Tuesday, February 2, 2010

Questions about Chartalism

I first got acquainted with Chartalism because two regular commenters of Nick Rowe’s posts, Winterspeak , Scott Fullwiler, and JKH, constantly to pertain to this (to me) seemingly coherent and consistent system of thought in their reasoning on certain discussions. I encountered it again in this discussion thread at Interfluidity.

I’ve been doing a bit of research on it in the last few days and I’ve discovered that Neo-Chartalists’ central ideas seem to converge around the contributions of L. Randall Wray, Warren Mosler, and Bill Mitchell. The system they advocate has a different starting point as the conventionally held beliefs in economics, or what they call ‘Neo-liberal’ ideology. To illustrate briefly what Chartalism is, let me explain what Neo-liberal is to them. The main difference in systems seems to be in how money is created, or how its use comes about in an economy.

Neo-liberals believe that money is created by economic trades by private sector participants in the market. Money arises because it is a more efficient to use a commonly accepted currency rather than engaging in barter for all of one’s basic needs. This money is then what the private sector uses to pay its debts, taxes and other obligations. When there is an economic dislocation, such as what recently happened, because private participants find themselves highly indebted, they engage in less trades, and this leads to a general decrease in aggregate demand. In this instance, the government should step in and stimulate the economy, by filling in the deficient demand.

Chartalists believe that money is created, so that government can induce its citizens to work and pay their taxes. Government, as the issuing authority, makes use of money as a way to get its citizens to defend its borders, police its citizens, teach its children, and the various other duties that need to be done in running a state. Because money is what the government, in turn, will accept as payment for taxes, people will willingly work for money. And because everybody is subjected to taxes, money then becomes a useful medium of currency among the citizens when they trade with one another, because the recipient can also use it to pay his own taxes. In short, the starting point of Chartalism is the issuance of fiat money by government. This fiat can be anything, and need not be backed by any real commodity. The mere fact that it is backed by government, and will be accepted by government, is enough.

In this view of the economy, when an economic dislocation happens, Chartalists also believe that government should step in. in fact, for Chartalists, whenever there is a dislocation, the ultimate cause can always be traced back to government. Because money is created by government issuing money and using it to spend for government’s needs, when the government decides to scale back money in circulation, either by spending less or taxing more, less money circulating leads to less money to fund for everybody’s work. Companies that used to get more from the government now scale back their operations. This leads to less income for its workers who then decrease their demand for goods and services in the private sector. Hence, even more so for Chartalists than it is for what they call the Neo-Liberals, the solution for our current economic problem is more government spending.

This line of thought is not that hard to accept for me. Whether money in fact arises from private sector trades or because government wants to give its citizens the means to pay their taxes, they’re both believable for me. And the Chartalist implications, that government needs to step in and help whenever there is deficient private sector demand, is something that I have also advocated here several times.

However, before I am willing to revise my ‘Neo-liberal’ framework for the Chartalist one, I’d like to ask a few questions. If given acceptable answers, I will embrace Chartalism with all its ramifications. These are my questions:
1. If currently circulating government fiat is the lower constraint to generating demand, then the inevitable conclusion is that all the government needs to do is to spend more, up to infinity, to pick up any slack. How do Chartalists determine what is the upper constraint to issuing more currency?

2. How does government ensure that fiat issued to generate demand goes to every person that needs to spend more, rather than this amount just being hijacked by rentseekers? (i.e,m monopolists, certain types of bankers, asset speculators)?

3. How does Chartalism account for leakages in an economy? i.e., fiat going towards spending abroad, or towards imports, or buying assets abroad? Will the government just issue more and spend more to compensate? When does it stop? When all citizens of the world are employed?

4. In the Chartalist view, banks are used by the government as sort of monetary boosters. When they loan out funds, they merely debit their accounts with the central bank, which can, for intents and purposes, ‘print the money’ by crediting their reserve. How do you control so that banks (fiat boosters) don’t create more fiat than what is needed? (This assumes that there is indeed an upper constraint to money issued/what can be spent by government) After all, if we take the ultimate implication of Chartalist view (I could be mistaken) more loans leads to more demand. This way, banks did what the government could have otherwise done itself, by spending more in the real economy.

5. What is the absolute scale of what the government is allowed to do/spend on to stimulate the economy? i.e., Can it start up manufacturing firms, to make up for all those lost to offshoring? Or start banks, start daycare centers, dogwalking companies, for as long as it creates employment?

