MMT bleg
Modern Monetary Theory is a term that one encounters with increasing frequency. It is often applied to a specific policy, such as advocacy of expansionary fiscal policy. But that’s not a very useful definition. Lots of economists now advocate expansionary fiscal policy in the current environment of very low interest rates and high unemployment.
MMT is more than fiscal stimulus; it is a model of the macroeconomy. In order to better understand the MMT model I’ve been reading “Macroeconomics”, an undergraduate textbook written by William Mitchell, Randall Wray and Martin Watts. While MMT is not my cup of tea, I don’t want to be unfair in my appraisal. Thus I’ll discuss one potential problem here (and another today over at Econlog), and try to elicit feedback from MMTers—what am I getting wrong? Am I being unfair? If so, what’s the intuition that I’m missing?
On page 342 they make an assertion that caught my attention:
Monetarists are hostile to the creation of base money to finance deficits because they claim it is inflationary due to the Quantity Theory of Money (QTM). MMT advocates would first highlight institutional practice, namely that net treasury spending initially causes an equal increase in base money.
Second, they would challenge the theory of inflation based on QTM, and argue that if a fiscal deficit gives rise to demand pull inflation, then the ex post composition of ΔB + ΔMb in Equation (21.1) is irrelevant. Overall spending in the economy is the driver of the inflation process, and not the ex post distribution of net financial assets created between bonds and base money.
A few initial observations:
1. The first paragraph seems misleading, as it may give students the false impression that the Fed does not determine the stock of base money. But I’d like to focus on the second paragraph.
2. The second paragraph seems to apply to all open market purchases, not just those that occur when market interest rates equal the interest rate on excess reserves (IOER). That’s clear from the rest of the book, which focuses heavily on historical examples from the 1960s, 1970s and 1980s. So for the rest of the post I’ll consider OMOs that occur in a world where nominal interest rates are positive and there is no IOER, i.e. the pre-2008 world. To be sure, I don’t think their claim is even true in a world with IOER, but it’s at least more defensible in today’s world.
3. Most mainstream economists (including John Maynard Keynes) would not agree with the claim that a purchase of interest-bearing bonds with zero interest base money is “irrelevant”.
4. I’m focusing on this point because much of the analysis in this textbook hinges on this claim. If it’s false (and I think it is) then the rest of the book sort of falls apart. For instance, the book assumes that demand management is done by the fiscal authority, whereas in the real world central banks determine aggregate demand (at least when interest rates are positive).
OK, so why do MMTers believe that OMOs don’t matter? Suppose we go back to the economy of the 1990s, when risk-free interest rates were often about 5%. Assume the monetary base is $500 billion (as in 1998). Now consider this thought experiment. The Fed buys another $500 billion in Treasury bonds, paid for with zero interest base money. Is that action actually “irrelevant” because the sum of base money and publicly held debt doesn’t change?
Both monetarists and Keynesians would predict that this action would boost output in the short run, and cause both P and NGDP to double in the long run. Monetarists would point to the creation of huge excess cash balances. Banks would try to get rid of their excess reserves by purchasing assets. Over time, some of the excess reserves would leak out as cash in circulation, but this would cause excess cash balances for the public. Only when the price level doubled would the public and banks be willing to hold $1000 billion in base money, twice as much as before.
Now you might argue that this is the monetarist view, which has fallen out of favor. But Keynesian would make roughly the same prediction.
In the Keynesian model, the huge open market purchase would sharply depress interest rates, to a level far below the natural rate of interest. This would cause aggregate demand to rise sharply. Aggregate demand would continue to increase until the market interest rate was once again equal to the natural rate. But that could only occur when the price level had doubled. Even in the Keynesian model, one-time increases in the monetary base are neutral in the long run.
So what do MMTers think would happen? That’s what I can’t figure out. Here are some possibilities:
1. Maybe the MMT claim that the composition is “irrelevant” is a claim that these assets are close substitutes. Swapping cash for bonds doesn’t matter. Interest rates, output and inflation are not affected. But is this plausible? Why would the Fed’s decision to double the monetary base cause the public and banks to wish to hold twice as much zero interest base money as a share of GDP? For instance, if banks can earn 5% on T-bills and 0% on reserves, why would they choose to hold more excess reserves? Ditto for the public’s holding of cash.
2. Maybe the MMT claim is that the composition does affect interest rates, but not the broader economy. That is, maybe they are claiming that a big open market purchase would drive interest rates much lower, perhaps even to zero, without impacting output or inflation. But how plausible is the claim that in 1998 the Fed could have injected enough base money to drive rates to zero without triggering inflation?
NeoFisherians correctly point out that low interest rates are often associated with low inflation. But that’s probably due to reverse causation—the Fisher effect. I know of no case where a central bank injected massive quantities of reserves into an economy with market interest rates well above zero and with no IOER (i.e. an economy like the US in 1998) without triggering high inflation. And I know of many dozens of cases where such a policy did create high inflation.
