Author Topic: Article on the future of the USD...and a question on Modern Monetary Theory  (Read 2818 times)

Offline BDinVA

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Just came across this article about USD and it's role in international trade, how we got there, and what could happen if things change:

http://www.europac.ca/voices/so_long_us_dollar

I see a lot of articles like this lately out on the fringe news sites.  Obviously the mainstream media wouldn't be able to cover since the masses wouldn't understand the groundwork to even comprehend the ramifications of the issue, so we wouldn't expect it to get covered until we were already covered in the ish from the fan.

Listening to Jack's economy-related commentary has really reignited my interest in economics that I found when I was in undergraduate.  I've been doing some research and have been looking into Modern Monetary Theory, but have trouble really comprehending the sustainability aspect of it.  Here's a link with an overview:
http://pragcap.com/understand-the-modern-monetary-system/understanding-modern-monetary-system

Contrary to a lot of Jack's commentary, MMT argues that deficits are actually a GOOD thing.  Here's an article from the Washington Post that explains some background:
http://www.washingtonpost.com/business/modern-monetary-theory-is-an-unconventional-take-on-economic-strategy/2012/02/15/gIQAR8uPMR_story.html

Anyways, if anyone has any thoughts, I thought it might provide an interesting discussion.

(New to the podcast...I'm in sensory overload from the amount of info in this forum)

-Brad


Offline LvsChant

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Glad to see you here... thanks for sharing the links. I'll check them out... You might find lewrockwell.com interesting. Lots of economists giving a slightly different spin on the MS media perspective. You'll find more Austrian economists among them.

You might also like our very own Hare of Caerbannog's blog at badquaker.com . He loves discussing economic topics.

Offline Mr. Bill

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Here's an article from The Economist about three "heterodox" economic theories (Neo-Chartalism, a.k.a. Modern Monetary Theory; Market Monetarism; and Austrian Economics):

Marginal revolutionaries: The crisis and the blogosphere have opened mainstream economics up to new attack

Offline bigbear

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The laws of supply and demand are just that:  laws. 

Modern Monetary Theory (albeit much of economics in general) is just that:  theory.

Any attempt by humans to circumvent laws with theory (and not an equal and opposite law) is likely doomed to fail.  It's just a matter of how many balls you can keep in the air for how long.  Flight only took place when the Wright Brothers counteracted one law (gravity) with others (lift, thrust).  Because there are few known laws of economics, we're left to theory.

It's my understanding that Jack (nor Austrian's in general) don't argue whether deficits are a good thing or bad thing.  But that they can be a good/bad thing if used appropriately/inappropriately.  And that's where the chafing begins (who decides what's appropriate when the deficit is incurred?).  Austrian's (and most Keynesians) say too much debt/deficit is a BAD thing.  Again, that's where the chafing begins (how much is too much?).  Austrian's would tend to lean toward deficits being cautionary as the bill must get paid and you're taking away from future flexibility. 

As for sustainability:   I'm not convinced MMT is sustainable, but it's basically what the country has been running on for years.

MMT seems like it would work in a closed system (i.e. no competition from other currencies), but when other currencies come into play then eventually it could become more advantageous to produce/import/export/whatever  in another currency.  I'm no expert, but it seems that MMT assumes that the value received from the investments or import/export stays in the currency of the fiat printer. 

But what's to stop me for arbitraging the currency valuation difference from say the US$ to the AU$ (or visa versa)?  The purchasing power of one currency is different than another.  So I'd expect to be compensated in the exchange for the loss of purchasing power (either more currency or a higher interest rate).

What about interest coverage ratios?  Taxes would have to increase or the gov't would risk default.

Risk of default?  Countries have defaulted on debts in the past.

Offline Economan

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It's my understanding that Jack (nor Austrian's in general) don't argue whether deficits are a good thing or bad thing.  But that they can be a good/bad thing if used appropriately/inappropriately.  And that's where the chafing begins (who decides what's appropriate when the deficit is incurred?).  Austrian's (and most Keynesians) say too much debt/deficit is a BAD thing.  Again, that's where the chafing begins (how much is too much?).  Austrian's would tend to lean toward deficits being cautionary as the bill must get paid and you're taking away from future flexibility. 

