Friday, June 5, 2020

Magical Monetary Theory

I read Stephanie Kelton's book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy,” and wrote this review for the Wall Street Journal. As usual I have to wait 30 days to post the whole thing here.

I approached this task with an open mind. What I had heard of MMT has some overlap with fiscal theory of the price level, on which I work, and I hoped to see some commonality.

I was disappointed. Short version:
"Ms. Kelton...starts with a few correct observations. But when the implications don’t lead to her desired conclusions, her logic, facts and language turn into pretzels." 
Full version in 30 days, if you can't find a way around WSJ paywall.


  1. I look forward to the full review.

    I have to say, despite record quantitative easing and large federal fiscal deficits, the Cleveland Fed inflation expectations outlook is for almost no inflation in the next 10 years.

    Such intelligent luminaries as Paul Volcker or Martin feldstein spent four decades predicting higher rates of inflation and interest rates. Instead interest rates and inflation trended lower decade after decade.

    So what gives? MMT seems off-cue...would simple money-financed fiscal programs, AKA helicopter drops, be a better platform?

    The Swiss National Bank printed up about $100,000 for every Swiss resident and purchased bonds on the global markets to prevent a rise in the value of the Swiss franc. Inflation and real GDP inside Switzerland hardly budged. This Swiss now own bonds about three times their national debt.

    Something doesn't add up. See Japan.

    1. This is just my hypothesis, so take it for what it's worth, but I think we have had a lot of inflation in recent decades. Just not in consumer prices, but instead in stock and bond prices. Essentially, inflation occurs where the money goes, and QE puts the newly-printed money into the hands of wealthy investors, who then take that money and re-invest it. Specifically in stocks because with interest rates so low, stocks are where you can get a return. So what do we see in recent decades? Low consumer price inflation, high stock and bond prices, and increasing wealth inequality.

    2. Stock and bond prices "inflating" aren't really inflation. If you own stocks & bonds and the prices "inflate," you can sell them and acquire more consumer goods.

      I think the reason we see increases in stock and bond prices is SO MUCH wealth now accumulates to such a tiny circle of economic agents, and this circle is too lazy to do anything productive with this wealth.

      So they just dump the wealth into the fixed income and equity markets so they can bring up a screen and look at how wealthy they are.

      I believe there is now $18TR in bonds with negative yields!!

      These guys live so far out on the right of Bernoulli's log-utility curve that negative 100 bps yield reduces their utility by zero.

      They'd rather lose the 100bps/yr than hire a guy to assemble an angel investing portfolio who has to take calls from 300 schlubs/week.

    3. It's asset price inflation, which as you said isn't the same as consumer price inflation in that it's good for asset owners, but it's still a form of inflation. I think Volcker and Feldstein forgot to take into account that if the Fed money is going to wealthy people, they aren't going to spend enough of it to inflate consumer prices. But the downside is soaring inequality, and what happens if we ever try to give money to Main Street? Inflation could end up becoming a thing then. (Unless the MMT people are right, the government giving out the printed money to Main Street doesn't induce inflation because the money is used productively. My guess though is that in reality, a lot of it won't be used productively.)

    4. I think guys focus to much on spending when talking about inequality.

      What, in my opinion, is more important is almost no money goes to creating businesses that employ people. GDP of US is [what?] $21TR, and only $40BN goes to VC and maybe $120BN to angel-investing.

      Since there's no wealth tax, the guys to whom all wealth accumulates can just buy muni- bonds in the secondary market and do fabulously with a 1.5% yield.

      But even creating businesses isn't ideal. More STABLE would be a giant global $10TR/yr, wealth tax-funded not-for-profit that creates millions of not-for-profits.

      Those firms stay viable even if they don't generate profits!

      If the not-for-profits suck enough workers out of the for-profit sector then wages would go up.

