Friday, June 12, 2020

Grumpy podcast: MMT, debt, and perpetuities

A podcast on this week's topics, MMT and debt.


  1. People might be scared of (doubt) 'perpetual' anything - so why not just promise fixed or indexed payments for a fixed period with no final big payment, just a final interest payment.

  2. What would Milton Friedman say about MMT ?

    1. Given that Friedman advocated abolishing interest yielding government debt, as does MMT, I'd guess he'd have been quite partial to MMT, if not a leading exponent of MMT.

    2. On second thoughts, and in contrast to my first reply to your comment, MMTers favour DISCRETIONARY fiscal stimulus (as per the conventional wisdom) whereas Friedman thought governments were so incompetent that they should not be allowed any discretion at all: i.e. that we should create the same amount of extra money a year and spend it into the private sector. So to that extent, Friedman would not have agreed with MMT (nor with the conventional wisdom that prevails nowadays.)

    3. He might have appreciated the Job Gty being an automatic stabilizer with no reliance on govt discretion.

  3. If governments issued perpetuities instead of bonds, would they still have access to negative interest rates, as a monetary tool?

    1. The bonds themselves could not be sensible with rates below Zero unless somehow the currency was going to trashpaper but the Treasury would honor coupon payments that were debits? What would be the resales price? In terms to trashpaper outside the bonds?
      And why not just buy and hoard bullion bars?

    2. I think something like MMT and its earlier "State theory of money" could only be conceived in a finite, closed economy with no ability of citizens to transfer ownership of assets outside the closed economy. Barter would soon replace use of this scrip that becomes the data for taxes, as tax dodging would become a monetary policy problem.

      Police State to follow? And the whole idea of a closed economy is something we can observe in N.Korea, Cuba, and old E.Germany. J.M. Keynes seems to have endorsed a closed economy in the 1930s introduction to the German translation of his General Theory. He wrote it would work better under Germany's system.

      I can hardly imagine this as "progressive" much less "liberal" in any sense of human freedom and dignity.

    3. The Fed can always collect a seigniorage tax. It is a central bank authorized under the right to coin which implies the right to for Congress to collect siegniorage taxes. Mostly likely the fed will buy a bunch of perpetuities and return the gain to Treasury.

  4. There is an assumption that there is a market for perpetuities so i would ask where the evidence is to support such issuance?
    Inflation is a worry with debt/GDP exceeding 100%, but what if we see all major nations around the world which i believe is the case levering up, is this not more of a relative issue; meaning that a bad house in a horrible neighborhood is still a better house than alternatives? While the risk of the debt creating inflation scenario may be there, it would appear to be a greater risk if rest of major nations in the world not levering up while US is, but less persuasive argument perhaps if all are

  5. Hi John and others,

    Thanks for your podcast. I've only recently come across MMT too and I am intrigued by its claim that a government must spend money before it taxes or borrows by issuing Treasuries. Therefore, flipping my understanding of the government's budget constraint on its head. Did you or anyone else have any comments about this? Is this true?

    Secondly, the main take home message I took from The Deficit Myth was that a government is not financially constrained and should spend until the economy is producing at its full potential - at which point MMT says inflation starts to kick in and spending needs to cease. Intuitively this makes sense to me but at the same time I'm cautious of the idea of a government just increasing its spending. In your review you discuss the 'slack' in the economy. I'm wondering if you or anyone else has any ideas as how to empirically show a what level of government spending inflation will start? Does anyone have any suggestions as how to empirically show the limit of debt a government can take on?

    Many thanks for any ideas and sorry for the long post.

    1. Matt, MMT is simply a lens in which to look at policy. The government doesn't necessarily NEED to increase spending until inflation kicks in. It can decrease taxes to the household and business sector to improve the employment situation - which we saw in the USA after the 2017 tax cuts and subsequent ~2% unemployment.

      The point is, the so called deficit needs to be as high as it needs to be to reach the full employment situation whether it be by lower taxes or increased spending (infrastructure etc..)

    2. Hi Tom,
      Thanks for your comments. I understand your point about decreasing taxes so that households have more money to spend on other things which in turn will increase aggregate demand and hence drive employment. I agree with your thinking there, but in an environment such as what we are in now, do you think there is more of a need for government to directly increase spending on infrastructure or other projects? I just wonder if tax cuts are maybe less effective in a situation we find ourselves in now as business confidence is low and I'm sure many will be wary about expanding or taking on more workers.

