Within 1 week there will be highlights of this video on Youtube posted under various titles.
Bob Murphy owns Mosler and MMT
Austrian school owns MMT in debate
Warren Mosler owns Austrians in debate
Schiff bot owned in debate by Warren Mosler
( I do not endorse these titles!)
-Give ’em hell RPM, I am very excited to watch this debate. I will be pleased if it is anywhere near as good as your debate with a Keynesian a while back.
I thought it was a nice debate. It was established that Keyniesianism is based upon violence and that the MMTers really can’t point to a reason for their violence except the nonexistent and amorphous “monopolies”. Finally, there was no acknowledgment by Mosler of the concept of economic calculation, the pricing process or Keynesian policy leading to the mis-pricing of everything. I’m shocked.
Murphy’s closing remarks were strong. The rest of the debate was mixed and confusing.
The highlight was when Mosler threatened all who would not accept his business card as “money” with a 9mm handgun. Well, he wasn’t going to do the shooting. He had his “man” stationed outside the door. My hair caught fire with that “explanation”.
Mosler explained the “morality” of state money in his book:
The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops. See Mosler’s “Seven Deadly Innocent Frauds”, page 26.
Yes, Mosler was explicite early on in the debate that the issuer must first issue the tokens before it can collect the tokens.
He saved the ‘at the point of a gun’ part until later.
I must be warped, because I couldn’t believe that none of the audience questioners called him on that. Bob waited until the end to call him on it, perhaps a tactical move.
I couldn’t have waited, as my eyes popped out and it became difficult for me to take breaths.
The MMTers believe in the “state theory of money”. The only reason there is money and the only reason money has any value is because the government orders people to pay taxes with it. See the quote from Warren “Hut Tax” Mosler above. The concept of different values for different products while using such money disappears from their analysis.
“Of course, government can give value to anything with the use of force.”
Wait what?
Value is subjective, meaning it is individual based.
One person forcing another to do X does not create value, it destroys that individual’s valuations and replaces them with the valuations of the first individual.
The big take away from this is that the Keynesians, monetarists and statists of all stripes have the most pathetic and naive vision of the nature of the state.
I was particularly taken aback when Mosler didn’t respond to Murphy’s question about a company needing to create (from thin air) currency so that it could deliver on the obligations they promised(pensions etc).
Mosler only said that this CEO should be imprisoned.
The point is that there is no difference, and thus no reason there should be a monopoly issuer of currency. Purchasing power comes from somewhere. Having the ability to direct resources implies having purchasing power at your disposal. Their policies are inherently inflationary. Their ability to direct resources to achieve “full employment” obviously is at everyone elses expense(purchasing power per dollar all else being equal). They admit constraint by inflation by deny that their policies would really cause it. And then to cool off any inflation, just raise taxes. This is absurd. People are simply not this flexible with their finances. If taxes were 0, everyone would begin planning their savings, consumption, investments based on “this” budget surplus. If I buy a house, that mortgage, car payment etc are fixed. I planned my future consumption based on a having full power over income/spending. If the MMT president comes along and raises taxes, then I now have a deficit. A lot of bad things ensue. To prove my point, just look at welfare, food stamp, unemployment dependence. They build their finances around the expectation of this money coming in. It is a problem society wide. This follows similar logic as with interest rates. We have enough trouble predicting what consumer goods will cost. The last thing we need is manipulation of interest rates, regulatory cost, tax raises, and price and wage controls etc.
A question was asked to Bob claiming that depressions were worse and more frequent on the gold standard. Implied is “why use a gold standard then if fiat money has smoothed things out?” There are different gold standards. You can have some form of commodity backing your currency, but this does not mean the governments are all Austrian economists. There were wars, 2 central banks and many stupid policies in place. But we always had quicker recoveries and public debts would always shrink(until another war). Our pseudo gold standard in the mid 1900’s was a disaster. Not because of gold, but because of politicians.
An economic theory should not rest squarely on the fallacy of correlation implying causation. Everything that happens while a country has a gold standard is not caused by the gold standard. This is common sense. High death rates in hospitals does not mean that hospitals are slaughterhouses. 30 percent of all US deaths occur in hospitals. If I used this logical fallacy I would be scared silly walking into a hospital.
It appears that MMT is going to be very hard to disprove, as there are so many “technically true, but that doesn’t mean anything” caveats. Our saving grace was highlighted at the end when Mosler was asked if there was a politician practicing MMT. People are naturally skeptical of the notion of unlimited money printing to cure all ails of society. There are at least hints of restraint in Keynesianism.
P.S. Mosler said we don’t have a “nominal” problem with social security, but we may have a “real” problem. I have never heard the argument like that before. Hilarious.
Regarding MMT, I think we will be well on our way to victory if we could just get the rabble (the ladies???) to understand that the government creates money out of think air like criminals and that inflation is a purposeful government program. The MMT message helps with that project.
No, roddis, it doesn’t deny there was a gold standard but points out two myths about the real world Classical Gold Standard:
(1) that it was a system with a pure metallic standard, and
(2) that it was a system where most money was gold, and where all credit money was backed up by gold.
It is not denied that the gold was the inelastic monetary base in this period, that monetary units were defined in terms of grains of gold, and that the real world system imposed a contractionary and deflationary bias on the nations that used it during times when gold production slumped.
” to understand that the government creates money out of think air like criminals and that inflation is a purposeful government program.”
So when private sector agents create negotiable bills of exchange, negotiable promissory notes, negotiable cheques, it is all creating “money out of think air like criminals”? lol
“So when private sector agents create negotiable bills of exchange, negotiable promissory notes, negotiable cheques, it is all creating “money out of think air like criminals”?”
Last I checked, no one was forced to accept negotiable bills of exchange against their will. They can’t create money unilaterally, unlike the Fed.
“Last I checked, no one was forced to accept negotiable bills of exchange against their will”
Which means that your objection cannot logically be to new money creation per se, but to instances where people are allegedly forced to use money by legal tender laws or tax payments.
Very good, LK, you’re finally starting to catch on to this whole “logical consistency” thing. Now see if you can follow the next logical implication that follows…
Except negotiable bills of credit are not money. Did I forget to mention that?
Ignoring that bills of credit are just the governmental version of banknotes, we will see that should Bank A issue a negotiable banknote, this is not money. Rather, it is a promise to pay a negotiated sum of money at a later date. I fail to see how this could even be a generally circulating banknote, as certainly people would much prefer to know what they are actually getting paid ahead of time, rather than negotiate with the bank upon the time of redemption.
“Except negotiable bills of credit are not money. “
So negotiable bills of exchange, negotiable promissory notes, and negotiable cheques are never used as a means of payment and medium do exchange? Or in the case of bills of exchange (historically) even as a short term stores of value as financial assets?
That should come as a surprise to most business people!
“So negotiable bills of exchange, negotiable promissory notes, and negotiable cheques are never used as a means of payment and medium do exchange?”
These items are only money substitutes. They are not means of payment – they are promises of future payment, of a specified amount. They amount to nothing more than a contract.
Let’s take a negotiable check, for instance. I write out a check for $300 made out to a local business. At this point, there is no money created – there is still $300 in my bank account, and a CONTRACT to transfer that $300 to another bank account (belonging to the business) upon the “cashing” of the check. After cashing, that money is TAKEN from my account and TRANSFERRED to theirs. AT NO POINT is the money supply increased by the creation of the money substitute.
“Or in the case of bills of exchange (historically) even as a short term stores of value as financial assets?”
No, they cannot, they are denominated in actual money of some kind – a $500 check is not a store of value, but the $500 promised upon cashing IS. Any function as a store of value is dependent on the actual money backing the check.
I was particularly taken aback when Mosler didn’t respond to Murphy’s question about a company needing to create (from thin air) currency so that it could deliver on the obligations they promised(pensions etc).
Interesting question from a monetary point of view… does the corporation create money from thin air just by offering pension obligations? I mean, even before they try to deliver on anything.
If you think about it, having a pension obligation in writing could be collateral for a loan, so workers can spend it before they actually get that pension money. Being able to spend it means prices could be driven up by that “stimulus” money.
I didn’t see the debate (if this was already answered), I’m waiting for it to come out on DVD.
LK is right in this case. In terms of facilitating exchanges between people, bills of credit are not only common, but have a long history even going back to the gold standard.
Pretty close to our entire world of computer banking and electronic transfers runs on credit… there’s nothing in there other than elaborate promissory notes. That’s what commerce is running on, so it’s very disingenuous to pretend money is something else sitting over there somewhere.
Admittedly, our current system is on the verge of falling over, and probably contains a lot of rottenness (i.e. bad credit that never will get paid out, or false promises if you prefer). These things to have an effect on prices though, so they can’t be ignored.
Nothing wrong with issuing bills of credit, nothing wrong with trading bills of credit, but there is something wrong with the government making those bills legal tender by law.
The video was quiet and low quality, and I thought the moderator was poor. He shut it down whenever it began to get wonkish, which was irritating. For instance, there was not nearly enough on the rate of interest, surely the heart of the debate.
But there were some good bits, and I’d hope for more like it. There just needs to be a clearer direction next time.
Now gentlemen, let’s try to use Arnold Kling’s advice and speak each other’s languages as we discuss this stuff. So, instead of talking about the invalidity of the other person’s viewpoint as looked at through your axis of anger, let’s try showing them what is right and desirable through their axis of understanding.
I know this. I was attempting sarcasm. Kling’s recent interview on Econ Lib was… glib. On one hand, he’s correct that you will never get your point across to someone when you insist that their current viewpoint is “evil” as you see things. No incentive for them to repent and reconsider when you start out telling them they’re aholes.
But on the other hand, if your opponent doesn’t have certain words/concepts in their vocabulary, it’s pretty hopeless to communicate with them in a meaningful way and attempting to “speak their language” simply results in conceding the (semantic) point.
I do agree that in general one should bend over backwards to communicate on whatever terms are workable, without pride and without writing off people who disagree.
However, we already tried that with MMTers and they basically hit a wall when prices enter the model.
The MMTers did bring up the concept that fiat currency is based on violence and that the value of the fiat currency depends on how high taxes are. This is an important concept. I think there’s probably pre-MMT examples of this (e.g. the infamous “hut tax” incident) but it is good to have a well understood theoretical base. Many people seem to thing that government is beneficent providing fiat currency for us to use. The difference between Austrians and MMTers on that particular point is only one of perspective, not facts.
inflation affects the price of money.
austrians have been wrong about inflation.
hence austrians don’t understand prices.
(but they keep babbling about them, nothing can stop them, not even reality.)
I’ve been right about inflation. In 2009, I predicted low CPI inflation because most of the funny money would go to support the otherwise unsustainable asset prices.
Except I was wrong. The formerly 99 cent Jr. Bacon Cheeseburger at Wendy’s is now $1.89. Gas is $4.09 a gallon.
I bought some stuff at the auto parts store yesterday and the guy said “OMG, everything we sell is up this year!”
Anyone who shops for shampoo or other such necessities should notice a strange phenomenon wherein the bottles on the shelves have magically shrunk but the price is the same….
Yeah exactly, inflation went into food and fuel and price of raw materials, including metals like gold and silver.
Nothing in Austrian theory predicts exactly what the chain of monetary injection leads to, nor how long it takes to get there. This is in some ways a weakness of Austrian theory, but not because Austrians don’t recognize prices, but because the detailed cause and effect chain in an economy is very long and complex.
Also as I’ve said before debt deflation is real, and is completely consistent with Austrian theory. When loans go bad, IOU notes get torn up and something must devalue to compensate. This is a double-strength Cantillon effect: money is injected in some places while being destroyed in other places. MMT also ignores debt deflation, BTW.
This is the fundamental disconnect with MMT. THEY don’t understand inflation and deflation.
If I have inflation of the money supply of 5 percent and deflation in prices due to productivity of 6 percent, then net prices will fall by 1 percent. (All else =. )Austrians understand this. MMT refuse to look at anything except NET inflation/deflation.
The obvious point to highlight is that absent the monetary inflation of 5 percent, prices would have fell by 6 percent, instead of 1.
Massive printing of money with net deflation does not blow up Austrian economics. It only blows up the MMT created straw man.
Not every Austrian believes the same net inflation/deflation amount in the future.
The Austrians I closely align with believe mass inflation will come followed by mass deflation. If policy changes, then this prediction will change. We base this prediction on policy, thus we are more or less looking at policy first. Absent fed policy, we would have experienced very large deflationary forces.
So just why again do MMT’ers refuse to look at individual forces’ effect on the net result?
Because mike Norman can proclaim that printing of money has led to an increase in the dollar value by using this fallacious logic.
I have already shown why correlation does not imply causation above.
A deflationary effect of 6 offset by an inflationary of 5 does not = negative 1 percent?
Austrians are not allowed to differ in their opinion of future policies?
This doesn’t change the meaning of (and types/causes) inflation/deflation.
This doesn’t change the arithmetic.
Instead of offering a reasoned reply (according to MMT) you simply attacked it and said that it couldn’t be Austrian.
I study Austrian, Keynesian and MMT economics. I am not afraid to study the actual theory behind those that disagree with me.
Misrepresenting others’ points of view doesn’t do me any good. Nor should it do you any good.
You are in the Mike Norman camp. You choose to represent your economic school by only attacking others that disagree with you. Try the Mosler camp, eh buddy?
You can read tons of articles that back up what I said. And they are authored by the most notable Austrians. I purposefully chose those two opposing forces.
Notable MMT’ers like Norman and Kelton do not believe that MMT policy will cause any inflation or significant inflation, but do acknowledge they are constrained by it. It becomes key when critiquing this belief to consider the individual effects on the NET outcome. Instead of the fallacy of saying “we printed a bunch of money and there is NO inflation”.
Sorry Mammoth, I am not letting you out of this one.
“Maybe I should have said there is nothing particularly Austrian about that. ”
Wrong. Ignorance is not basis for an argument.
“In any case, (some or many) Austrians were wrong about inflation, MMTers were not.”
You are mixing things up here. So I must clarify so that even you will understand.
Some people expected net deflation, no-flation and net inflation. All three outcomes are consistent with Austrian economics. Austrian economics isn’t the hyperinflation school. ABCT describes booms and busts, not the MMT straw man of boom-hyperinflation. Show me an Austrian article that says “if QE then hyperinflation”. You can’t. It is an absurd notion and history has already proven it wrong thus far in Japan.
There is nothing about Austrian economics that predicts what one particular country will do. Some countries in the world will default via inflation and some will do it the honest way.
MMT proponents love to say that stimulus won’t create inflation because you will increase productivity. Per my above arithmetic
1 – 1 = 0
Austrian economics accounts for this. We agree that 1-1=0, but do not believe that it will be anywhere near -1(productivity)(and of course all else equal). Government will never be productive with resources on average.
You have once more proven that MMT cannot look at individual effects on the net outcome, MMT only looks at the net outcome. I am still studying MMT, but thus far I have only seen MMT give overly simple explanations as to why Fed policy won’t create inflation.
Now I really have to ask, do you really want to try hindsight in a mirror?
Mike Norman on housing in 2006? Was MMT right then?
Mike Norman repeatedly calling for the Euro to trade at parity with the US dollar. MMT?
As someone unversed in MMT I enjoyed getting the cliff notes version of the theory. I have a couple questions for any MMTers who are reading this:
1. Mosler insists that the gov monopoly on money will result in a shortage as suggested by the standard neoclassical model of monopoly. But clearly money is unique in that it has no absolute value, only relative value. The optimal supply of money – at least in a static sense, which is all that the standard neoclassical model Mosler appealed to analyzes – is meaningless (ignoring practical concerns like ease of carry and transacting with, and sticky prices). One of the audience questions pushed him on this, pointing out that prices can adjust so markets clear with any supply of money. Mosler seemed to disregard this point.
Instead Mosler replied that a shortage of money can arise if there is not enough of it in the economy to pay the tax man. Yet it is hard to envision a situation when this could ever be a binding constraint. Just about all taxes are ad valorem, in which case you will never have a situation where there is not enough money to pay the tax amount because the required tax payment is determined as a fraction of the money value of transactions, which of course can never be greater than the amount of money in circulation.
2. Please correct me if I am misrepresenting him, but I believe Mosler said that in a floating exchange rate regime, the government sets the interest rate and that without activist monetary policy the risk-free rate is zero. I don’t see why that would be the case. (a) Can someone please explain to me his reasoning here? The only way the risk-free rate (I’m assuming he means 3m T-bills) could be zero is if there is no opportunity cost to holding 3m T-bills, which, not only can’t be true, but also does not depend on the monetary policy being pursued. (b) Even if this were true, so what? What consequences would follow from having a risk-free rate equal to zero?
———————-
On a separate note, I wish Bob would have pushed Mosler more on the real economy. Bob talked about capital misallocation, but Mosler seemed to ignore the connection between the monetary/financial side and the real side. Sure we can create infinite money, but that does not alleviate the scarcity of real goods and services. I think at one point he even brought up an example like: if a bank lends me $50,000 to buy a car, that doesn’t take away from a bank’s ability to lend you money to do the same so long as the monetary authority is unconstrained. Now I hope I’m misremembering here, but if not, then he is ignoring the obvious point that, whether or not my ability to get a loan is impinged, there is still one fewer car in the economy for everyone else.
“I don’t see why that would be the case. (a) Can someone please explain to me his reasoning here?”
