun all around, I guess. ;-)

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    1. That's interesting, now that's given even more to research and look into.

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  45. Neil,

    "If you see somebody trying to take the politics out of economics, then what they are trying to do is take all other politics *other than their own* out of economics."

    And obviously someone suggesting that economics is politics is injecting their politics, no?

    Imagine: some people can describe a car without actually driving it. Rightly or wrongly, today there's even a lot of mechanics that will work on your car and not take it for a test drive before handing you back the keys!

    Of course, driving it somewhere can give one a whole different set of inputs. But when you drive it off a cliff rather than to the store, is a description of the car the most important thing???

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  46. "exactly what do you (or your mother) have a problem with what is presented there?"

    It's a tautological waste of time.

    There is far too much arguing about the definition of words without any actual forward motion. There is too much 'tablet of stone' regard for the national accounting.

    In terms of point of view 'there can be only one'.

    Pretty much all of these arguments boil down to 'my definition is better than yours'. It isn't like that. Accounting is a flat system. You can have multiple accounting policies depending upon what you are trying to show. All accounting is an opinion.

    The problem as ever is trying to show the function of a dynamic system over time using decompositions that are static and two dimensional.

    You need something more than X = X + 1 to describe causality properly.

    And "the amount of saving required to fund investment I" is simply wrong. Aggregate Investment happens regardless of savings. Increase in financial savings is just the amount of loans made less the amount of loans paid off. It's a residual caused by people choosing not to spend.

    Essentially it is voluntary taxation. If people don't undertake voluntary taxation, then compulsory taxation has to step in to stop the economy overheating. You then find that the government pays off its own 'loans' with the 'surplus' it is collecting.

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  47. "What they do say is MMT cannot exist without JG. So, if JG doesn't currently exist, then..."

    You're not very good at logical thinking, are you. MMT is a body of theoretical/ academic work. If MMT economists say that the JG is a fundamental part of MMT, that is not the same thing as saying that the JG actually exists as an actual operating institution in the real world. Is it.

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  48. Salsabob,

    "The first is that MMR points out that MMT has both descriptive and proscriptive elements. For some reason, this makes advocates of MMT heads explode"

    You mean prescriptive. No, no MMT heads explode if you say that it has both descriptive and prescriptive elements. Heads explode when self-serving idiots like Cullen make up utter bullshit about MMT and present vague incoherent rambling and factually incorrect nonsense as a meaningful alternative 'economic theory'.

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  49. "What they do say is MMT cannot exist without JG"

    The JG is the only mechanism that eliminates the "Phillips Curve" trade-off between inflation and unemployment and anchors the financial circuit in the real circuit using the price of labour. All other macro strategies eulogise unemployment and want to keep millions of people in destitution as a tool to keep everybody else in line.

    And the love of unemployment and destitution is a political position. A particularly unpleasant one given the sociological evidence on how damaging it is, and how much resentment it causes in wider society. Even more unpleasant when you try and pretend that isn't what you are doing.

    And of course your economics is inefficient, since you are discarding 5% of labour output that could easily be captured and deployed via a JG.

    No amount of jiggling with interest rates will solve the job matching problem. If you create jobs first and match people to them, you will always end up with a list of jobs and a list of people that don't match them. The JG reverses that and introduces a mechanism where you take people and create jobs to match them *as they are now*.

    It turns the unemployment buffer into an employment buffer. It disciplines the private sector - forcing them to compete for labour and hopefully automate away job positions. It reduces the power of the corporate sector returning it to the people via their representatives. And it helps the corporate sector by weeding out nefarious firms that try and undercut good firms with slave labour techniques, as well as ensuring that the labour buffer is 'ready for work' as much as is possible.

    And of course it maintains effective demand in a counter-cyclical manner - without disrupting the private, or public, sector wage structure too much.

    The goal of MMT is to provide full employment and price stability.

    Of course if your political philosophy doesn't value full employment, or nation states, or price stability then you'll have a different proposal.

    But that is a result of the differing philosophy.

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    Replies
    1. Terrific post, I totally agree. I will come back to this later. I'm writing a short post about this subject based on the British social credit movement.

      Delete
  50. This comment has been removed by the author.

