MMT

[Eugene Ash]

Tl;dr: MMT is misguided as it is not considering globalization effects: supply of goods, increased labor pool.


Being a trained economist, could not contain myself to opine on MMT.

1) USA has advantage of being the universal currency of trade. You can't begin to imagine how many railcars of money are in circulation in countries not all of Americans know of. Printing money works, but

2) not in Venezuela. MMT doesn't work there. It is necessary to examine the differences.

In order to debunk MMT one has to understand the law of supply and demand and... Ideal gas law.

Consider a closed economy: everything in USA must be produced in USA, and no dollars leave. Government wants to make sure that everyone has a job that pays and economy is evolving and is efficient.

Enter inflation. Print a little money, 2-3% a year inflation helps to re-allocate workforce to where one can be productive and rewarded with a raise in a promising industry. Coalminers will be with no raises forever, so will be waiters, room cleaners. But e.g. data scientists, AI specialists will enjoy raises. So waiters go study something useful, everyone is happy.

Thus, Federal Reserve Bank has a mandate of both inflation and full employment. With the Ideal gas equation: you increase the temperature (print Money) and an overheated economy blows a valve. PV = nRT. Where: P = pressure/inflation. V=Volume/of goods. n=number of people/amount of gas, T = temperature/amount of extra money created.

So, give same number people a bit more money, they will produce more goods, and if they are not keeping up with demand, you’ll get inflation. Keep throttling this and you’re on your way to higher standards of living and long stretches of prosperity. Too much gas --> raising prices = inflation, chasing the same goods. Empty shelves, no TP and shortage of pasta anywhere.

And for a while the economy had all these barriers which were making it a fairly impenetrable, so V(olume of goods) did not change that much. Nobody was flying in 1200 ventilators overnight in a Jet. It was the 1920s where the Keynesian economics was shaped. So nobody would imagine the level of modern level of globalization. So, it was easy to overheat a country’s economy, since it was neatly contained with geographical and protectionists boundaries. At that time adding amount of money could not be done quickly, humanity adhered to gold standard, and amount of that doesn’t change rapidly. Then there was paper money, that could be freely exchanged to gold/metals. Bretton Woods system made sure of that. Then that guarantee was broken, decoupling from metals in August 1971. By then $ was already a standard of world trade.

Decoupling from gold with a growing population works in theory and helps to provide full employment without having to be bogged down by pesky gold liabilities and convertibility to a finite supply of metal. Works well in a closed system, easier to tweak. Triumph of Keynesian school of thought.


Fast forward to modern times: Presently, for more than a decade ECB, Fed, and Japan for more than a couple of decades now, were trying to ignite this inflation by creating huge amounts of money, and still fell short of the targeted 2%.

Enter Modern Monetary Theory: maybe amount of printed money doesn’t matter, says a hipster who has never been to a 3rd world country, stricken by a runaway hyperinflation.

What about combined gas law that postulates that if you increase temperature and keep the volume the same, you’ll get higher pressure?

You increase amount of money, keep volume of goods the same, you’ll get inflation? It used to work. But in a global economy the volume [of goods] is unstoppable, stretchable!

Dollars are gladly accepted everywhere on Earth, where countries still use Keynesian thought and turn on their presses. Where people are not lulled into trusting their governments with their paper currencies, they’d rather trust $.

In these conditions USA can get away with an increasing flow of goods, produced cheap, without having to make them. So printed/created money goes directly to the unconstrained goods flow abroad, resulting from decades of overcapacity. Overcapacity to produce things that are included into CPI. That mythical basket of standardized necessities, some of which mattered decades ago (TVs?). Or mass-produced eggs that are tasteless and one is depressed just by looking at their shells. All of these cheap commodities go into CPI.

But the things that people really want, like these 1000$+ phones, shiny new sneakers, Ivy leage college degrees, are not fitting into the CPI.



So is MMT right? Pumping money doesn’t move CPI? Sort of. Remember the n = amount of gas/number of people? Now in an open system, you’re just giving more money to more people. Economic integration lifted up hundreds of millions of Chinese people over decades. Great win for humanity and a welcome change from wars of 20th century. In return, other countries send a lot of goods to US, made with cheaper labor, at a lower price tag, importing deflation.

So the pumped up dollars are not creating goods pressure in the CPI basket of commodities [including oil]. But absolutely are inflating prices in art, rarities, but most concerning in healthcare, education and real estate. These are necessities which are paid by insurance and cheap credit.

