Responses to my questions about Chartalism

In the comments, I get responses to my questions about Chartalism from Tom Hickey, Winterspeak and JKH, and I respond to their answers. I am posting them here to provide continuity from my previous post.

Tom Hickey said: Hi Rogue, good questions.
1. A sovereign government that is the monopoly provider of a non-convertible floating fx currency is not financially constrained but there are real constraints on currency issuance or either inflation or deflation will result. As the monopoly provider of the currency of issue, which enters the economy through government disbursements and creates net financial assets, the government has the corresponding responsibility to provide the proper amount of currency to balance nominal aggregate demand with real output capacity at full employment, neither providing too much, which would be inflationary, nor too little, which would be deflationary. Primary signals in judging nominal AD relative to real output capacity are the output gap and the employment rate.

2. Good question. This is why MMT favors fiscal means, since both disbursements and taxation can be tightly targeted to encourage more efficient and effective distribution when inefficiencies and deficiencies arise.

3. Floating fx rates generally handle international currency balance with respect to trade and other such issues. In addition, as the issuer of the world's reserve currency, the US is in a special position and relationship with other nations and their currencies. Therefore, the US must balance national and international needs. Similarly, the developed nations have recognized their responsibility to the global economy by maintaining order and fostering the development of emerging nations. This involves making capital and technology available where it is needed, for example, as well as forging international cooperation, e.g., WTO, G20, IMF, World Bank, SDR's, etc. Of course, there is still a long way to go.

4. The commercial banking system creates bank money or credit money by lending -loans create deposits. Therefore, all credit money in the economy nets to zero. Only the currency issuer can increase net financial assets (by disbursing) and reduce them (by taxing). The central bank affects the commercial banking system chiefly through its control of the overnight rate on reserves, which influence the cost of lending, hence, borrowing.

5. No absolute limit. This is a political choice. The Chinese make different choices in this regard than the US, for example.

6. The US government has a responsibility under the Constitution "to provide for the general welfare" (Preamble). MMT takes this to apply monetarily particularly to employment. MMT scholars have published a great deal on full employment and price stability.

7. MMT scholars have proposed a job guarantee that would set a stable floor price for labor.

There are two excellent intros to MMT principles:
Warren Mosler's 7 Deadly Innocent Frauds
L. Randall Wray, Understanding Modern Money: The Key to Full Employment and Price Stability

winterspeak said...
No disagreement with Tom, but another perspective:

1. Upper constraint to Govt issuing currency is an intolerable amount of inflation.

2. The best way to ensure Govt currency goes to everyone in today's high-tax world is to lower taxes (take less money away from people). Regressive taxes like payroll tax work best here. Or, it can be disbursed on per capita basis.

3. Chartalists like imports. It means an economy can issue tokens for real stuff. Real stuff is worth something, money is just a token, so yes, run higher deficits (lower taxes, higher spending) and fund foreign savings demand.

4. Banks are a public private partnership with the Govt. They cannot create net financial assets. Capital requirements limit how much credit they can extend. The hope is that banks will focus on making good loans (loans that will be paid back) because private capital is in first loss position for when those loans go bad. This is not how it has worked in practise for quite some time due to terrible regulation, and predatory banks are a product of their environment.

5. How much the Govt can or should direct private investigation is an issue outside of chartalism. Chartalism is mostly just accounting, it isn't really a "theory".

6. Generally, the Govt should keep its people employed. So yes, if businesses experience aggregate demand shortfall, and employment falls, the Govt should step in.

7. The system embraces market competition by having private capital in first loss position, and adjusting fiscal demand broadly. Although this is a funny question as in practise, we are in a chartalist world, and what happens in practise is the Govt largess goes to those who are politically connected (GM unions, Goldman Sachs)

JKH said...
Agree with Tom and winterspeak. I’ll add that Chartalism might be viewed as a two stage process of understanding and belief. Understanding is the result of a correct interpretation of the facts of accounting, and how the monetary system actually works. This is a significant hurdle. Not nearly enough economists understand basic monetary operations – for example, why the textbook “multiplier” theory of deposits leads to outer darkness, or what excess reserves actually represent on today’s Federal Reserve balance sheet. Belief is what individual Chartalists do with the result of their understanding, and how they steer it into preferred ideology and policy. Belief is an option. Understanding how the monetary system is a requirement. Most Chartalists will emphasize that understanding allows debate about policy that otherwise can’t take place on a level playing field insofar as facts on the ground are concerned. The problem is that not nearly enough economists are yet able to pass that threshold of understanding because of existing educational indoctrination.

I respond:
Tom, Winterspeak, JKH, thanks for providing answers to my questions.

1. Tom, I see the logic of using the output gap and employment rate as the signals to look for. For as long as fiscal actions are going towards productive activities that create actual employment instead of non-productive speculative activities, then the net benefit should outweigh any incremental inflation.

2. WS, agreed that lowering tax may enable some businesses marginally responsive to hiring when lowered tax rates frees up some cash flow for this purpose, but perhaps at this point in our current economic predicament, more hiring and spending by government will do more of the trick, since what businesses need more than anything is a boost in sales.

3. WS, I guess if it all boils down to nothing more than trade balances (and the deficit nation does not actually incur debts that have interest and maturity obligations as a normal loan would) then you’re right, it shouldn’t matter how much money actually goes towards imports. Come to think of it, surplus countries do not acquire the deficit nation’s bonds when they finance deficits, they acquire foreign reserves. So it’s just cash that they can use to fund future deficits vis-a-vis the former deficit country (US).

4. My actual concern with the banks acting as fiat boosters is that not all bank loans could actually go towards consumption or towards financing productive activities. Sometimes they are used towards financial speculation. This results in an income boost for the recipient, who does not merely deposit it in the bank or use it fund consumption, but uses it to fund even more speculation in the same (or other) assets. In other words, banks can have a closed loop effect on the growth of asset bubbles. I’m sure this is something outside the scope of the original intent of government fiat, but I was wondering if Chartalist framework had any additional ideas on how to contain this loop from happening. Otherwise, yes, WS, banks are the product of their environment, and probably the only way to contain it is with strong regulation.

5. Tom, I thought as much. For as long as it contributes to productive employment and increases national output, then why should government be limited from it (Well, it shouldn’t be immoral or promote public vice, though that hasn’t stopped government from being the monopoly gambling business operator in some countries.) WS, if it’s not a theory, just accounting, that probably explains why I didn’t find it hard to reconcile these ideas with my own conceptions of the economy.

6. Flowing from Tom’s answer in # 1, ok.

7. My concern in question 7 was that having a definite safety net could also have the unintended consequence of having people not try harder to innovate anymore. Who cares if we don’t innovate, when if we lose our jobs as a result, the government is always there to give us our new gig? So perhaps there should be a clear distinction that government will only provide a safety net when there is a general demand decline in the economy, not to any casualty of a previously giant corporation that loses market share.

UPDATE: There are more clarifications about Chartalism from Scott Fullwiler in the comment thread.