Trader's Crucible — Monetary Realism and MMT

Read it at Trader's Crucible
Monetary Realism and MMT

by TC

Trader's Crucible — The Unappreciated Effects of Making Stuff

Something to think about.

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The Unappreciated Effects of Making Stuff
by TC

INTEL's co-founder Andy Grove has been making some similar points about innovative edge of late.

Trader's Crucible — What do we agree on?

I know, the JG is all the hot topic.

But I’d rather talk about something we agree on – the need for more fiscal stimulus.  We need more fiscal stimulus.Here are the reasons I’d rather talk about fiscal stimulus than the JG:

1. People here largely agree on the need for more fiscal stimulus
2. 2012 election season is coming up
3. Odds are higher than zero we can get stimulus passed and in action in 2012

Read the rest at Trader's Crucible
What do we agree on
by TC

Trader's Crucible — MMT and the Jobs Guarantee

For the record. And it's interesting, too.

Read it at Trader's Crucible
MMT and the Jobs Guarantee

Trader's Crucible on Bitcoin

Bitcoin hacked, proving once again it’s not real money

TC also mentions the problem of uneven large spreads in different locations.

I suspect that these coins are not fungible, because my 9 year old son would be able to rip the faces off of these spreads. The bitcoin is probably closer to a fad than a real form of money.

Trader's Crucible is on a roll

Trader's Crucible adds a follow-up to recent posts, Chapter 3: In which Mr. Rowe proves his worth. Read the comments, too.

Where James K. Galbraith Slays the IGBC Bogeyman

Prof. James K. Galbriath asks, Is The Federal Debt Unsustainable? and concludes:

The significant conclusion is that there is a devil in the interest rate assumption. If the real interest rate on the public debt is assumed to be greater than the real growth rate, unstable debt dynamics are likely. The offsetting primary surplus that is required for stability is an onerous burden for most countries, and to achieve it in the United States would be practically impossible, since the required cuts would undermine GDP growth and tax revenues. This is why the various budget plans now in circulation will not work out, if they are ever implemented. However, where the real interest rate is below the growth rate or even slightly negative, the fiscal balance required for stability is a primary deficit, and the sustainable deficit gets larger as the debt burden grows. This is why big countries with big public debts can run big deficits and get away with it, as the United States has done almost without interruption since the 1930s.

Prof. Galbraith explains why.

"At a reasonable interest rate for risk-free liquid bonds, moreover, the present debt/GDP path of the United States is (or would be) sustainable, especially following modest economic recovery. The CBO’s assumption, which is that the United States must offer a real interest rate on the public debt higher than the real growth rate, by itself creates an unsustainability that is not otherwise there. It also goes against economic logic and is belied by history. Changing that one assumption completely alters the long-term dynamic of the public debt. By the terms of the CBO’s own model, a low interest rate erases the notion that the US debt-to-GDP ratio is on an 'unsustainable path.'

"The prudent policy conclusion is: keep the projected interest rate down. Otherwise, stay cool. There is no need for radical reductions in future spending plans, or for cuts in Social Security or Medicare benefits, to achieve this. Do not change the expected primary deficit abruptly. Let the economy recover through time, and do not worry if the debt-to-GDP ratio rises for a while. If we follow the present fiscal and monetary path for 15 or 20 years—and if that path achieves an acceptable rate of growth and return to high employment, with positive but low inflation—we’ll see a debt-to-GDP ratio higher than now but still within our own postwar experience and that of other wealthy, stable, prosperous countries. At that time, it may well be that the primary deficit will already be below the value required for a stable debt-to-GDP ratio, since the threshold will be higher, and tax revenues rise as incomes recover."

Prof. Galbraith's policy note explicates the point about the IGBC that Trader's Crucible made in Chapter 2: In Which the Traders Crucible slays the Intertemporal Government Budget Constraint, and Mr. Rowe demonstrates his Worth.

See aso, Stephanie Kelton, Limitations of the Government Budget Constraint: Users vs. Issuers of the Currency

Abstract

The financial crisis and ensuing economic meltdown has led to sharp increases in the deficits and debt levels of many advanced economies. The run-up in public sector indebtedness helped to restore private sector balance sheets, laying the foundation for economic recovery in these regions. But the so-called “sovereign” debt crisis in the Eurozone has undermined the fiscal resolve that has, thus far, kept truly sovereign governments from slipping into a bona fide depression. Fearful of becoming the next Greece, governments that could allow an unlimited fiscal adjustment to restore full employment, are methodically weakening their fiscal support mechanisms and setting themselves on a path to becoming the next Japan.

The definitive MMT work on interest rates, debt, and the IGBC is Scott Fullwiler's Interest Rates and Fiscal Sustainability.

The IGBC Goes the Way of the Money Multiplier

Trader's Crucible dispatches the intertemporal government budget constraint (IGBC). It's a short post, so I won't try to summarize it.

The concise way to destroy the IGBC, and why to destroy it

Hint: MMT has shown how the money multiplier is an ex post artfact rather than an ex ante cause. So is the IGBC. Since both are ex post rather than ex ante, as the mainstream incorrectly supposes, mainstream thinking about them is simply backwards.

Trader's Crucible Slays the IGBC Bogeyman

Chapter 2: In Which the Traders Crucible slays the Intertemporal Government Budget Constraint, and Mr. Rowe demonstrates his Worth

"If the violations of the no Ponzi criteria are not observable for the most liquid and transparent possible market in any economy, then the EMH must be wrong. No EMH in the market for money has devastating consequences.

"It’s at this point where I raise the head of the IGBC and proclaim the dragon slain. Either you believe the inflation rate as the only way to tell if people believe the IGBC is holding, or go back to believing in crystal balls telling the future. If you insist on a strong belief in magic, then I hand over the head of the EMH."

TC mounts a clever argument in the form of a dilemma — either the Intertemporal Government Budget Constraint (IGBC) or or the Efficient Market Hypothesis (EMH), but not both.