    5. Yes, inflation is absolutely there, except it's going into land values(real estate), not goods and services. Problem is economists conflate the two. Not a fan of the gold standard, but when we were on it inflation was able to direct itself at goods and services. But no longer since the 70's we've had repeated land bubbles, manifest today as mortgage crises. It's astonishing how this is so overlooked. The judges make a mistake when they speak of inequality. It's inevitable the wealthy will divert capital into real estate and it's derivatives such as stocks of monopoly corporations. They are not stupid. So there's no forced inequality, it's all a free choice of the people in general. Tens of millions of home owners with mortgages are fully complict. And are bailed out first by government of all party's

  2. MMT'ers on Twitter never seem to be able to answer why it's necessary to print money or borrow more from those to whom all wealth accumulates when one can just TAX them until the tears streaming out of their eyes are composed of blood (like the villain in the remake of 'Casino Royale').

    Instituting an n%/yr (n=12) global wealth tax with a Woodford Tax design (named after the economist Michael Woodford who makes Cochrane grumpy by making him look idiotic at Econ conferences) such that the taxed need only pay (n/3)%/yr if they pay with bank loans would be by 20 orders of magnitude the most lucrative event in banking history ($1.5TR+/yr from $20TR+/yr in tax revenues).

    ERGO, the BANK LOBBY would see that the global wealth tax is effected within 9 months (nothing comes between bankers and an extra $1.5TR+ in revenues).

    The tax would be avoidance-impervious and never able to be repealed. It would erase any semblance of poverty from the Earth within seven years and raise tens of trillions of dollars to apply toward curtailing carbon emissions globally. It could fund a global, $10TR/yr not-for-profit that eliminates unemployment and business cycles.

    1. Solomon is the author of a 72 page paper-back book titled "The Woodford Tax" priced at $23 per copy. Other than the author's book title, the other search results returned are for taxation in Woodford County, Illinois, USA. As Solomon notes above, his tax proposition will, by design, erase poverty from the face of the earth within 7 yrs. A laudable goal, but misplaced. As W. Pareto observed several decades ago, one could theoretically redistribute accumulated wealth uniformly to all persons now living, and within one generation that wealth would be concentrated in the hands of a minority, not perhaps the same minority that the wealth is now concentrated in. One doesn't have to go far to find real-world examples: the PRC, the Russian Confederation, the former Soviet satellites, etc. The other promised benefits of a "Woodford Tax", e.g., elimination of unemployment and business cycles have also been demonstrated to be chimera--see, for example, Soviet collectivism, and state-ownership of the means of production where nationalization of the British auto industry under a Labour government proved disastrous (e.g., British Leyland).

    2. One problem with academia is it has "evolved" to confusing hypergraphia with intelligence. For example, the most economically successful country to ever exist, the United States, is often said to be based on Federalist 10 (which is only 2 pages long). By contrast, Piketty's 700 and 1,200 page books in which he mentions a global wealth tax never figures out how to ACHIEVE a global wealth tax.

      My book, The Woodford Tax, named after Michael Woodford (the most genius economist to ever stride 'terra firma') is the most important economics book ever written. In fact, the chasm between The Woodford Tax and all other econ books is so vast, those other books shouldn't even be called econ books.

      In The Woodford Tax, in Section [IV.] 'Eliminating Global Poverty --Economics and the Concept of Interest', I explain how economics is like Chemistry before "Chemistry" knew what an element is. Economics knows that it knows what interest is, but does not know. This is demonstrated entirely from first principles. "What [got economics] into trouble is not what [it didn't] know. It's what [it] knew for sure that just aint't so." (To paraphrase Mark Twain).

      I would suggest you review the movie version of 'A Beautiful Mind'. When John Nash gets the MIT gig and sees a teachable moment to school his Princeton grad student colleagues, he does not instruct them to embrace hypergraphia or read more.

    3. Barron's Magazine has run an article by Michael C. Klein under the headline "The Case for Permanent Wartime Economics" that reviews Kelton's arguments in her latest book, "the Deficit Myth". As, Klein notes, Kelton's proposals are hardly likely to achieve the ends she claims for her proposed solution to the various challenges identified in her publication. Klein also notes that MMT is as useful to the far right hand side of the political spectrum as to the far left hand side. In other words, "what one fool can do, another can too."