How plausible does it seem that you could take an economy like the US in 1998, cut Treasury bill yields from 5% to 0% vie OMOs, which would dramatically reduce mortgage interest rates, and not trigger a sharp increase in aggregate demand? I just don’t get what the MMTers are claiming here. If interest rates didn’t fall then you get runaway inflation via the hot potato effect, and if interest rates immediately plunged to zero you’d get a big rise in AD because (unlike in cases like the deflationary 1930s or 1990s Japan) you’d be sharply depressing market interest rates to well below the natural rate for a healthy economy.
What do MMTers think would have happened if the Fed had bought $500 billion in bonds in 1998, and announced that the increase was permanent? And why?
Even if I am misinterpreting their claim and they respond, “Yes, MMTers admit that open market purchases are expansionary”, it would not make me think I’ve wasted my time with this post. That answer would imply that there are other major problems with the textbook, which is mostly written using the implicit assumption that monetary policy does not determine aggregate demand.
I’ll have many more questions on MMT.
PS. And can we count the %$*#@&$ votes! Isn’t that the point of elections?
Tags:
22. November 2020 at 23:04
[…] be unfair in my appraisal, so I’ll discuss a point of confusion here (and another today over at MoneyIllusion), and try to elicit feedback from those better schooled in the model. Am I being unfair? If so, […]
23. November 2020 at 01:41
Was the success of Japan in side-stepping the Great Depression due to money-financed fiscal programs (MFFPs), or by another mechanism?
Or was it a version of MMT?
Is there a difference between MFFPs and MMT, at least when stimulus is desired?
23. November 2020 at 03:06
[…] unfair in my appraisal, so I’ll discuss a point of confusion here (and another today over at MoneyIllusion), and try to elicit feedback from those better schooled in the model. Am I being unfair? If so, […]
23. November 2020 at 04:26
Re Scott’s desire to “elicit feedback from MMTers” I should first say that I am a fully paid up and self-confessed MMTer: I organised a little seminar for Warren Mosler a few years ago in the UK.
I’m not sure about Mitchell & Co’s claim that “Monetarists are hostile to the creation of base money to finance deficits because they claim it is inflationary due to the Quantity Theory of Money (QTM).” Actually Milton Friedman, the arch monetarist, specifically advocated deficits funded by new base money in his 1948 American Economic Review paper.
Next, Scott disagrees with the MMT claim that the “purchase of interest-bearing bonds with zero interest base money is irrelevant”. I suggest it is actually irrelevant or near irrelevant in that that exercise has little effect on what MMTers call “Private Sector Net Finanicial Assets”. That is, to purchase $X worth of bonds, the Fed creates $X of new money and purchases $X of bonds, thus PSNFA stays about the same. There is certainly little effect where the bonds yield little interest and are near maturity: low interest yielding and near maturity bonds are pretty much the same as cash.
Given a higher rate of interest, there will be more of an effect though: one effect will be to cut interest rates.
In contrast to the latter small effect of buying back govt debt, particularly low interest yielding debt, the preferred MMT method of implementing stimulus, i.e. creating new base money and spending it (and/or cutting taxes) certainly does influence PSNFA: for each $ of that “create and spend” policy, PSNFA rises by a $. Ergo the effect per $ is much bigger.
23. November 2020 at 05:18
You should be asking the serious questions—-you are an economist. Someone needs too and I would be open to your response to their answers.
But I am not an economist so I can afford to have a different set of priors. MMT is a nonsense theory. It is the nihilism of economics and is designed or at least supported by the extreme left to do whatever they feel like doing. I can see Harris or Biden (50/50 Biden is out by 2022) naming an MMT as head of Fed. But perhaps the creaky lifer Keynesians inside the Fed will force a demand pull inflation guy into the job.
23. November 2020 at 06:27
higher interest rates mean higher debt service costs, but those higher interest payments are also someone else’s income.
(I’m not an MMTer but I’ve heard them make this point)
Cheers!
23. November 2020 at 06:54
Just for fun I do the weekly MMT quiz that Bill Mitchell runs on his blog:
http://bilbo.economicoutlook.net/blog/?p=46348
I have learned that the only way to get all the questions ‘right’ is to assume that swapping bonds for money (and vice versa( has no real effect.
For example the ‘right’ answer to the question ‘Assuming the expenditure multiplier is greater than 1, if the government increases its deficit, the net spending injection will have a greatest impact on aggregate spending if there are no offsetting monetary operations by the central bank (government bond sales) draining the excess reserves created.’ is False.
23. November 2020 at 09:32
I won’t try to answer your question is it’s over-my-head but I will comment that if true creation of cash were used prescriptively to achieve our inflation targets, it may require a MUCH smaller amount of market intervention than the current methods.
In fact, I bet if Trump went out and announced that the government would be funding even a relatively tiny amount of its budget with new cash rather than tax-revenues and debt, inflation expectations would tick up dramatically.