Most Austrian economists will tell you that deficits are bad, bad, bad, bad, bad.  Austrians are not, in general, big fans of government expenditures.  Philosophically, many (though not all) are anarcho-capitalists.  You are probably referring to the neo-classical school who does not believe that deficit spending is necessarily bad unless it's excessive.  Keynesians, in theory believe that deficit spending is good if the economy is not doing well.  Boost aggregate demand via gov't spending and cutting taxes, then raise taxes and cut spending when the economy recovers.

There's good evidence to suggest that those policies might work on a small scale and if they were carried out properly.  But government being what it is, they can't seem to figure out the cut spending or cut taxing part....



Offline Economan

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*Sigh*

Okay, so there's SOME microscopic bit of truth to the idea that deficit spending can improve the economy.  But here's the scoop.  The theories that support this idea are VERY short term theories.  They were never meant to suggest that the government should be spending in deficits long-term.  The whole point of deficit spending from a fiscal policy standpoint is to boost aggregate demand.  It can absolutely do that.  But here's the problem: on what does the gov't spend this money?  How, where, and in what is aggregate demand boosted?

So the gov't spends money in the economy by either employing services or purchasing goods.  Either way, how do we know if this is a sustainable boost to the economy?  We don't!  Once gov't expenditure ceases, the industry or sector that received funds may die off.  Taxation and deficit spending creates market dis-coordination - where scarce goods and resources are pumped into goods/services that are not necessarily what the economy "demands."  Market distortions are created, booms and busts (the business cycle) are created. 

Imagine if the gov't were to spend billions on developing the gefilte fish industry in the US.  We are going to create tax incentives for fisherman and processing plants, build roads, powerlines, and infrastructure to support the gefilte fish industry all using gov't funds.  After it's built and the gov't has spent billions of tax dollars to do it, we find out that no one wants to eat gefilte fish.  The industry dies and all the resources spent on building the industry were wasted.  This is market dis-coordination and wealth destruction.

This happens all the time.  Money that is taken in taxes could be left in the market, where private decision makers (entrepreneurs) figure out how to best serve the demands of society, and compete to be the most efficient at it.  Money that is saved and invested can be borrowed to build or expand businesses.  In fact, the wealthiest among us - those who are burdened with the highest tax rates - are usually the ones with the highest savings rates as well.  Savings = Private Investment in society.  Assuming that interest rates are market interest rates and not set by the Fed, the most productive investments are made, and society is better off than if gov't taxes and spends on what may or may not be the most beneficial service for society.

So this doesn't actually cover monetary theory, but it does explain how market distortions cause dis-coordination, and why that's bad.  Monetary policy is a much more powerful tool in the economy, and even more capable of creating distortions.

Offline Economan

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As for the dollar... it's a sinking ship. 

We often think of money differently than other goods and services, but it's really not any different.  Think of the dollar as any other good produced in society - but one we all agree to trade with.  It's still subject to the laws of supply and demand like any other good.

Now think of who produces this good: the Fed and the banks (through monetization of debt).  They have the ability to simply pump out this good (and the marginal cost to do so is infinitely close to zero now).  As the supply of dollars rises (which has happened in dramatic ways: the bailouts, the "secret" Fed bailouts), the "price" or value of the dollar falls, holding demand constant. 

Now, if we dramatically increase the supply (which we have done), and demand increases consummately, we might have a state of semi-equilibrium, where the value of the dollar doesn't change much.  Supply and demand schedules are pushed out, but the "equilibrium" value is the same. 

But if demand falls (as the article noted was happening), and supply doesn't fall after being pushed WAY out there, the dollar tanks in value.  When goods fall in value, demand often falls year after year.  We would call this hyper-inflation.

The Fed simply cannot conduct open-market operations (the way they pull dollars out of the market) fast enough to contain the inflation.  This is why Jack says that inflation is expected.  This is why we prepare.  This is GOING to happen.  The question is, how long do we have, and how bad will it be?  No one can accurately answer that.  It pays to be prepared.

Sorry for the three different replies, but it's late and I'm tired...

Offline Mr. Bill

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"Modern Monetary Theory" is back in the news.