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  51. S = I + (S - I) doesn't say anything new. It simply says that private saving = private investment + (private saving - private investment). Cullen Roche and some others thought that this equation 'proves' that private investment is 'more important' than (private saving - private investment) but of course it does no such thing. The equation tells you absolutely nothing that isn't already stated by the usual sectoral balance equations presented within MMT.

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  52. The rest of that MMT/MMR article is just JKH trying to sound superior whilst actually saying almost nothing of substance and nitpicking on minor or pointless things. JKH originally created the confusion around his equation because he didn't clearly explain what it represented or what he was actually trying to say, which in retrospect was very little. JKH seems to need fifteen paragraphs to say things which could be stated in one sentence.

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  53. And now you know why one would not own a bank and be its only customer.

    Because banks cannot just create money, hand it to themselves and declare a profit.

    Cullen understands MMT, he's just playing at a higher level than you.

    Actually, he's just a run-of-the-mill ideologue.

    If the JGP is part-and-parcel to MMT, then MMT has both descriptive and prescriptive elements - that would be a fact.

    A JG is part of MMT's macroeconomic framework. It's an academic proposal that is no more or less 'prescriptive' than the NAIRU. As usual, academia informs policymakers and the public.

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  54. Salsabob,

    "that misunderstanding the primary role of banks in "printing money" helps set the stage for MMT overstating the role of govt in sustaining economic well-being relative to the real economic dynamo of the private sector"

    You're demonstrating that you don't understand what you're talking about at all, and engaging in the same sort of vague and meaningless waffle as Cullen. MMT has always made clear that banks create 'money' in the form of deposits.

    "While most MMTers are not supporters of command economies and probable agree with the primary role of the private sector"

    Macro demand management, employer of last resort, etc, these are not the same thing as a 'command economy'. You're just using the same sort of idiotic rhetoric as Cullen, argument by insinuation, dog whistle blowing. By now I'm pretty certain that you're just a disingenuous troll.

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  55. OT: Is Tom taking a break or busy? Hope he is well!

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  56. Hope this doesn't get me banned from this website, but as a part Libertarian, part Supply Sider and part MMTr, I don't think the Fed should be targeting interest rates at all. Instead, the Fed should target gold at a price that balances the interests of debtors vs. creditors and just let interest rates float, based on supply and demand for credit.

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  57. OT: Is Tom taking a break or busy? Hope he is well!

    Thanks for asking, Ignacio.

    I was down with a stomach flu Mon-Wed, Monday was a 24-hour wipeout and it took me two days to get my energy back. A-OK now.

    BTW, I got the flu shot in Sep, while my SO passed on it. She didn't get it. So much for that.

    Now I am catching up on things and also getting ready for the holidays.

    I've caught up with the comments and am up to date on that. Interesting discussions but I a lot of repetition of the same things we've been through many times previously.

    I haven't been checking my RSS feeds for lack of time. Hope to get to it on the weekend. I feel out of the loop.

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  58. "the Fed should target gold at a price that balances the interests of debtors vs. creditors"

    What does that mean?

    The fed doesn't target interest rates, it targets inflation.

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  59. "but as a part Libertarian, part Supply Sider and part MMTr,"

    Well that puts the Bruce Jenner thing in perspective.

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  60. Ignacio said with respect to Cullen Roche:

    " to make himself relevant chose to attack MMT through straw-man arguments."

    Ignacio, I TOTALLY agree.

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  61. Ed (The Rombach Report)...

    Nothing will get YOU banned, although I scream at you from time to time. ;)

    -Mike

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  62. Tom a friend had it and went to doctor and doctor told him it seems to be overly affecting males .... ?????

    Try to enjoy the 'time off'... ;)

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  63. Ed

    "a price that balances the interests of debtors vs. creditors"

    You seem to be saying the fed should target inflation (which it does), but it should somehow do this by fixing the gold price.

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  64. OT: Tom hope you get get to a 100% soon, just asked because when you take a break (busy/out of town) you usually leave a notice, and this time you didn't so was a bit worried.

    I take part of my daily news fix from this blog so when you are not posting (completely right if you take a break ofc) I notice it soon.

    Cheers for answering.

