Most debates around Modern Monetary Theory (MMT) revolve around the role of operations and the meaning of the “fiscal constraint”: what are the limits on fiscal policy? (The focus on this one topic is either the result of this being the most interesting topic, and/or critics not being bothered to read anything else in the MMT literature.) These debates are typically uninteresting, because they end up being purely semantic debates, and the two sides actually agreeing on the underlying principles. To avoid wasting time on such debates, we need to re-cast the debate into a debate over something concrete. In the absence of a discussion of a specific policy, I believe that the best way to phrase the debate is as follows: does the government’s debt-to-GDP ratio matter?
There is a secondary, debate: do government’s need to fear “bond market vigilantes”? Since the usual argument is that said vigilantes will rebel when the debt-to-GDP ratio gets too high, it can be viewed as a side argument of the main debate.Bond Economics
The Debt-To-GDP Ratio Does Not Matter: The Fiscal Constraint Debate
Brian Romanchuk
20 comments:
My reasons for thinking the debt:GDP ratio doesn’t matter are thus. Not sure if they’re better than Brian’s.
1. Debt and base money are the same thing, as pointed out by Warren Mosler. Or at least they merge into each other: that is, debt which pays a very low rate of interest and which is near maturity comes to the same thing as base money. (“Near maturity” debt is actually accepted in lieu of money in the World’s financial centers.)
2. In as far as a high debt simply equals the private sector holding a larger than usual stock of base money / “low interest near maturity” debt, there cannot be any harm in that, long as the result is not excess demand and inflation.
3. If in the latter scenario, artificial attempts are made to cut the “debt / stock of money”, demand will probably fall and unemployment will rise, which equals shooting yourself in the foot.
4. Raising interest rates, i.e. raising the rate of interest paid on the debt is probably an acceptable way of TEMPORARILY cutting demand, but in the longer term, there is no excuse for paying any significant amount of interest to the rich simply for hoarding base money. Ergo the MMT “permanent zero rate of interest” idea is correct or approximately correct.
5. Conclusion. The size of the debt / amount of base money in private sector hands simply needs to be whatever minimises unemployment while keeping to the inflation target. That “size” might be 10% of GDP. It could be 100% or as seems to be the case in Japan, it might be nearer 200%. The exact size / percentage is wholly irrelevant.
"Debt and base money are the same thing, as pointed out by Warren Mosler. "
No they are not Ralph...
If a non-bank entity has a bond that the CB buys then that increases bank assets (Reserve Assets), increases bank deposit liabilities (former bond holder now forced to save in a deposit account) , so the bank leverage ratios (A-L)/A are forced down (by the monetary policy) and causes a credit growth slowdown... (numerator unchanged and denominator increased)
Just doing debt issuance doesnt do this... the creation of your "base money!" by the CB is very bearish and is not equivalent to simply debt issuance...
Just look at the latest H.8 report...
You have Reserves up 200B since September and bank loan assets and deposit liabilities are both down as banks have had to liquidate loans to accommodate the higher levels of Reserve Assets...
Mike's latest:
"Loans and leases in Bank Credit down $2 bln to $9.995T. Second week down. Lowest level in 3 weeks. Growth rate down four-tenths. Slowest in 21 months.
Commercial & Industrial loans down $9.7 bln to $2.347T. Second week down. Biggest decline in 3 months. Growth rate falls to 1.6%, slowest in 22 mos. "
They've added $100Bs of your "base money!" and are collapsing the whole f-ing thing again...
they are NOT equivalent policies...
I didn’t attempt to justify the argument, rather just point out the implications of the ratio not mattering. If someone disagrees, they have to show how it matters.
I imagine that people could complain that this was too simple a formulation, but I think it catches a good portion of the bad critiques of MMT.
Brian,
"we need to re-cast the debate into a debate over something concrete. In the absence of a discussion of a specific policy, I believe that the best way to phrase the debate is as follows: does the government’s debt-to-GDP ratio matter? "
You say we have to include something "concrete" and then proceed to refer to a ratio...
A ratio is not "concrete" it is an abstraction...
Something "concrete" would be real...
iow you cant say we have to be more real and then refer to an abstraction...
Youre making the typical reification error you always see...
A reification error is also called "fallacy of misplaced concreteness"...
Maybe what you mean is we need to have better trained people employed in this in applying appropriate abstractions of the Finance and Accounting Sciences making the policy assessments...
Here:
https://www.sciencedirect.com/science/article/abs/pii/S0010027717302159
"ratio calculations: ratios are a naturally dimensionless or abstract quantity"
Ratios are not "concrete" or Real....
The ratio of hands to fingers is 1:5 for most people.
Frank, re my claim that base money and govt debt are the same thing, I enlarged on that in my first comment above by saying that “they merge into each other”. I.e. what’s the difference, as viewed by the holder of some debt, between $X of debt that matures in one day’s time and $X? There’s no difference!
Same for “one week’s time”: the difference is still negligible. As for “one month’s time” the difference is a bit bigger. And in the case of “ten years time” obviously there’s a significant difference.
