Thanks—appreciate the response and explanation. Always nice to get clear ‘Yes’/‘No’ response to a question!
To play the other side, isn’t the mainstream response you’ve described really strawmanning MMT though?
First, on the inflation point, as I note in the body of the main post, MMT still says that there is a point at which additional money cause inflation, because an economy is already at its then-current productive capacity and therefore the money does not stimulate further production. This would explain the Venezuala example.
This is also what I was referring to in the main post when I said that the IGM Chicago Survey doesn’t seem like it asks fair questions about MMT—e.g. the position put to various economists as representing MMT was that “Countries that borrow in their own currency can finance as much real government spending as they want by creating money”. On my read, that’s not a fair reflection of what MMT-advocates would say.
And isn’t it consistent with MMT’s theory re inflation that despite the massive quantitative easing programs during and after the GFC, including in the US and Japan, haven’t necessarily led to increased inflation as might have been predicted.
Or, to focus on the present example, given the amount of new capital being injected into the economy, is the mainstream expectation that we will see a spike in inflation soon? If we don’t, should that cause us to question the existing models?
Second, on the ‘capacity to borrow’ point, isn’t what’s happening now that the Federal Reserve is simply buying Treasury bonds? It seems to me like, if that can happen, there’s a captive market for Treasury bonds and perhaps no need to worry that you’ll fail to find a lender.
I appreciate that, from the sound of things, you know what you’re talking about when it comes to economics, so please don’t take the above questions as me trying to argue about something that I don’t understand. I recognise that I don’t fully understand this area and am asking these questions in the hope of getting a better grasp of it.
No worries! I’m always happy to help out. The main things are:
1. It’s true that MMT usually recognizes that excess aggregate demand from money printing leads to increases in prices. The main error that MMT makes here is in saying that it is always possible to avoid default by printing money, even if it causes hyperinflation, so that the true constraint on government spending is its willingness to accept inflation, not its ability to continue making interest payments. The Chicago MMT question may have been poorly worded.
2. I think that these observations are just as consistent with a New Keynesian view of a liquidity trap as with MMT, but New Keynesians have the big advantage of their predictions being laid out far in advance – back in the 80s and 90s, in fact. The New Keynesian view makes significant refinements to Old Keynesian theories of aggregate demand in that it clarifies when government spending is effective in increasing aggregate demand without raising prices. Most notably, New Keynesian views model the financial sector in a lot more depth, and there’s a bunch of models explaining why the way the Federal Reserve acted wouldn’t be expected to cause inflation under the conditions it was facing.
3. There are three problems with this idea of the Fed as a captive lender. The first is inflation. To their credit, MMT people generally recognize this, so it’s not a big problem. The second is that the Federal Reserve, and other central banks, are independent: Central banks can make decisions without interference from either the legislature or executive. This is extremely important, because the Federal Reserve needs the ability to communicate clearly to everyone that it’s going to be responsible and keep inflation low, or else people lose confidence in the currency. The Federal Reserve’s independence is to economists what the Supreme Court’s independence is to judges. Because of this, the Federal Reserve is unlikely to print money with the intention of financing government debt, especially permanently – QE has always been intended as a temporary measure to lower interest rates, not as a permanent expansion of the money base, and the Federal Reserve is still collecting interest on the money it lent to remove it from circulation. The final problem is nobody accepting your currency in exchange for goods and services anymore if inflation gets too far out of hand – the Fed can print all it wants, but it can’t force people to agree to actually use the money.
Thanks—appreciate the response and explanation. Always nice to get clear ‘Yes’/‘No’ response to a question!
To play the other side, isn’t the mainstream response you’ve described really strawmanning MMT though?
First, on the inflation point, as I note in the body of the main post, MMT still says that there is a point at which additional money cause inflation, because an economy is already at its then-current productive capacity and therefore the money does not stimulate further production. This would explain the Venezuala example.
This is also what I was referring to in the main post when I said that the IGM Chicago Survey doesn’t seem like it asks fair questions about MMT—e.g. the position put to various economists as representing MMT was that “Countries that borrow in their own currency can finance as much real government spending as they want by creating money”. On my read, that’s not a fair reflection of what MMT-advocates would say.
And isn’t it consistent with MMT’s theory re inflation that despite the massive quantitative easing programs during and after the GFC, including in the US and Japan, haven’t necessarily led to increased inflation as might have been predicted.
Or, to focus on the present example, given the amount of new capital being injected into the economy, is the mainstream expectation that we will see a spike in inflation soon? If we don’t, should that cause us to question the existing models?
Second, on the ‘capacity to borrow’ point, isn’t what’s happening now that the Federal Reserve is simply buying Treasury bonds? It seems to me like, if that can happen, there’s a captive market for Treasury bonds and perhaps no need to worry that you’ll fail to find a lender.
I appreciate that, from the sound of things, you know what you’re talking about when it comes to economics, so please don’t take the above questions as me trying to argue about something that I don’t understand. I recognise that I don’t fully understand this area and am asking these questions in the hope of getting a better grasp of it.
Cheers
No worries! I’m always happy to help out. The main things are:
1. It’s true that MMT usually recognizes that excess aggregate demand from money printing leads to increases in prices. The main error that MMT makes here is in saying that it is always possible to avoid default by printing money, even if it causes hyperinflation, so that the true constraint on government spending is its willingness to accept inflation, not its ability to continue making interest payments. The Chicago MMT question may have been poorly worded.
2. I think that these observations are just as consistent with a New Keynesian view of a liquidity trap as with MMT, but New Keynesians have the big advantage of their predictions being laid out far in advance – back in the 80s and 90s, in fact. The New Keynesian view makes significant refinements to Old Keynesian theories of aggregate demand in that it clarifies when government spending is effective in increasing aggregate demand without raising prices. Most notably, New Keynesian views model the financial sector in a lot more depth, and there’s a bunch of models explaining why the way the Federal Reserve acted wouldn’t be expected to cause inflation under the conditions it was facing.
3. There are three problems with this idea of the Fed as a captive lender. The first is inflation. To their credit, MMT people generally recognize this, so it’s not a big problem. The second is that the Federal Reserve, and other central banks, are independent: Central banks can make decisions without interference from either the legislature or executive. This is extremely important, because the Federal Reserve needs the ability to communicate clearly to everyone that it’s going to be responsible and keep inflation low, or else people lose confidence in the currency. The Federal Reserve’s independence is to economists what the Supreme Court’s independence is to judges. Because of this, the Federal Reserve is unlikely to print money with the intention of financing government debt, especially permanently – QE has always been intended as a temporary measure to lower interest rates, not as a permanent expansion of the money base, and the Federal Reserve is still collecting interest on the money it lent to remove it from circulation. The final problem is nobody accepting your currency in exchange for goods and services anymore if inflation gets too far out of hand – the Fed can print all it wants, but it can’t force people to agree to actually use the money.