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  65. http://www.mayoclinic.org/diseases-conditions/viral-gastroenteritis/basics/symptoms/con-20019350

    Although it's commonly called stomach flu, gastroenteritis isn't the same as influenza. Real flu (influenza) affects only your respiratory system — your nose, throat and lungs. Gastroenteritis, on the other hand, attacks your intestines, causing signs and symptoms, such as...

    Enjoy the recovery :)

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  66. "Hope this doesn't get me banned from this website, but as a part Libertarian, part Supply Sider and part MMTr, I don't think the Fed should be targeting interest rates at all. Instead, the Fed should target gold at a price that balances the interests of debtors vs. creditors and just let interest rates float, based on supply and demand for credit."

    Why gold? This is completely random. A better idea yet: just merge FED operations desks with treasury and STOP entirely trying to set the lending rates or the price of anything really through monetary operations. The govt already sets the price for pretty much everything in the economy through fiscal operations (which have wider impact anyway) and is how it should be.

    The issuance of bonds should be abolished, it would require changing collateral regulation and providing saving securities for individuals and pension managers though (the last is already there, is just a matter of expanding on the service), but is really an inadequate system which gives the morons reason to cry about "how much debt we are leaving to our grandchildren" all the time. Just use existing saving instruments and set the saving rate there w/o issuing any liability, there is zero reason.

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    1. We shouldn't base anything around gold, only the mega rich can own gold mines, i.e., access to free money. With that power over our money supply they will screw everyone, and rule over us without restraint. That's why the libertarians love gold.

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  67. Philipe - If the Fed successfully targets inflation at 2%, it is putting its thumb on the scale in a way that benefits borrowers at the expense of lenders. At 2% inflation rate, the value of the dollar declines by about 17% in one decade. Have a look at the link below which features Supply Side icon and now deceased, Jude Wanniski, commenting on Ron Paul's question to Alan Greenspan in one of his last HH Congressional testimonies.

    http://www.polyconomics.com/memos/mm-050726.ht

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  68. "Nothing will get YOU banned, although I scream at you from time to time. ;)"

    Mike - You are a man of action! Scream at will. Don't know what holiday you celebrate, but Happy Hanukkah, Merry Christmas & Sim Sim Sala Bim!

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  69. The FED cannot target inflation. Private sector creates inflation through lending most of the time because it creates it's own "money"/liquidity during while it can leverage. Nothing CB's do can change that, it's an hoax, their policy is reactive.

    To control "inflation" you have to target the asset price through law (yeah, libertarians are against this because they don't understand anything about how the economy works). This is one of the reasons why no one can claim that economics can be devoid of politics (as Neil pointed out above, when they do is usually because they want to control the lawmaking and enforcement so only their preferred rules apply).

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  70. This comment has been removed by the author.

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  71. "Well that puts the Bruce Jenner thing in perspective."

    Neil - Sometimes I like to wear an MMT outfit because it makes me feel pretty. ;-)

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  72. Philippe - Not sure why the link doesn't work. Lets try again.

    http://www.polyconomics.com/memos/mm-050726.htm

    If you still cannot access the link, just Google Jude Wanniski, Ron Paul's Great Question.

    BTW, I completely agree with Ignacio's comment... "The FED cannot target inflation. Private sector creates inflation through lending most of the time because it creates it's own "money"/liquidity during while it can leverage. Nothing CB's do can change that, it's an hoax, their policy is reactive."

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    1. Inflation is typically a product of administrative pricing followed with acquiesence by spending administrators. Gold makes this impossible by preventing accomodation of price rises by spending administrators, but the corrective mechanism is depression.

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  73. Ed

    So Wanniski makes an unfounded assertion that historically gold standards have had better outcomes that non-gold standard monetary systems. Apart from that, what is the point of your link?

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  74. "If the Fed successfully targets inflation at 2%, it is putting its thumb on the scale"

    So you think it should target zero inflation?

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  75. Tom - I think your 'significant other' had a good plan. Other things aside, people don't die until they 'give up the ghost' - the will is also the prime factor in human health other things aside (like self-destruction through diet and stress, misdirected desire).