      I've always been intrigued by the term full employment. I appreciate that the Phillips Curve has largely been discredited as a policy targeting tool and trying to exploit the relationship between inflation and unemployment has been unsuccessful, but yet the full employment rate seems to fluctuate so as to control inflation. Do you or anyone else have any thoughts about full employment? It might seem idealistic of me, but I intuitively think of full employment being the level at which every person looking for a job can find work. Again, forgive me if I'm thinking too simplistically, but surely anything less than having every willing worker employed means that your economy is operating below it's productive potential? Cheers, Matt

    3. Matt: MMT folk espouse the Job Gty as the logical policy prescription for the economy. Full employment is when you offer anyone who wants a job -- a job, and nobody shows up.

    4. You've been particularly grumpy with your critique of The Deficit Myth. I recommend you do a little more research into MMT before you do your critiques.

      RE: "... Federal Job Gty ... ..."
      • I recommend you research Pavlina Tcherneva's (@ptcherneva) work on the Job Gty. She has alot of papers on it. Publishing a book written for humans which is scheduled to come out shortly: The Case for a Job Guarantee:
      • Whose going to make this Work: Funded by the Federal Govt: Tasks administered by local govts.
      • Here's the MMT general approach as outlined by a gentleman and a scholar:
      • Why will they do something Useful/Not make-work": Because it will be administered by local govts who are interested in getting reelected and doing stuff popular in the community.
      • Why should they work at all?: Because they will get paid. If you want to get into the weeds: you can definitely get fired from the Job Gty program. If you do, you can reapply, but you wouldn't be entitled to another JG job until you wait 30 days with no benefits. If you get fired second time in a 12 month period, you have to wait 60 days. If you get fired a 3rd time, you have to wait 90 days, but at this point you are assigned a counselor to suss out the problem. Nobody likes getting fired and having to start a new job. If you wait or work a year, you're back to 30 days.

      RE: "... MMT says you can print any amount you like ... no inflation ..."
      • MMT has said no such thing as you state later.

      RE: "... Spend $20 Trillion ... woops, soak up $20T with taxes. ..."
      • But then you immediately note that perhaps you only have to raise $5T, but then you say again that you have to soak it up again with taxes. So which is it? What you don't state is that its money SPENT, not ISSUED that can potentially cause inflation. And if you spend up to full employment, the economy produces more goods and services offsetting the added money. You are ignoring the entire right hand side of the EQUATION --> THE SUPPLY SIDE.

      RE: "... tax the rich because they have different political opinions than she does ... ..."
      • No. Tax the rich because with Great Gatsby levels of wealth and income inequality we lose what little democracy and self-governance there is as the uber wealthy take over the govt, further stack the rules in their favor, and become forever entrenched in their privilege. (See the US in last 40 years.)

    5. RE: "... Limiting Principale ... the limit is that although you increase real output you will run out of slack ... conventional part of economics for 60 years"
      • Really??? For the last 60 years economists have said that he limit to govt spending is not taxes, or borrowing, but the productive capacity of the economy as measured by inflation???? Really??? Preposterous.

      RE: "... ISLM ... ..."
      • You still believe in ISLM? You and Krugman.

      RE: "... borrow in any amount and won't have to pay it back ... ..."
      • MMT has not said this. MMT states that a monetary sovereign does not NEED to tax or borrow in order to spend. And it can ALWAYS pay back the debt. In fact: The truth is the US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

      RE: "... 1970s inflation ... horribly wrong ..."
      • Inflation is easily managed in these circumstances. For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
      a) Income Taxes,
      b) Sales/VAT Taxes
      c) Asset Value (or Wealth) Taxes
      That'll cool things off pronto.
      • 1970s inflation was hardly "horrible". 13% peak overall, 7% wage inflation. Stagflation was caused by Yom Kippur War and Oil Embargo. Not that big of a mystery.

  6. kelton says take some of the wealth from the rich, not ALL their wealth, as the interviewee quotes her saying.
    he just cant hide his political bias, and funny, accuses kelton of that all the time.


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