      What seems to be missing in those who advocate for MMT is the basis for the dominance of the U.S. dollar in international commerce is confidence that the dollar's purchasing power will not rapidly erode. MMT's core thesis is that the dollar can be 'printed' in endless profusion without incurring runaway inflation. That might be possible if the U.S. economy was a closed economy (autarchy), but not if it is to remain an open economy with its currency remaining as the sole reserve currency in the global economy. The example of the Weimar Repulic's experiment with the equivalent of MMT should stand as an object lesson for MMT advocates.

    4. If I may answer as an MMTer not on Twitter, MMT does not claim that it is necessary to print money or borrow from those to whom all wealth accumulates when [governments] can just tax.

      What MMT claims is that it accurately describes the workings of a fiat monetary system. In such a system, taxes primarily serve to motivate sellers of goods and services to accept the money that the government prints and and offers to sellers as payment.

      MMTers often cite a paper by former NY Fed President Beardsley Ruml on taxes. One of the purposes he lists for taxes--besides the necessity of acquiring dollars for payment of taxes--is "expressing public policy in the distribution of income and wealth."

      Many MMTers would agree that tax policy should express public purposes in the distribution of income and wealth. Some might not.

    5. Mmt just uses asset/liabilities and balance sheet flows to make up their concepts.

      Taxes are a liability of the private sector that reduces inflation. A deficit is inflationary because it's adds money to the private sector without a corresponding liability.

      When you actually think of the economy in this way the general idea of what MMT is comes out. The formula mv=pq is a form of this balance sheet look at flows too.

      The major reach they do in terms of policy in my opinion is more related to their ideas of what would be inflationary. But their basic balance sheet stuff makes a lot of sense.

    6. The answer to the question you put in your first paragraph is extremely simple, and as follows. TAX has a deflationary (i.e. demand reducing) effect. If the economy needs MORE demand, it is not desperately clever to do something that REDUCES demand. Thus tax may or may not be an appropriate way of funding govt spending.

      Moreover, your point has nothing specifically to do with MMT. That is, even under conventional polices, governments tend to raise deficits during recessions (e.g. by cutting taxes).

    7. "What MMT claims is that it accurately describes the workings of a fiat monetary system. In such a system, taxes primarily serve to motivate sellers of goods and services to accept the money that the government prints and and offers to sellers as payment"

      Let's approach this like a cooking project. To quote the great Andre Soltner from his book 'The Lutece Cookbook':

      "When I start to cook something, I already have in my mouth, and in my mind, the taste of what I am cooking. It is like a dream, a dream of what the food is going to be."

      So let's be like Andre. 1.) What do we want to cook? 2.) What ingredients do we have on hand?

      [1.] What we want to cook

      (a.) If the impact on the economy of the COVID pandemic has taught us anything, it has taught us that, proportionally, people working for non-profits have had FAR fewer job losses than people working in the for-profit sector. I bet John Cocharane hasn't missed a paycheck since COVID hit. The fact is, generating profits is a rather formidable hurdle for a firm to remain viable.

      So one thing we probably would want is human history's most giant global not-for-profit to be sort of "the dual space" of the for profit sector. The not-for-profit would be funded by the global wealth tax.

      (b.) Since wealth accumulation is without question an absolute good, wealth accumulation needs to be made idiot-proof for everyone on the planet.

      This could be accomplished with a Global Retirement Account (GRA).

      $20TR+/yr comes from the global wealth tax (and the tax is all paid with loans). The loans are essentially risk-free (since the loans are made to those to whom all wealth accumulates). The loans are packaged into global wealth tax amortizing collateralized loan obligation bonds, are not allowed to trade, and (say) $7TR/yr of the global wealth tax money can go to buy the bonds for the 80% most destitute on Earth and put in their global retirement accounts. In seven years you've transformed the downtrodden into risk-free bond portfolio owners, so you've erased poverty from the Earth.

      NOTICE THE GEARING of The Woodford Tax-initiated mechanism.