    Matt- the will (along with intelligence and the capacity to love) is stronger in women; they watch men succumb, smile beautifully, maybe do a little mothering beyond the call of filial duty, and among themselves call it with great delight - 'manflu'.

    This is what I find amazing about the world and the yin and yang of the species: one finding their reward in creativity, nurturing, growth; the other in conquering.

    Many thanks to all of the contributors of MNE for 2015 - deeply appreciated and truly an education. Best wishes and a heart-felt feeling of peace, human dignity and prosperity for the new year ahead. Something is going to have to give because without creativity there will be nothing left to conquer!

    What does it mean to be human?

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  76. Jr nice words.....

    The whole male/female thing is DEEP imo..... REEEEEAAALLY significant in some way imo.....

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  77. Phillipe,

    Wanniski's (btw the pride of Pottsville, PA.. also the home of Yeungling lager....) correlation there is because under gold we could always go out and dig some more up as opposed to now where our morons think "we're out of money!"

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  78. "We shouldn't base anything around gold, only the mega rich can own gold mines, i.e., access to free money."

    nivekvb - What should the central banks do with their gold holdings? The mega rich can and do own all types of enterprises aside from gold mines. How are gold mines free money? Aren't there costs associated with operating gold mines? Gold and silver are often by products that can be captured from copper mining.

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  79. "So you think it should target zero inflation?"

    I don't see why not. Weights and measures in commerce are standards, and it is illegal to mess around with them. Aside from that, there are two types of deflation. Technological advances are inherently deflationary in a good way because they make skilled labor power more productive and devalue investments made in previous cycles. The other type of deflation, created by policy mistakes, like the U.S. running chronic budget surpluses from 1997 to 2001, are inherently bad because it leads to a credit collapse. I think Marx envisioned falling prices from applying technological advances to the means of production which would result in rising living standards, not necessarily from rising wages, but from falling prices.

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  80. Well Ed we are going to get to test that posit from Karl with these oil and gas prices continuing to fall in USD terms....

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  81. "Well Ed we are going to get to test that posit from Karl with these oil and gas prices continuing to fall in USD terms...."

    Matt - That's a very interesting question. My take on it is that the drop in oil prices that is attributable to fracking technology in the U.S. is more or less in line with what Marx was talking about. Clearly the lower oil prices benefit drivers when they are filling up at the gas pump. However, some of the drop in oil prices is also attributable to Saudi Arabia trying to push oil prices lower to put, U.S. frackers, Iran and Russian oil producers out of business. I think Saudi Arabia still has the lowest cost of production.

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  82. Yes, I knew my comment about gold was wrong, I thought maybe no one would pick up on it. If you own an oil well that's free money too, or if you own any mineral mine. This is why some economists say we should remove income and sales taxes and put the tax on land and the valuable minerals that are extracted instead.

    Who gave these mega rich all this land and minerals anyway? In Europe warlords fought over it and stole the land, and in Britain the Normans stole it and have kept it ever since.

    When people make money from land, property, and minerals economists call this rent extraction. They argue that rather than tax work, the tax should be put on rent extraction instead. And the rich can't offshore land to avoid their taxes.

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  83. "If you own an oil well that's free money too, or if you own any mineral mine."

    It's not free money if you had to pay for the oil well or mine. A tax on the profits the oil well or mine produces is like any other business tax... no?

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    1. If someone steals a bicycle and sells it to you, you won't get very far with the police when you tell them that you paid good money for it.

      In South Africa, who gave the white people all the gold and diamond mines?

      I believe in property rights, so most of the tax going on land and resources seems a fair compromise to me.

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  84. Ed

    "rising living standards, not necessarily from rising wages, but from falling prices."

    What matters for living standards is wages and prices in real terms. As such you can potentially have rising living standards with either inflation or deflation. The problem with trying to maintain deflation at a rate equal to a general increase in productivity is that it's not really feasible. The only thing you can do is set a nominal target - say 2% inflation or 2% deflation. If you set a deflationary target, however, your economy is going to end up in recession or depression.

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  85. this stuff about deflation or inflation really has nothing to do with Marx in particular, as it's just standard economics. I can't see the point of name dropping Karl for no reason.