So traditional CPI does not budge, and the social security and pension payments are indexed to that, guaranteeing a commoditized survival that is failing to match brochures of the active retirement communities and golden years. CDs are yielding nothing, because Fed decided to drench everything in liquidity. A traditional late-life portfolio, heavily slanted towards bonds is yielding south of 7%, failing short of actuarial assumption.

Enter the everything bubble. Last bits of productive assets are snapped up, since there are no alternatives. Real estate in dynamic cities, productive enterprises, good of education. All went up in price because Fed keeps pumping money in, waiting for CPI to move, decimates savers in the process and keeps bailing out zombie companies and industries.


So MMT is flawed as it is looking at the wrong set of variables. It is misguided as it ignores first principles. Specifically it doesn't understand how inflation is made. Adoption of this scourge will lead to bubbles getting bigger, social inequality, inflating P/E multiples to new normal highs.


So why tf am I writing this in a TSLA forum? I believe TSLA can put capital to good productive use, making our energy use more efficient and cleaner. It already is at a point close to self-reinforcing economies of scale. Ultimate productive asset to snap up.

And yes, while we might be tempted to go on tangents debating virtues of finite supply of precious metals, crypto, tp rolls, don’t fight the Fed, just make sure you hodl productive assets that will serve you and your families in years to come.

 

[jbcarioca]

So, maybe a trivialized example might be relevant:
If an economy were like a pressure cooker, everything inside would 'cook' similarly. However, even the most insular economy today is subject to dynamic influences from elsewhere, so ideal gas law is handy to make algorithms but is inherently flawed. Whenever any approach begins with 'modern' one can be assured that the lessons of history have been summarily dismissed.

Were that everyone had a clue of what 'First Principles' actually are. The idea is glorious, execution is fraught.

The problem of money is inherently difficult. When I took my first course in Monetary Policy in fall 1971 the course was taught by Scott Pardee, at the time acting as a senior functionary of the FOMC. Those were interesting times. As he pointed out then, money is itself entirely a matter of societal faith. A reserve currency is whatever the world decides it so be. Bretton Woods defined a convention, Richard Nixon erased the convention one late summer day. Bizarrely the reserve currency role ended out largely unchanged.

In the 18th and early 19th century the Maria Teresa Tolar served that role, pretty much because the Ottoman Empire was dominant in trade. That one continued as legal tender into the early 1980's in some places. (When I was CEO of a bank in Yemen in 1979 we still dealt in Maria Teresa. I still have some, which I have given to monetary policy gurus among my friends). For a time Sterling worked.

For MMT to work, or even Keynsian, the monetary system itself must be stable. Under Bretton Woods the whole global concept was predefined definitions. The concept failed, but it took Nixon to deliver the death knell. Behold the SDR and shortly thereafter the Euro. Add to that the pseudollars (UAE Dirham, Bahamian Dollar etc), Pseudo French Franc (East African franc) still sailing. Absolutely none of those are really stable, but they share with Bretton Woods the characteristic of long rigidity interrupted by large movements. Just think of small earth tremors and 'The big one".

It seems to me that as TSLA investors we are experiencing a situation analogous to the 1971 monetary policy issues. This time we have Elon Musk with SpaceX and Tesla dealing in first principles, while nearly everyone around him is thinking of smoothly continuing status quo. The analogy works well if we consider what happened in 1973 when the Israelis erupted and OPEC decided to keep the loot themselves. Elon is already building the future.

The US is ceding the traditional roles, largely to China. China, understanding, is supporting Tesla and several others.

The entire concept of the US Dollar as reserve currency exists because of the US global stability role. With that now gone, the reserve currency role is an increasingly rigid shell. It will continue to appear strong, but will suddenly crack soon. I cannot define 'soon'. However, with an erratic unstable government (think Ottoman Empire 1910) and astounding domestic deficits coupled with balance of payments deficits plus zero interest rates... the stage is being set for catastrophe.

Traditional monetary theory seeing all this. Keynes did not, and MMT is absurd on the face. It is analogous to pricing options with Black-Scholes when everyone who can understand know it flatly does not function in US markets, but is used because people deem it to work. Whatever can be more analogous to Bretton Woods than that?

I invest in TSLA despite all the volatility precisely because TSLA is built for the evolving world, not the old one.
One Last Point: I do NOT anticipate anything like a depression. I do expect steady erosion of US global influence and role, thus yielding gradual lessening of the US$ ability to tolerate constant deficits. This will be obvious soon, probably by early 2021. I hope I'm wrong. Maybe I've lived in too many stressed economies.