6. What is the limit (if any) to the government backstopping any declines in aggregate demand? i.e., If businesses in aggregate experience a levelling off of sales, do we expect government to step in to maintain previous levels of aggregate employment?

7. How does this system incorporate market competition if everyone is backstopped? Ex. You have 99% employment, 90% of whom are employed by Microsoft, while 9% is employed by an upstart Google. If Google starts growing, it’s going to destroy jobs at Microsoft. Will the government step in and hire those laid off at Microsoft?

If I get answers to this, I’m will shed off my ‘Neo-liberal’ framework right this minute in favour of Chartalism. (I have a feeling that reality is actually a hybrid of both systems) All the same, government needs to help pick up the slack.

UPDATE: This today from Marshall Auerback is a good summary of the Chartalism view.

22 comments:

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.

Rogue Economist said...

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.

Greg said...

I'm almost embarrassed to chime in here seeing as the commenters before me are ones from whom I've gotten most of my insights about MMT.

The reason it stood out to me and simply had the ring of truth to it was the fact that it tried to "explain away" nothing yet provided explanations for most everything. When you hold the tenets of neoliberalism up to the light they tend to not look too shiny. There are too many assumptions that cant be made in a real world, "Rational expectations" and "Efficient market hypothesis" are the two doozies. If the basis for your economic paradigm rests on these two things you are in trouble and no amount of fancy math can make it any different.

Once you get past the old gold standard notions that have a fixed amount of money and realize the power of a fiat issuing entity, the possibilities of true bottom up wealth creation start to become evident. True democracy.

There is so much to learn about economics studying Bill Mitchell, Warren Mosler , Randall Wray and Marshall Auerbach and you realize that the neoliberals are simply talking about financing really. The question should never be; do we have any money (for a govt that is), but do we need it or can we make it? Once you remove finance from the picture the economics of the situation is whats left.

I hope you join us and become a fellow traveler. God knows we need to get the debt a phobes to S.T.F U

Scott Fullwiler said...

I agree with everything that's been said thus far. Nice to see non-chartalists that actually understand chartalism talking about chartalism (impressed myself there that I got the word "chartalism" into a sentence three times!).

I would say that chartalism or MMT as it relates to modern capitalist economies is mostly about "understanding" as JKH put it. I have yet to see anyone with expertise in this realm find a defect in this aspect or "stage" (as JKH put it) of chartalism. Once there, we can certainly discuss and build dynamic models consistent with the understanding stage to test policy proposals put forth by chartalists and others if we think that's necessary, but, as JKH noted, we rarely get there, even with heterodox economists.

Indeed, to elaborate and provide an application of JKH's point, many of the heterodox economists engaged in dynamic modeling (and, perhaps even more so, their followers) haven't grasped this two-stage process and critique the first stage/understanding part of chartlism AS IF it were the second stage. (Hope that last part makes sense.)

Also, I would just add that I think that the chartalist "understanding" stage is more than accounting. It's about what we call the "operational" realities of (mostly) financial relations between financial institutions, central banks, and governments. Accounting is a subset of "operational" realities. An example would be a paper I did several years ago suggesting that the Fed pay interest on reserve balances at the target rate in order to leave a large amount of reserve balances circulating while still achieving a positive interest rate target. I suggested that this wouldn't disrupt normal Fed operations and wouldn't be inflationary. All of this has turned out to be true, and a number of Fed researchers have since noted as much (though none have cited me . . . sigh). There was surely some accounting there, but also understanding of day-to-day operations and behaviors of those involved.

Finally, the term chartalism is actually originally in reference to an alternative approach to the nature of money. Randy Wray's latest is perhaps his best yet on the topic: http://cas.umkc.edu/econ/economics/faculty/wray/601wray/wray%20money.pdf

Best,
Scott

Scott Fullwiler said...

Hi Rogue,

Regarding your #7, I would first note that the chartalist proposal is for a job at a "decent wage" that doesn't compete with the private sector. As such, the wage should ideally be enouh to survive, but less than what is available in the private sector. "Decent" is purposely left vague--our political bent would prefer a "living wage" where this can be "afforded" in the sense that it wouldn't be inflationary, but we recognize that the least disruptive approach would be to set it at the existing minimum wage. We are agnostic on the issue of further expanding the safetey net beyond this . . . we leave that mostly to the political process and just try to note the consequences of different approaches there.