Second, I don’t see why turning debt into base money would cause a “credit growth slowdown”. Banks are normally constrained by their LACK OF reserves (base money). Thus more base money in their accounts at the Fed, the more they can lend.
"Thus more base money in their accounts at the Fed, the more they can lend."
The banks dont "lend out" the Reserves the Reserves are a regulatory abstraction...
Youre making the same reification error as Brian ... you are talking about scientific abstractions as if they are REAL... they are not real...
And you say: "what’s the difference, as viewed by the holder of some debt, between $X of debt that matures in one day’s time and $X? There’s no difference!"
The 'holder of some debt' in your example is not a regulated entity...
For any regulated entity, like a Depository, the exact composition of Assets and Liabilities matters very much....
Here:
https://www.britannica.com/science/abstraction
"Abstract as an adjective is contrasted with concrete in that, whereas the latter refers to a particular thing, the former refers to a kind, or general character, under which the particular thing—i.e., the “instance”—falls. Thus, war is abstract, but World War I is concrete; circularity is abstract, but coins, dinner plates, and other particular circular objects are concrete. The term abstract is sometimes used to refer to things that are not located in space or time; in this sense, numbers, properties, sets, propositions, and even facts can be said to be abstract, whereas individual physical objects and events are concrete."
Fingers are real, Franko. Yours are probably made of concrete. Or just cement.
Ratios are real. They are abstract in the sense they are conceptual.
You say we have to include something "concrete" and then proceed to refer to a ratio...
A ratio is not "concrete" it is an abstraction...
Something "concrete" would be real...
Ergo, ratios are not "real".
Ratios are not real they are an abstraction this is my point...
Brian says "we have to start talking about something concrete ... so let's look at this ratio..."
Doesnt make any sense...
Ralph says "banks have more Reserves to lend out!" ... same thing...
MMT says "where do football games get the points to put on the scoreboard!" to no effect...
Same thing... reification error ...
The context of Brian's statement is clear. He's referring to that which is specific or definite. The opposite of which, is vague.
con·crete
/ˈkänˌkrēt,ˌkänˈkrēt/
adjective: concrete
1. existing in a material or physical form; not abstract. e.g. "concrete objects like stones" Similar: solid, material, real, physical, tangible, touchable, tactile, palpable, visible, existing Opposite: abstract, theoretical, imaginary
specific; definite. e.g. "I haven't got any concrete proof" Similar: definite, specific, firm, positive, conclusive, definitive, fixed, decided, set in stone, factual, actual, real, genuine, substantial, material, tangible, bona fide Opposite: vague
3. (of a noun) denoting a material object as opposed to an abstract quality, state, or action.
noun: concrete; plural noun: concretes
A heavy, rough building material made from a mixture of broken stone or gravel, sand, cement, and water, that can be spread or poured into molds and that forms a mass resembling stone on hardening. e.g. "slabs of concrete"
verb: concrete; 3rd person present: concretes; past tense: concreted; past participle: concreted; gerund or present participle: concreting
1. cover (an area) with concrete. e.g. "the precious English countryside may soon be concreted over"
fix in position with concrete. e.g. "the post is concreted into the ground"
2. archaic - form (something) into a mass; solidify. e.g. "the juices of the plants are concreted upon the surface"
make real or concrete instead of abstract.
"concreting God into actual form"
Phrases
be set in concrete — (of a policy or idea) be fixed and unalterable.
"I do not regard the constitution as set in concrete"
Origin
late Middle English (in the sense ‘solidified’): from French concret or Latin concretus, past participle of concrescere ‘grow together’. Early use was also as a grammatical term designating a quality belonging to a substance (usually expressed by an adjective such as white in white paper ) as opposed to the quality itself (expressed by an abstract noun such as whiteness ); later concrete came to be used to refer to nouns embodying attributes (e.g. fool, hero ), as opposed to the attributes themselves (e.g. foolishness, heroism ), and this is the basis of the modern use as the opposite of ‘abstract’. The noun sense ‘building material’ dates from the mid 19th century.
Ratios are real.
Percepts are real.
Concepts are real or imaginary.
Franko is unreal.
Those assertions are opposite the cognitive science...
Let’s get to the bottom of this.... What is your degree in?
Do YOU think banks “lend out the reserves!” too?
Here they are not synonymous:
https://en.wikipedia.org/wiki/Abstract_and_concrete
Are you degreed in Philosophy ?
I can't speak for Brian, but he wants to talk about a ratio that is materially relevant to the topic at hand. Many abstract concepts have real world applications.
One of the meanings of 'concrete' has to do with what is definite, specific, firm, positive, conclusive, definitive, fixed, decided, set in stone, factual, actual, real, genuine, substantial, material, tangible, or bona fide... not whether it exists physically.
I used to believe banks lent out depositor's money, but then I learned who is on the hook for loans that go bad. There are capital requirements, and when that isn't enough, there is deposit insurance.
"Bail-ins" change the equation yet again.
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