      Net assets $1BN guy has to pay $120MM tax if she DOESN'T pay with bank loan, only $40MM if she pays with bank loan.

      The SAVINGS lives in total wealth space. The INTEREST (on the loan) lives in (relatively) puny loan amount space.

      THAT MEANS . . . the interest (on an essentially risk-free) loan CAN BE QUITE HIGH, and she will still take the loan because her savings dwarfs the cost of paying without the loans.

      So, passing the interest through to the bond holders, the interest on the risk-free bonds can be gianormous -- 15%. 20% !!!! (This construction demonstrates that Economics knew that it knew what interest is, but didn't. It wasn't the "rent on money," instead it turned out to be the mechanism to lift the entire world out of poverty.

      So the bonds and the principals remain in the GRA, but the huge interest payments get paid to the bond holders.


      So, since MMT can't cook us anything that we want to eat, what do we need it for if it's not Andre Soltner?

      Clearly what is happening here is NOT that taxes are motivating providers of goods & services to accept money. Tax revenues are being used to fund a not-for-profit and a global retirement account.

      [2.] Ingredients

      To be brief, the wealth existing on Earth is for all intents and purposes infinite. Those global GDP numbers you see printed every year do not sublimate into the atmosphere in continuous time -- they ACCUMULATE. Google: Funery Mask of Psussenes I. That is $500MM in wealth that was part of the GDP of 1,100BC. That wealth still exists today.

    8. GDP is NOT a measure of wealth. It is a measure of currency flow.

    9. Whether or not a tax has a demand-reducing effect depends on who is taxed and what is being done with the tax revenues.

      If you're taxing those to whom all wealth accumulates who are just dumping their wealth into the secondary markets for bonds and equities (i.e., deploying capital that does absolutely NOTHING productive), then taking the tax revenues and starting (say) a $2TR/yr angel-investment fund or a $10TR/yr not for profit that employs millions of people, then that tax would increase demand (not decrease demand).

    10. Well, the point is that you don't have to wait around until you can make the necessary policy changes required to actually getting around to taxing rich people whose grip on the lobbying industry makes such a transformation so arduous.

    11. The plutocracy maintains control by using divide & conquer.

      But divide & conquer can be used even more effectively against the plutocracy.

      Just design the global wealth tax so the banks make and extra $1.5TR+/yr from making the loans to pay the tax, then the BANK LOBBY will see to it that there's a global wealth tax.

      The most powerful lobby can be co-opted to push for the global wealth tax.

      That is THE ONLY way to get a global wealth tax.

  3. If you're interested in discussions and information about MMT, I recommend listening to "The MMT Podcast" (Google "The MMT Podcast" to find it). I'm just a curious person trying to share info with others.

  4. I’m very lazy. I like nothing better to come across a review that says “I read this book, so you don’t have to.” I think that’s what John’s WSJ piece says but, lazy as I might be, I was kind of hoping that I'd have to read her book. Based on what John told us and some other stuff I’ve read, in all that annoying rhetoric she seems to be making some combination of the following claims:

    1) Scarcity is not a problem. We can afford nice things (e.g., free college). Capitalist economies operating under the kinds of constraints we now have are very inefficient, leaving an army of underemployed “slack”.
    2) Deficit financing is a superior way of enjoying this free lunch.

    So what about the first one? Seems silly, of course, to say that capitalist economies are less efficient than other economies. But on the other hand, to give Kelton a fair reading, we should admit that there are obviously underemployed resources (e.g., an army of reasonably bright kids that are educated in crummy public schools, people who can’t start a business because of regulatory requirements….)

    And so what about number2 ? Could government help us buy those nice things if it paid for them with deficit financing instead of the kinds of taxes we use now. I might not agree with that, but I’d certainly listen to the argument.

    It doesn’t sound like Kelton has written that book. Pity.

    1. My guess is that most people cannot start businesses because they lack capital.

      Since there is no wealth tax, those to whom all wealth accumulates are happy with a triple tax free muni- portfolio, with all the bonds having been bought on the secondary market, yielding 1.5%.