As such, I hardly believe that the policy would lead to a lack of desire to innovate or otherwise encourage more less productive behaviors. Indeed, I would argue the opposite of your point . . . I think the lack of a decent safety net can discourage risk taking, particularly where the fate of entire families are involved. I have friends in academia who desire alternative, entrepreneurial-minded careers, but put these aspirations on hold--the risk of losing guaranteed income, health insurance, and so forth . . .and worse, subjecting their families to the same, is too great.

The problem with only offering a job guarantee during downturns is that even in the best of times jobs generally aren't created in the numbers necessary for the bottom of the low-skilled, out of the labor force, etc. Randy Wray did a few very good papers documenting this during the late 1990s boom, and he and Stephanie Bell did a paper in 2004 updating. All of these are available at the Levy Institute's website.

Tom Hickey said...

Scott, thanks for the link to Randy's latest.

Rogue, Randy Wray has a post on the job guarantee that briefly summarizes the issues.

http://neweconomicperspectives.blogspot.com/2009/08/job-guarantee.html

Here's a paper by Warren Mosler and Bill Mitchell that fleshes it out.

http://econrsss.anu.edu.au/pdf/DP441.pdf

winterspeak said...

I'm going to break ranks with the others and say that I don't like the Employer of Last Resort policy. I'm not going to go into the reasons here, as they have to do with the operational realities of a democratic political system, and thus is separate from Chartalism.

Rogue: The payroll tax holiday is actually there to help households, not businesses. If households have more money, they can save, pay down debt, and buy stuff -- all of which is good. Of course, two of those three actions are good for businesses too! It has other features beyond this as well.

Your concern about banks is well founded btw. As Mosler has pointed out a number of times, the banking sector, well private credit in general, is pro-cyclical, and we just need to deal with that fact. Mosler's bank regulation proposals are radical, and worth considering even if you end up disagreeing.

Greg said...

Regarding ELR or JG policies. I think there is a good dissection of those issues in this article by Ralph Musgrave.

http://employerlastresort.blogspot.com/

Upon reading your post again I would just like to comment on question #7 and your use of the word backstopped. Often, I think, this is used perjoratively ( not saying you meant it as such) to suggest a nanny state that wont require us to innovate and therefore rewards failure. I think many of the Chartalist simply have a different view of what we should consider achievement. Achievement is what you do AFTER you've been fed, clothed, housed and have health care. Those four things are simply part and parcel to existence. One cannot even begin to "live", in our truly unique human sense, until those things are covered and not being strived for. Whether all Chartalists would express it this way or not, I sense from reading what pretty much all these guys have written over the last few months, that they share this sentiment about lifes basics.

The beauty of MMT is the non ideological nature of it and the fact that I as a leftist can reach this view about what we can do with our currency from a human rights perspective while someone like Warren who is more conservative might reach the same conclusion (I'm not trying to put thoughts into your already crowded mind Warren......if you're out there) based on the idea that each of these people with basic needs met and a basic job guaranteed will facilitate commerce by providing more customers for the private sector.

Once you stop worrying about what the govt debt or deficit is you can really get around to getting something done.

AndyfromTucson said...

Here are my personal answers, which may, or may not, follow the MMT party line:

1. "[How do you determine the upper constraint to] issuing more currency."
The MMT pieces I have read seem to be oriented towards using fiscal measures (i.e. government spending) to generate demand rather than pumping up the money supply to generate demand. The monetary part of the theory is that the government need not bother to "borrow" money to finance deficits; it can just print money as needed for spending purposes. So, my answer to this question is: Who cares how much currency is out there; look at aggregate demand and adjust government spending as needed to make demand match supply and let the money supply fall where it may.

2. "How does government ensure that fiat issued to generate demand goes to every person that needs to spend more, rather than this amount just being hijacked by rentseekers?"
The government increases spending as the means of boosting demand, so the answer is that the government guides where the money goes by its spending decisions.

3. "How does Chartalism account for leakages in an economy? i.e., fiat going towards spending abroad, or towards imports, or buying assets abroad?"
I would say that under an MMT regime the government just increases government spending until full employment is reached, without particularly worrying about how that might (or might not) generate business for the rest of the world.

4. "When they loan out funds, they merely debit their accounts with the central bank, which can, for intents and purposes, ‘print the money’ by crediting their reserve. How do you control so that banks (fiat boosters) don’t create more fiat than what is needed? "
The answer is that the money supply is controlled the same way it currently is. I read pieces arguing that banks currently ignore their reserves and reserve requirements when making their lending decisions. Instead they base lending decisions entirely on the creditworthiness of the applicant and interest rates, and then go find the necessary reserves after the fact if they need to. For a long time the real control of how much money banks 'print' has been through setting interest rates and not through reserve requirements, etc.