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  86. "My take on it is that the drop in oil prices that is attributable to fracking technology in the U.S. "

    I agree too Ed imo this is generally not appreciated as far as how it will help real outcomes in the US in the near term...

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  87. "So you think it should target zero inflation?"

    I don't see why not.

    Several reasons.

    1. "Inflation" is an estimate rather than a measurement (observable). The estimates are only accurate within a range whose margin of error is also unknown with any precision and likely variable.

    CBs choose to err on the high side rather than the low to avoid deflation, which is worse than inflation from the CBs POV since they don't have tools to handle it (think negative interest rates).

    Targeting a particular inflation rate doesn't imply either hitting the target or even being sure what the actual rate is. It's a Bayesian "educated guess" that the CB is always adjusting based on their models and the data that they can gather, being in a particularly powerful position to do so regarding the financial sector especially.

    2. Inflation encourages economic activity through the "hot potato effect" that discourages saving (not-spending). Saving doesn't necessarily flow to real investment., which is a form of spending.

    CB's actually target the real interest rate using the nominal rate as tool, guided by estimates of price level variation, present and expected. It's an art, not a science. Without getting into the details of the factors involved, it should be evident to those familiar with the matter than there's a lot of handwaving going on, evidences by the range of views of the members of the FOMC.

    The thinking is that a 2% inflation rate target should set the policy rate to return a real interest rate a bit above zero on T-bills, which are essentially cash substitutes used by finance and business, on the assumptions that economic investment drives the economy and that the rate of investment is inversely proportional to the real interest rate.

    CB policymakers are fearful making errors that will damage financial interests owing to expectations regarding price level variation and changes in confidence. Confidence in the CB reduces market volatility and increases velocity. So CBs tend to be conservative regarding policymaking. So I would say that the 2% inflation target is a matter of building into the policy rule enough perceived margin of safety along with enough stimulus to optimize real growth.

    My conclusion is that central banking is a command system based on financial alchemy rather than science. Just set the policy rate to zero already, and use functional finance and a price anchor to deal with price stability.

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  88. "What should the central banks do with their gold holdings?"

    Sell them to gold bugs. It is the one commodity that can be hoarded without really affecting anything useful in the real economy and therefore reduces the amount of 'accumulation savings' that the central bank has to issue to keep the system flowing in an optimum manner.

    You don't want houses, copper or pork bellies hoarded. Let them have their shiny metal to fondle.

    Rather than looking to shiny metals or mystical omniscient Solomon benevolent dictators to magically solve the problem, why not work on fixing the political system so it works for the ordinary people?

    There is no god that fixes things. We have to fix it collectively.

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  89. "Sell them to gold bugs."

    Neil - If the CBs Sell all their gold to the gold bugs, that would drain reserves from the system. If there is good reason to drain reserves and that is their purpose, then all well and good. It would seem to denote a tightening or deflationary bias in policy.

    "There is no god that fixes things."

    What does an agnostic, dyslexic, insomniac do all night?

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  90. "that would drain reserves from the system"

    The gold belongs to the Treasury, at least it does in the US. If the gold was sold the CB would credit the Treasury's account with the amount and the Treasury would then either hold it, spend it, or place it in the commercial banking system.

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  91. "The gold belongs to the Treasury, at least it does in the US."

    Philippe - This may be a difference without a distinction, but I thought the gold belonged to the Fed. The Treasury securities held by the Fed from QE asset purchases are liabilities of the Treasury and assets of the Fed. The Fed pays about $100 billion interest income annually to the Treasury. However as far as I know, Fed gold holdings are not similarly liabilities of the US Treasury. If the Fed sells its gold holdings and credits the reserves to the Treasury account, wouldn't the Treasury have to obtain Congressional approval to spent it? By placing the dollar proceeds of the Fed gold sales in the commercial banking system, the Treasury would in effect be sterilizing the reserves drained from the gold sales. Agree?

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  92. http://www.federalreserve.gov/faqs/does-the-federal-reserve-own-or-hold-gold.htm

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  93. "Fed gold holdings are not similarly liabilities of the US Treasury'

    The fed just holds the gold on behalf of the treasury.

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  94. Philippe - Thanx for that link. Very informative.

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