I second this call for clarity. It seemed to me that this point was one of the structurally weak points in the MMT edifice of economic theory. I know Bob mentioned the logic behind why interest rates serve a real purpose earlier in the debate, but I really wish he would have pounded him on this point. Either I’m totally missing Mosler’s argument, or what he is saying makes zero sense. Absent any intervention, why on earth would $10 today be equivalent to $10 ten years from now (which is what is implied by an interest rate of zero)?!?!?!
Economic activity is based on exchanging real goods for money, in other words you get money buy working for it (or possibly by lending risk capital to others that will do the work). The money is an accounting record of the work already invested.
So, why should there be a profit for holding the money for any amount of time, without doing any further work, or funding someone else’s work? How can an economy be based on the giving away of newly printed free money in exchange for simply holding the currency?
In a fixed exchange rate system there is a default risk which mandates the payment of some interest. That is only because the private sector, not the government, is in control of the currency. Under a fiat system the default risk goes away, and along with it the justification for interest payments.
Even absent default risk, there is still an opportunity cost to holding debt, and hence still reason for interest payments. If I can earn X% risk-adjusted return investing in stocks, then I am going to demand compensation for holding debt even if that debt is risk free, because by holding that debt I am forfeiting the opportunity to earn X% in the stock market.
You have a choice between an investment with no risk and no profit, and an alternative investment having numerous risks and the possibility of a positive return. If the government offered two types of risk free assets, one that pays interest and another that didn’t, then you could say there is opportunity cost in choosing the one with no return. The notion of opportunity cost assumes a choice between multiple investments with comparable risks. But there is no comparing the risks between government securities and equities.
” The notion of opportunity cost assumes a choice between multiple investments with comparable risks.”
No it doesn’t. Please find me a source that makes this assumption.
Opportunity cost is simply your highest valued foregone alternative. Nothing about the concept or definition of opportunity cost precludes evaluating alternatives or investment opportunities with different risks.
“But there is no comparing the risks between government securities and equities.”
Yes there is. People do this all the time as evidenced by the fact that they invest in one or the other. E.g. if I invest in the stocks, my actions reveal that I prefer the risky opportunity to earn X% in the stock market over the risk-free opportunity to earn Y% holding government bonds. People make evaluations like these all the time, even if only implicitly (although most investors will do explicit analysis to figure out what type of securities to invest in).
Let’s do an extreme example just for fun. If I could earn a 1000% return per day investing in a company with a 0.00001% chance of defaulting over the next 1000 years, you would still say that there is no opportunity cost to buying government debt instead?
If what you are saying were true, that opportunities of differing risks cannot be compared, there would literally be no human action.
Further, if you were correct that the only component of interest rates is default risk, how can you explain the fact that treasury bills – which don’t offer coupon payments – trade at a discount to their face value?
“Opportunity cost is simply your highest valued foregone alternative. Nothing about the concept or definition of opportunity cost precludes evaluating alternatives or investment opportunities with different risks.”
Let me try again to explain what I mean. The calculation of opportunity cost requires some normalization of the risks between the two opportunities. You mentioned “risk-adjusted returns” (a neoclassical concept) yourself. Otherwise you are just measuring the return to risk rather the opportunity cost of choosing something other than the highest valued investment.
I agree that some normalization is necessary in order for humans to make choices between options with varying risks. But any such normalization is subjective in nature and itself subject to all kinds of risks (model risk specifically). You cannot just convert equity risk into equivalent government bond risk via some equation, any more than I can convert a bushel of apples into an equivalent bushel of oranges.
So it just doesn’t make any sense to say that you would “demand compensation” for holding govt securities rather than equities. You either choose the risky equity market or the safe market for govt securities.
Now for the T-bill question. The fed sells T-bills at a discount to face value in order to implement an interest rate above zero. But under zero interest rate policy they would not do this, so T-bills would trade at face value. Actually they would probably not exist since people would just prefer liquid bank deposits.
I am relatively new to the whole MMT game, so cut me some slack if I am misunderstanding. But what happens when not enough people want to accept 0% return in exchange for 0 risk (preferring to sit in a safe private bank account yielding, say, 1%) to fund the government’s obligations? The Central Bank then purchases the shortfall?
Also, what about real rates. Without even getting into whether the above would result in some sort of apocalyptic hyperinflation, you are still going to have some inflation. That means that ZIRP forever implies negative interest rates forever. But you are telling me the government will never have to offer positive nominal rates to attract capital from the private sector in this environment?
The optimal supply of money – at least in a static sense, which is all that the standard neoclassical model Mosler appealed to analyzes – is meaningless (ignoring practical concerns like ease of carry and transacting with, and sticky prices).
If you think about it, in order for the creation of money to ever make a difference, it actually requires a Cantillon effect (even when sticky prices are considered). Thus, Cantillon effects are not an accidental consequence, they are the desired effect of the exercise.
Try to explain that to an MMTer and you get stuck as soon as you mention the word “price”.
if a bank lends me $50,000 to buy a car, that doesn’t take away from a bank’s ability to lend you money to do the same so long as the monetary authority is unconstrained. Now I hope I’m misremembering here, but if not, then he is ignoring the obvious point that, whether or not my ability to get a loan is impinged, there is still one fewer car in the economy for everyone else.
Remember that if there’s only one car and the bank is lending to both you and Bob to buy the same car, the bank always wants you to get into a bidding war with Bob to crank up the price of that car. Whoever the winner is, he will be deep in debt.
I believe Mosler said that under floating exchange, the natural rate of interest would be zero. And he favored that. Via my attempt at Austrian logic, I conclude that this implies that the currency is worth zero. Otherwise loans would not be made from savings as time preference is everywhere and always in operation. Correct me oh wise ones.
The primary reason people will want to use US dollars is because there will be capital gains taxes on any gains accrued from the exchange of dollars for foreign currency (and for precious metals). Absent such taxes, one could save and transact in the most stable form of money and convert at the last minute or when the dollar is at a low point in order to pay taxes in dollars.
Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.
100 years ago, Von Mises explained that the so called “state theory of money” was “acatallactic” and thus did not even consider the topic of relative purchasing power which is in fact expressed as subjective valuations in voluntary exchanges. The entire topic is alien to MMTers. They do not and cannot engage it.
Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce. [1] The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce. But this limitation amounts to abandonment of the attempt to explain the problem of money.
MMTers and Keynesians in general have no interest in understanding anything Austrian or libertarian. They are relentless and meticulous in their total lack of understanding. The only reason for us to engage them is to try to understand where they are coming from. We will never change them and it is pointless to try.
But more important, how about my point that Prof. Murphy’s statement that Austrian economics business cycle theory is about market interest rates sending signals for investment? And when the Fed lowers rates to try to support output it’s introducing a distortion, etc.? My response is that may be true for fixed fx where market forces determine rates, but not floating fx where the cb necessarily sets the term structure of ‘risk free rates’ if it wants that term structure above 0. That is, without ‘govt. intervention’= tsy secs and interest on reserves= spending that exceeds taxation results in excess reserves and a 0 fed funds rate. Seems to me this means Austrian business cycle theory is at best applicable to fixed fx regimes?
This is the typical “out” that deniers of economic calculation distortions resort to when they accept the basic premise but won’t go the logical distance.
It basically boils down to a claim that if the CB changes interest rates, then market actors should practise their sworn duty to support the state in this activity, by being able to take a single distorted interest rate, and scientifically separating it into two components, one caused by purely market processes, and the other by the state’s inflation activity.
And there is a ready and waiting reply, just in case: If market actors can’t do this, then they’re either stupid morons who should work in distorted interest rate environments, or, the person bringing these distortion issues up, are themselves closeted anti-market, the market is irrational types, and so they’re arguments are crocodile tears and fake outrage.
So you think rates are what the fed wants them to be, zero, just because of market actors’ “sworn duty to support the state”. Do you really think that?
(I am replying to your comment but the reply button is gone which is why I am starting a new thread)
“Let me try again to explain what I mean. The calculation of opportunity cost requires some normalization of the risks between the two opportunities. You mentioned “risk-adjusted returns” (a neoclassical concept) yourself. Otherwise you are just measuring the return to risk rather the opportunity cost of choosing something other than the highest valued investment.”
Looking at non risk-adjusted returns doesn’t mean you are measuring *only* the return to risk, it just means that you haven’t teased out the risk component from the opportunity cost component.
“I agree that some normalization is necessary in order for humans to make choices between options with varying risks. But any such normalization is subjective in nature and itself subject to all kinds of risks (model risk specifically). “
All assessments are subjective. Economics explicitly acknowledges that all benefits, and therefore costs, are subjective. In no way does that invalidate the concept of opportunity cost. If I subjectively perceive there to be any positive expected benefit to investing $X in stock, then by instead investing that $X in government bonds, I suffer the opportunity cost of foregoing the stock investment that would have brought me subjective value.
“You cannot just convert equity risk into equivalent government bond risk via some equation,”
Sure you can. Financial analysts do this daily. It doesn’t mean they will do a perfect job. Their models are imprecise. But they can compare the risks of different investment options and choose a portfolio that they subjectively perceive will bring them the greatest expected value.
” any more than I can convert a bushel of apples into an equivalent bushel of oranges.”
If I am willing to pay up to $5 for a bushel of apples and up to $2.50 for a bushel of oranges, then I can say that I have a conversion ratio of 2 oranges per apple. One of the primary benefits of money is that it does permit these types of calculations. (Although money is not even necessary for this example to work).
In any event, being able to precisely quantify the benefit of an investment or the exchange ratio between two goods is irrelevant. All that’s necessary to admit the concept of opportunity cost in this discussion is acknowledgement of the fact that alternative uses of resources can bring subjective value and that resources are scarce.
“So it just doesn’t make any sense to say that you would “demand compensation” for holding govt securities rather than equities. You either choose the risky equity market or the safe market for govt securities.”
Yes, you choose one or the other. But so long as either would bring you some subjective utility – even if you can’t quantify that utility, then there is an opportunity cost to holding either security. If investing in equities would bring you some subjective value, then you will demand compensation for investing in the the alternative (treasuries). Otherwise there would be no incentive to invest in treasuries. Everyone would instead invest in stocks or corporate bonds, or or even just hold cash and earn the same (zero) return.
“Now for the T-bill question. The fed sells T-bills at a discount to face value in order to implement an interest rate above zero. But under zero interest rate policy they would not do this, so T-bills would trade at face value. Actually they would probably not exist since people would just prefer liquid bank deposits.”
The Treasury, not the Fed, issues T-bills. And the Treasury does not set the price for T-bills. They are sold at auction. If investors wanted to, they could bid T-bills up to face value. But no one does that, despite T-bills being perceived as risk-free, because no one wants to invest in something that will net them zero return when they could instead earn a positive return investing elsewhere.
(I am replying to your comment but the reply button is gone which is why I am starting a new thread. Also I posted this much earlier but for whatever reason it seemed to have been skipped over by the moderator.)
“Let me try again to explain what I mean. The calculation of opportunity cost requires some normalization of the risks between the two opportunities. You mentioned “risk-adjusted returns” (a neoclassical concept) yourself. Otherwise you are just measuring the return to risk rather the opportunity cost of choosing something other than the highest valued investment.”
Looking at non risk-adjusted returns doesn’t mean you are measuring *only* the return to risk, it just means that you haven’t teased out the risk component from the opportunity cost component.
“I agree that some normalization is necessary in order for humans to make choices between options with varying risks. But any such normalization is subjective in nature and itself subject to all kinds of risks (model risk specifically). “
All valuation is subjective. Economics explicitly acknowledges that all benefits, and therefore costs, are subjective. In no way does that invalidate the concept of opportunity cost. If I subjectively perceive there to be any positive expected benefit to investing $X in stock, then by instead investing that $X in government bonds, I suffer the opportunity cost of foregoing the stock investment that would have brought me subjective value.
“You cannot just convert equity risk into equivalent government bond risk via some equation,”
If by “convert” you mean “compare, then sure you can. Financial analysts do this daily. It doesn’t mean they will do a perfect job. Their models are imprecise. But they can compare the risks of different investment options and choose a portfolio that they subjectively perceive will bring them the greatest expected value.
” any more than I can convert a bushel of apples into an equivalent bushel of oranges.”
If I am willing to pay up to $5 for a bushel of apples and up to $2.50 for a bushel of oranges, then I can say that I have a conversion ratio of 2 oranges per apple.
In any event, being able to precisely quantify the benefit of an investment or the exchange ratio between two goods is irrelevant. All that’s necessary to admit the concept of opportunity cost in this discussion is acknowledgement of the fact that alternative uses of resources can bring subjective value and that resources are scarce.
“So it just doesn’t make any sense to say that you would “demand compensation” for holding govt securities rather than equities. You either choose the risky equity market or the safe market for govt securities.”
You choose one or the other, as you say. But so long as either would bring you some subjective benefit – even if you can’t quantify that benefit – then there is an opportunity cost to holding either security. If investing in equities would bring you some subjective value, then you will demand a return for investing in the the alternative (treasuries) to compensate you for the opportunity to earn a return in equities that you are foregoing by purchasing the T-bill. Otherwise there would be no incentive to invest in treasuries. Everyone would instead invest in stocks or corporate bonds, or or even just hold cash and earn the same (zero) return.
“Now for the T-bill question. The fed sells T-bills at a discount to face value in order to implement an interest rate above zero. But under zero interest rate policy they would not do this, so T-bills would trade at face value. Actually they would probably not exist since people would just prefer liquid bank deposits.”
The Treasury, not the Fed, issues T-bills. And the Treasury does not set the price for T-bills. They are sold at auction. If investors wanted to, they could bid T-bills up to face value. But no one does that, despite T-bills being perceived as risk-free, because no one wants to invest in something that will net them zero return when they could instead earn a positive return investing elsewhere or simply hold cash.
Well ok to all of that but we are not in dispute about the idea or utility of opportunity cost as a concept. Only it’s use as a justification for interest payments. I think I now see the point of disagreement though. It looks as though you are assuming that the opportunity cost is negative, when it in fact is just as likely to be positive.
Let’s assume there is some function, necessarily subjective in nature, that you have decided to use to normalize the risk/return profiles of equities and govt bonds. Whatever the difference in returns between the two normalized profiles will be considered “opportunity cost”. But if equities are highly risky and returns are low, and your model is decent, you will find that the risk adjusted returns on equities are lower than bonds, even if the actual returns are higher. This can be true of any two investments. So you think that a negative opportunity cost justifies a positive interest payment. Do you also think that positive opportunity cost justifies a negative interest payment, real or nominal?
” It looks as though you are assuming that the opportunity cost is negative, when it in fact is just as likely to be positive.”
It seems like you are conflating opportunity cost with net value. Opportunity cost is positive by definition. It stems from the fact that alternative uses of resources can bring a person subjective value, and by putting your resources to one use you are forfeiting the opportunity to use them in some other way that would have brought you benefit. That foregone benefit is the opportunity cost.
Now, that opportunity cost can then be compared against the benefit of the action taken, and it is possible that the cost could be greater than the benefit in which case net value would be negative (unless you buy into the perfectly rational agent model). That happens when the cost is greater than the benefit.
It is also possible for the benefit of the action taken to exceed the foregone benefit of the alternative. In that case, net value will be positive. But that does not mean that the opportunity cost is negative. It just means that the benefit exceeds the cost.
“Let’s assume there is some function, necessarily subjective in nature, that you have decided to use to normalize the risk/return profiles of equities and govt bonds. Whatever the difference in returns between the two normalized profiles will be considered “opportunity cost”.
No. The difference in the risk-adjusted returns between the bond and stock investments is the net value of investing in bonds (or stocks, depending on if you are looking at U[B] – U[S] or U[S] – U[B]). The opportunity cost of investing in bonds is the risk-adjusted return from investing in stocks that you are forfeiting because your money is tied up in bonds. Similarly, the opportunity cost of investing in stocks would be the risk-adjusted return from investing in bonds that you are foregoing by having your money tied up in stocks.
“But if equities are highly risky and returns are low, and your model is decent, you will find that the risk adjusted returns on equities are lower than bonds, even if the actual returns are higher.””
I’m not saying that the risk-adjusted return to stocks will be greater than that on a bond. I’m simply saying that it will be a positive amount. And given that it is positive – that the stock investment brings some benefit – bond issues will need to offer some positive return if they are to induce any investors to purchase their debt, even if that debt is risk-free.
Note that even your sentence here does not allow for zero return bonds. You wrote: ” you will find that the risk adjusted returns on equities are lower than bonds”.
So long as the stock’s risk-adjusted return is greater than zero, this can only be the case if the bond offers a positive return as well!
By investing in bonds instead of equities, you are foregoing the opportunity to earn a positive risk-adjusted return in equities, and that foregone opportunity is the opportunity cost of the bond investment. And that is why even a risk-free bond will have to pay a positive interest rate to attract investors who could be earning a positive risk-adjusted return by investing their money elsewhere.
Yes I am conflating it with net value. I cannot appreciate the meaning of your opportunity cost, nor how it compels the government to make welfare payments to bond holders. It is the difference in value between opportunities that drives choice. I assume you are familiar with the MMT argument that investors have no channel through which to “demand compensation” owing the fact that we are in a non-convertible currency regime. I don’t need to repeat that here.
Also, on your other point, you cannot assume the risk-adjusted return of any particular investment is positive. Investing requires making predictions in order to estimate returns. There is no requirement that an investor gives a positive value to every opportunity. Some opportunities are just toxic.
I guess I must clear up the confusion about treasuries as well.
What I said was the fed SELLS treasuries, not ISSUES treasuries. The auction process is how treasuries are issued, but the fed also acts as a market maker for treasuries through its open market operations. If you try to bid them up to face value (we are talking about the secondary market here) the fed will step in as seller, pushing the price back down to where it wants. But in reality other investors will step in first knowing the fed is right behind them in the order book.