23. November 2020 at 09:41
How can any resource have value if producing more of it does not affect its value?
23. November 2020 at 10:16
Ralph, I’m talking about the case where T-bills earn 5%. You seem to be saying the MMTers are wrong in that case. Am I interpreting you correctly?
And do you really believe that the public is indifferent between holding $20 bills and T-bills, even when interest rates are only 1%? I’m not! Banks aren’t. Drug dealers aren’t.
Carl, Good question. The only plausible response is if it’s exchanged for a perfect substitute. But I tried to show in this post that cash and T-bills are not perfect substitutes at positive interest rates.
23. November 2020 at 12:23
I just want to be cautious with this claim at the end: “the implicit assumption that monetary policy does not determine aggregate demand“. What does the term “monetary policy” even refer to? In ordinary macroeconomic discussion, there’s a pretty easy definition: “monetary policy” is government action that changes the monetary base. “Fiscal policy” is spending and taxation and borrowing (which, in the current real world, has no net effect on the monetary base).
But that doesn’t work any more in the MMT world. Their vision merges fiscal and monetary policy, so that ordinary government expenditures both directly impact the economy, and also change the monetary base simultaneously.
So it’s a little harder to tell what you think the MMT claim is, regarding so-called “monetary policy”, given that they don’t use that term the way the rest of us usually do.
23. November 2020 at 12:51
@Brett, that there are two sides to every transaction is hardly unique to MMT. That all debt is someone’s asset is another common point, although the exact implications of that are the subject of much debate. Inflation means things are more expensive, but it also means more income for the recipient. Etc., etc.
23. November 2020 at 15:35
“as it may give students the false impression that the Fed does not determine the stock of base money. ”
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
“While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates. In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. “
23. November 2020 at 15:36
Scott- Where are you getting this from about a “natural” rate?:
“to a level far below the natural rate of interest. This would cause aggregate demand to rise sharply. Aggregate demand would continue to increase until the market interest rate was once again equal to the natural rate.”
Why do you believe in a natural rate for government tokens (i.e., reserves or treasuries)?
23. November 2020 at 15:38
MMT says all government spending works via crediting bank accounts (put numbers up in account) and there are unlimited intraday overdrafts. If no saving in spending chain get all government spedning back as tax. Hence, all government spending is funded by printing money.
23. November 2020 at 16:12
Don, You said:
“So it’s a little harder to tell what you think the MMT claim is, regarding so-called “monetary policy”, given that they don’t use that term the way the rest of us usually do.”
But in the statement I quote they are saying that OMOs don’t matter if we hold the budget deficit fixed. Swapping base money for bonds doesn’t matter. That’s a pretty controversial statement.
Kester, But if the Fed is targeting interest rates then how does a Treasury operation impact the base? The Fed would simply offset the impact to keep rates constant. That’s exactly my point.
And what about when the Fed uses OMOs as needed to adjust their interest rate target to a new level? Is that “irrelevant”?
I’m not seeing any answers to my questions.
Clint, I’m not a Keynesian, I’m just pointing out the Keynesian view, which is that what matters is the relationship between the market rate and the natural rate. The natural rate can be defined as the Fed’s interest rate setting that produces stable 2% inflation. (Although there are other possible definitions.) My point is that the MMT claim seems at variance with both monetarist and Keynesian models, but I don’t see any explanation as to WHY those standard models are wrong. The burden of proof is on those MMTers claiming that OMOs don’t matter—that’s a radical claim at positive interest rates.
Kester, You said:
“Hence, all government spending is funded by printing money.”
Again, not if the Fed is targeting interest rates. Any injection of base money caused by the Treasury spending money would be offset by the Fed selling bonds, thus increasing the stock of debt held by the public. The spending would be financed by debt in that case.
The Fed gets to decide the size of the monetary base.
Generally speaking, when spending is financed by printing money it doesn’t end well, although at zero interest rates you can do this to some degree.
23. November 2020 at 16:24
The argument about the pre-2008 system is straightforward, but perhaps not clear from the textbook section. (My comments are based on other MMT readings, no references handy, sorry.)
If the Fed created a significant amount of excess reserves, the Fed Funds rate would collapse to zero. (In practice, the system ran with a small amount of excess reserves.) Since repo is a competing money market instrument, this drives the risk-free curve to zero at the short end. This will happen no matter what the Fed announces as its target rate. This is incompatible with the framework used by the Fed, where they announced a target for the Fed Funds rate.
Once the entire risk-free curve has collapsed to 0%, bonds and Fed Funds are fungible instruments.
Countries that use a corridor system avoid the collapse to 0% (like the Fed post-2008), but all the purchases do is change the duration of governmental liabilities outstanding. The argument is that such a duration shift is not economically significant.
23. November 2020 at 16:36
Brian, That explanation doesn’t help.
If you claim that doing X has no effect because if the Fed did X the interest rate would collapse and the Fed doesn’t want the interest rate to collapse because they target interest rates, then you haven’t said anything meaningful at all. What’s the effect of doing X? The textbook seems to say no effect.
