Thursday, December 17, 2020

The ideological bankruptcy of modern monetary theory — Mervyn King


Mervyn King trashes MMT.
If you can’t explain something, try an abbreviation. The latest in economics is MMT — Modern Monetary Theory or, in other words, a magic money tree. It’s a simple idea. It costs almost nothing to print money: the cost of printing banknotes is negligible compared with their face value, and even lower when the Bank of England creates money electronically through its so-called ‘quantitative easing’ programme (QE). That money could be given to the public — either directly or indirectly via the government — to enable people to spend more, so raising output and employment. We are all better off.

Why didn’t we think of this before? Well, of course we did. From Roman emperors through Henry VIII and the Weimar Republic to present-day Zimbabwe and Venezuela, rulers have shown all those clever central bankers struggling to get inflation up to their 2 per cent target how to do it. Unfortunately, they didn’t stop at 2 per cent but ended up in hyperinflations in which prices doubled in a day — equivalent to annual percentage inflation in the many trillions. Needless to say, in such situations the economy tends to collapse. As my wife says when I praise the quality of a bottle of wine and suggest some more, ‘Moderation in all things’....
No kidding. He actually wrote that. It goes downhill from there. Bizarre.

The Spectator
The ideological bankruptcy of modern monetary theory
Mervyn King

18 comments:

Peter Pan said...

Going downhill may be the trend of the future.

Unknown said...

You can bet yet last dollar this ass Mervyn King was too lazy to actually study the historical evolution of currency!

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3557233

Matt Franko said...

“They’re printin’ money!”

Unknown said...

YouTube historical currency lesson for Merv taking up less than five minutes of his precious time:-

https://www.youtube.com/watch?v=brMLr9kasLY

Unknown said...

Longer version of YouTube historical currency lesson for Merv taking up less than an hour of his precious time:-

YouTube historical currency lesson for Merv taking up less than five minutes of his precious time:-

https://www.youtube.com/watch?v=bCdKI5dGn9c

Ralph Musgrave said...

Mervy King started going senile a few years ago. In Ch7 of his book “The End of Alchemy” he argues against full reserve banking, and his first reason is that commercial banks wouldn’t like it and would “lobby hard” against it.

No doubt Wall Street banks “lobbied hard” against any bank executives being sent to prison for robo signing and other crimes committed by banks. That’s not a brilliant argument against sending bank executives to prison.

I dare say murderers aren’t too keen on murderers being sent to jail....:-)

Ralph Musgrave said...

That Mervy King article does actually make one valid criticism of MMT, and it’s one I’ve pointed to over the years. It’s that while MMT theory may be fine, MMTers have not thought through the practicalities. In particular, as King says, MMT seems to assume that politicians control the amount of money that is created and spent, and in view of Mugabe, the Weimar republic etc, that may not be desperately clever. (That’s in his para starting “It is not monetary…”).

So, is there a way of implementing MMT while keeping politicians away from the printing press? Well yes there is. As pointed out by Positive Money and Ben Bernanke, it would be perfectly feasible to have the central bank (or some other independent committee of economists) decide how much money to print each year.

But Mervyn King is evidently not aware of the latter Positive Money / Bernanke point, so he’s clearly is not up to speed on this subject.


NeilW said...

"As pointed out by Positive Money and Ben Bernanke, it would be perfectly feasible to have the central bank"

That just gives to process to a bunch of unelected politicians like - Mervyn King.

And as we can see they are even more incompetent than the people we elect. The difference is we can get rid of the elected people.

And that's why the money *must* be with elected politicians. They should not be able to outsource responsibility to unelected wonks.

NeilW said...

"he argues against full reserve banking"

So does anybody sensible, since it has no effective control function that can't be replicated simply by increasing the interest rate.

Matt Franko said...

“They should not be able to outsource responsibility to unelected wonks.“

That’s what elected officials do all the time.,, maybe except for Trump...

Ralph Musgrave said...

NeilW, Your point is not really relevant to the point of mine to which you responded. My basic point was that Mervyn King is not up to speed with MMT since he is apparently not aware of the Positive Money / Bernanke point.

But as regards your criticism of PM/B, how come you're OK with governments "outsourcing" ten thousand decisions to sundry committees of experts, but not OK with outsourcing the decision on the size of a stimulus package to economists?

Moreover, if the decision on the size of a stimulus package IS TAKEN by a Treasury, there's bound to be some committee of economists in the treasury who do all the detailed work, like try to forcast inflation, and suggest a suitable size for a stimulus package (like the Office for Budget Responsibility in the UK). So your system just involves replacing one committee with another. Or perhaps since all economists according to you are "incompetent", you'd want to see OBR type committees disbanded? Is that right?

Unknown said...

Trump side-lined cyber-security did he not. No doubt he thought playing disruptive mind-games more important!

Ralph Musgrave said...

NeilW, You ask whether "anyone sensible" backs full reserve. I listed about sixty economists who back full reserve here:

https://fractionalreserveisnonsense.weebly.com/more-on-full--fractional-reserve.html

Second, you argue that full reserve is defective because it "has no effective control function that can't be replicated simply by increasing the interest rate." The flaw in that point is that interest rates can be adjusted both under fractional and full reserve. So the interest rate versus fiscal stimulus argument has nothing to do with the full versus fractional reserve argument.

And even if interest rate adjustments were not possible under full reserve, the fact that interest rate adjustments are possible under fractional reserve is not a brilliant argument for fractional reserve because it leaves open the question as to which is better: interest rate adjustments or fiscal stimulus.

And what do you know? Since MMT advocates a permanent zero rate of interest, it would seem MMT (along with Milton Friedman incidentally) does not back interest rate adjustments (except perhaps in emergencies). I quite agree with MMT and Friedman there.

Andrew Anderson said...
This comment has been removed by the author.
Andrew Anderson said...

Since MMT advocates a permanent zero rate of interest, it would seem MMT ... does not back interest rate adjustments (except perhaps in emergencies). Ralph

I detect a softening on MMT's permanent ZIRP since, according to Richard Murphy, they are having difficulties with contriving a FAIR tax policy to control price inflation:

Eleventh, inflation is not now controlled by interest rates – because we don’t want them to rise. It’s going to be controlled by tax. I admit, right now no one has an ideal tax to achieve this goal. I am working on it. It is possible. And it’s progressive, and so fair. from Macroeconomics, Money (MMT Style) and Post-Brexit Recovery, All in One Twitter thread [bold added]

My bet is that the MMT School will abandon permanent ZIRP since they are not adverse to welfare for the banks and the rich when it comes to driving interest rates down. Why then should they be adverse to welfare for the banks and the rich to drive interest rates up?

Unknown said...

Mervyn King needs to be asked why he believes money (currency) isn't a product of law and therefore a governance product. If he denies it is he owes an explanation how it magically appears and holds its value over the short term.

Matt Franko said...

“ If you can’t explain something, try an abbreviation.”

Abbreviations are figurative language... MMT is an acronym...

Andrew Anderson said...

I quite agree with MMT and Friedman there. Ralph Musgrave

The devil is in the details, Ralph. We can have low interest rates WITHOUT government privileges for the banks via an equal Citizen's Dividend and negative interest on large users/hoarders of the Nation's fiat, a public utility.