This is a bit of a simplification because the fed doesn’t normally target specific treasury yields, just the fed funds rate. But the two are related through arbitrage. It has nothing to do with preference between multiple investments. You would get the same result even if there were no other investments.
“Open market operations involve the buying and selling of Government securities in the open, or secondary, market by the Federal Reserve—a purchase adds to nonborrowed reserves, while a sale reduces them (see Chapter 5 for details).”
The Fed does not have an infinite amount of Treasuries to sell. If investors were actually willing to pay face value for T-bills, the Fed would be powerless to stop this once they ran out (which would happen almost instantly if they are selling them below par value and investors value them at par value as you suggest).
(Also, by the way, the Fed does not act as a market maker. The Fed conducts open market operations to achieve specific monetary policy goals, not to provide liquidity.)
Secondly, you correctly note here: ” the fed doesn’t normally target specific treasury yields, just the fed funds rate.”
It seems like an incredible strain to argue that investors refrain from paying face value for T-bills* only* because they expect that if they do, the Fed will jump in to undercut them. For the overwhelming majority of the Fed’s history, maintaining nonzero T-bill rates has never been an explicit policy objective as far as I’m aware. Additionally, the Fed is much more frequently a net buyer of T-bills. Why do we not see interest rates hit zero during the times when the Fed buys T-bills, if you are indeed correct about there being no opportunity cost to holding T-bills?
More importantly, you have not addressed my primary argument from the preceding post. Assume a risky asset S and a risk-free asset B. If S yields a positive risk-adjusted return, then:
(a) the risk-adjusted return to S is the opportunity cost of buying B, because by buying B you are foregoing the risk-adjusted return you would have earned from investing in S instead, and
(b) the only reason anyone would be willing to purchase B instead of S is if B offered a better risk-adjusted return. So long as the risk-adjusted return to S is greater than zero, then the interest rate B pays must also be greater than zero. Even if there weren’t a single risky security offering a positive risk-adjusted return, the interest rate on B still wouldn’t be zero because if it were then people would simply hold cash instead of investing at all.
This all follows from the fundamental assumptions of economics. Given that people have unlimited wants and limited resources, there will always be an opportunity cost to any action or investment because doing so necessarily precludes one from taking particular alternative actions. If your money is tied up in bonds – whether or not they are risk-free – you cannot use those same funds to earn positive returns elsewhere. That means there is an opportunity cost to holding bonds, and if investors are to suffer that opportunity cost they will want to be compensated for doing so by at least as much as they would have earned (on a risk-adjusted basis) had they invested in those alternative positive-return investments instead (or if their best alternative was to hold cash, they will want to be compensated for not having immediate access to their funds for consumption purchases).
Or, Brian, let me also phrase my argument in the form of this question: If you are an investor, and you have a choice between (a) investing in some asset that yields a positive risk-adjusted return, (b) holding cash, or (c) investing in a bond with no default risk that earns zero return, why would you ever invest in the bond that pays you nothing to give up your money for a length of time?
I’m going to focus on the opportunity cost thing. How on earth can you argue that someone should be compensated or “demand compensation” for something they did not do? Imagine I have to choose to invest in company A or company B with my capital. Both are considered equally risky. I cannot invest in both. If I chose company A will I expect greater returns because of the fact I missed the opportunity to invest in company B? Of course not!
But that’s exactly what I think you are arguing feel free to correct me if I’m wrong.
“I’m going to focus on the opportunity cost thing. How on earth can you argue that someone should be compensated or “demand compensation” for something they did not do?”
Consult any economics textbook and you will see that the definition of opportunity cost is the highest valued foregone alternative (although strictly speaking it is the value of that foregone alternative). You will demand compensation for investing in something because there are alternative uses of your money that could have also brought you benefit.
“Imagine I have to choose to invest in company A or company B with my capital. Both are considered equally risky. I cannot invest in both. If I chose company A will I expect greater returns because of the fact I missed the opportunity to invest in company B?”
If company A wants to earn your investment dollars, they must offer a better return than company B, because if they don’t then you will invest in company B instead. In other words, you will “demand compensation” from company A – demand a return greater than that offered by your best alternative – if you are to be persuaded to invest in company A. Also note that if you invest in company A, your opportunity cost is the return from company B that you are not earning, but would have been earning had you instead invested in company B.
Turning back to the case of the risk-free bond, the investor’s thought process might run something like this:
“If I invest in stock S I will earn an expected return of $5. But there is a risk, so I value my subjective expected benefit from that investment at only $3. If I am going to consider instead investing in a risk-free bond, then, I will only do so if it pays me more than $3. If it pays me $0 then I have no reason to invest in it and will instead invest in S which pays me risk-adjusted $3, because $3 is preferable to $0.”
It is in this sense that investors will demand compensation for holding a risk-free bond. They will only forego the opportunity to earn a positive risk-adjusted return investing their money elsewhere if they can earn a higher return investing in the risk-free bond.
I also posted a short reply to my own post with a question for you, although it has not been cleared by the moderator yet. I will copy that question here in case this post gets cleared before my prior one:
Let me also phrase my argument in the form of this question: If you are an investor, and you have a choice between (a) investing in some asset that yields a positive risk-adjusted return, (b) holding cash, or (c) investing in a bond with no default risk that earns zero return, why would you ever invest in the bond that pays you nothing to give up your money for a length of time?
“If I invest in stock S I will earn an expected return of $5. But there is a risk, so I value my subjective expected benefit from that investment at only $3. If I am going to consider instead investing in a risk-free bond, then, I will only do so if it pays me more than $3. If it pays me $0 then I have no reason to invest in it and will instead invest in S which pays me risk-adjusted $3, because $3 is preferable to $0.”
I think this whole discussion turns on the issue of whether the “risk-adjusted expected value” of your investment may be negative. You seem to assume that investment returns are inherently positive. But even if that were true it doesn’t mean that investors cannot perceive them to be negative. And certainly there are specific investments with negative returns.
Investors often look at the stock market and say, “The risk adjusted returns in the equity market are negative 20%. Therefore I’m buying bonds”. It doesn’t matter whether the return on bonds is positive, zero or slight negative. It is still a better choice than stocks with their negative returns. So investors will buy bonds yielding close to nothing not because of compensation for “opportunity cost”, but because it is still the best opportunity.
To answer your last question. If bonds pay 0% then investors will be indifferent between bonds and cash. But this is only a problem in a convertible currency arrangement where “cash” is an IOU for (say) gold, and bonds are an IOU for gold at a later date(s). Because the government might not have enough gold at some point, and therefore it might need to compensate for the default risk like any other investor that wants to borrow money.
But in our system bonds, reserves, repos, bank deposits are all just different types of IOU for other types of IOU’s. Of course government will never run out of its own IOU’s. But the more important observation is that it is changing the total stock of IOU’s held by the private sector that leads to changes in price. The government has to buy something other than an IOU in exchange for it’s IOU’s in order to drive prices. When all it does is buy one type of IOU (bonds) with another type of IOU (reserves). It cannot cause prices to change.
This is why it isn’t any problem if the fed freely buys bonds exchanging them for reserves. Warren compares bonds to money in a savings account and reserves to money in a checking account. It isn’t any problem for the bank to move money back and forth. It’s up to you whether you want the interest or not.
“I think this whole discussion turns on the issue of whether the “risk-adjusted expected value” of your investment may be negative.”
It seems like you are at least conceding that *if* alternative investments can yield (subjectively-assessed) positive risk-adjusted returns, then there is an opportunity cost to holding bonds, and so investors will demand a positive return even on risk-free bonds in this case.
This is a far far cry from your original statement, which was: “Under a fiat system the default risk goes away, and along with it the justification for interest payments.” in which you did not make any type of qualification about having no beneficial alternative uses of money.
The only way to reconcile what (I think) we are now in agreement upon with your initial statement is if you attempt to claim that it is the normal state of affairs for there not to be a single beneficial use of money. Which basically means we’ve reached nirvana.
“You seem to assume that investment returns are inherently positive. But even if that were true it doesn’t mean that investors cannot perceive them to be negative. And certainly there are specific investments with negative returns.”
I’m not assuming that *all* investment returns are inherently positive, or that there can’t be specific investments with negative returns. I was using an example with two investment opportunities just to keep things simple. My argument is that as long as there is even a single beneficial use of money, then if people are to forego that beneficial use, they will only do so for a price that compensates them adequately for giving up the opportunity.
“Investors often look at the stock market and say, “The risk adjusted returns in the equity market are negative 20%.”
Again, while there may be specific investments that investors think will yield negative returns, so long as there is even a single investment that they think will yield a positive return – be it stock or otherwise – then they will prefer that alternative investment to a zero-yield bond.
Also, I don’t see how you can say that “the risk adjusted returns in the equity market are negative 20%” . If you mean that investors expect the S&P to fall by 20%, then they can make a profit by shorting the S&P. Or buying put options. Or selling call options. Or buying VIX options. As long as there is even a SINGLE alternative way for people to put their money to use, then there is an opportunity cost to buying bonds and people won’t pay face value for them.
“Therefore I’m buying bonds”.”
Because those bonds offer a positive risk-adjusted return. No one would buy bonds if they offered zero yield.
“It doesn’t matter whether the return on bonds is positive, zero or slight negative.”
Yes it does! Do you seriously think people would invest in a bond that offers zero or negative return instead of simply not investing at all (and this is again all under the implausible assumption of there not being a single other profitable investment opportunity)?
“So investors will buy bonds yielding close to nothing
“Close to nothing” and nothing are two very different things. T-bills yield *close* to nothing because not only are they free of default risk, but they are also highly liquid and less sensitive to other risks because of their short duration.
Even still, T-bills have to offer a positive return because if they didn’t then investors would just hold cash (again, under the implausible assumption of there not being a single other profitable use of money) because cash is even more liquid than T-bills.
But your original argument mentioned nothing about liquidity. In the case of an illiquid bond, even if the issuer has no risk of defaulting, the bond would have to offer a much higher return to induce investors to buy them in the first place.
” not because of compensation for “opportunity cost”, but because it is still the best opportunity.”
Yet in your own analysis you are implicitly relying on the opportunity cost concept. When you say that the return on the relevant alternative investment is low (in your example, equities) and therefore people are willing to pay more for bonds, that exactly means that the opportunity cost of holding bonds is low. As you seem to have conceded, when the alternative investment yields positive risk-adjusted returns, people won’t be willing to accept zero yield on their bonds because the opportunity cost – the stock investment – is high in that case.
I wan to stress that if you are now changing your argument from
“Under a fiat system the default risk goes away, and along with it the justification for interest payments.”
to
Under a fiat system the default risk goes away, and along with it the justification for interest payments only when every single other investment opportunity yields negative risk-adjusted returns,
that these are not at all the same claim. And as for the second one, it is difficult if not impossible to imagine a situation where there isn’t a single profitable alternative. Where all worthwhile investments have been made.
And EVEN STILL, even if there wasn’t a single profitable investment opportunity at a given moment, bonds STILL wouldn’t trade at par because people would simply hold cash instead.
“To answer your last question. If bonds pay 0% then investors will be indifferent between bonds and cash.”
Do you really believe this? Cash has the advantage of being infinitely liquid. Cash can be used immediately to pounce upon any new investment opportunities that arise, or to buy consumption goods, or to pay for a hospital visit if you get in an accident, or any number of uses. If your money is tied up on bonds then you need to sell them first before you can take advantage of the new opportunity or pay your medical bills. When you go to sell your bonds, you incur a transaction cost, and you run the risk that there won’t be any willing buyers when you want to sell. Given these disadvantages of holding bonds relative to cash, I don’t see how you can argue that investors will be indifferent between the two when the bond offers no advantages and pays no return.
As for the rest of your post, I don’t see how that ties into your argument about the risk-free return on bonds being zero.
Bob I still think you should talk to a therapist about your need to argue with LK on a daily basis, but that’s not really my business. THANK YOU for this post. I *knew* that Mike Norman guy, and his swagger, were familiar, but I couldn’t put my finger on it. This is what had been eluding me, as he lectured me on courtesy to one’s opponents.
Dr. Kelton, chair of the department of economics at the University of Missouri, Kansas City, presented evidence that strongly suggests that everyone in mainstream economics misunderstands how government finance interacts with the economy. She demonstrated how government finance is part of the domestic and global balance sheet.
“When federal inflows (taxes) and outflows (spending) are viewed as balance sheet items, we clearly see how everyone and everything is connected,” states Pitney. “Dr, Kelton presented a fascinating chart that illustrated the perfect symmetry of inflows and outflows among the US government, businesses, households and other countries,” he continues, “and how the outflows from one of those sectors shows up as inflows somewhere else.”
Dr. Kelton showed that government deficits are an important source of corporate profits. She pointed out, “The fiscal cliff and the sequester are ‘customer killers,’ meaning that people have less money to spend and it is creating a massive drag on the economy. We need to cut taxes or increase spending now — debt is only half of the balance sheet.”
The keynote inspired Pitney to learn more and expand his understanding of MMT. He asserts, “If MMT is as robust as seems to be, this could be a game changer and has significant implications for the broader economy and our individual planning clients.”
Of course, the MMT “accounting” process does not account for much. Like accounting for voluntary transactions and their terms. Or $220 trillion in unfunded adult diaper changing services for baby boomers.
And that “new net financial assets” nonsense is just a Cantillon Effect of squirting of stolen purchasing power to the new recipients.
When MMTers claim that the government’s deficit is the private sector’s surplus, it’s not exactly true. There are two possible scenarios.
The first is when the deficit is all borrowed debt. Some part of the private sector owes all that debt to another part of the private sector. So, contrary to MMTer insinuations, there is NO free lunch there. And no accounting for who in the private sector actually owes the debt or to whom.
The second scenario is when the government just spends money into existence in excess of tax receipts (which at present it DOES NOT DO). The recipients of the new funny are receiving purchasing power from those holding the existing money. There is only a free lunch for the recipient but an equal loss for the victim. And MMT makes no accounting for it.
” just a Cantillon Effect of squirting of stolen purchasing power to the new recipients”
You have no desire to understand anything about anything.
Your sole desire is to seek out new meaningless slogans, which you can then pointlessly repeat ad nauseam, and then stupidly chastise your contemptuous audience for not “understanding” your pointless and meaningless slogans.
“The problem is demand. The government can temporarily boost demand to help soften the effects of the private sector adjustment.
We can’t run out of money, the Federal Government (Fed,Treasury,etc.) creates it on computers and spends it.
The idle capital and unemployed workers are ready to produce, the only barrier is money, which the government creates.
Until the government renounces any and all Austerity, and embarks on an effort to use government spending to fill this output gap, unemployment will remain high, and GDP lower than its potential.
”
“We need a large, $1.1 Trillion government stimulus jobs-directed spending program NOW. ”
Something tells me………(you get the idea where I was going)
“The result was a credit market and economy in shambles, and a government unwilling to plug the aggregate demand hole adequately with New Deal style public expenditures. ”
“do something about the unnecessary future pain. ”
“If you are unemployed,…………., it is not your fault. ”
“Americans being shafted by free trade agreements and destruction of collective bargaining. ”
“Every time there’s a business with machines or facilities idle due to low sales, or a worker unable to find a way to contribute, it’s money being lost and wasted in our economy. ”
“Monetary sovereigns worldwide must Say No to Austerity.”
The MMTers used to start off their scam by insisting that a government deficit was necessary for a private sector surplus based upon a chart like this:
“”
[an economy closed to international trade]. Define “private saving” as “private saving minus Investment” … which is how MMTers normally use the word “saving”, or sometimes “net saving”. Then it’s just standard National Income Accounting. Y=C+I+G, and S=Y-T-C, therefore S-I=G-T.
“”
But in any public communication of MMT, especially videos of MMT, they don’t point this out.
And there you have it: When MMTers speak of “net saving,” they don’t mean that people collectively save more than people collectively borrow. No, they mean people collectively save more than people collectively invest.
As a final way to illustrate the non sequitur of the equations involving government budget deficits, note that we could do the same thing with, say, Google. Go back through all the equations above, and redefine G to mean “total spending by Google.” Then C would be “total consumption spending by the-world-except-Google,” and so on. *******
After doing this, we would be able to prove — with mathematical certainty — that unless Google were willing to go deeper into debt next year, the world-except-Google would be unable to accumulate net financial assets, in the way MMTers define that term. The proper response to this (perfectly valid) observation is, Who cares?
I believe Bob got Mosler to admit that during the debate.
It seems to me that this all amounts to nothing more than all of this new “net saving” is nothing but a new shot of funny money into society, the recipient of which has a free lunch at the expense of those holding the old money. MMTers are adamant and meticulous about ignoring and suppressing the concepts of Cantillon Effects and economic calculation.
Their theory is 100 percent correct NOMINALLY. Countering their theory is as simple as their explanation of it.
MMT: when we print money it won’t be inflationary(on prices)
Us: By definition, (all else equal) this pushes up prices.
Net prices may fall in this scenario(Japan), but would have fallen further absent this MMT policy.
MMT: Well all else won’t be equal. We will offset the inflationary effect of money supply increases by increasing productivity.
Us: And government has proven capable of this?
MMT: Well you just don’t go printing and spending “willy nilly”.
Us: Except they do. It is theoretically possible for the government to be productive with resources, they just are not on average. Government is a net destroyer of wealth.
-Difference between public and private sector using dilution to fund the company or country’s operations.