 

[adiggs]

I'm not an economist, I see I have a lot to learn, and that I'm punching way out of my weight class . Won't stop me from giving it a go.

Maybe it helps that I AM one of those data scientists @Eugene Ash mentioned, and thus I can afford a more rosy view of things than others. I do realize that I've got an awfully privileged place in the world - this corona virus effect on my life (barring catching a severe form of it) is one of annoyance and minor restriction; I won't be wondering where the money will come to pay rent, buy groceries, etc..

I don't have a particular school of economic thought I prefer over others, mostly because I don't know the different schools of economic thought. But I do have some thoughts that seem true to me, and am interested in what others think.


My first thought is really a question - what is money? This $20 bill I have - what is it worth? This 1 oz gold coin I have - what is it worth? I claim that neither has any intrinsic value of any particular note. I.e. - that $20 bill - I supposed if I had enough of them, along with a needle and thread - I could see them together into a particularly poor paper blanket and use that to stay warm. That would have some value.

The gold coin - I could use it as a paper weight, but there are lots of dense objects I can use as a paper weight. I do understand there are some industrial uses for gold so there is some intrinsic value there, but very few buyers of gold are buying it for that purpose.


The actual value of money of any form is extrinsic. By that I mean, the value of that $20 bill isn't in how I value it (or at least not completely) - it's in how others around me value it based on what they will exchange for it. As long as we all have an approximately equal valuation of that $20 bill (etc..), then we can use it to make exchanges that net out to stuff we have of economic value, for stuff we need/want of economic value.

So my answer to the question "what is money" is that money represents a claim on economic activity. We perform some act / produce something of economic economic value, and we exchange it for money. We then take that money and exchange it for something of economic value or purchase economic activity. As long as we have an approximately equal understanding of the value of the money both exchanges are dependent on, and as long as we have a deep well of trust and faith that we can use this "money" to make the exchanges, then an economy can be born.

That trust and faith needs to be so deep, that it mostly goes unquestioned.

Because in the end, even if many people think that money is the objective, it really isn't. It's the claims on economic activity that are valuable and that we want - not the money.


It seems (if I simplify grossly) that there are two extremes of economic thought presented so far, both flawed. One is that we can print an infinite amount of money, but that's obviously not true - there isn't an infinite claim on economic activity available.

The other is that there is a finite supply of money (say the gold standard in the extreme) and we need to manage to that. Governments need to run balanced budgets, and money comes from somewhere external to those governments. There is a sense here that money does have some intrinsic value, and we recognize that in the form of it's limitation.


So my question for the actual economists - where is that useful middle ground? Or put differently, what are you arguing for. As an outsider, it seems like every school of economic thought I've been exposed to (again - amateur here) has pretty grave shortcomings. How do we reconcile those into something that provides what I see as the primary function of money - enabling an economy that isn't a barter economy.

Because direct exchanges of economic value (my chicken for your horseshoe) is an obvious economic disaster in today's modern economy. If nothing else, it takes too much work for a routine economic exchange to take place (what - you don't need another chicken? That's all I've got. But hey - she lays really lovely, rich eggs!).

 

[adiggs]

Inflation is an interesting beasty. I recognize and agree with the constraint that @Eugene Ash listed for standard measures of inflation. The example I usually use, in response to somebody saying that today's dollars are a fraction of the value of 1913 dollars, is to observe that I couldn't buy an iPhone in 1920 for $40 ($1000 / $25). In fact, I couldn't buy an iPhone in 1913 for all the economic activity in the world, much less have it be as valuable as today's iPhone as there wouldn't be anybody to talk / interact with.

US Inflation Calculator (tells me a 1913 dollar will take $26 dollars today to buy the same stuff)

The basket of goods for measuring inflation is, at best, a mechanism for measure the change in money's value year to year and maybe over a 5 or 10 year period. Technology is changing the cost and value of goods so quickly, inflation isn't useful over long periods of time.




So one thing I got from his post is that there are other forms of inflation going on that I really hadn't considered, and they're real, and somehow they need to be considered. So expand the basket of goods used to measure inflation - that seems like a possible start, but likely incomplete, as the really rare items don't have enough transactions to ascertain the value of the money being transacted.


And yet, our economy needs an adequate supply of money in circulation in order to facilitate our routine economic exchanges.