Sunday, November 17, 2019

Scott Fullwiler — Quick(?) MMT 101 lesson

From Twitter via AppThreadReader

Note: material in brackets is added to the original by Tom Hickey for clarification.

Scott Fullwiler @stf18
1. Quick(?) MMT 101 lesson:

From the very beginning in the 1990s, MMT has NEVER argued that 'printing money' was necessary. Anyone saying MMT = "print money," even if they (correctly) incorporate an inflation constraint, is getting MMT dead wrong.

2. The argument from the earliest days--@wbmosler 's "Soft Currency Economics," Wray's "Understanding Modern Money," or @StephanieKelton 's "Can Taxes & Bonds Finance Govt Spending?"--the MMT argument is that ALL govt deficits are 'printing money' ALREADY (!).
[A currency issuer issues currency using its central bank as the government's fiscal agent acting on behalf of the Treasury to settle government appropriated spending into nongovernment in the payments system that the central bank administers. This is how state (chartal) money is created.—tjh]
3. These and other foundational, early MMT pieces argue that the choice to issue bonds or not is about monetary policy how to set the CB's interest rate target, not whether to 'finance' a deficit or 'print money.'

4. The argument across literally dozens of publications is consistent--whether or not govt issues bonds when it runs a deficit, the macroeconomic impact of 'bonds vs. money' is nil.
5. What matters for macro impact is the deficit itself, and how it is created (spending/taxing priorities), since the deficit is creating net financial wealth in the pvt sector (note I did NOT say 'real' wealth (!)).

6. The choice to issue bonds or not in the face of a deficit is simply about [one] risk-free govt asset (say, T-bills) vs. another risk-free govt asset of perhaps slightly longer maturity (but that's also a policy choice).

7. This is also partly why we predicted back in the 2001 that Japan's QE wouldn't be inflationary, and predicted the same for the US in 2008. QE & 'monetization' of govt debt is about an asset swap--it's the deficit itself that has the 'quantity' effect, not the financing.
 [This asset swap of one from of government liability to another does not alter the amount of net financial assets generated by deficits. It only alters the term and doesn't affect the quantity of nongovernment net financial assets.]

8. Similarly, in the real world, CB's are defending their national payments systems every minute of every day. This means they accommodate banks' demand for CB liabilities always at or near their current interest rate target.

9. From an MMT perspective, it's really weird that people believe a govt running a deficit via overdraft at the CB is inherently inflationary, but the current system, where govt runs a deficit while CB guarantees mkt liquidity for bond dealers to buy govt bonds, isn't.

10. So, from the beginning 20+ yrs ago, MMT said the 'choice' to issue bonds when running a deficit was about how to set CB's int rate target. W/ bond sales, CB accommodates banks at its tgt rate. W/o bond sales, CB sets rate at ZIRP or uses IOR=tgt rate to set tgt rate <> 0

11. This is just supply and demand from ECON 101. If you push out the supply curve beyond the entire demand curve, either the price falls to 0 or you have a price floor set at <> 0. Those are the only 2 possibilities when 'printing money' to run a deficit.

12. Neoclassicals actually agree w/ this, for different reasons. For them, if 'monetize' govt debt & CB rate = 0, 'monetization' isn't inflationary. Or, if CB sets rate <> 0 via IOR=target rate, still not inflationary.

13. In both cases, CB's reserves are considered effectively equivalent to holding, say, T-bills. So, 'monetization' or 'printing money' is effectively equivalent to 'printing' [issuing] T-bills. IOW, if you blend neoclassical model w/ actual CB ops, 'printing money' [issuing currency] isn't inflationary.

14. Putting this all together . . . MMT has NEVER argued that 'printing money' as conventionally interpreted is necessary to carry out MMT policy proposals. All deficits create net financial wealth for pvt sector, regardless of 'finance' method.

15. Choice to issue bonds or not when running a deficit is about how to set CB's target rate, not 'financing' a deficit. This means that interest on national debt is a policy variable, or at least can be (for monetary sovereign, of course).

16. So, choice to issue bonds or not is not about 'quantity' impact of a deficit, but about 'how' CB chooses to achieve its target rate. Hitting interest rate tgt by overdraft to govt & pay IOR=tgt rate=2% has no difference of macro significance from . . .

17. ... hitting interest rate target by govt instead issuing tbills while CB ensures mkt liquidity at tgt rate = 2% to banks & bond dealers.

18. Now, there are places where MMT scholars argued for no bond issuance, govt gets CB overdraft, & CB sets tgt rate= 0 (permanent ZIRP). Note, tho, that this is (a) not arguing in favor of 'printing money' even in neoclassical view (it's Krugman's liquidity trap, actually) ...

19. (b) and is therefore, simply a policy proposal for low interest rates on govt debt. It is also NOT arguing for ZIRP in a neoclassical world--Wray did his Ph.D. under Minsky. Minsky was against manipulating short term rates; instead favored credit regs/margins of safety.

20. That is, when MMT proposes ZIRP, it is proposing it for ONLY the govt debt, NOT for the economy overall as in a New Keynesian model. There are dozens of MMT publications on regulating credit, and more on the way. MMT was about macroprudential before that was a thing.