Example: Company xyz has a market cap of 1 billion. There are 1 million shares outstanding and the public has all of them. xyz issues 1 million shares(to sell) to fund future expansion. The market cap doesn’t instantly double. The total purchasing power for the entire O/S remains the same. Now, here is where productivity comes in. The company is able to expand in size by using the share sale to achieve profitability and further YoY growth in revenues. Had xyz not diluted, they would have failed. They took 1/2 of the purchasing power from shareholders, but put it to productive use and ultimately rewarded shareholders with higher valuations.
In the case of a forward split of 2:1, again the market cap remains unchanged. The distribution of shares (%) remains unchanged. In this case, an Austrian wouldn’t give a hoot. THIS is NOT inflation. Prices(cost of goods) went up, but I have an exact amount of additional shares to offset it.
Government:
There are 1 trillion dollars in existence. They are all owned by the public. The government prints 1 trillion dollars. Purchasing power does not instantly double. The government now has 1/2 of the total purchasing power of the country. They STOLE 1/2 of the purchasing power from each previously existing dollar. Again, this is not a problem if it is put to productive use. Simply ask yourself what would a government do compared to what a public company would do with this money. Government may create a motor company. “ha see we are being productive ~mmt”
They will also create agencies to oversee this. Government motor co., would have (like every other government institution) incredibly dense chains of command.(top heavy). They would not have to be concerned about share price or profitability. “hey we can always print to cover the losses ~mmt”
Only a liar or a fool can deny that newly created currency(or shares) takes power from the existing stock. Now…..MMT claims that “once the economy recovers”, the government can shrink in size and these people can return to the private sector.
ding dong! hello?
Has anyone noticed how hard it is to cut any government agency’s budget? Austerity?
Firemen? impossible to cut their budget, etc etc
If you cut the government motor’s budget, JOBS WILL BE LOST. MMT simply proposes to massively increase the public sector, and once at full employment magically they will transfer back to the private sector WILLINGLY.
If MMT hasn’t noticed….. politicians are in charge. Again, it is all theoretically possible, but REALly impossible. MMT can never be implemented. It requires legislative changes that will likely never even be put on paper by congress.
After doing this, we would be able to prove — with mathematical certainty — that unless Google were willing to go deeper into debt next year, the world-except-Google would be unable to accumulate net financial assets, in the way MMTers define that term. The proper response to this (perfectly valid) observation is, Who cares?
I’d like to expand on this thought a bit. I just want to make one small correction to your statement. Instead of “go deeper into debt”. It should say “spends more than its income”. So if google spends more than its income we would say they are losing money. If google loses money, that means the non-google economy is profiting by the same amount. What does this mean for prices in the non-google economy? Google’s net spending puts an upward pressure on those prices. On the other hand if google earns a profit it exerts a downward pressure on prices in the non-google economy.
Now imagine google running big profits for years and years. In enough time there will not be enough dollars in the non-google economy for google to justifiy continuing to pay its developers. The non-google economy is like a spent mine. There are a few things that might happen.
1) Someone agrees to go lose enough money to fill the gap continually created by Google’s profits, keeping the economy afloat.
2) Google begins to accept real goods as payment, turning itself into the swing supplier and price setter of the currency. As such, it will have to decide whether it wants to create jobs just to keep the unwashed hoards of non-googlers from storming the headquarters. In other words, it finds itself in the role of government.
3) People decide they don’t need Googles too-hard-to-get currency after all and revert to barter systems or maybe create a new currency.
So I wrote a comment here that apparently got deleted? Anyways, what I wrote was in response to the following part of Brian’s comment:
“On the other hand if google earns a profit it exerts a downward pressure on prices in the non-google economy.
Now imagine google running big profits for years and years. In enough time there will not be enough dollars in the non-google economy for google to justifiy continuing to pay its developers. The non-google economy is like a spent mine.”
The only way this happens is if google takes the profits it earns and stuffs them into a mattress, removing them from the circulating money supply. Typically if companies earn profits they will pay dividends to shareholders, reinvest to grow their operations, and if they still have money left over they can put it in some type of investment vehicle or even just stick it in the bank. In all these cases, google’s profits are reinjected into the economy. The only way for the money supply to dwindle (for the rest of the economy) is if google decides to accumulate an ever-increasing pile of cash and never invest this money or pay dividends or put it in a bank. They would literally need to sit on ever increasing cash reserves for your scenario to hold.
This is where the accounting stuff becomes important. It is the NET flow that matters. As long the NET flow of funds is positive to google, it is still as if they are taking money and stuffing it in the mattress.
It does not matter if they write paychecks that flow back to the economy, if at the end of the day they are making sales that are bigger than the paychecks going out.
REINVESTMENT
Reinvestment involves taking the profits from an investment, and spending them again, in hopes of netting an even bigger, leveraged return. Whether and you can do this profitably or not depends critically on supply of the asset you are trying to acquire; money. But there will always come some point where money cannot be reinvested profitably unless someone is running an offsetting loss.
DIVIDENDS
When companies can’t find a way to leverage their profits they pay dividends. If only we could rely on everyone to spend their dividends on consumable, real goods there would be no problem. This would circulate assets back into the economy and keep it alive. But in real life investors often want to leverage those dividends for even more profit. The problem is that these dividends are subject to adverse selection. They are receiving the dividend only because there is a lack of profitable investment opportunities, otherwise google could have invested the money itself.
When investors look into the economy they see a well that is running dry, in other words, risk adjusted returns below zero. Not only will they (correctly) assign negative values to most investment strategies, but they will assign a positive real return on cash, owing to it’s increasing scarcity! This effect makes the NET VALUE of cash very much positive, keeping the dividend payments in the proverbial mattress. So yes, google will keep stuffing the money in the mattress OR its shareholders turn themselves into charity organizations that run perpetual nominal losses.
Now let me try to address some of your other post.
“Under a fiat system the default risk goes away, and along with it the justification for interest payments only when every single other investment opportunity yields negative risk-adjusted returns”
I don’t agree with this statement exactly. Instead I would say:
“Under a fiat system the default risk goes away, and along with it the justification for interest payments as long as there exist some investors who do not have alternative investments with positive “risk-adjusted nominal returns”. And by “some” I mean enough investors to buy the bonds government wants to sell. So yes, I agree that there is a situation where government would be required to pay positive interest; namely when the private sector is collectively euphoric about it’s nominal earnings prospects. But such euphoria can only be justified if someone is running a very large deficit into the economy. Under normal situations there will always be more investment dollars than there are positively valued nominal investments to put them in.
Do note this entire discussion assumes a government that wants the private sector to buy bonds in the first place. I’ve already covered the reasons why the issuer of fiat currency has no need to issue debt at all. If the US issues bonds it is only doing so in order to make welfare payments to bond holders. Not out of demand for cash-flow/liquidity reasons and definitely not to control inflation.
” If you mean that investors expect the S&P to fall by 20%, then they can make a profit by shorting the S&P. Or buying put options. Or selling call options. Or buying VIX options. As long as there is even a SINGLE alternative way for people to put their money to use, then there is an opportunity cost to buying bonds and people won’t pay face value for them.”
This is a nice try but it doesn’t hold water. Not wanting a long SPX position is definitely NOT the same thing as wanting a short SPX position. Every trader knows the value of going home flat. There is huge uncertainty around any predictions which means that your expectancy should be negative for all strategies.
You need a really good reason to believe in any kind of derivative strategy. This becomes much easier to visualize if you think about what you are really trying to do, which is take dollars out of the economy by selling them, then buying them back for less. You gotta get someone else to let go of those dollars and that is really hard to do.
I still didn’t address your liquidity question but I think we are running out of space here. If you want to continue you can hit me up @brianprogrammer . I appreciate you taking the the time to go toe to toe on all these fine points.
I don’t use twitter so I’m just going to post here if you are interested in continuing this discussion.
” I appreciate you taking the the time to go toe to toe on all these fine points.”
Ha, I regret starting (not as a slight against you, just that I’ve put more time than I can afford), but at this point I’m in too deep!
“This is where the accounting stuff becomes important. It is the NET flow that matters. As long the NET flow of funds is positive to google, it is still as if they are taking money and stuffing it in the mattress.
It does not matter if they write paychecks that flow back to the economy, if at the end of the day they are making sales that are bigger than the paychecks going out.”
I maintain that this only leads to a dwindling supply of cash for the non-google economy if google is willing to sit on an ever-increasing amount of cash. Certainly all companies want to maintain some cash on hand, but I’ve never heard of a company trying to amass ever-increasing piles of cash in its vaults instead of putting that money to work. Recently Apple was in the news for sitting on a lot of cash, but the fact that that even registers as a story is indicative of how rare it is for a company to sit on large cash reserves.
Nor does it make sense from the company’s perspective for them to attempt to acquire ever-increasing cash reserves instead of reinvesting profits or putting them in the bank or some other type of fund. Even when they do sit on excess cash reserves, they will not do so forever. They must plan on spending that money at some point, at which time it will circulate again.
Yes their goal is to make profit, but of course fiat money does not have intrinsic value, it’s valued for it’s purchasing power – the value of money is that it can be spent on goods and services. So it does not make sense for a company (or an individual) to amass ever increasing cash reserves forever. During times of high uncertainty they may refrain from investing, but at some point they will want to do something with that money – spend, reinvest, or put it in the bank – and in all cases the money is reintroduced into circulation.
————————————–
“Under a fiat system the default risk goes away, and along with it the justification for interest payments as long as there exist some investors who do not have alternative investments with positive “risk-adjusted nominal returns”. And by “some” I mean enough investors to buy the bonds government wants to sell. So yes, I agree that there is a situation where government would be required to pay positive interest; namely when the private sector is collectively euphoric about it’s nominal earnings prospects.”
Two points: (1) We seem to disagree on how likely it is for this situation – enough investors not having any alternative investments with positive risk-adjusted returns – to occur. To be clear, by any alternative investment I mean not only do they not see any profitable opportunities in equities – long or short – but they also do not see any worthwhile bonds or commodities or derivatives, and they also do not think depositing their money in a bank is worthwhile. I think this is quite a rare concurrence.
Now you can argue that this is only rare precisely because we do have a public government willing to run deficits, but I am skeptical of this because, although infrequent, there have been times when the government has ran surpluses, and the economy did just fine. For the four years from 1998 – 2001 the federal government ran a surplus each year. Of course the government was still in debt, but one would think, if the MMT position was correct, that running a surplus for four consecutive years should result in a reduction in prosperity and 0% 3-month T-bill yields. Yet neither happened. Real and nominal GDP per capita both increased over this entire span, and the 3-month T-bill yield averaged close to 4%. Sure there was a short recession during 2001, but it is hard to pin that on the gov running a surplus considering that 1998 – 2000 were not recession years and that even with the short recession, GDP per capita increased from 2000 to 2001.
(2) My second point is the same one I raised in my previous post, which you acknowledged not addressing, but this is a point you cannot ignore if you are going to claim that the interest rate on debt with no default risk is zero: Even if there is not a single profitable alternative use of money, holding cash is still better than holding a zero-return bond because cash can be used to respond to unforeseen investment opportunities or unforeseen spending needs. With bonds, you need to sell them first. Doing so incurs a transaction cost of both money and time, and there is also a risk that you won’t find willing buyers when you want to sell for the price you want to sell at. Given these costs of holding bonds, the only way to induce investors to purchase bonds instead of hold cash is to offer a positive return.
————————–
Regarding the SP tangent, I was just pointing out that even in a down economy there are still ways to make money.
“Not wanting a long SPX position is definitely NOT the same thing as wanting a short SPX position. Every trader knows the value of going home flat. There is huge uncertainty around any predictions which means that your expectancy should be negative for all strategies.”
Sure, not wanting a long SP position is not the same as wanting a short position. If you are too uncertain you may want neither. But your original quote made it sound like investors were confident that equity values were going down: “Investors often look at the stock market and say, “The risk adjusted returns in the equity market are negative 20%.”
But again, I was only noting a couple possible ways to make money in down economies. When uncertainty about equities is high, I agree bond yields will fall. But they will not fall to zero for the reasons I’ve mentioned.
“You need a really good reason to believe in any kind of derivative strategy. This becomes much easier to visualize if you think about what you are really trying to do, which is take dollars out of the economy by selling them, then buying them back for less. You gotta get someone else to let go of those dollars and that is really hard to do.”
Huh? Not sure what you mean here. With put and call options you are just buying or selling the right to buy or sell the underlying at a pre-specified price. Even if you don’t know which way the market will move, if you expect high volatility then you might be able to profit from a long straddle for instance. Just an example of strategy that may be profitable when others don’t appear to be.
But sure not all investors will always want a piece of the equity market. As I said above, however, I can’t imagine an investor not wanting a piece of the equity market AND not wanting a piece of the bond market AND not wanting a piece of commodities, fx, or any other investment vehicle, AND not wanting to deposit their money in a bank AND not want to hold cash. Which would all be necessary for T-bills to trade at par.
———————————————
More general MMT question: I’ve seen MMTers stress (so far as I can tell, and again I know very little about it) that without government issuing debt or injecting cash, there can be no net creation of financial assets. Do MMTers believe that without an increase in net financial assets there also cannot be an increase in real assets, i.e. economic growth?
Has there ever been a case of any company sitting on literal cash holdings (i.e. notes in a vault, outside a bank)? I don’t know for sure but very hard to believe that Google and Apple don’t keep their money in electronic bank accounts like everyone else does. Of course the banks can lend against these reserves at any time. The into Google and out of Google sectoral balance has nothing whatsoever to do with the circulation of currency in the economy.
The MMT “net saving” concept has nothing whatsoever to do with people’s savings, nor anything else for that matter.
Bob
I saw your debate with Mosler and you appeared to be flummoxed by Mosler’s statements that Austrian arguments are not applicable in a floating exchange rate standard since they are predicated on a gold standard. You did not really have a good response to him and appeared to be perplexed. How do you answer him after having some time to mull this over.
Wesmouch the reason I was perplexed is that he didn’t give me any particular explanation for his assertion. We were specifically talking about business cycle theory in that portion of the debate. An artificially low interest rate causes malinvestments, whether or not there is a gold standard. The Austrians have explained the housing bubble in this respect, for example. It’s not that we were all misinformed and thought there was a gold standard this whole time.
If I had said to Mosler, “Your jobs proposal made sense in the past, but not after John Lennon was shot,” I imagine he would have been taken aback as well.
Prediction:
Within 1 week there will be highlights of this video on Youtube posted under various titles.
Bob Murphy owns Mosler and MMT
Austrian school owns MMT in debate
Warren Mosler owns Austrians in debate
Schiff bot owned in debate by Warren Mosler
( I do not endorse these titles!)
-Give ’em hell RPM, I am very excited to watch this debate. I will be pleased if it is anywhere near as good as your debate with a Keynesian a while back.
Sincerely,
Tony
Wow, only 2 hours away! Bless my west coast location and forgetfulness!
Should be a route. Facts and science are on your side.
I thought it was a nice debate. It was established that Keyniesianism is based upon violence and that the MMTers really can’t point to a reason for their violence except the nonexistent and amorphous “monopolies”. Finally, there was no acknowledgment by Mosler of the concept of economic calculation, the pricing process or Keynesian policy leading to the mis-pricing of everything. I’m shocked.
Murphy’s closing remarks were strong. The rest of the debate was mixed and confusing.
The highlight was when Mosler threatened all who would not accept his business card as “money” with a 9mm handgun. Well, he wasn’t going to do the shooting. He had his “man” stationed outside the door. My hair caught fire with that “explanation”.
Mosler explained the “morality” of state money in his book:
The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops. See Mosler’s “Seven Deadly Innocent Frauds”, page 26.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
Yes, Mosler was explicite early on in the debate that the issuer must first issue the tokens before it can collect the tokens.
He saved the ‘at the point of a gun’ part until later.
I must be warped, because I couldn’t believe that none of the audience questioners called him on that. Bob waited until the end to call him on it, perhaps a tactical move.
I couldn’t have waited, as my eyes popped out and it became difficult for me to take breaths.
another chicken?
Of course, government can give value to anything with the use of force. But what is controversial about that? What does this have to do with anything?
The MMTers believe in the “state theory of money”. The only reason there is money and the only reason money has any value is because the government orders people to pay taxes with it. See the quote from Warren “Hut Tax” Mosler above. The concept of different values for different products while using such money disappears from their analysis.
“Of course, government can give value to anything with the use of force.”
Wait what?
Value is subjective, meaning it is individual based.
One person forcing another to do X does not create value, it destroys that individual’s valuations and replaces them with the valuations of the first individual.
No new value is created in violence.
Way to win a debate! Threatening the audience at gunpoint. Been done before of course, but still fresh, especially when debating against a pacifist.
Mind you, has anyone explained to Mosler just how many 9mm handguns there are in the USA? That’s a lot of competing private currencies.
The big take away from this is that the Keynesians, monetarists and statists of all stripes have the most pathetic and naive vision of the nature of the state.
And, BTW, Free Bradley Manning.
http://www.economicpolicyjournal.com/2013/06/assange-issues-statement-on-first-day.html#more
I was particularly taken aback when Mosler didn’t respond to Murphy’s question about a company needing to create (from thin air) currency so that it could deliver on the obligations they promised(pensions etc).
Mosler only said that this CEO should be imprisoned.