I really hope that this is not the MMTers “explanation”.
But it’s even worse. Prior to 2008 the Fed frequently adjusted interest rates, and they did so by changing the monetary base in OMOs. So they certainly can and do change the monetary base.
So again, are MMTers saying that a big OMO would not change the interest rate? Or are they saying that a change in the interest rate wouldn’t affect the economy? A yes or no to each of these two questions would help.
The textbook is not clear on this point.
23. November 2020 at 17:02
The Fed had effectively zero discretion in the reserves it supplied to the system on a day-to-day basis – excess reserves were effectively nil. Meanwhile, reserve accounting is lagged (I believe), so there was nothing banks can do if the Fed decided to not supply the required reserves. That’s how the system worked, and standard toy models did not reflect that reality.
The textbook passage you quote doesn’t seem to fit this discussion. There’s a few debates being addressed.
1) A core argument is that the belief that the Fed had discretion when supplying reserves is incorrect. As I stated above, they needed to supply required reserves, and the excess was negligible. You will need to find a more advanced text to run through the operations. It’s possibly in the textbook, but I’m not sure.
2) The Fed couldn’t supply excess reserves without driving the interest rate to zero. That’s what the literature says will happen. That’s contradictory to the use of policy rates.
3) The argument is that the effect of interest rates on the economy is weaker than mainstream assumptions, and effects are mixed. That’s a big debate.
4) There is a debate about the effect of changing the duration of government liabilities. Straight interest rate expectations suggests that the effect would be small.
23. November 2020 at 17:04
(I’m dealing with other distractions, so I had to respond quickly. I might write a longer explanation on my blog later.)
23. November 2020 at 17:18
What does ΔB + ΔMb mean?
23. November 2020 at 17:32
1) There are 3 ways to implement monetary policy: a floor system, a corridor system, or a ceiling system.
2) Empirically (and it’s not surprisingly theoretically) we know that the demand for reserves by banks is highly insensitive to the interest rate: banks have a particular quantity of reserves that they need/want, and aren’t particularly interested in holding more or less than that amount, basically regardless of what rates are.
3) In MMT bank lending is not seen as reserve-constrained, but rather as demand-constrained: if a creditworthy customer shows up for a loan, the banks can find a way to get reserves if they turn out to need them. But if reserves show up that the banks weren’t expecting, that’s not likely to cause them to loosen credit standards (which is the only way to make more loans at a given interest rate).
4) Empirically, neither consumption nor most categories of investment spending are particularly sensitive to interest rates.
MMTers essentially argue that any effect of OMOs have to happen through prices, not quantities. I.e. if it doesn’t affect interest rates, then it doesn’t affect inflation. And even if it does affect interest rates, it may not actually affect inflation, if there isn’t a large enough reaction from aggregate demand to actually cause prices to move.
In a corridor system, the CB cannot just discretionarily add reserves, unless they’re willing to stop running a corridor system and start running a floor system. If they aren’t, they have to promptly remove the reserves they just added. If they are, then they now have a floor system; if they don’t raise IOR to the former target rate, then the interest rate will have just fallen, from its previous target to the IOR rate (which could be zero). So the price effect depends on just what the CB intends to do here: eg. if they don’t intend to abandon the corridor system, then there is no price effect because maintaining the system requires them to promptly drain the reserves.
As for quantity effects:
a) We don’t think the substitution argument really holds water here. In terms of individuals, individual consumption decisions just have very little to do with the allocation of their portfolios between different liquid assets. For banks, as above, bank lending isn’t reserve-constrained most of the time.
b) Liquidity is a much more important factor. If your assets are illiquid, then you might not be able to accomplish the spending that you otherwise might want to, because you can’t liquidate your assets. So if OMOs had the effect of replacing illiquid assets with liquid ones, then that could have an effect on aggregate demand even apart from price channels. But, given that the government not only issues highly liquid instruments, but also actively backstops the institutions that maintain that liquidity (e.g. dealers), there’s nothing doing here. (This is in contrast with WW2, when some economists were actively arguing that gov should issue illiquid instruments, eg. non-negotiable non-redeemable notes, in order to lock up savings, to reduce spending.)
One last point: IMO it’s mostly not correct to think of OMOs as managing the interest rate. Clearly in floor (or ceiling) systems they don’t do that – they just ensure that reserves are within the range where IOR (or the lending rate) will work. In corridor systems, likewise, OMOs aren’t used for changing the interest rate. They are primarily used to cancel out the effect of other changes to the CB’s balance sheet. For instance, if the Treasury is running a surplus for the day, draining reserves, the CB might have to do an OMO, to add reserves back in as counter. This is what OMOs are mostly used for. The people who ran the desk at the Fed report that they didn’t need to do OMOs to change rates pre-2008 – the Fed’s announcement of a new rate target would be sufficient to move the market rate. So, OMOs aren’t for changing interest rates per se, they are for maintaining the monetary policy implementation system.