      A guy with net assets of $100MM+ is typically too lazy to hire some guys to construct an angel investment portfolio for him.

    2. Kelton most certainly does not say that scarcity is not a problem. Scarcity of real resources (materials, labor, technical knowhow) are certainly constraints, but for a government that issues currency money never is. She also says that debt financing is not a superior way for a government to purchase goods and services, it's just what happens when a government prints and spends money.

      In a nutshell, when the government wants to buy something or hire someone, it prints dollars out of thin air and offers them to us as payment for goods and services that we create out of thin air. The government motivates us to accept the dollars by requiring us to pay taxes with those dollars, under threat of force if necessary. That money printing--not taxes--finance government spending is the key insight of MMT.

    3. The reality I described above is obscured by the fact that much of the money the government creates and spends is in the form of Treasury bonds, which are simply "future money" which in practice is easily swapped for current money at a small discount.

    4. Scott S: Most people cannot start businesses NOT because they lack capital, but because they lack (prospective) customers. Capital has become the big deal its become only in the past 30 years (to the detriment of entrepreneurs and society).

    5. I don't agree. I've met scores of people who wanted to start businesses, but they could not find funding to start the businesses.

      If you want to get into the nitty gritty, I'd rather have some rich guys endow a not-for-profit for me with $15MM, and I'd get paid off the returns of the endowment.

      I'd get paid well, I'd be answerable to no one, I couldn't get fired, I could set my own hours, and my enterprise would be unable to fail (unless I invested the endowment with someone like Madoff).

      Having to produce profits is a pain in the neck (not to mention being answerable to clients and investors).

      That's why a global wealth tax fueled $10TR/yr not for profit that funded millions of nfp's would go a long way toward solving the world's economic problems.

      Bloomberg stuffs $4BN/yr into his family office. He's not gonna hire 3 guys to listen to my business ideas. He'd rather just stuff his money into the secondary markets for bonds and equities.

      The left wing wacko Nick Hanauer sold his family's pillow business to a private equity firm (that ran it into the ground) because he was too lazy to hire five guys to run the business.

  5. Is the Reserve currency of dollars a factor in MMT?

    1. The fact of one's currency being a reserve currency certainly gives that currency a boost, and enables one to implement MMT policies (or indeed to implement deficits under conventional arrangements) more easily. MMTers do not in my experience deal with this point all that often: i.e. they tend not to admit that while MMT would work for the US and some other countries, it won't work for some poor and small African nation.

    2. The concept of reserve currency is not a big deal for MMT. MMT asserts that US dollars are valuable because of the US Government's ability to demand US dollars as payment of US taxes. The value of the US dollar to someone who doesn't have to pay US taxes depends simply on the dollar's usability as a medium of exchange, and that in turn is really just a function of the relative size of the US economy.

      As far as MMT working for a poor small nation, MMT recognizes that the constraints on what a government can buy with the currency it issues are determined by what is offered for sale in that currency; that is, what labor, materials, and technology is offered for sale in that currency. These constraints are different for every country, and are liable to be more constrictive for small and poor economies. This doesn't mean MMT "won't work" for small economies, it just means the real constraints are different.

    3. You are talking about MMT as a policy option. MMT doesn't "work" for anyone, but rather is a framework for understanding economics. Monetary sovereignty is not available to all nations in all circumstances. MMT recognizes this fact. Reserve currency status is a benefit to sovereignty as it creates foreign demand in addition to domestic demand for the currency.

    4. Your assertion about what MMTers "do not do" will come as something of a surprise to scholars like William Mitchell who have worked with small African nations to explain how they can maximize their policy space by floating their currencies and avoiding borrowing in foreign currencies.

  6. Project much? Mmt is a tautology. Your lame attempt to argue against FACTS is all about YOUR politics

  7. MMT is much messier than people like Kelton are willing to admit to, because we’re dealing with emotions, we’re dealing with human beings, and we’re not dealing with rigid rules.