The point is that there is no difference, and thus no reason there should be a monopoly issuer of currency. Purchasing power comes from somewhere. Having the ability to direct resources implies having purchasing power at your disposal. Their policies are inherently inflationary. Their ability to direct resources to achieve “full employment” obviously is at everyone elses expense(purchasing power per dollar all else being equal). They admit constraint by inflation by deny that their policies would really cause it. And then to cool off any inflation, just raise taxes. This is absurd. People are simply not this flexible with their finances. If taxes were 0, everyone would begin planning their savings, consumption, investments based on “this” budget surplus. If I buy a house, that mortgage, car payment etc are fixed. I planned my future consumption based on a having full power over income/spending. If the MMT president comes along and raises taxes, then I now have a deficit. A lot of bad things ensue. To prove my point, just look at welfare, food stamp, unemployment dependence. They build their finances around the expectation of this money coming in. It is a problem society wide. This follows similar logic as with interest rates. We have enough trouble predicting what consumer goods will cost. The last thing we need is manipulation of interest rates, regulatory cost, tax raises, and price and wage controls etc.
A question was asked to Bob claiming that depressions were worse and more frequent on the gold standard. Implied is “why use a gold standard then if fiat money has smoothed things out?” There are different gold standards. You can have some form of commodity backing your currency, but this does not mean the governments are all Austrian economists. There were wars, 2 central banks and many stupid policies in place. But we always had quicker recoveries and public debts would always shrink(until another war). Our pseudo gold standard in the mid 1900’s was a disaster. Not because of gold, but because of politicians.
An economic theory should not rest squarely on the fallacy of correlation implying causation. Everything that happens while a country has a gold standard is not caused by the gold standard. This is common sense. High death rates in hospitals does not mean that hospitals are slaughterhouses. 30 percent of all US deaths occur in hospitals. If I used this logical fallacy I would be scared silly walking into a hospital.
This example is better, http://en.wikipedia.org/wiki/File%3aPiratesVsTemp_English.jpg
It appears that MMT is going to be very hard to disprove, as there are so many “technically true, but that doesn’t mean anything” caveats. Our saving grace was highlighted at the end when Mosler was asked if there was a politician practicing MMT. People are naturally skeptical of the notion of unlimited money printing to cure all ails of society. There are at least hints of restraint in Keynesianism.
P.S. Mosler said we don’t have a “nominal” problem with social security, but we may have a “real” problem. I have never heard the argument like that before. Hilarious.
The great and powerful Lord Keynes explains that there really never was a gold standard. (Which he somehow thinks helps the Keynesian narrative).
http://socialdemocracy21stcentury.blogspot.com/2013/03/the-classical-gold-standard-era-was-myth.html
Regarding MMT, I think we will be well on our way to victory if we could just get the rabble (the ladies???) to understand that the government creates money out of think air like criminals and that inflation is a purposeful government program. The MMT message helps with that project.
No, roddis, it doesn’t deny there was a gold standard but points out two myths about the real world Classical Gold Standard:
(1) that it was a system with a pure metallic standard, and
(2) that it was a system where most money was gold, and where all credit money was backed up by gold.
It is not denied that the gold was the inelastic monetary base in this period, that monetary units were defined in terms of grains of gold, and that the real world system imposed a contractionary and deflationary bias on the nations that used it during times when gold production slumped.
” to understand that the government creates money out of think air like criminals and that inflation is a purposeful government program.”
So when private sector agents create negotiable bills of exchange, negotiable promissory notes, negotiable cheques, it is all creating “money out of think air like criminals”? lol
There are different types of laissez faire
LOL as they say.
“So when private sector agents create negotiable bills of exchange, negotiable promissory notes, negotiable cheques, it is all creating “money out of think air like criminals”?”
Last I checked, no one was forced to accept negotiable bills of exchange against their will. They can’t create money unilaterally, unlike the Fed.
“Last I checked, no one was forced to accept negotiable bills of exchange against their will”
Which means that your objection cannot logically be to new money creation per se, but to instances where people are allegedly forced to use money by legal tender laws or tax payments.
Very good, LK, you’re finally starting to catch on to this whole “logical consistency” thing. Now see if you can follow the next logical implication that follows…
Except negotiable bills of credit are not money. Did I forget to mention that?
Ignoring that bills of credit are just the governmental version of banknotes, we will see that should Bank A issue a negotiable banknote, this is not money. Rather, it is a promise to pay a negotiated sum of money at a later date. I fail to see how this could even be a generally circulating banknote, as certainly people would much prefer to know what they are actually getting paid ahead of time, rather than negotiate with the bank upon the time of redemption.
“Except negotiable bills of credit are not money. “
So negotiable bills of exchange, negotiable promissory notes, and negotiable cheques are never used as a means of payment and medium do exchange? Or in the case of bills of exchange (historically) even as a short term stores of value as financial assets?
That should come as a surprise to most business people!
“So negotiable bills of exchange, negotiable promissory notes, and negotiable cheques are never used as a means of payment and medium do exchange?”
These items are only money substitutes. They are not means of payment – they are promises of future payment, of a specified amount. They amount to nothing more than a contract.
Let’s take a negotiable check, for instance. I write out a check for $300 made out to a local business. At this point, there is no money created – there is still $300 in my bank account, and a CONTRACT to transfer that $300 to another bank account (belonging to the business) upon the “cashing” of the check. After cashing, that money is TAKEN from my account and TRANSFERRED to theirs. AT NO POINT is the money supply increased by the creation of the money substitute.
“Or in the case of bills of exchange (historically) even as a short term stores of value as financial assets?”
No, they cannot, they are denominated in actual money of some kind – a $500 check is not a store of value, but the $500 promised upon cashing IS. Any function as a store of value is dependent on the actual money backing the check.
Promises to pay money are not the same thing as money, LK.
Interesting question from a monetary point of view… does the corporation create money from thin air just by offering pension obligations? I mean, even before they try to deliver on anything.
If you think about it, having a pension obligation in writing could be collateral for a loan, so workers can spend it before they actually get that pension money. Being able to spend it means prices could be driven up by that “stimulus” money.
I didn’t see the debate (if this was already answered), I’m waiting for it to come out on DVD.
See the responses to the following thread, above:
http://consultingbyrpm.com/blog/2013/06/mosler-debate.html#comment-66004
LK is right in this case. In terms of facilitating exchanges between people, bills of credit are not only common, but have a long history even going back to the gold standard.
Pretty close to our entire world of computer banking and electronic transfers runs on credit… there’s nothing in there other than elaborate promissory notes. That’s what commerce is running on, so it’s very disingenuous to pretend money is something else sitting over there somewhere.
Admittedly, our current system is on the verge of falling over, and probably contains a lot of rottenness (i.e. bad credit that never will get paid out, or false promises if you prefer). These things to have an effect on prices though, so they can’t be ignored.
Nothing wrong with issuing bills of credit, nothing wrong with trading bills of credit, but there is something wrong with the government making those bills legal tender by law.
The video was quiet and low quality, and I thought the moderator was poor. He shut it down whenever it began to get wonkish, which was irritating. For instance, there was not nearly enough on the rate of interest, surely the heart of the debate.
But there were some good bits, and I’d hope for more like it. There just needs to be a clearer direction next time.
“The video was quiet and low quality…”
Then I propose that next time Silas takes care about the streaming. (I rely on UE’s judgement here, I haven’t seen it.).
Did they do a Karaoke battle at the end?
I didn’t get a chance to check it out. I’m just hoping it ended like this:
http://youtu.be/IoZfl5TR6MA
I think the MMT side can be summed up with this cartoon.
http://tinyurl.com/mejnbhm
Now gentlemen, let’s try to use Arnold Kling’s advice and speak each other’s languages as we discuss this stuff. So, instead of talking about the invalidity of the other person’s viewpoint as looked at through your axis of anger, let’s try showing them what is right and desirable through their axis of understanding.
Some important concepts (like prices for example) don’t even exist in the MMT axis of understanding.
Tel,
I know this. I was attempting sarcasm. Kling’s recent interview on Econ Lib was… glib. On one hand, he’s correct that you will never get your point across to someone when you insist that their current viewpoint is “evil” as you see things. No incentive for them to repent and reconsider when you start out telling them they’re aholes.
But on the other hand, if your opponent doesn’t have certain words/concepts in their vocabulary, it’s pretty hopeless to communicate with them in a meaningful way and attempting to “speak their language” simply results in conceding the (semantic) point.
Sorry to spoil your sarc.
I do agree that in general one should bend over backwards to communicate on whatever terms are workable, without pride and without writing off people who disagree.
However, we already tried that with MMTers and they basically hit a wall when prices enter the model.
The MMTers did bring up the concept that fiat currency is based on violence and that the value of the fiat currency depends on how high taxes are. This is an important concept. I think there’s probably pre-MMT examples of this (e.g. the infamous “hut tax” incident) but it is good to have a well understood theoretical base. Many people seem to thing that government is beneficent providing fiat currency for us to use. The difference between Austrians and MMTers on that particular point is only one of perspective, not facts.
inflation affects the price of money.
austrians have been wrong about inflation.
hence austrians don’t understand prices.
(but they keep babbling about them, nothing can stop them, not even reality.)
I’ve been right about inflation. In 2009, I predicted low CPI inflation because most of the funny money would go to support the otherwise unsustainable asset prices.
Except I was wrong. The formerly 99 cent Jr. Bacon Cheeseburger at Wendy’s is now $1.89. Gas is $4.09 a gallon.
I bought some stuff at the auto parts store yesterday and the guy said “OMG, everything we sell is up this year!”
Anyone who shops for shampoo or other such necessities should notice a strange phenomenon wherein the bottles on the shelves have magically shrunk but the price is the same….
the bottles on the shelves have magically shrunk but the price is the same….
This is just more proof that Lord Keynes is right. Prices aren’t flexible and LK has thus refuted the entirety of Austrian thought.
Yeah exactly, inflation went into food and fuel and price of raw materials, including metals like gold and silver.
Nothing in Austrian theory predicts exactly what the chain of monetary injection leads to, nor how long it takes to get there. This is in some ways a weakness of Austrian theory, but not because Austrians don’t recognize prices, but because the detailed cause and effect chain in an economy is very long and complex.
Also as I’ve said before debt deflation is real, and is completely consistent with Austrian theory. When loans go bad, IOU notes get torn up and something must devalue to compensate. This is a double-strength Cantillon effect: money is injected in some places while being destroyed in other places. MMT also ignores debt deflation, BTW.
“inflation affects the price of money.
austrians have been wrong about inflation.”
Austrians are the ones who taught MMTers that inflation affects the exchange ratios between money and that which money is used to buy.
“Hence austrians don’t understand prices.”
Hence the moon is made of cheese.
Yay, this non sequitur game is fun.
Austrians didn’t teach anything to anyone.
They just babble among themselves, almost like MMTers
“Austrians didn’t teach anything to anyone.”
Yes, they did.
This is the fundamental disconnect with MMT. THEY don’t understand inflation and deflation.
If I have inflation of the money supply of 5 percent and deflation in prices due to productivity of 6 percent, then net prices will fall by 1 percent. (All else =. )Austrians understand this. MMT refuse to look at anything except NET inflation/deflation.
The obvious point to highlight is that absent the monetary inflation of 5 percent, prices would have fell by 6 percent, instead of 1.
Massive printing of money with net deflation does not blow up Austrian economics. It only blows up the MMT created straw man.
Not every Austrian believes the same net inflation/deflation amount in the future.
The Austrians I closely align with believe mass inflation will come followed by mass deflation. If policy changes, then this prediction will change. We base this prediction on policy, thus we are more or less looking at policy first. Absent fed policy, we would have experienced very large deflationary forces.
So just why again do MMT’ers refuse to look at individual forces’ effect on the net result?
Because mike Norman can proclaim that printing of money has led to an increase in the dollar value by using this fallacious logic.
I have already shown why correlation does not imply causation above.
there is nothing Austrian about that bullshit
Yes, there is.
no, there isn’t
this stupid Austrian game is still funny!
“there is nothing Austrian about that bullshit”
A deflationary effect of 6 offset by an inflationary of 5 does not = negative 1 percent?
Austrians are not allowed to differ in their opinion of future policies?
This doesn’t change the meaning of (and types/causes) inflation/deflation.
This doesn’t change the arithmetic.
Instead of offering a reasoned reply (according to MMT) you simply attacked it and said that it couldn’t be Austrian.
I study Austrian, Keynesian and MMT economics. I am not afraid to study the actual theory behind those that disagree with me.
Misrepresenting others’ points of view doesn’t do me any good. Nor should it do you any good.
You are in the Mike Norman camp. You choose to represent your economic school by only attacking others that disagree with you. Try the Mosler camp, eh buddy?
You can read tons of articles that back up what I said. And they are authored by the most notable Austrians. I purposefully chose those two opposing forces.
Notable MMT’ers like Norman and Kelton do not believe that MMT policy will cause any inflation or significant inflation, but do acknowledge they are constrained by it. It becomes key when critiquing this belief to consider the individual effects on the NET outcome. Instead of the fallacy of saying “we printed a bunch of money and there is NO inflation”.
Maybe I should have said there is nothing particularly Austrian about that.
In any case, (some or many) Austrians were wrong about inflation, MMTers were not.
Sorry Mammoth, I am not letting you out of this one.
“Maybe I should have said there is nothing particularly Austrian about that. ”
Wrong. Ignorance is not basis for an argument.
“In any case, (some or many) Austrians were wrong about inflation, MMTers were not.”
You are mixing things up here. So I must clarify so that even you will understand.
Some people expected net deflation, no-flation and net inflation. All three outcomes are consistent with Austrian economics. Austrian economics isn’t the hyperinflation school. ABCT describes booms and busts, not the MMT straw man of boom-hyperinflation. Show me an Austrian article that says “if QE then hyperinflation”. You can’t. It is an absurd notion and history has already proven it wrong thus far in Japan.
There is nothing about Austrian economics that predicts what one particular country will do. Some countries in the world will default via inflation and some will do it the honest way.
MMT proponents love to say that stimulus won’t create inflation because you will increase productivity. Per my above arithmetic
1 – 1 = 0
Austrian economics accounts for this. We agree that 1-1=0, but do not believe that it will be anywhere near -1(productivity)(and of course all else equal). Government will never be productive with resources on average.
You have once more proven that MMT cannot look at individual effects on the net outcome, MMT only looks at the net outcome. I am still studying MMT, but thus far I have only seen MMT give overly simple explanations as to why Fed policy won’t create inflation.
Now I really have to ask, do you really want to try hindsight in a mirror?
Mike Norman on housing in 2006? Was MMT right then?
Mike Norman repeatedly calling for the Euro to trade at parity with the US dollar. MMT?
http://www.youtube.com/watch?feature=player_embedded&v=6ZavufehR4I
Read this
http://mises.org/document/2002/Deflation-and-Japan-Revisited
P.S. tell me what the velocity of money is now, then tell me what it was several years ago.
What exactly do you mean by “the price of money”?
Are you pricing the money in other money, or in itself, or as an interest rate?
but you understand the concept of straw man argument right?
These non-existent straw men are red herring ad hominem false dichotomy fallacy fallacies with whipped cream.
As someone unversed in MMT I enjoyed getting the cliff notes version of the theory. I have a couple questions for any MMTers who are reading this:
1. Mosler insists that the gov monopoly on money will result in a shortage as suggested by the standard neoclassical model of monopoly. But clearly money is unique in that it has no absolute value, only relative value. The optimal supply of money – at least in a static sense, which is all that the standard neoclassical model Mosler appealed to analyzes – is meaningless (ignoring practical concerns like ease of carry and transacting with, and sticky prices). One of the audience questions pushed him on this, pointing out that prices can adjust so markets clear with any supply of money. Mosler seemed to disregard this point.
Instead Mosler replied that a shortage of money can arise if there is not enough of it in the economy to pay the tax man. Yet it is hard to envision a situation when this could ever be a binding constraint. Just about all taxes are ad valorem, in which case you will never have a situation where there is not enough money to pay the tax amount because the required tax payment is determined as a fraction of the money value of transactions, which of course can never be greater than the amount of money in circulation.
2. Please correct me if I am misrepresenting him, but I believe Mosler said that in a floating exchange rate regime, the government sets the interest rate and that without activist monetary policy the risk-free rate is zero. I don’t see why that would be the case. (a) Can someone please explain to me his reasoning here? The only way the risk-free rate (I’m assuming he means 3m T-bills) could be zero is if there is no opportunity cost to holding 3m T-bills, which, not only can’t be true, but also does not depend on the monetary policy being pursued. (b) Even if this were true, so what? What consequences would follow from having a risk-free rate equal to zero?
———————-
On a separate note, I wish Bob would have pushed Mosler more on the real economy. Bob talked about capital misallocation, but Mosler seemed to ignore the connection between the monetary/financial side and the real side. Sure we can create infinite money, but that does not alleviate the scarcity of real goods and services. I think at one point he even brought up an example like: if a bank lends me $50,000 to buy a car, that doesn’t take away from a bank’s ability to lend you money to do the same so long as the monetary authority is unconstrained. Now I hope I’m misremembering here, but if not, then he is ignoring the obvious point that, whether or not my ability to get a loan is impinged, there is still one fewer car in the economy for everyone else.
“I don’t see why that would be the case. (a) Can someone please explain to me his reasoning here?”
I second this call for clarity. It seemed to me that this point was one of the structurally weak points in the MMT edifice of economic theory. I know Bob mentioned the logic behind why interest rates serve a real purpose earlier in the debate, but I really wish he would have pounded him on this point. Either I’m totally missing Mosler’s argument, or what he is saying makes zero sense. Absent any intervention, why on earth would $10 today be equivalent to $10 ten years from now (which is what is implied by an interest rate of zero)?!?!?!