23. November 2020 at 20:38
Scott – Re the Fed buying up T-Bills that pay 5%. You ask whether I am saying MMTers are wrong to say there is no effect there. Yes: that’s what I’m saying. I.e. if the Fed buys bills that pay 5%, there is a significant interest rate cutting effect, isn’t there? In contrast, if it buys bills that pay say 0.5%, then there’s relatively little effect, seems to me.
23. November 2020 at 20:43
Brian, I had a very simple question; what would happen if the Fed swapped base money for bonds. Lecturing me about the Fed’s interest rate targeting regime is of no help at all. I know how it works; I’m asking what would happen with a monetarist thought experiment like the one in the textbook. What if they suddenly doubled the base, at a time when interest rates were 5%
You might want to study Fed policy during 1979-82 to get some perspective on systems other than interest rate targeting.
Sam, Ok, it’s beginning to look like no one is going to answer my question. Lecturing me on how the Fed conducts OMOs is not helpful. I’m not a moron; I just wrote an entire book on monetary policy. I know how the system works under a wide variety or regimes including money supply targeting, interest rate targeting, exchange rate targeting, gold price targeting, etc.
BTW, this:
“The people who ran the desk at the Fed report that they didn’t need to do OMOs to change rates pre-2008 – the Fed’s announcement of a new rate target would be sufficient to move the market rate.”
Doesn’t mean why you seem to think it means. It just means that prices move in anticipation of changes in quantities. That’s Efficient Market Hypothesis 101.
I’m guessing that if you went back to 1998 and immediately cut the T-bill yield from 5% to 0%, not many people (including homebuyers) would think that the Fed’s action was completely “irrelevant”. But if that’s the claim MMTers want to make, I’ll go with it in my review of the book.
As far as this:
“There are 3 ways to implement monetary policy: a floor system, a corridor system, or a ceiling system.”
There are many more, and the best system is none of those three. Stop targeting interest rates entirely, and target something more reliable.
And this is beside the point:
“In a corridor system, the CB cannot just discretionarily add reserves, unless they’re willing to stop running a corridor system and start running a floor system. If they aren’t, they have to promptly remove the reserves they just added. If they are, then they now have a floor system; if they don’t raise IOR to the former target rate, then the interest rate will have just fallen, from its previous target to the IOR rate (which could be zero). So the price effect depends on just what the CB intends to do here: eg. if they don’t intend to abandon the corridor system, then there is no price effect because maintaining the system requires them to promptly drain the reserves.”
So the textbook says an OMO has no effect. I say it does. And the MMT response is that you can’t do an exogenous OMO if you are targeting interest rates? That’s not much of an answer is it? It’s like if I ask what happens if you drive a car at 100mph, and you tell me there is no answer because it’s illegal to drive at 100mph. That doesn’t answer the question. The textbook authors are the ones who criticized the monetarist claim that OMOs have an effect. They brought it up, not me. Saying the Fed wouldn’t do that is of no help. And indeed the Fed could do OMOs if it was willing to adjust its interest rate target to a new level, which it frequently does.
You said:
“In MMT bank lending is not seen as reserve-constrained, but rather as demand-constrained”
Nominal lending is reserve constrained and real lending is demand constrained. But reading the textbook I see little evidence that the authors understand the distinction between factors that affect real lending and factors that affect nominal lending.
23. November 2020 at 20:45
Ralph, OK, that’s an answer. Thanks.
So you are saying the text is wrong in claiming OMOs are “irrelevant”? Because that seems like a pretty important effect.
23. November 2020 at 21:08
Once again, Sumner throws more shade than light, with his nonsensical claim that even his apt pupil Don Geddis called out: (Sumner) “3. Most mainstream economists (including John Maynard Keynes) would not agree with the claim that a purchase of interest-bearing bonds with zero interest base money is “irrelevant”.” – a nonsense tautology along the lines of “if God is all powerful, can He create a stone that not even He can lift?” Sumner is setting up a strawman, and the use of “irrelevant” is confusing. MMT is simply saying (aside from any nonsense it claims) that printing money when interest rates are near zero is not a big deal. Is this irrelevant? Depends on the interest rate. The Fed can create money out of thin air, buy buying any commercial paper in exchange for base money. Since loans can be created by the multiplier 1/(1-r) where r = base money, this means the Fed can easily create money out of thin air, by buying junk commercial paper (which they’ve done). This has no effect (is irrelevant) if interest rates are close to zero and indeed if money is largely neutral, short term and long (never mind that robbing Peter by buying Paul’s junk commercial paper favors Paul, but as a whole the economy doesn’t change). Even I can grasp this, much less the long dead Keynes. Is Sumner playing dumb? He taught this stuff for 40 years right?
The difficulty with MMT is when interest rates start to get into double digit territory. Then all that printed new money becomes relevant, robbing Peter to pay for Paul’s junk paper does have consequences, and inflation occurs, even hyperinflation (where money is no longer neutral).