A very short description:
Reuters, 8/7/19: Explainer: Five questions about Modern Monetary Theory
Quote
...MMT proponents also have a distinct view about the demand for money.... They see it as rooted in government’s power to order that taxes be paid in a currency which it alone issues, and which it can also spend on goods and services. In their view, that means government spending can be used for core policies including a universal job guarantee that stabilize demand through the business cycle. ...

MMT advocates contend governments that have their own national currencies do not have a “budget constraint” — in other words they can’t run out of money because they can always issue more. Since they also see fiscal policy as the main tool to stabilize the economy, they would trust elected officials to make the spending decisions needed to ensure goals like universal employment. Some argue that’s a recipe for inflation, and the reason an independent central bank is needed to check excessive spending. MMT advocates do acknowledge the risk of inflation and see it as the constraint that would keep politicians honest. Under this framework, inflation is seen as a product of real resource limits, and it would fall to Congress to set spending, tax and industry-specific regulatory policies to keep inflation under control. ...

A somewhat longer description:
Investopedia 7/30/19: Modern Monetary Theory (MMT)
Quote
...The central idea of MMT is that governments with a fiat currency system can and should print (or create with a few keystrokes in today's digital age) as much money as they need to spend because they cannot go broke or be insolvent unless a political decision to do so is taken.

Traditional thinking says such spending would be fiscally irresponsible as the debt would balloon and inflation would skyrocket.

But according to MMT, a large government debt isn't the precursor to collapse we have been led to believe it is, countries like the U.S. can sustain much greater deficits without cause for concern, and in fact a small deficit or surplus can be extremely harmful and cause a recession since deficit spending is what builds people's savings. ...

According to MMT, the only limit the government has when it comes to spending is the availability of real resources, like workers, construction supplies etc. When government spending is too great with respect to the resources available, inflation can surge if decision makers are not careful.

Taxes create an ongoing demand for currency and are a tool to take money out of an economy that is getting overheated, says MMT. ...

A really hulking long article with lots of technical details:
Vox, 4/16/19: Modern Monetary Theory, explained
Quote
...[According to MMT:] Inflation doesn’t usually result from too-high aggregate demand, which taxes can help cool. Instead, it comes from monopolists and other predatory capitalists using their market power to push prices higher, and it can be tackled by directly regulating those capitalists. ...

So if MMT prescribes various regulations (and, where necessary, taxes) to control inflation, while keeping interest rates at zero, how does it plan to achieve full employment?

Simple: a job guarantee. ...

The idea behind such a sweeping and universal program, in the context of MMT, is to ensure full employment no matter what policies the government is adopting to fight inflation. Indeed, the job guarantee is in part a way to keep wages down, or at least keep them from continually rising, to prevent an inflationary spiral. ...

So far, only progressive Democrats and socialists are explicitly campaigning for MMT.  But this article suggests that mainstream Republicans and Democrats are already well down the MMT road:
Reuters, 8/7/19: MMT may be Democrats' economic cure, but only Trump got the memo
Quote
...Proponents of MMT have been called fanciful for the notion that the U.S. Congress, which typically struggles to pass an annual budget, could with smart budgeting and regulation take over the Federal Reserve’s job of controlling inflation.

And even [Stephanie] Kelton, an economics professor at Stony Brook University in New York and an adviser to Senator Bernie Sanders’ presidential campaign, is a bit thrown by the fact that the person who appears closest to accepting her argument is President Donald Trump, whose Republican Party has traditionally touted an adherence to fiscal discipline.

Trump and Republicans in Congress, she said, “did not allow perceived budget constraints to stand in their way” of a $1.5 trillion tax cut package which was passed in late 2017 and pushed the federal debt beyond $22 trillion.

Democrats now seem ready to get in the game.

Lawmakers from both parties recently reached a federal spending deal that is expected to raise the federal deficit by $2 trillion over the next two years, and Democrats lining up to run against Trump in 2020 have largely avoided talk of fiscal restraint so far in the campaign. ...

My amateur conclusion: we're gonna have inflation, but it'll be partly masked by regulation and other governmental interference in the economy.

Offline LvsChant

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Thanks for reviving this topic, Bill. I'm going to wade through those articles now...