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.
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.