Economic activity is based on exchanging real goods for money, in other words you get money buy working for it (or possibly by lending risk capital to others that will do the work). The money is an accounting record of the work already invested.
So, why should there be a profit for holding the money for any amount of time, without doing any further work, or funding someone else’s work? How can an economy be based on the giving away of newly printed free money in exchange for simply holding the currency?
In a fixed exchange rate system there is a default risk which mandates the payment of some interest. That is only because the private sector, not the government, is in control of the currency. Under a fiat system the default risk goes away, and along with it the justification for interest payments.
Brian,
Even absent default risk, there is still an opportunity cost to holding debt, and hence still reason for interest payments. If I can earn X% risk-adjusted return investing in stocks, then I am going to demand compensation for holding debt even if that debt is risk free, because by holding that debt I am forfeiting the opportunity to earn X% in the stock market.
You have a choice between an investment with no risk and no profit, and an alternative investment having numerous risks and the possibility of a positive return. If the government offered two types of risk free assets, one that pays interest and another that didn’t, then you could say there is opportunity cost in choosing the one with no return. The notion of opportunity cost assumes a choice between multiple investments with comparable risks. But there is no comparing the risks between government securities and equities.
” The notion of opportunity cost assumes a choice between multiple investments with comparable risks.”
No it doesn’t. Please find me a source that makes this assumption.
Opportunity cost is simply your highest valued foregone alternative. Nothing about the concept or definition of opportunity cost precludes evaluating alternatives or investment opportunities with different risks.
“But there is no comparing the risks between government securities and equities.”
Yes there is. People do this all the time as evidenced by the fact that they invest in one or the other. E.g. if I invest in the stocks, my actions reveal that I prefer the risky opportunity to earn X% in the stock market over the risk-free opportunity to earn Y% holding government bonds. People make evaluations like these all the time, even if only implicitly (although most investors will do explicit analysis to figure out what type of securities to invest in).
Let’s do an extreme example just for fun. If I could earn a 1000% return per day investing in a company with a 0.00001% chance of defaulting over the next 1000 years, you would still say that there is no opportunity cost to buying government debt instead?
If what you are saying were true, that opportunities of differing risks cannot be compared, there would literally be no human action.
Further, if you were correct that the only component of interest rates is default risk, how can you explain the fact that treasury bills – which don’t offer coupon payments – trade at a discount to their face value?
“Opportunity cost is simply your highest valued foregone alternative. Nothing about the concept or definition of opportunity cost precludes evaluating alternatives or investment opportunities with different risks.”
Let me try again to explain what I mean. The calculation of opportunity cost requires some normalization of the risks between the two opportunities. You mentioned “risk-adjusted returns” (a neoclassical concept) yourself. Otherwise you are just measuring the return to risk rather the opportunity cost of choosing something other than the highest valued investment.
I agree that some normalization is necessary in order for humans to make choices between options with varying risks. But any such normalization is subjective in nature and itself subject to all kinds of risks (model risk specifically). You cannot just convert equity risk into equivalent government bond risk via some equation, any more than I can convert a bushel of apples into an equivalent bushel of oranges.
So it just doesn’t make any sense to say that you would “demand compensation” for holding govt securities rather than equities. You either choose the risky equity market or the safe market for govt securities.
Now for the T-bill question. The fed sells T-bills at a discount to face value in order to implement an interest rate above zero. But under zero interest rate policy they would not do this, so T-bills would trade at face value. Actually they would probably not exist since people would just prefer liquid bank deposits.
I am relatively new to the whole MMT game, so cut me some slack if I am misunderstanding. But what happens when not enough people want to accept 0% return in exchange for 0 risk (preferring to sit in a safe private bank account yielding, say, 1%) to fund the government’s obligations? The Central Bank then purchases the shortfall?
Also, what about real rates. Without even getting into whether the above would result in some sort of apocalyptic hyperinflation, you are still going to have some inflation. That means that ZIRP forever implies negative interest rates forever. But you are telling me the government will never have to offer positive nominal rates to attract capital from the private sector in this environment?
If you think about it, in order for the creation of money to ever make a difference, it actually requires a Cantillon effect (even when sticky prices are considered). Thus, Cantillon effects are not an accidental consequence, they are the desired effect of the exercise.
Try to explain that to an MMTer and you get stuck as soon as you mention the word “price”.
Remember that if there’s only one car and the bank is lending to both you and Bob to buy the same car, the bank always wants you to get into a bidding war with Bob to crank up the price of that car. Whoever the winner is, he will be deep in debt.
I believe Mosler said that under floating exchange, the natural rate of interest would be zero. And he favored that. Via my attempt at Austrian logic, I conclude that this implies that the currency is worth zero. Otherwise loans would not be made from savings as time preference is everywhere and always in operation. Correct me oh wise ones.
The primary reason people will want to use US dollars is because there will be capital gains taxes on any gains accrued from the exchange of dollars for foreign currency (and for precious metals). Absent such taxes, one could save and transact in the most stable form of money and convert at the last minute or when the dollar is at a low point in order to pay taxes in dollars.
Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.
http://www.irs.gov/pub/irs-pdf/p525.pdf
Publication 525 – Taxable and Nontaxable Income – -For use in preparing 2012 Returns
100 years ago, Von Mises explained that the so called “state theory of money” was “acatallactic” and thus did not even consider the topic of relative purchasing power which is in fact expressed as subjective valuations in voluntary exchanges. The entire topic is alien to MMTers. They do not and cannot engage it.
Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce. [1] The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce. But this limitation amounts to abandonment of the attempt to explain the problem of money.
http://mises.org/books/Theory_Money_Credit/AppendixA.aspx
MMTers and Keynesians in general have no interest in understanding anything Austrian or libertarian. They are relentless and meticulous in their total lack of understanding. The only reason for us to engage them is to try to understand where they are coming from. We will never change them and it is pointless to try.
Anyone who thinks the MMTers can be engaged should read these comments. It’s almost more than I can take and I have a fairly high tolerance.
http://mikenormaneconomics.blogspot.com/2013/06/warren-moslervsrobert-murphy-today.html?showComment=1370330651057#c6561470401668133465
I didn’t watch the debate. What was the “unfortunate” “Mike Norman incident” mentioned by a couple commentators over there?
Norman accused RPM of attacking Mosler. Norman was extremely rude and even Mosler was confused by the rant.
Norman then asked if Murphy wanted to return to the gold standard……
Norman obviously asked a filler question, he really just wanted to attack RPM.
Mosler and RPM teased eachother throughout the debate, but it was entirely light-hearted and obviously neither intended or took harm.
Norman is to MMT what Roddis is to AE, a liability
No, Roddis is an asset.
You’re a liability everywhere you go.
chirp chirp
Mirror mirror
Mike Norman is a wise and classy guy.
http://mikenormaneconomics.blogspot.com/2012/11/federal-govt-delivering-millions-of.html?showComment=1351962868921#c7419009962230293763
Some of another debate. Bob isn’t on stage but the guy who is. mutatis mutandis, sure sounds like Bob. http://www.youtube.com/watch?v=UBt2XPpJ25I&feature=player_detailpage
FYI
Warren MoslerJune 5, 2013 at 7:34 AM
But more important, how about my point that Prof. Murphy’s statement that Austrian economics business cycle theory is about market interest rates sending signals for investment? And when the Fed lowers rates to try to support output it’s introducing a distortion, etc.? My response is that may be true for fixed fx where market forces determine rates, but not floating fx where the cb necessarily sets the term structure of ‘risk free rates’ if it wants that term structure above 0. That is, without ‘govt. intervention’= tsy secs and interest on reserves= spending that exceeds taxation results in excess reserves and a 0 fed funds rate. Seems to me this means Austrian business cycle theory is at best applicable to fixed fx regimes?
http://tinyurl.com/lsr6pnu
This is the typical “out” that deniers of economic calculation distortions resort to when they accept the basic premise but won’t go the logical distance.
It basically boils down to a claim that if the CB changes interest rates, then market actors should practise their sworn duty to support the state in this activity, by being able to take a single distorted interest rate, and scientifically separating it into two components, one caused by purely market processes, and the other by the state’s inflation activity.
And there is a ready and waiting reply, just in case: If market actors can’t do this, then they’re either stupid morons who should work in distorted interest rate environments, or, the person bringing these distortion issues up, are themselves closeted anti-market, the market is irrational types, and so they’re arguments are crocodile tears and fake outrage.
So you think rates are what the fed wants them to be, zero, just because of market actors’ “sworn duty to support the state”. Do you really think that?
No. My argument is different from that.
Brian,
(I am replying to your comment but the reply button is gone which is why I am starting a new thread)
“Let me try again to explain what I mean. The calculation of opportunity cost requires some normalization of the risks between the two opportunities. You mentioned “risk-adjusted returns” (a neoclassical concept) yourself. Otherwise you are just measuring the return to risk rather the opportunity cost of choosing something other than the highest valued investment.”
Looking at non risk-adjusted returns doesn’t mean you are measuring *only* the return to risk, it just means that you haven’t teased out the risk component from the opportunity cost component.
“I agree that some normalization is necessary in order for humans to make choices between options with varying risks. But any such normalization is subjective in nature and itself subject to all kinds of risks (model risk specifically). “
All assessments are subjective. Economics explicitly acknowledges that all benefits, and therefore costs, are subjective. In no way does that invalidate the concept of opportunity cost. If I subjectively perceive there to be any positive expected benefit to investing $X in stock, then by instead investing that $X in government bonds, I suffer the opportunity cost of foregoing the stock investment that would have brought me subjective value.
“You cannot just convert equity risk into equivalent government bond risk via some equation,”
Sure you can. Financial analysts do this daily. It doesn’t mean they will do a perfect job. Their models are imprecise. But they can compare the risks of different investment options and choose a portfolio that they subjectively perceive will bring them the greatest expected value.
” any more than I can convert a bushel of apples into an equivalent bushel of oranges.”
If I am willing to pay up to $5 for a bushel of apples and up to $2.50 for a bushel of oranges, then I can say that I have a conversion ratio of 2 oranges per apple. One of the primary benefits of money is that it does permit these types of calculations. (Although money is not even necessary for this example to work).
In any event, being able to precisely quantify the benefit of an investment or the exchange ratio between two goods is irrelevant. All that’s necessary to admit the concept of opportunity cost in this discussion is acknowledgement of the fact that alternative uses of resources can bring subjective value and that resources are scarce.
“So it just doesn’t make any sense to say that you would “demand compensation” for holding govt securities rather than equities. You either choose the risky equity market or the safe market for govt securities.”
Yes, you choose one or the other. But so long as either would bring you some subjective utility – even if you can’t quantify that utility, then there is an opportunity cost to holding either security. If investing in equities would bring you some subjective value, then you will demand compensation for investing in the the alternative (treasuries). Otherwise there would be no incentive to invest in treasuries. Everyone would instead invest in stocks or corporate bonds, or or even just hold cash and earn the same (zero) return.
“Now for the T-bill question. The fed sells T-bills at a discount to face value in order to implement an interest rate above zero. But under zero interest rate policy they would not do this, so T-bills would trade at face value. Actually they would probably not exist since people would just prefer liquid bank deposits.”
The Treasury, not the Fed, issues T-bills. And the Treasury does not set the price for T-bills. They are sold at auction. If investors wanted to, they could bid T-bills up to face value. But no one does that, despite T-bills being perceived as risk-free, because no one wants to invest in something that will net them zero return when they could instead earn a positive return investing elsewhere.
Brian,
(I am replying to your comment but the reply button is gone which is why I am starting a new thread. Also I posted this much earlier but for whatever reason it seemed to have been skipped over by the moderator.)
“Let me try again to explain what I mean. The calculation of opportunity cost requires some normalization of the risks between the two opportunities. You mentioned “risk-adjusted returns” (a neoclassical concept) yourself. Otherwise you are just measuring the return to risk rather the opportunity cost of choosing something other than the highest valued investment.”
Looking at non risk-adjusted returns doesn’t mean you are measuring *only* the return to risk, it just means that you haven’t teased out the risk component from the opportunity cost component.
“I agree that some normalization is necessary in order for humans to make choices between options with varying risks. But any such normalization is subjective in nature and itself subject to all kinds of risks (model risk specifically). “
All valuation is subjective. Economics explicitly acknowledges that all benefits, and therefore costs, are subjective. In no way does that invalidate the concept of opportunity cost. If I subjectively perceive there to be any positive expected benefit to investing $X in stock, then by instead investing that $X in government bonds, I suffer the opportunity cost of foregoing the stock investment that would have brought me subjective value.
“You cannot just convert equity risk into equivalent government bond risk via some equation,”
If by “convert” you mean “compare, then sure you can. Financial analysts do this daily. It doesn’t mean they will do a perfect job. Their models are imprecise. But they can compare the risks of different investment options and choose a portfolio that they subjectively perceive will bring them the greatest expected value.
” any more than I can convert a bushel of apples into an equivalent bushel of oranges.”
If I am willing to pay up to $5 for a bushel of apples and up to $2.50 for a bushel of oranges, then I can say that I have a conversion ratio of 2 oranges per apple.
In any event, being able to precisely quantify the benefit of an investment or the exchange ratio between two goods is irrelevant. All that’s necessary to admit the concept of opportunity cost in this discussion is acknowledgement of the fact that alternative uses of resources can bring subjective value and that resources are scarce.
“So it just doesn’t make any sense to say that you would “demand compensation” for holding govt securities rather than equities. You either choose the risky equity market or the safe market for govt securities.”
You choose one or the other, as you say. But so long as either would bring you some subjective benefit – even if you can’t quantify that benefit – then there is an opportunity cost to holding either security. If investing in equities would bring you some subjective value, then you will demand a return for investing in the the alternative (treasuries) to compensate you for the opportunity to earn a return in equities that you are foregoing by purchasing the T-bill. Otherwise there would be no incentive to invest in treasuries. Everyone would instead invest in stocks or corporate bonds, or or even just hold cash and earn the same (zero) return.
“Now for the T-bill question. The fed sells T-bills at a discount to face value in order to implement an interest rate above zero. But under zero interest rate policy they would not do this, so T-bills would trade at face value. Actually they would probably not exist since people would just prefer liquid bank deposits.”
The Treasury, not the Fed, issues T-bills. And the Treasury does not set the price for T-bills. They are sold at auction. If investors wanted to, they could bid T-bills up to face value. But no one does that, despite T-bills being perceived as risk-free, because no one wants to invest in something that will net them zero return when they could instead earn a positive return investing elsewhere or simply hold cash.
Well ok to all of that but we are not in dispute about the idea or utility of opportunity cost as a concept. Only it’s use as a justification for interest payments. I think I now see the point of disagreement though. It looks as though you are assuming that the opportunity cost is negative, when it in fact is just as likely to be positive.
Let’s assume there is some function, necessarily subjective in nature, that you have decided to use to normalize the risk/return profiles of equities and govt bonds. Whatever the difference in returns between the two normalized profiles will be considered “opportunity cost”. But if equities are highly risky and returns are low, and your model is decent, you will find that the risk adjusted returns on equities are lower than bonds, even if the actual returns are higher. This can be true of any two investments. So you think that a negative opportunity cost justifies a positive interest payment. Do you also think that positive opportunity cost justifies a negative interest payment, real or nominal?
” It looks as though you are assuming that the opportunity cost is negative, when it in fact is just as likely to be positive.”
It seems like you are conflating opportunity cost with net value. Opportunity cost is positive by definition. It stems from the fact that alternative uses of resources can bring a person subjective value, and by putting your resources to one use you are forfeiting the opportunity to use them in some other way that would have brought you benefit. That foregone benefit is the opportunity cost.
Now, that opportunity cost can then be compared against the benefit of the action taken, and it is possible that the cost could be greater than the benefit in which case net value would be negative (unless you buy into the perfectly rational agent model). That happens when the cost is greater than the benefit.
It is also possible for the benefit of the action taken to exceed the foregone benefit of the alternative. In that case, net value will be positive. But that does not mean that the opportunity cost is negative. It just means that the benefit exceeds the cost.
“Let’s assume there is some function, necessarily subjective in nature, that you have decided to use to normalize the risk/return profiles of equities and govt bonds. Whatever the difference in returns between the two normalized profiles will be considered “opportunity cost”.
No. The difference in the risk-adjusted returns between the bond and stock investments is the net value of investing in bonds (or stocks, depending on if you are looking at U[B] – U[S] or U[S] – U[B]). The opportunity cost of investing in bonds is the risk-adjusted return from investing in stocks that you are forfeiting because your money is tied up in bonds. Similarly, the opportunity cost of investing in stocks would be the risk-adjusted return from investing in bonds that you are foregoing by having your money tied up in stocks.
“But if equities are highly risky and returns are low, and your model is decent, you will find that the risk adjusted returns on equities are lower than bonds, even if the actual returns are higher.””
I’m not saying that the risk-adjusted return to stocks will be greater than that on a bond. I’m simply saying that it will be a positive amount. And given that it is positive – that the stock investment brings some benefit – bond issues will need to offer some positive return if they are to induce any investors to purchase their debt, even if that debt is risk-free.
Note that even your sentence here does not allow for zero return bonds. You wrote: ” you will find that the risk adjusted returns on equities are lower than bonds”.
So long as the stock’s risk-adjusted return is greater than zero, this can only be the case if the bond offers a positive return as well!