5. "What is the . . . scale of what the government is allowed to do/spend on to stimulate the economy? i.e., Can it start up manufacturing firms, to make up for all those lost to offshoring?"
I am not sure what you are getting at with asking if the government can "start" various businesses. The government doesn't need to "start" businesses to stimulate aggregate demand, all it needs to do is buy goods and services on the open market. The answer is the government can spend its money on whatever it deems to be worth spending money on, just like it does now. The only difference under an MMT regime is that the government doesn't borrow to cover deficits, it just prints the money it spends.

6. "What is the limit (if any) to the government backstopping any declines in aggregate demand? . . . do we expect government to step in to maintain previous levels of aggregate employment?"
Sure, why not stabilize employment at a societally desirable level? Is there any particular societal value in having significant portions of the working age population out of work?

7. "How does this system incorporate market competition if everyone is backstopped? Ex. You have 99% employment, 90% of whom are employed by Microsoft, while 9% is employed by an upstart Google. If Google starts growing, it’s going to destroy jobs at Microsoft. Will the government step in and hire those laid off at Microsoft?"
In the scenario you describe the government should increase spending on social desirable projects using competitive procurements. New private ventures will be formed to compete for the governments business, and they will hire the people laid off from Microsoft.

Tom Hickey said...

Achievement is what you do AFTER you've been fed, clothed, housed and have health care. Those four things are simply part and parcel to existence. One cannot even begin to "live", in our truly unique human sense, until those things are covered and not being strived for.

Greg puts his finger on an important point. In a modern economy, people chronically out of work are essentially deprived of a place in society. They cannot fend for themselves by individual effort. They don't even have space in which they can stand for long, let alone lie down to sleep, without depending on charity.

It is unconscionable for a an economically developed civilized society to permit this when it does not have to. Everyone has a human right to basic existence, which means "subsistence" in economic terms.

Moreover, unemployment and underemployment are a waste of human resources that come with an economic cost to society. It is poor policy to allow foregone opportunity to sap potential, especially when it is unnecessary.

The notion that paying the underclass a subsistence wage for gainful and productive work in the society promotes indolence or lack of initiative is Dickensian. A lot of mainstream economic thinking is based on assumptions that are not in accord with reality-based disciplines such as cognitive science, psychology, and sociology, let alone values based fields like ethics. Such unsubstantiated assumptions are value-based rather than reality-based. They are also based on questionable values.

Scott Fullwiler said...

Tom and Greg . . . all well said. I'd just reiterate my above point, that I think providing such basics to each enhances risk taking overall, particularly among those who have something to lose. If you'd like to leave your boring job with decent benefits and start that new business you've been dreaming of, but someone in your family has a chronic health condition, you think twice. I do, at least.

Rogue Economist said...

Tom, Greg, and Scott. Agreed on #7. In reality, most of the innovation in a company only comes from certain individuals, and most businesses are structured in such a way that these innovators capture most of the benefits if the innovation is successful. Most other people are there to help the innovator to achieve his dream. However, when the ‘innovator’ comes up short, or if his innovation proves not to be an innovation at all, and was merely making a risky bet or an uneconomic enterprise, the rest of the people who were never part of the upside are surely going to be the first to feel the downside.

So yes, a liveable wage for people doing good honest jobs should be maintained (government usually seems to need more teachers and healthworkers), or at the least, provide some assistance while the people are trying to find their new place in the economy.

Thanks also to all others for the additional inputs. Hopefully, these points become part of the assumed truths in discussions going forward.

JP Koning said...

Rebel,

Interesting post, looks like I missed most of the conversation.

I agree with the chartalists that a good monetary theory needs to be built from the ground up. This includes looking at actual institutions, understanding their methods, and the way the accounting works. But I don't think that the chartalists actually understand the reality of central bank accounting, nor do I think that they've dug far enough into the workings of modern central banks.

The key transaction in MMT accounting is when the Fed (I'll use American institutions to make things easier) credits to the Treasury's account new chequing dollars ex nihilo. Out of nothing. These are then spent in the real economy to pay for Treasury expenses.

The problem with this key transaction is that the Federal Reserve is not allowed to create chequing account dollars for the Treasury ex-nihilo, nor has it ever been permitted that power (small caveat here). To see why this transaction is illegal requires going beyond the accounting techniques so prided by MMTers. One also needs to understand monetary law and how it has evolved over time.