@Ben Cole – Slavery, Manchuria, not printing money, saved Japan in the Great Depression.
24. November 2020 at 01:33
Ray Lopez: Egads, Ray Lopez, that is like saying bananas are coconuts, except in the Philippines.
Where do French fries originate? In Greece.
Gog and Magog rule the North Pole.
Ray, read up on Korekiyo Takahashi. Manchuria was an expensive expedition, and like nearly all foreign expeditions, financed by government to benefit special interests.
24. November 2020 at 02:42
[fills browser with investopedia tabs]
Nope, econ pleeb for life. Nice to see Sumner back punching at his weight though.
24. November 2020 at 03:34
None of this matters.
The dollar will be worthless soon once the Great Reset is complete.
No economic theory can adequately account for political stupidity.
All of these models will be placed into the garbage bin in the next 10 years, and new models will emerge – models that place us all onto communes.
24. November 2020 at 06:30
Burgos, The budget deficit–showing it can be financed with borrowing (B for bonds) or printing base money.
24. November 2020 at 09:18
@Ben Cole – slavery pays. Read “Time on the Cross” by Fogel et al, or, quicker, read the short synopsis here: http://faculty.weber.edu/kmackay/economics%20of%20slavery.asp
There’s no reason to believe the Japanese experience in Manchuria was any different.
24. November 2020 at 12:28
I wrote a longer response on my website: http://www.bondeconomics.com/2020/11/comments-on-scott-sumners-questions.html
Just a couple of observations:
(1) MMTers (and post-Keynesians) have long pointed out that policymakers – including Volcker – were aware that they were still setting interest rates during the Monetarist experiment. I gave a couple references.
(2) MMTers reject Monetarist models, so unless one takes that into account, one will be confused by MMT.
24. November 2020 at 19:44
Re: stop targeting interest rates
The endogenous money crew has long argued that the CB has no choice but to target interest rates. To refuse to supply reserves on demand to banks at the policy rate would crash the banking system, something patently against the CB’s mandate. As Brian notes, even during Volcker, they were still lending reserves at the window, which sets the ceiling for the inter-bank rate (feel free to factor in frown costs, but it doesn’t change the basic reasoning here).
This is one of those ‘paradigm shift’ issues. Your language doesn’t work within our paradigm, and clearly ours doesn’t work within yours. In our a paradigm “what are the effects of OMOs” isn’t a sensible question, because OMOs are not a discretionary instrument. They’re not the fundamental building block here. It would sort of be like asking “how fast are you cranking your engine when you drive?” It doesn’t make sense because you don’t decide the engine speed, you just hit the gas pedal or take your foot off it, the engine speed is a residual result of that action.
The interest rate is discretionary – that is the building block for us. OMOs are one possible mechanism to help the CB maintains its target interest rate. We seem to agree that OMOs do nothing in a floor system (so long as they don’t remove reserves beyond the point where you stop having a floor system), and presumably you agree they also don’t do anything for a ceiling system (so long as they don’t add so many reserves that it stops being a ceiling system). So what about in a corridor system? Well, they can’t do that, that’s not how corridor systems work. It’s like asking “what if you increased the engine speed but keep driving the same road speed?” How exactly is that supposed to work?
So the reason you don’t like the answers you’re getting is because in our language, it’s a bad question. But we can talk about the effects of monetary policy, which for us are about either a) raising or lowering the interest rate, b) adjusting the composition of portfolios (**in a ceiling or floor system only** if we’re talking about reserves vs. bonds, but we could also talk about different maturities of bonds in any system), and/or c) financial regulation.
Re bank lending:
“Nominal lending is reserve constrained and real lending is demand constrained.”
I honestly have no idea what this means. “Nominal lending” and “real lending” refer to the exact same thing, but measured in different units. How can one of them be reserve-constrained and the other not be?
And more to the point, where’s your evidence that lending is reserve-constrained, in any way whatsoever? We’ve got actual bankers telling us over and over again that they’re not reserve-constrained in their lending decisions (except maybe in the middle of a financial crisis).
As usual, I’d encourage readers interested in the finer points of MMT to check out this website. In particular, on monetary policy see items 5,6 and 7. https://deficitowls.wixsite.com/mmt4mainstreamecons
24. November 2020 at 20:55
It’s always important to remember that in a Modern Money system the natural rate of interest is zero.
Anything else is an artificial market intervention designed to suppress asset prices.
http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF
24. November 2020 at 21:13
“Nominal lending is reserve constrained”
Nominal lending is never reserve constrained. Most of the world doesn’t have reserve requirements, yet banking works just fine. Banks have no need of reserves outside of legislative requirements. They are merely a convenience, and the legislative requirements are only ever a surcharge on the price of money, nothing else.
Lending only ever stops when the last creditworthy borrower prepared to pay the current price on money walks in the door. The two levers are creditworthiness and price. That’s it. MMT recommends controlling banks via the creditworthiness lever.