By investing in bonds instead of equities, you are foregoing the opportunity to earn a positive risk-adjusted return in equities, and that foregone opportunity is the opportunity cost of the bond investment. And that is why even a risk-free bond will have to pay a positive interest rate to attract investors who could be earning a positive risk-adjusted return by investing their money elsewhere.
Yes I am conflating it with net value. I cannot appreciate the meaning of your opportunity cost, nor how it compels the government to make welfare payments to bond holders. It is the difference in value between opportunities that drives choice. I assume you are familiar with the MMT argument that investors have no channel through which to “demand compensation” owing the fact that we are in a non-convertible currency regime. I don’t need to repeat that here.
Also, on your other point, you cannot assume the risk-adjusted return of any particular investment is positive. Investing requires making predictions in order to estimate returns. There is no requirement that an investor gives a positive value to every opportunity. Some opportunities are just toxic.
I guess I must clear up the confusion about treasuries as well.
What I said was the fed SELLS treasuries, not ISSUES treasuries. The auction process is how treasuries are issued, but the fed also acts as a market maker for treasuries through its open market operations. If you try to bid them up to face value (we are talking about the secondary market here) the fed will step in as seller, pushing the price back down to where it wants. But in reality other investors will step in first knowing the fed is right behind them in the order book.
This is a bit of a simplification because the fed doesn’t normally target specific treasury yields, just the fed funds rate. But the two are related through arbitrage. It has nothing to do with preference between multiple investments. You would get the same result even if there were no other investments.
“Open market operations involve the buying and selling of Government securities in the open, or secondary, market by the Federal Reserve—a purchase adds to nonborrowed reserves, while a sale reduces them (see Chapter 5 for details).”
http://research.stlouisfed.org/aggreg/meeks.pdf
The Fed does not have an infinite amount of Treasuries to sell. If investors were actually willing to pay face value for T-bills, the Fed would be powerless to stop this once they ran out (which would happen almost instantly if they are selling them below par value and investors value them at par value as you suggest).
(Also, by the way, the Fed does not act as a market maker. The Fed conducts open market operations to achieve specific monetary policy goals, not to provide liquidity.)
Secondly, you correctly note here: ” the fed doesn’t normally target specific treasury yields, just the fed funds rate.”
It seems like an incredible strain to argue that investors refrain from paying face value for T-bills* only* because they expect that if they do, the Fed will jump in to undercut them. For the overwhelming majority of the Fed’s history, maintaining nonzero T-bill rates has never been an explicit policy objective as far as I’m aware. Additionally, the Fed is much more frequently a net buyer of T-bills. Why do we not see interest rates hit zero during the times when the Fed buys T-bills, if you are indeed correct about there being no opportunity cost to holding T-bills?
More importantly, you have not addressed my primary argument from the preceding post. Assume a risky asset S and a risk-free asset B. If S yields a positive risk-adjusted return, then:
(a) the risk-adjusted return to S is the opportunity cost of buying B, because by buying B you are foregoing the risk-adjusted return you would have earned from investing in S instead, and
(b) the only reason anyone would be willing to purchase B instead of S is if B offered a better risk-adjusted return. So long as the risk-adjusted return to S is greater than zero, then the interest rate B pays must also be greater than zero. Even if there weren’t a single risky security offering a positive risk-adjusted return, the interest rate on B still wouldn’t be zero because if it were then people would simply hold cash instead of investing at all.
This all follows from the fundamental assumptions of economics. Given that people have unlimited wants and limited resources, there will always be an opportunity cost to any action or investment because doing so necessarily precludes one from taking particular alternative actions. If your money is tied up in bonds – whether or not they are risk-free – you cannot use those same funds to earn positive returns elsewhere. That means there is an opportunity cost to holding bonds, and if investors are to suffer that opportunity cost they will want to be compensated for doing so by at least as much as they would have earned (on a risk-adjusted basis) had they invested in those alternative positive-return investments instead (or if their best alternative was to hold cash, they will want to be compensated for not having immediate access to their funds for consumption purchases).
Or, Brian, let me also phrase my argument in the form of this question: If you are an investor, and you have a choice between (a) investing in some asset that yields a positive risk-adjusted return, (b) holding cash, or (c) investing in a bond with no default risk that earns zero return, why would you ever invest in the bond that pays you nothing to give up your money for a length of time?
I’m going to focus on the opportunity cost thing. How on earth can you argue that someone should be compensated or “demand compensation” for something they did not do? Imagine I have to choose to invest in company A or company B with my capital. Both are considered equally risky. I cannot invest in both. If I chose company A will I expect greater returns because of the fact I missed the opportunity to invest in company B? Of course not!
But that’s exactly what I think you are arguing feel free to correct me if I’m wrong.
“I’m going to focus on the opportunity cost thing. How on earth can you argue that someone should be compensated or “demand compensation” for something they did not do?”
Consult any economics textbook and you will see that the definition of opportunity cost is the highest valued foregone alternative (although strictly speaking it is the value of that foregone alternative). You will demand compensation for investing in something because there are alternative uses of your money that could have also brought you benefit.
“Imagine I have to choose to invest in company A or company B with my capital. Both are considered equally risky. I cannot invest in both. If I chose company A will I expect greater returns because of the fact I missed the opportunity to invest in company B?”
If company A wants to earn your investment dollars, they must offer a better return than company B, because if they don’t then you will invest in company B instead. In other words, you will “demand compensation” from company A – demand a return greater than that offered by your best alternative – if you are to be persuaded to invest in company A. Also note that if you invest in company A, your opportunity cost is the return from company B that you are not earning, but would have been earning had you instead invested in company B.
Turning back to the case of the risk-free bond, the investor’s thought process might run something like this:
“If I invest in stock S I will earn an expected return of $5. But there is a risk, so I value my subjective expected benefit from that investment at only $3. If I am going to consider instead investing in a risk-free bond, then, I will only do so if it pays me more than $3. If it pays me $0 then I have no reason to invest in it and will instead invest in S which pays me risk-adjusted $3, because $3 is preferable to $0.”
It is in this sense that investors will demand compensation for holding a risk-free bond. They will only forego the opportunity to earn a positive risk-adjusted return investing their money elsewhere if they can earn a higher return investing in the risk-free bond.
I also posted a short reply to my own post with a question for you, although it has not been cleared by the moderator yet. I will copy that question here in case this post gets cleared before my prior one:
Let me also phrase my argument in the form of this question: If you are an investor, and you have a choice between (a) investing in some asset that yields a positive risk-adjusted return, (b) holding cash, or (c) investing in a bond with no default risk that earns zero return, why would you ever invest in the bond that pays you nothing to give up your money for a length of time?
“If I invest in stock S I will earn an expected return of $5. But there is a risk, so I value my subjective expected benefit from that investment at only $3. If I am going to consider instead investing in a risk-free bond, then, I will only do so if it pays me more than $3. If it pays me $0 then I have no reason to invest in it and will instead invest in S which pays me risk-adjusted $3, because $3 is preferable to $0.”
I think this whole discussion turns on the issue of whether the “risk-adjusted expected value” of your investment may be negative. You seem to assume that investment returns are inherently positive. But even if that were true it doesn’t mean that investors cannot perceive them to be negative. And certainly there are specific investments with negative returns.
Investors often look at the stock market and say, “The risk adjusted returns in the equity market are negative 20%. Therefore I’m buying bonds”. It doesn’t matter whether the return on bonds is positive, zero or slight negative. It is still a better choice than stocks with their negative returns. So investors will buy bonds yielding close to nothing not because of compensation for “opportunity cost”, but because it is still the best opportunity.
To answer your last question. If bonds pay 0% then investors will be indifferent between bonds and cash. But this is only a problem in a convertible currency arrangement where “cash” is an IOU for (say) gold, and bonds are an IOU for gold at a later date(s). Because the government might not have enough gold at some point, and therefore it might need to compensate for the default risk like any other investor that wants to borrow money.
But in our system bonds, reserves, repos, bank deposits are all just different types of IOU for other types of IOU’s. Of course government will never run out of its own IOU’s. But the more important observation is that it is changing the total stock of IOU’s held by the private sector that leads to changes in price. The government has to buy something other than an IOU in exchange for it’s IOU’s in order to drive prices. When all it does is buy one type of IOU (bonds) with another type of IOU (reserves). It cannot cause prices to change.
This is why it isn’t any problem if the fed freely buys bonds exchanging them for reserves. Warren compares bonds to money in a savings account and reserves to money in a checking account. It isn’t any problem for the bank to move money back and forth. It’s up to you whether you want the interest or not.
“I think this whole discussion turns on the issue of whether the “risk-adjusted expected value” of your investment may be negative.”
It seems like you are at least conceding that *if* alternative investments can yield (subjectively-assessed) positive risk-adjusted returns, then there is an opportunity cost to holding bonds, and so investors will demand a positive return even on risk-free bonds in this case.
This is a far far cry from your original statement, which was: “Under a fiat system the default risk goes away, and along with it the justification for interest payments.” in which you did not make any type of qualification about having no beneficial alternative uses of money.
The only way to reconcile what (I think) we are now in agreement upon with your initial statement is if you attempt to claim that it is the normal state of affairs for there not to be a single beneficial use of money. Which basically means we’ve reached nirvana.
“You seem to assume that investment returns are inherently positive. But even if that were true it doesn’t mean that investors cannot perceive them to be negative. And certainly there are specific investments with negative returns.”
I’m not assuming that *all* investment returns are inherently positive, or that there can’t be specific investments with negative returns. I was using an example with two investment opportunities just to keep things simple. My argument is that as long as there is even a single beneficial use of money, then if people are to forego that beneficial use, they will only do so for a price that compensates them adequately for giving up the opportunity.
“Investors often look at the stock market and say, “The risk adjusted returns in the equity market are negative 20%.”
Again, while there may be specific investments that investors think will yield negative returns, so long as there is even a single investment that they think will yield a positive return – be it stock or otherwise – then they will prefer that alternative investment to a zero-yield bond.
Also, I don’t see how you can say that “the risk adjusted returns in the equity market are negative 20%” . If you mean that investors expect the S&P to fall by 20%, then they can make a profit by shorting the S&P. Or buying put options. Or selling call options. Or buying VIX options. As long as there is even a SINGLE alternative way for people to put their money to use, then there is an opportunity cost to buying bonds and people won’t pay face value for them.
“Therefore I’m buying bonds”.”
Because those bonds offer a positive risk-adjusted return. No one would buy bonds if they offered zero yield.
“It doesn’t matter whether the return on bonds is positive, zero or slight negative.”
Yes it does! Do you seriously think people would invest in a bond that offers zero or negative return instead of simply not investing at all (and this is again all under the implausible assumption of there not being a single other profitable investment opportunity)?
“So investors will buy bonds yielding close to nothing
“Close to nothing” and nothing are two very different things. T-bills yield *close* to nothing because not only are they free of default risk, but they are also highly liquid and less sensitive to other risks because of their short duration.
Even still, T-bills have to offer a positive return because if they didn’t then investors would just hold cash (again, under the implausible assumption of there not being a single other profitable use of money) because cash is even more liquid than T-bills.
But your original argument mentioned nothing about liquidity. In the case of an illiquid bond, even if the issuer has no risk of defaulting, the bond would have to offer a much higher return to induce investors to buy them in the first place.
” not because of compensation for “opportunity cost”, but because it is still the best opportunity.”
Yet in your own analysis you are implicitly relying on the opportunity cost concept. When you say that the return on the relevant alternative investment is low (in your example, equities) and therefore people are willing to pay more for bonds, that exactly means that the opportunity cost of holding bonds is low. As you seem to have conceded, when the alternative investment yields positive risk-adjusted returns, people won’t be willing to accept zero yield on their bonds because the opportunity cost – the stock investment – is high in that case.
I wan to stress that if you are now changing your argument from
“Under a fiat system the default risk goes away, and along with it the justification for interest payments.”
to
Under a fiat system the default risk goes away, and along with it the justification for interest payments only when every single other investment opportunity yields negative risk-adjusted returns,
that these are not at all the same claim. And as for the second one, it is difficult if not impossible to imagine a situation where there isn’t a single profitable alternative. Where all worthwhile investments have been made.
And EVEN STILL, even if there wasn’t a single profitable investment opportunity at a given moment, bonds STILL wouldn’t trade at par because people would simply hold cash instead.
“To answer your last question. If bonds pay 0% then investors will be indifferent between bonds and cash.”
Do you really believe this? Cash has the advantage of being infinitely liquid. Cash can be used immediately to pounce upon any new investment opportunities that arise, or to buy consumption goods, or to pay for a hospital visit if you get in an accident, or any number of uses. If your money is tied up on bonds then you need to sell them first before you can take advantage of the new opportunity or pay your medical bills. When you go to sell your bonds, you incur a transaction cost, and you run the risk that there won’t be any willing buyers when you want to sell. Given these disadvantages of holding bonds relative to cash, I don’t see how you can argue that investors will be indifferent between the two when the bond offers no advantages and pays no return.
As for the rest of your post, I don’t see how that ties into your argument about the risk-free return on bonds being zero.
In addition to being a wise and classy guy, Mike Norman was there before the housing bubble crashed, along with Peter Schiff.
http://www.youtube.com/watch?v=C7DlAjrhm9s
This is the link for what I do instead of engaging Mammouth.
Wow. That was not the link to Mike Norman and his 2006 wisdom.
http://www.youtube.com/watch?v=1G0tfb8ZefA
Bob I still think you should talk to a therapist about your need to argue with LK on a daily basis, but that’s not really my business. THANK YOU for this post. I *knew* that Mike Norman guy, and his swagger, were familiar, but I couldn’t put my finger on it. This is what had been eluding me, as he lectured me on courtesy to one’s opponents.
No no no. Therapy is for Krugman obsessives. LK has much to teach us by finding interesting and voluminous old quotes to mangle.
I will concede that there might be something not quite right about posting comments on the Mike Norman site.
Mike Norman does not appear to know that anti-gouging laws cause shortages. Hard to believe, but it’s true.
http://mikenormaneconomics.blogspot.com/2012/11/federal-govt-delivering-millions-of.html?showComment=1351962868921#c7419009962230293763
I find it fascinating. Also, I think standing up to bullies is therapy.
The most important lesson from the debate is that it never reached more than 400 viewers worldwide.
Nobody cares. Just face it.
We might actually agree on something here, Mammouth.
But the youtube will ultimately be seen by millions. Like the previous session with Mike Norman:
http://www.youtube.com/watch?feature=player_embedded&v=BFk6epIveY8
And I probably count for 3 or 4 of those viewers having listened to the entire thing. So maybe I do need therapy.
MMT on the move, taking over the world.
Dr. Kelton, chair of the department of economics at the University of Missouri, Kansas City, presented evidence that strongly suggests that everyone in mainstream economics misunderstands how government finance interacts with the economy. She demonstrated how government finance is part of the domestic and global balance sheet.
“When federal inflows (taxes) and outflows (spending) are viewed as balance sheet items, we clearly see how everyone and everything is connected,” states Pitney. “Dr, Kelton presented a fascinating chart that illustrated the perfect symmetry of inflows and outflows among the US government, businesses, households and other countries,” he continues, “and how the outflows from one of those sectors shows up as inflows somewhere else.”
Dr. Kelton showed that government deficits are an important source of corporate profits. She pointed out, “The fiscal cliff and the sequester are ‘customer killers,’ meaning that people have less money to spend and it is creating a massive drag on the economy. We need to cut taxes or increase spending now — debt is only half of the balance sheet.”
The keynote inspired Pitney to learn more and expand his understanding of MMT. He asserts, “If MMT is as robust as seems to be, this could be a game changer and has significant implications for the broader economy and our individual planning clients.”
http://www.prweb.com/releases/sanfrancisco/financialplanner/prweb10796933.htm
Of course, the MMT “accounting” process does not account for much. Like accounting for voluntary transactions and their terms. Or $220 trillion in unfunded adult diaper changing services for baby boomers.
And that “new net financial assets” nonsense is just a Cantillon Effect of squirting of stolen purchasing power to the new recipients.
When MMTers claim that the government’s deficit is the private sector’s surplus, it’s not exactly true. There are two possible scenarios.
The first is when the deficit is all borrowed debt. Some part of the private sector owes all that debt to another part of the private sector. So, contrary to MMTer insinuations, there is NO free lunch there. And no accounting for who in the private sector actually owes the debt or to whom.
The second scenario is when the government just spends money into existence in excess of tax receipts (which at present it DOES NOT DO). The recipients of the new funny are receiving purchasing power from those holding the existing money. There is only a free lunch for the recipient but an equal loss for the victim. And MMT makes no accounting for it.
” just a Cantillon Effect of squirting of stolen purchasing power to the new recipients”
You have no desire to understand anything about anything.
Your sole desire is to seek out new meaningless slogans, which you can then pointlessly repeat ad nauseam, and then stupidly chastise your contemptuous audience for not “understanding” your pointless and meaningless slogans.
You are a pointless fool.
Where’s the beef? Where’s the substance of a refutation?
In his water bowl, where he keeps his passive aggressiveness after being told an uncomfortable truth.
MMT is very very serious,
“The problem is demand. The government can temporarily boost demand to help soften the effects of the private sector adjustment.
We can’t run out of money, the Federal Government (Fed,Treasury,etc.) creates it on computers and spends it.
The idle capital and unemployed workers are ready to produce, the only barrier is money, which the government creates.
Until the government renounces any and all Austerity, and embarks on an effort to use government spending to fill this output gap, unemployment will remain high, and GDP lower than its potential.