    George gammon has a pretty interesting take on it.

  8. MMT is nothing new. We've been using it for many many decades. Pretty much every single country now uses fiat currency. Our problem is the Corporate control over our Congress. If we the people actually had control over Congress to say, we want to prioritize money towards M4A, Green New Deal, Free College.. Congress would pass the law, federal reserve would make the money available. Done! As long as we have the resources, then no need to fear inflation. Corporate control over our Congress & Oligarchy are the true problem.

    1. “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
      Martin Gilens and Benjamin I. Page
      Each of four theoretical traditions in the study of American politics—which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism—offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism. “

  9. Dear Mr. Cochrane: Thank you for reading that book so I don't have to.

    But, but, but. When I took Soc Sci I in the mid 1960s, Mr. Friedman delivered the lecture on money. We were taught that inflation was an effect caused by an excessive growth of the money supply.

    We were given the equation MV = PY, where M is the money supply, V is the velocity of money, P is the level of prices, and Y is the GDP. V, we were taught, is exogenous and basically constant. If M goes up, V is fixed, and Y grows at a fixed rate, P must increase. Expansion of the money supply beyond the growth of Y causes inflation.

    We have had an absolute explosion is what has always been included in the money supply -- Reserve Bank Credit. Item 1 of the June 4, 2020 Fed Report H.4.1 shows that Reserve Bank Credit (which is almost all of the M1 monetary base) was 7.1T$ compared to 3.3T$ a year ago. But, there is simply no evidence of inflation.

    "Get Ready for More Coronavirus Disinflation, at Least in the Short Run" By Jon Hartley | May 28, 2020

    "In April the Consumer Price Index (CPI) had its greatest one-month decline on record, with year-over-year inflation falling to 0.38 percent (core inflation, which excludes food and energy, fell to 1.4 percent). Wall Street predicts that inflation will remain subdued below the Fed’s 2 percent target for some time to come, as the break-even interest rate on U.S. Treasury Inflation Protected Securities (TIPS) shows that markets expect inflation to roughly average 0.8 percent over the next five years." ...

    "Online inflation as measured by the MIT Billion Prices Project/PriceStats, which tracks prices in real time on a daily basis on websites such as, has continued to fall throughout the month of May, even going slightly negative (implying some deflation)."

    So we have M double, Y is clearly down and P is flat, if the equation is correct, V must be approaching zero.

    What is wrong with this picture?

    1. . V, we were taught, is exogenous and basically constant.

      V is not fixed as an examination of the char will readily show. V has been dropping for ten or more years.

    2. V approaching zero. David Hume in his essay "Of Money" said something to the effect that coin that is locked up in chests has the same effect on prices as if it were annihilated.

  10. I subscribe to the WSJ, and so was able to read John Cochrane's review, though I haven't read Kelton's book yet. I've supported MMT for about ten years, thus I basically agree with Kelton. However, I've often found her analysis to be sloppy, thus I'm not at all surprised at the mistakes that JC claims to have found.

  11. Thanks. I'll pass, need real money and not MMT. Rgds

  12. GDP is the measure of a nation's productive (ie., production-and-consumption) economy. GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending, because all spending is another’s income). The economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (ie., business opportunity) exists, and government provides the rest. All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends only on currency-users perception), there are no limits other than that perception.

    The household spending in GDP includes everything that the public buys to consume — food, housing, transportation, healthcare, entertainment, etc. The income side of GDP includes neither Federal borrowing nor personal or corporate income taxes - so they do not (and never have) paid for (or funded) that spending. QED. What lorerrn says above is truth!

  13. Reading some (most) of the comments on here tells me pretty much all I need to know about MMT. 'Funny Money' was what we used to call the social credit movement; its modern incarnation seems more like 'Loony Money'.

  14. Https://

    For those with a genuine interest these may help

  15. Thw hit pieces from all the conventional theory grifters are coming thick and fast.
    The same guys who've been wrong about everything for 40 years.
    It would be laughable if you guys didn't have so much blood on your hands. ☹️


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