21. Minsky was adamant that manipulating short-term interest rates was actually destabilizing (he blamed the rise of money manager capitalism on Volcker's high rates). Raise margins of safety to slow credit rather than raising the overnight, risk-free rate.

22. A benefit of margins of safety is that raising interest rates to slow credit leads to higher hurdle rates that can only be met by riskier projects, while raising margins of safety slows credit by favoring the LESS risky loans.

23. Particularly given that the problem of a debt bubble is that credit QUALITY is bad, it's really weird from an MMT perspective that it's mostly MMT arguing in favor of macro policy that target credit quality ...

24. ... while neoclassicals go to lengths to NOT talk about credit quality--use a Taylor rule to manipulate short-term rates, increase liquidity requirements, increase capital, but little to nothing about underwriting. (Shocker--we now have a corp debt bubble.)

25. So, MMT is NOT arguing for 'printing money' and 'ZIRP' in the conventional, neoclassical world. MMT is arguing for stabilizing demand side of the economy w/ a mix of govt's budget position (at low rates, however 'financed') & credit quality/margins of safety.
The confusion arises to a great owing to overlooking 1) the distinction between the currency issuer and users of the currency that must obtain it from the issuer and 2) the nongovernment net financial assets that deficit spending generates as a nongovernment asset on the balance sheet balancing government liabilities created by public spending. Scott doesn't feature these points in the thread, so I added it for clarity. 

The point is that "printing money" is identical with  issuing currency through appropriated spending in excess of taxes, that is, deficit spending. Government spending is through the appropriation process and the appropriations are funded directly by currency issuance. A currency issuer is self-funding. 

Government spending increases nongovernment net financial assets in the government's payment system administered by the central bank, while taxes decrease nongovernment net financial assets in the payments system. The flip side of public (government) debt is private (nongovernment) saving. 

The only way that nongovernment can net save financial assets in aggregate over a period is through deficit spending, which is a flow that adds to the stock of government debt and nongovernment net financial assets as financial wealth. Warren Mosler points out that currency units that are not taxed back remain in the nongovernment as tax credits not yet assessed and collected. The ability of a government to levy and collect taxes "drives" demand for the currency as the only means of meeting this imposed obligation.

Those who obsess on debt, public and private, fail to understand that all money as an asset is someone's liability. State-created money is a liability of the state and an asset for the saver. Money created by financial institutions like commercial banks is a (loan) asset of the institution while the liability is that of the borrower.

The difference is that a state that is sovereign in its currency can always meet its obligations since it is the currency issuer, whereas currency users must obtain the currency to meet obligations. 

Thus, the real constraint on government issuance is availability of real resources for sale and the financial constraint is price stability.

What about the central bank being private? Many central banks are now owned by their governments, e.g, the Bank of England. The Fed is a public-private partnership whose profit after operating expenses and a 6% annual return on the capital of the member banks is deposited in the Treasury account and the stock cannot be traded.

In addition, there are three major functions of the Fed. The first is managing the payments system for final clearing. This is administered by the twelve federal reserve banks in accordance with the Federal Reserve Act of 1913 as amended. Most payment are now cleared by netting through clearing houses. The federal reserve banks are owned and operated by the member banks in the various regions in accordance with the current provisions of the Federal Reserve Act.

The second function is setting and administering monetary policy. This is the prerogative of the Federal Reserve Board of Governors and is administered through the FOMC at the Federal Reserve Bank of New York. These are functions administered by officials that are politically independent but appointed by government for a fixed term.

The third function of the Fed is regulation of the financial system. This ultimately falls to the chair of the Federal Reserve Board of Governors, a government appointment although "politically independent." For example, Alan Greenspan adopted a lax policy and after the global financial crisis admitted that it was too lax, owing to mistaken assumptions about incentives.


Matt Franko said...

“ (nothing to do with Arts or STEM - two sides of the same coin).”

That’s what someone who never studied/trained in STEM would say....

You guys are trained to synthesize that’s what you’re doing here again with your figurative language metaphor “two sides of the same coin”

Try to make the same point here leaving out the figurative language... try to make the same point using only literal language... I don’t think you could do it...

Some things like raw materials are given to us but no manufactured items are given to us we create them thru educated labor and work...

You’re talking about some sort of primitive hunter gatherer society... we’re way past that due to science

Matt Franko said...

“the distinction between the currency issuer and users of the currency that must obtain it from the issuer”

To see this distinction requires an ability to discriminate... Platonists are not trained to discriminate they are trained to synthesize which they do via the figure of speech “money” which does not allow any such discrimination... they then reify this figure of speech and everyone both govt and citizens have to “get some money from somewhere!” like “money!” is real and not a figure of speech...

Matt Franko said...

This is all fine and dandy in some fantasy land dreamscape....but in the meantime we have Platonist unqualified morons in control who literally think we are “out of money!”

US Great Depression era old wives tale: “ when the money is gone love flies out the window”...

Euthanize the Platonists and all of this goes away...