Sigh... I guess I should get this out of the way fast at the start. Not that it would stop any of the glib "print money free pass" sort of comments... but I may as well try.
All through my life, I've always been curious about many things... and there are many things that I have had an initial unbelieving reaction towards that has often enticed me to try to understand the viewpoint better. I think really truly believe that most ideas and positions are held from a different viewpoint, and they make sense when seen in the same light, and that it does well to understand to better inform your own ideas or integrate the ideas if they make sense.
If nothing else, it is a regression back to the pre-internet days of debate through reasoned understanding... and learning. All of that nuance has been lost in the false dichotomy that infects all aspects of our lives now...
It is the same learning drive that brought me to crypto... after the initial, "this can't work" phase. And lets not kid ourselves, if you didn't have that initial disbelief reaction, then it is quite possible that you haven't thought or understood much further than what someone else has parroted.
So, I had this same disbelief when it came to Modern Monetary Theory... as did probably most people, but I was determined to go beyond the memes and the one-liners.
Why?
Well, it is because it is quite self-evident that the dominant strain of economics (Chicago school) that most of the Western world has gravitated towards is quite patently not correctly describing how the world works... but we hold to it, because it makes "intuitive" sense. However, intuition is nothing better than a good story that we make up to kid ourselves... and the entire field of economics is great at "post-hoc" explainations... and economies are so complex that you can pretty much predict anything, and then layer your story on afterwards as to why it DID or DIDN'T happen.
... plus, there seemed to be the usual humanities (yes, economics is humanities....) trick of cherry-picking data and historical writings to support a pre-defined outcome (in this case, a particular economic ideology)... which if you bother going back to the source material and additional books, don't really support the assertions. But who does that?
Anyway, that brings us to Modern Monetary Theory... and contrary to common understanding, it isn't about freeing the money printer!
So, given my dissatisfaction at how the economy is working... and how the stories that we have been led to understand as "economics" are being used to further the ends of the few at the expense of the many... I was definitely curious about learning about a different fundamental understanding of how economies work. After all, if we don't understand what is of critical fundamental importance, then we won't be able to harness and tame the power of the economy.
Perhaps if your model of the economy isn't quite working, perhaps it is time to revisit the assumptions?
PLEASE read at least up to this point before commenting.... if you did, include the word "penguin" somewhere in your reply so that I can weed out the non-readers.
So, I have made it through the first few chunks of this book... and contrary to common understanding, Modern Monetary Theory is not a new concept. It has been floating around for a while, but always in the shadow of the dominant strain of economics. And interestingly enough, there are a few parallels and overlaps with the crypto way of thinking...
In fact, it started not long after the world moved to a fiat system of currency... and the fundamental difference in assumption is the identification of the government as the "issuer" of a currency, instead of a "user". This is where it differs from the simplistic but palatable "household" analogy of the government.
As an issuer, the deficit is NOT the constraint on government spending... if not, then what is? Well, it is inflation. And different ways of spending causes different outcomes on inflation... now that is much more difficult to measure and predict than "budget balances", so it is a much more nuanced take on the economy. So, not an internet ready concept...
... and YES, printing too much money is still going to cause inflation... but it is not the deficit number itself that does that.
As we in the crypto ecosystem know, the money printer is free to print whatever it wants... the computer just needs to be updated. And in fact, that is how government contracts and programs are funded. Not through taxation...
... but if not through taxation, why do we NEED taxation? Well, as a money sink (same as a token sink in token-economics) and to create a demand and purpose for the fiat currency. Without it, the fiat currency is pointless and worthless.
So, by identifying the true constraint on a budget (inflation, not deficit), the possibility is there for better managing the economy and society in general.
However, it is more than likely that at the moment, it is easier to scream "debt and deficit" and to keep pressing the buttons that we know don't do anything because the fundamental assumptions are mistaken...
Anyway, I'm still slogging through the book... hence the scatter brained approach to writing this post!
But it has been a bit of an interesting eye opener about what sort of economic assumptions have been made that have been ingrained into popular understanding... and even more interesting that most of the people that understand the workings of the economy/markets don't actually believe the stuff that makes it to politicians to peddle to the public!