This is interesting in itself, because part of the attraction of MMT to blog participants, made up of the intelligent professional, is its accounting aspects, and a large proportion of professionals are accountants. But the accountants have forgotten the lawyers and the legal aspects of monetary institutions. Accounting AND law are needed to get the correct picture.

The Federal Reserve Act is structured in such a way that the Fed is restricted from interacting with the Treasury in many ways. Sections 13, 14, and 16 are relevant to this. For instance, the Fed can only buy securities in the open market, and not directly from the Treasury. To make a long story short, the Act prevents ex-nihilo creation of Fed deposits for the purposes of the Treasury.

The Act allows the Treasury only one way to increase its account at the Federal Reserve, and that is by transferring in money from Treasury accounts held at private banks. And the only way for the Treasury to increase its accounts at private banks is through tax inflows and bond issues. Thus, the Treasury IS financially constrained.

So I would say that MMT is no description of modern central banks. All it describes is a hypothetical world in which there are no legal barriers between the Fed and the Treasury. ie. a much more centralized government, probably a police state. As such, it's not a bad theory.

By the way, I live in Toronto too. Kind of cold nowadays.

Rogue Economist said...

JP, your explanation shows why the government still needs to issue bonds to finance deficits. They can't just print out of nowhere, someone has to deem the printing creditworthy. The private banks do that, and this prevents the government from funding every favor to every constituency.

My guess is that the point made by Chartalists here is that for as long as the private sector accepts the government's borrowings (because it can be used later on to extinguish their tax obligations, or lent to their neighbor to extinguish his obligations) then the government can borrow.

The private sector will be the check and balance, whether they are accepting the government's pricing of their goods, or accepting the government's borrowing. I haven't read a comprehensive literature on Chartalism (beyong blog posts)or Fed operations, but this seems a reasonable way to look at it. Thanks for chiming in, neighbor.

JP Koning said...

"They can't just print out of nowhere, someone has to deem the printing creditworthy. "

To clarify, they can't just print out of nowhere because:
1. It is illegal and always has been given the evolution of central banking law and practice
2. If it wasn't illegal, such printing would still have to pass the market test, as you point out.

Enjoy your blog, I'll have to stop by more often.

JP Koning said...

"They can't just print out of nowhere, someone has to deem the printing creditworthy. "

To clarify, they can't just print out of nowhere because:
1. It is illegal and always has been given the evolution of central banking law and practice
2. If it wasn't illegal, such printing would still have to pass the market test, as you point out.

Enjoy your blog, I'll have to stop by more often.

JP Koning said...

Oh, and
3. Such printing would fail the market test, and as such the monetary unit would only retain its value through ever increasing resort to force by authorities. Thus MMT well explains a police state.

Rogue Economist said...

JP, what do you mean by "the monetary unit would only retain its value through ever increasing resort to force by authorities"? Did you mean that inflation will be contained by confiscation of private property? Is this what you think will happen?

Inflation is what I think the ultimate problem of unconstrained government spending will be, and that is what we should be mindful of when start allowing government to start increasing its spending activities. Right now, though, the lack of private demand is the problem, so allowing for a little more spending from the government couldn't hurt. But this spending should not end up propping uncompetitive industries, and should allow for a profitable shift into new ones.

JP Koning said...

Hello again,

In regards to your question... printing (say, pesos) out of nowhere will cause market participants to try to substitute into other currencies. This is the process of dollarization. Movement into dollars will threaten the value of the peso.

The government can try to use force to de-dollarize the economy i.e, make dollar transactions illegal, and thereby fortify the peso's value.

But the market will only select another currency, say euros, such that the government will have to increase its efforts to both de-euroize and prevent re-dollarization. This growing policing of market transactions in order to protect the value of currency "issued from nothing" is the inevitable result of MMT logic.

Jim said...

JP's comment re: the laws around Central Banking in the US would seem to blow a major hole in MMT.

Until you realize those "laws" are circumvented all the time. Who is going to sue or prosecute the Fed and/or Treasury for breaking them?

Also, this is done via numbers on a computer screen. There is no "printing".

We also need to move away from the "printing more money automatically equals currency devaluation" canard. That may be true if currencies had an intrinsic value, but when their value is measured against other currencies, that's just not true. The US has much buffer room to "print" given its reserve status and the fact that dollars will remain in demand as long as it runs a large trade deficit.