”
“We need a large, $1.1 Trillion government stimulus jobs-directed spending program NOW. ”
Something tells me………(you get the idea where I was going)
“The result was a credit market and economy in shambles, and a government unwilling to plug the aggregate demand hole adequately with New Deal style public expenditures. ”
“do something about the unnecessary future pain. ”
“If you are unemployed,…………., it is not your fault. ”
“Americans being shafted by free trade agreements and destruction of collective bargaining. ”
“Every time there’s a business with machines or facilities idle due to low sales, or a worker unable to find a way to contribute, it’s money being lost and wasted in our economy. ”
“Monetary sovereigns worldwide must Say No to Austerity.”
The MMTers used to start off their scam by insisting that a government deficit was necessary for a private sector surplus based upon a chart like this:
http://pragcap.com/wp-content/uploads/2012/02/pk1.jpg
“”
[an economy closed to international trade]. Define “private saving” as “private saving minus Investment” … which is how MMTers normally use the word “saving”, or sometimes “net saving”. Then it’s just standard National Income Accounting. Y=C+I+G, and S=Y-T-C, therefore S-I=G-T.
“”
But in any public communication of MMT, especially videos of MMT, they don’t point this out.
Bob Murphy noted this two years ago:
And there you have it: When MMTers speak of “net saving,” they don’t mean that people collectively save more than people collectively borrow. No, they mean people collectively save more than people collectively invest.
As a final way to illustrate the non sequitur of the equations involving government budget deficits, note that we could do the same thing with, say, Google. Go back through all the equations above, and redefine G to mean “total spending by Google.” Then C would be “total consumption spending by the-world-except-Google,” and so on. *******
After doing this, we would be able to prove — with mathematical certainty — that unless Google were willing to go deeper into debt next year, the world-except-Google would be unable to accumulate net financial assets, in the way MMTers define that term. The proper response to this (perfectly valid) observation is, Who cares?
http://mises.org/daily/5260
I believe Bob got Mosler to admit that during the debate.
It seems to me that this all amounts to nothing more than all of this new “net saving” is nothing but a new shot of funny money into society, the recipient of which has a free lunch at the expense of those holding the old money. MMTers are adamant and meticulous about ignoring and suppressing the concepts of Cantillon Effects and economic calculation.
Their theory is 100 percent correct NOMINALLY. Countering their theory is as simple as their explanation of it.
MMT: when we print money it won’t be inflationary(on prices)
Us: By definition, (all else equal) this pushes up prices.
Net prices may fall in this scenario(Japan), but would have fallen further absent this MMT policy.
MMT: Well all else won’t be equal. We will offset the inflationary effect of money supply increases by increasing productivity.
Us: And government has proven capable of this?
MMT: Well you just don’t go printing and spending “willy nilly”.
Us: Except they do. It is theoretically possible for the government to be productive with resources, they just are not on average. Government is a net destroyer of wealth.
-Difference between public and private sector using dilution to fund the company or country’s operations.
Example: Company xyz has a market cap of 1 billion. There are 1 million shares outstanding and the public has all of them. xyz issues 1 million shares(to sell) to fund future expansion. The market cap doesn’t instantly double. The total purchasing power for the entire O/S remains the same. Now, here is where productivity comes in. The company is able to expand in size by using the share sale to achieve profitability and further YoY growth in revenues. Had xyz not diluted, they would have failed. They took 1/2 of the purchasing power from shareholders, but put it to productive use and ultimately rewarded shareholders with higher valuations.
In the case of a forward split of 2:1, again the market cap remains unchanged. The distribution of shares (%) remains unchanged. In this case, an Austrian wouldn’t give a hoot. THIS is NOT inflation. Prices(cost of goods) went up, but I have an exact amount of additional shares to offset it.
Government:
There are 1 trillion dollars in existence. They are all owned by the public. The government prints 1 trillion dollars. Purchasing power does not instantly double. The government now has 1/2 of the total purchasing power of the country. They STOLE 1/2 of the purchasing power from each previously existing dollar. Again, this is not a problem if it is put to productive use. Simply ask yourself what would a government do compared to what a public company would do with this money. Government may create a motor company. “ha see we are being productive ~mmt”
They will also create agencies to oversee this. Government motor co., would have (like every other government institution) incredibly dense chains of command.(top heavy). They would not have to be concerned about share price or profitability. “hey we can always print to cover the losses ~mmt”
Only a liar or a fool can deny that newly created currency(or shares) takes power from the existing stock. Now…..MMT claims that “once the economy recovers”, the government can shrink in size and these people can return to the private sector.
ding dong! hello?
Has anyone noticed how hard it is to cut any government agency’s budget? Austerity?
Firemen? impossible to cut their budget, etc etc
If you cut the government motor’s budget, JOBS WILL BE LOST. MMT simply proposes to massively increase the public sector, and once at full employment magically they will transfer back to the private sector WILLINGLY.
If MMT hasn’t noticed….. politicians are in charge. Again, it is all theoretically possible, but REALly impossible. MMT can never be implemented. It requires legislative changes that will likely never even be put on paper by congress.
After doing this, we would be able to prove — with mathematical certainty — that unless Google were willing to go deeper into debt next year, the world-except-Google would be unable to accumulate net financial assets, in the way MMTers define that term. The proper response to this (perfectly valid) observation is, Who cares?
I’d like to expand on this thought a bit. I just want to make one small correction to your statement. Instead of “go deeper into debt”. It should say “spends more than its income”. So if google spends more than its income we would say they are losing money. If google loses money, that means the non-google economy is profiting by the same amount. What does this mean for prices in the non-google economy? Google’s net spending puts an upward pressure on those prices. On the other hand if google earns a profit it exerts a downward pressure on prices in the non-google economy.
Now imagine google running big profits for years and years. In enough time there will not be enough dollars in the non-google economy for google to justifiy continuing to pay its developers. The non-google economy is like a spent mine. There are a few things that might happen.
1) Someone agrees to go lose enough money to fill the gap continually created by Google’s profits, keeping the economy afloat.
2) Google begins to accept real goods as payment, turning itself into the swing supplier and price setter of the currency. As such, it will have to decide whether it wants to create jobs just to keep the unwashed hoards of non-googlers from storming the headquarters. In other words, it finds itself in the role of government.
3) People decide they don’t need Googles too-hard-to-get currency after all and revert to barter systems or maybe create a new currency.
So I wrote a comment here that apparently got deleted? Anyways, what I wrote was in response to the following part of Brian’s comment:
“On the other hand if google earns a profit it exerts a downward pressure on prices in the non-google economy.
Now imagine google running big profits for years and years. In enough time there will not be enough dollars in the non-google economy for google to justifiy continuing to pay its developers. The non-google economy is like a spent mine.”
The only way this happens is if google takes the profits it earns and stuffs them into a mattress, removing them from the circulating money supply. Typically if companies earn profits they will pay dividends to shareholders, reinvest to grow their operations, and if they still have money left over they can put it in some type of investment vehicle or even just stick it in the bank. In all these cases, google’s profits are reinjected into the economy. The only way for the money supply to dwindle (for the rest of the economy) is if google decides to accumulate an ever-increasing pile of cash and never invest this money or pay dividends or put it in a bank. They would literally need to sit on ever increasing cash reserves for your scenario to hold.
This is where the accounting stuff becomes important. It is the NET flow that matters. As long the NET flow of funds is positive to google, it is still as if they are taking money and stuffing it in the mattress.
It does not matter if they write paychecks that flow back to the economy, if at the end of the day they are making sales that are bigger than the paychecks going out.
REINVESTMENT
Reinvestment involves taking the profits from an investment, and spending them again, in hopes of netting an even bigger, leveraged return. Whether and you can do this profitably or not depends critically on supply of the asset you are trying to acquire; money. But there will always come some point where money cannot be reinvested profitably unless someone is running an offsetting loss.
DIVIDENDS
When companies can’t find a way to leverage their profits they pay dividends. If only we could rely on everyone to spend their dividends on consumable, real goods there would be no problem. This would circulate assets back into the economy and keep it alive. But in real life investors often want to leverage those dividends for even more profit. The problem is that these dividends are subject to adverse selection. They are receiving the dividend only because there is a lack of profitable investment opportunities, otherwise google could have invested the money itself.
When investors look into the economy they see a well that is running dry, in other words, risk adjusted returns below zero. Not only will they (correctly) assign negative values to most investment strategies, but they will assign a positive real return on cash, owing to it’s increasing scarcity! This effect makes the NET VALUE of cash very much positive, keeping the dividend payments in the proverbial mattress. So yes, google will keep stuffing the money in the mattress OR its shareholders turn themselves into charity organizations that run perpetual nominal losses.
Now let me try to address some of your other post.
“Under a fiat system the default risk goes away, and along with it the justification for interest payments only when every single other investment opportunity yields negative risk-adjusted returns”
I don’t agree with this statement exactly. Instead I would say:
“Under a fiat system the default risk goes away, and along with it the justification for interest payments as long as there exist some investors who do not have alternative investments with positive “risk-adjusted nominal returns”. And by “some” I mean enough investors to buy the bonds government wants to sell. So yes, I agree that there is a situation where government would be required to pay positive interest; namely when the private sector is collectively euphoric about it’s nominal earnings prospects. But such euphoria can only be justified if someone is running a very large deficit into the economy. Under normal situations there will always be more investment dollars than there are positively valued nominal investments to put them in.
Do note this entire discussion assumes a government that wants the private sector to buy bonds in the first place. I’ve already covered the reasons why the issuer of fiat currency has no need to issue debt at all. If the US issues bonds it is only doing so in order to make welfare payments to bond holders. Not out of demand for cash-flow/liquidity reasons and definitely not to control inflation.
” If you mean that investors expect the S&P to fall by 20%, then they can make a profit by shorting the S&P. Or buying put options. Or selling call options. Or buying VIX options. As long as there is even a SINGLE alternative way for people to put their money to use, then there is an opportunity cost to buying bonds and people won’t pay face value for them.”
This is a nice try but it doesn’t hold water. Not wanting a long SPX position is definitely NOT the same thing as wanting a short SPX position. Every trader knows the value of going home flat. There is huge uncertainty around any predictions which means that your expectancy should be negative for all strategies.
You need a really good reason to believe in any kind of derivative strategy. This becomes much easier to visualize if you think about what you are really trying to do, which is take dollars out of the economy by selling them, then buying them back for less. You gotta get someone else to let go of those dollars and that is really hard to do.
I still didn’t address your liquidity question but I think we are running out of space here. If you want to continue you can hit me up @brianprogrammer . I appreciate you taking the the time to go toe to toe on all these fine points.
According to Joe Weisenthal, Goldman Sachs uses the MMT “sector balances chart”:
http://www.businessinsider.com/goldmans-jan-hatzius-on-sectoral-balances-2012-12
You can comment on the debate on the “official” seminar web site
http://www.modernmoneyandpublicpurpose.com/forum.html#/20130604/mmt-vs-austrian-economics-2648885/
Brian,
I don’t use twitter so I’m just going to post here if you are interested in continuing this discussion.
” I appreciate you taking the the time to go toe to toe on all these fine points.”
Ha, I regret starting (not as a slight against you, just that I’ve put more time than I can afford), but at this point I’m in too deep!
“This is where the accounting stuff becomes important. It is the NET flow that matters. As long the NET flow of funds is positive to google, it is still as if they are taking money and stuffing it in the mattress.
It does not matter if they write paychecks that flow back to the economy, if at the end of the day they are making sales that are bigger than the paychecks going out.”
I maintain that this only leads to a dwindling supply of cash for the non-google economy if google is willing to sit on an ever-increasing amount of cash. Certainly all companies want to maintain some cash on hand, but I’ve never heard of a company trying to amass ever-increasing piles of cash in its vaults instead of putting that money to work. Recently Apple was in the news for sitting on a lot of cash, but the fact that that even registers as a story is indicative of how rare it is for a company to sit on large cash reserves.
Nor does it make sense from the company’s perspective for them to attempt to acquire ever-increasing cash reserves instead of reinvesting profits or putting them in the bank or some other type of fund. Even when they do sit on excess cash reserves, they will not do so forever. They must plan on spending that money at some point, at which time it will circulate again.
Yes their goal is to make profit, but of course fiat money does not have intrinsic value, it’s valued for it’s purchasing power – the value of money is that it can be spent on goods and services. So it does not make sense for a company (or an individual) to amass ever increasing cash reserves forever. During times of high uncertainty they may refrain from investing, but at some point they will want to do something with that money – spend, reinvest, or put it in the bank – and in all cases the money is reintroduced into circulation.
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“Under a fiat system the default risk goes away, and along with it the justification for interest payments as long as there exist some investors who do not have alternative investments with positive “risk-adjusted nominal returns”. And by “some” I mean enough investors to buy the bonds government wants to sell. So yes, I agree that there is a situation where government would be required to pay positive interest; namely when the private sector is collectively euphoric about it’s nominal earnings prospects.”
Two points: (1) We seem to disagree on how likely it is for this situation – enough investors not having any alternative investments with positive risk-adjusted returns – to occur. To be clear, by any alternative investment I mean not only do they not see any profitable opportunities in equities – long or short – but they also do not see any worthwhile bonds or commodities or derivatives, and they also do not think depositing their money in a bank is worthwhile. I think this is quite a rare concurrence.
Now you can argue that this is only rare precisely because we do have a public government willing to run deficits, but I am skeptical of this because, although infrequent, there have been times when the government has ran surpluses, and the economy did just fine. For the four years from 1998 – 2001 the federal government ran a surplus each year. Of course the government was still in debt, but one would think, if the MMT position was correct, that running a surplus for four consecutive years should result in a reduction in prosperity and 0% 3-month T-bill yields. Yet neither happened. Real and nominal GDP per capita both increased over this entire span, and the 3-month T-bill yield averaged close to 4%. Sure there was a short recession during 2001, but it is hard to pin that on the gov running a surplus considering that 1998 – 2000 were not recession years and that even with the short recession, GDP per capita increased from 2000 to 2001.
(2) My second point is the same one I raised in my previous post, which you acknowledged not addressing, but this is a point you cannot ignore if you are going to claim that the interest rate on debt with no default risk is zero: Even if there is not a single profitable alternative use of money, holding cash is still better than holding a zero-return bond because cash can be used to respond to unforeseen investment opportunities or unforeseen spending needs. With bonds, you need to sell them first. Doing so incurs a transaction cost of both money and time, and there is also a risk that you won’t find willing buyers when you want to sell for the price you want to sell at. Given these costs of holding bonds, the only way to induce investors to purchase bonds instead of hold cash is to offer a positive return.
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Regarding the SP tangent, I was just pointing out that even in a down economy there are still ways to make money.
“Not wanting a long SPX position is definitely NOT the same thing as wanting a short SPX position. Every trader knows the value of going home flat. There is huge uncertainty around any predictions which means that your expectancy should be negative for all strategies.”
Sure, not wanting a long SP position is not the same as wanting a short position. If you are too uncertain you may want neither. But your original quote made it sound like investors were confident that equity values were going down: “Investors often look at the stock market and say, “The risk adjusted returns in the equity market are negative 20%.”
But again, I was only noting a couple possible ways to make money in down economies. When uncertainty about equities is high, I agree bond yields will fall. But they will not fall to zero for the reasons I’ve mentioned.
“You need a really good reason to believe in any kind of derivative strategy. This becomes much easier to visualize if you think about what you are really trying to do, which is take dollars out of the economy by selling them, then buying them back for less. You gotta get someone else to let go of those dollars and that is really hard to do.”
Huh? Not sure what you mean here. With put and call options you are just buying or selling the right to buy or sell the underlying at a pre-specified price. Even if you don’t know which way the market will move, if you expect high volatility then you might be able to profit from a long straddle for instance. Just an example of strategy that may be profitable when others don’t appear to be.
But sure not all investors will always want a piece of the equity market. As I said above, however, I can’t imagine an investor not wanting a piece of the equity market AND not wanting a piece of the bond market AND not wanting a piece of commodities, fx, or any other investment vehicle, AND not wanting to deposit their money in a bank AND not want to hold cash. Which would all be necessary for T-bills to trade at par.
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More general MMT question: I’ve seen MMTers stress (so far as I can tell, and again I know very little about it) that without government issuing debt or injecting cash, there can be no net creation of financial assets. Do MMTers believe that without an increase in net financial assets there also cannot be an increase in real assets, i.e. economic growth?
Has there ever been a case of any company sitting on literal cash holdings (i.e. notes in a vault, outside a bank)? I don’t know for sure but very hard to believe that Google and Apple don’t keep their money in electronic bank accounts like everyone else does. Of course the banks can lend against these reserves at any time. The into Google and out of Google sectoral balance has nothing whatsoever to do with the circulation of currency in the economy.
The MMT “net saving” concept has nothing whatsoever to do with people’s savings, nor anything else for that matter.
Bob
I saw your debate with Mosler and you appeared to be flummoxed by Mosler’s statements that Austrian arguments are not applicable in a floating exchange rate standard since they are predicated on a gold standard. You did not really have a good response to him and appeared to be perplexed. How do you answer him after having some time to mull this over.
Wesmouch the reason I was perplexed is that he didn’t give me any particular explanation for his assertion. We were specifically talking about business cycle theory in that portion of the debate. An artificially low interest rate causes malinvestments, whether or not there is a gold standard. The Austrians have explained the housing bubble in this respect, for example. It’s not that we were all misinformed and thought there was a gold standard this whole time.
If I had said to Mosler, “Your jobs proposal made sense in the past, but not after John Lennon was shot,” I imagine he would have been taken aback as well.