I'm still up in the air about MMT, but I do see some interesting ideas about how the fundamental assumptions might need an updating.
If you made it to the end, then use the word "doghouse" instead!
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Penguin doghouse (bit lame but whatevs, I read your post).
I mean, since public debts are private assets, the government deficit spending any less than ten times the value of all the materials on Earth is robbing us of wealth and purposefully keeping the public poorer than it otherwise could be, right?
You can't in one breath say that's absurd because of the consequent inflation and in the next breath say that deficits don't matter because the balance is zero and the only real consequence is inflation.
If you do give MMT that much, you miss that you're giving them the implicit assumption that the knobs and dials (top-down) should be turned at all...the market (bottom-up) will always prove otherwise.
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Yeah, sorry, it was lame... but I got sick of people reading the title of posts and then jumping straight in.
I'm probably not the best person to explain MMT as I'm still new to trying to understand it... and getting my head around the different assumptions was quite tricky to start with. After all, we have been conditioned to think that everyone is a "user" of currency and are constrained by the same things. This held true for governments when the currency was redeemable and backed by something more concrete, but it isn't likely that we are going back there.
The idea is that different types of government spending will have different impacts on inflation, as some of it will develop the future whilst others are spending for the present. MMT doesn't seem to prescribe what is "good" spending... but it makes the case that there is a difference in how you spend, some types increase inequality and make for a worse worse overall trend for society and the economy.
Deficits do matter, but in this view, they are a second-order effect. And your example shows that well... if you printed endlessly, you debase like crazy... which would make everyone poorer. Where deficits "don't matter" is the obsession with keeping it zero or in surplus, but that doesn't mean you should blow it out either. Identifying the real constraint (if it is the real one...) is going to be better than holding onto a nice easily digestible story.
But more importantly, they are currently being used to create the political cover for NOT wanting to do things that don't align with a particular political worldview (all sides of politics do this). The case was made that deficits in the middle of the 20th century (pre-Chicago school) were not such a political issue, and it gave rise to the middle-class and all the economic good that came with it... with the rise of "common-sense" economics, we got vast and growing inequality, as we bought into a narrative that told a good story.
But again... I'm a novice that is just learning about this different take on how economies work. It is intriguing, and I'm not ready to dismiss it out of hand without learning more.
Saying it's not the deficit number itself that matters is a bit of a semantic argument. The government spending more causes inflation, not the deficit itself, but of course a higher deficit means higher spending. Also, a higher deficit means more money going to interest payments as a higher deficit equates to higher debt. This makes reducing spending even harder.
Likewise, to say that taxation doesn't pay for things is also a bit of a semantic argument. I agree taxation is needed for money to maintain its value but that's just another way of saying you can't print money for free or borrow too much. So either way, more government spending = more taxation = the government deciding how to spend more of the fruit of your labor. Then there of course is the inflation which is effectively also a form of taxation.
The problem isn't that fiat money doesn't work, the problem is that politicians can't be relied upon to properly manage such a system. Politicians win elections based on promises. Those promises usually cost money. The pressure is always to spend more.
It may well be that inflation is the constraint as opposed to the debt but they are directly related, especially given how much of the economy governments typically control these days. Obviously, debt should be constrained because of the consequences of not doing so (inflation). Also, inflation is sort of a trailing indicator. If you wait for an increase in prices to tell you that you're spending too much, it's already too late. Now you are stuck trying to unring a bell which is one of the reasons we get such large oscillations in the economy.
Oh, and I read to penguin and to doghouse. If there was another animal in there I missed it :)
Sorry about the keywords... I get sick of people just reading the title and then jumping straight in.
Well, the deficit part is not just semantics... because spending on different things will have different effects on inflation. Spending on infrastructure or future development is different to doing a general cash splash. However, in the deficit model, they look exactly the same.... which makes it easier to just say that you don't want to spend on things that you don't agree with.
I think that the taxation part is also not just a semantic thing. Does taxation fund the government spending, or is it a sink for the currency. Do we give money to be spend and thus, the government doesn't have money of its own to spend... or is money "created" by the printer, and then "deleted" by spending. It seems initially to be just semantics, but it does make a difference as it defines fundamentally what money is.