Working through operational balance sheets of banks (multiple banks competing with each other with separate lending and treasury departments operating asynchronously), would help you understand why this is the case.
25. November 2020 at 02:21
“The Fed buys another $500 billion in Treasury bonds, paid for with zero interest base money. Is that action actually “irrelevant” because the sum of base money and publicly held debt doesn’t change?
Both monetarists and Keynesians would predict that this action would boost output in the short run, and cause both P and NGDP to double in the long run”
Whoa there!
The Fed buys $500 billion in Treasury bonds and suddenly there’s $500Bn more in the real economy?
No one is saying that.
The Fed can buy $5000T in Treasury bonds and as long as none of it hits Main St, nothing has changed apart from some numbers on a spreadsheet.
25. November 2020 at 03:59
Ray Lopez:
So…in the 1930s, if the US has seized natural resources in Mexico and Canada by expensive military occupations, but used slave labor to extract the resources, then then US could have sidestepped the Great Depression?
I do not find that a compelling argument.
25. November 2020 at 06:58
did anyone see sumner playing toby belch in his college theatre group production of twelfth night? i didn’t either, but i can see it now.
25. November 2020 at 09:11
Brian, You said:
MMTers reject Monetarist models, so unless one takes that into account, one will be confused by MMT.”
I asked why they reject monetarism, and no one is giving me an answer. I’m not even seeing any evidence that MMTers UNDERSTAND monetarism. You talk about “setting interest rates” without drawing any distinction between “pegging rates at a constant level” and “moving the money supply around in a way that causes radical gyrations in the market interest rate”. If you want to call the latter “setting interest rates” that’s fine, but then the term no longer means what you think it means.
Sam, You said:
“This is one of those ‘paradigm shift’ issues. Your language doesn’t work within our paradigm, and clearly ours doesn’t work within yours. In our a paradigm “what are the effects of OMOs” isn’t a sensible question, because OMOs are not a discretionary instrument.”
This is why MMTers have so much trouble with mainstream economists. This is a profoundly misleading debating tactic. The MMT textbook says monetarists are wrong because OMOs have no effect, and when I call them on it they retreat to “OMOs are impossible”. Well, if that’s the claim then say so! I suspect that you are retreating to the claim that OMOs are impossible because you have no answer to my thought experiment of what would happen if the Fed bought another $500 billion in bonds back in 1998.
Actually, discretionary OMOs ARE possible, indeed they were the method by which the Fed adjusted interest rates prior to 2008.
Your comment reminds me of when MMTers say the money supply is “endogenous”, thus demonstrating that they don’t know what the term “endogenous” means.
You said:
“We seem to agree that OMOs do nothing in a floor system”
Not at all. Asset markets respond strongly to QE announcements in a floor system. The Fed’s March 2009 QE announcement caused the dollar to fall 4.5% against the euro. Why?
Neil, It would be helpful if you learned about the distinction between real and nominal variables before commenting here.
Wilson, If you are going to criticize monetarist and Keynesian views on OMOs it would help to first learn what they believe, and why they believe it. You are in way over your head.
25. November 2020 at 09:43
“I asked why they reject monetarism, and no one is giving me an answer.”
I would like to ask a question to you about monetarism – do monetarists believe in the money multiplier theory? MMT believes loans create deposits.
Have you read this paper from the Bank of England? It says the reality of how money created today differs from description found in some economics textbooks and essentially agrees with the MMT view.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
In normal times, the central bank does not fix the amount
of money in circulation, nor is central bank money
‘multiplied up’ into more loans and deposits. ”
“While the money multiplier theory can be a useful way of
introducing money and banking in economic textbooks, it is
not an accurate description of how money is created in reality.
Rather than controlling the quantity of reserves, central banks
today typically implement monetary policy by setting the
price of reserves — that is, interest rates.
In reality, neither are reserves a binding constraint on lending,
nor does the central bank fix the amount of reserves that are
available. As with the relationship between deposits and
loans, the relationship between reserves and loans typically
operates in the reverse way to that described in some
economics textbooks. Banks first decide how much to lend
depending on the profitable lending opportunities available to
them — which will, crucially, depend on the interest rate set
by the Bank of England. It is these lending decisions that
determine how many bank deposits are created by the banking
system. The amount of bank deposits in turn influences how
much central bank money banks want to hold in reserve (to
meet withdrawals by the public, make payments to other
banks, or meet regulatory liquidity requirements), which is
then, in normal times, supplied on demand by the Bank of
England”
“. A related
misconception is that banks can lend out their reserves.
Reserves can only be lent between banks, since consumers do
not have access to reserves accounts at the Bank of England.”
” And in contrast to descriptions found in some
textbooks, the Bank of England does not directly control the
quantity of either base or broad money. The Bank of England
is nevertheless still able to influence the amount of money in
the economy. It does so in normal times by setting monetary
policy — through the interest rate that it pays on reserves held
by commercial banks with the Bank of England.”