Agreed with the politicians part... that can't ever be fixed. But instead of viewing their promises through the lens of deficits, it can be viewed properly (maybe...) through inflation impact. That would at least mean that things are costed properly as a "change over time" manner instead of a "single snapshot" manner. Sure, politicians will still play the weird games... but it doesn't mean that economists need to.
Definitely, deficit and inflation ARE related, but not identical... but which is the fundamental constraint. IF deficit is NOT the fundamental constraint (as the government is NOT merely a user of currency), then we have been barking up the wrong tree... with consequences.
Inflation could be modelled... of course, imperfectly... but most budgets these days are just winging numbers anyway. So, not exactly worse... just more honest. But also, it really matters where you are spending the money!
Anyway, I'm still trying to get to grips with ideas myself... but I'm intrigued, as I'm pretty sure that the orthodox economic ideas are not really quite right.
i get what you are saying, but I just don't see a significant difference that's why I say it's a semantic argument. I mean, tax dollars are literally used to pay for things and service debt. To be a true sink wouldn't they just have to be burned or something? Otherwise, what is the difference? Debt is issued to pay for things beyond what tax dollars cover. This debt is essentially inflation (increase in money supply). And whatever the constraint is, the deficit/debt is the only way to control it. Or at least the most significant way. Government can't decrease the inflation rate, they can only decrease spending. Pretty much everyone who complains about the deficit will bring up inflation as the first reason so it's not like inflation being the big concern is a new revelation to anyone. Dollars aren't "deleted". They are all accounted for through tax income, spending and debt on the books. Nothing just disappears.
Also, while how you spend the money may have an effect on the specifics of inflation, spending too much will always lead to inflation. The inflation might hit harder in some areas than in others...for example if you decide to spend $1 trillion on infrastructure I would imagine you would see prices rise on things like steel, concrete, construction workers, etc, first. Increased prices of such things will, among other things, ultimately lead to increased construction costs for homes and other non-government construction, increased prices for cars/trucks/busses/trains which will lead to increased transportation prices which will lead to an increase in prices for pretty much everything though it wouldn't happen all at once.
In the "deficit model" it's not that things look exactly the same, it can just be thought of as an average. I mean it's not as if the government spends money on one specific thing. It typically throws money around like a drunken sailor. In any case, it spends enough money on enough different things to probably not be too concerned with breaking it down for the purposes of inflation calculation. By looking at deficit spending vs. GDP you should be able to gauge an approximate average inflation rate regardless of how you are spending the money. I'm defining average inflation rate here as the average percentage increase in price of ALL goods and services. This may be different than the specific basket of goods that the government uses. They can make that look however they want.
No matter which way you look at it, given current inflation levels, I think it is safe to say the deficit is too high (at least in the U.S.). The longer it remains too high, the worse off we'll all be because even if inflation goes to 0, prices will still have gained an absurd amount in only a few years.
I think that the key is the fact that dollars aren't backed... at some point, when they were backed, it made a difference. Now, the tax dollars are essentially burnt, as they aren't directly channeled to the projects that are funded. They are immediately credited by keystroke from the central bank and the reverse is also possible (even if it is a bad idea to do it in a big way...).
If tax dollars were actually required to pay for things, then deficits wouldn't be possible... and the entire system would have collapsed a long time ago when it became clear that there is NO way that the United States would ever clear its debt through spending cuts and/or taxation.
Definitely spending too much does contribute to inflation... I had recently read a passage that highlighted for me how the different types of spending the same dollar amount has different effects on inflation (and I also learnt that inflation modelling is already done, but just ignored by politicians in favour of the simpler deficit model). I'll photograph the passage when I get home.
It also highlighted the problem with the deficit model... as spending needed to be offset... but that both spending AND offset could be inflationary, and that wouldn't be taken into account as long as it zeroed out in the deficit model.
Agreed (I think...) about your last point, although, I do wonder if a different model was applied then the inflation effects could have been less severe as it would have affected the different ways of spending.
Anyway, still learning and reading... I am curious, but I'm pretty sure that the deficit model is still too simplistic and doesn't apply in a fiat world. Perhaps it would have worked in a hard-currency world, but we left that behind a long time ago.
I'll drop the photos later... it is interesting.
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Thanks for reading.
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