25. November 2020 at 22:39
“Actually, discretionary OMOs ARE possible, indeed they were the method by which the Fed adjusted interest rates prior to 2008”
That’s to get the causality the wrong way around.
The Fed had to do OMO’s because the natural rate of interest is zero and the excess reserves injected by government spending will drive the interest rate towards that if they are not drained.
Therefore the Fed has to do Open Market operations to drain them – or they lose control of their target rate.
Exactly the same If the system becomes short of reserves – the interest rate is driven up until sufficient institutions go bust to eliminate the deficiency.
Nearly ever issue with mainstream economists – whether monetarists or New Keynesians boils down to this problem they have with the existence of excess net savings. And that’s because the MMT view is that holding financial assets has insurance and status purposes. Money isn’t neutral .
25. November 2020 at 22:47
“You are in way over your head.”
You can believe anything you want of course. But that doesn’t mean it has an export licence to the real world.
Until you can tie what you believe to the actual operations of a real set of banks in the real world – via balance sheets then you are just doing pointless mathematical equations on pages.
And that makes them irrelevant for policy purposes.
It’s for you to come to the real world, not the other way around.
26. November 2020 at 07:11
SSumner writes:
“I asked why they reject monetarism, and no one is giving me an answer. I’m not even seeing any evidence that MMTers UNDERSTAND monetarism. You talk about “setting interest rates” without drawing any distinction between “pegging rates at a constant level” and “moving the money supply around in a way that causes radical gyrations in the market interest rate”. If you want to call the latter “setting interest rates” that’s fine, but then the term no longer means what you think it means.”
I wrote a long form answer on my website, and it should be closer to some answers you are looking for. I don’t want to type in the entire article here.
One key point is that even during the Volcker experiment, they had a binding constraint on the Fed Funds rate. So, the belief that the Fed “set” the monetary base was not really true. Volcker said as such in the 1979 FOMC minutes. There’s a long tradition of post-Keynesian authors (in the pre-MMT era) critiquing Monetarism, and MMTers inherited that tradition.
26. November 2020 at 10:20
Kester, I’ve posted on this before. If money is neutral, then there are a virtually infinite number of NOMINAL money multipliers, one for each asset in the economy, with the M2 multiplier being just one. The multiplier critics are referring to the effects on REAL lending and real deposits. I agree that monetary injections probably have little or no effect on real lending and real deposits.
As an aside, I never thought the money multiplier was a useful concept, because I don’t view the broader monetary aggregates as being useful. But it’s not correct to say the multiplier is “wrong”, rather it’s implications are misunderstood.
Yes, I’ve read MMT critiques of the money multiplier and they are missing the point. They show no understanding of the distinction between real changes and nominal changes in bank lending. In their view, monetary policy doesn’t effect the price level, so they basically ignore the nominal effects that form the heart of the multiplier process.
Here’s my response to the BOE. Suppose the BOE thinks the UK economy needs more liquidity. They might lower their target interest rate by injecting more reserves into the system. Those new reserves might have a multiplier effect on deposits, depending on a wide variety of factors. So while reserves are endogenous for any given interest rate peg, central banks can still inject more reserves if they are willing to adjust the interest rate peg.
Don’t mix up two issues, can money be injected without adjusting interest rates? And is money injected in order to adjust interest rates likely to have a multiplier effect?
Neil, You said:
“Therefore the Fed has to do Open Market operations to drain them – or they lose control of their target rate.”
No, you are missing the point. The Fed adjusted interest rates via OMOs. That’s not “losing control” it’s preferring an different interest rate and by implication a different level of base money.
As for your second comment, I am well aware of how balance sheets work. The problem is that MMTers seem to lack a coherent macro model with which to interpret the changes they see on balance sheets. They don’t seem to understand what the term ‘endogenous’ actually means. To say “money is endogenous” is not saying “the Fed doesn’t control money.” Rather it’s saying that for any given interest rate, money is endogenous. But then for any given inflation target, the nominal interest rate is endogenous. Does that mean the Fed can’t control interest rates?
To say “X is endogenous” is to say “It’s convenient to view X as endogenous for the purpose of this model.” That’s all.
Brian, See my reply to Neil, It seems people are getting hung up on the concept of endogeneity. The term “set” doesn’t mean what you think it means. Volcker basically told the New York Fed to “set” interest rates at a level that they believed would slow monetary growth. If that’s true, then it’s not wrong to say the Fed slowed monetary growth.
By analogy, suppose someone said that in 1974 OPEC did not exogenously reduce oil output, because oil output is determined by oil demand. Rather OPEC set prices at a level which could only be maintained with a lower oil output. That’s a distinction without a difference! They raised prices by reducing output. Full stop.
26. November 2020 at 10:51
“If money is neutral”
Bill Mitchell has criticised money neutrality in this blog, please read it:
http://bilbo.economicoutlook.net/blog/?p=12473
29. November 2020 at 11:18
My understanding is that MMT is a try to not to make lies.