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Modern Monetary Theory - MMT

Discussion in 'Business, Investment and Economics' started by Ann, May 2, 2019.

  1. Ann

    Ann

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    Ray Dalio is talking about Modern Monetary Theory and suggesting it is the way of future economics. He is a very interesting man and worth listening to IMO. This thread is simply a way to look at this aspect of economics and gain a better understanding of the concept. There may be a few offshoots of other areas of comment from Ray Dalio other than just MMT.

    "The doctrine, known as MMT, says that governments should manage their economies through spending and taxes -- instead of relying on independent central banks to do it via interest rates. It also seeks to allay fears over budget deficits and national debts by arguing that countries like the U.S., which have their own currency, can’t go broke and have more room to spend than is usually supposed -- provided inflation is subdued, as it is now." More..



    [​IMG]
    Ray Dalio
     
  2. Knobby22

    Knobby22 Mmmmmm 2nd breakfast

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    Sounds a bit like neo Keynesian theory.
    I agree, politics means that no one will do it though.
     
  3. Ann

    Ann

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    I am not so sure about that Knobby. If you read Dalio's essay it sounds like something the New Green Deal are trying to push. This 'ecological' political agenda is getting a lot of traction helped by the increase in support for the political Climate Change agenda. Keynesian economics was more a lever than a policy as I understand it.

    I was speaking on one of the global warming threads about the Law of Social Cycle.

    It could happen. This is why I am beginning to study Modern Monetary Theory with the help of this thread.
     
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  4. Ann

    Ann

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    Modern Monetary Theory Finds an Embrace in an Unexpected Place: Wall Street

    The package of eccentric ideas known as modern monetary theory — for example, that annual deficits are too small, and that the United States can essentially print money to pay off its debt — has been on the receiving end of a remarkable level of vitriol.

    In policy circles, heavyweight economists have churned out scathing attacks. In the business arena, titans like Laurence D. Fink and Bill Gates have labeled it “garbage” and “crazy talk.” And in academia, when the University of Chicago’s Booth School of Business asked top scholars about a couple of its claims, they split between the 28 percent who disagreed and the 72 percent who strongly disagreed.

    But M.M.T., as it’s known, is attracting a conspicuous number of fans in an unexpected place: Wall Street. Money managers, chief executives and business analysts maintain that the approach offers several important and overlooked insights, and far from finding it fanciful or deranged, they are using M.M.T. to build economic forecasts and even trading strategies. More..
     
  5. Knobby22

    Knobby22 Mmmmmm 2nd breakfast

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    He doesn't mention any green issues, Ann.

    More about increasing money supply and giving it to ordinary people by directly employing people though building improved infrastructure rather than the system where you use lower monetary policy to increase demand by giving banks more money which they are meant to lend and which has clearly failed in the USA. I agree with this comment.

    He uses the Depression example with Roosevelt which also occurred in Australia from what I have read.

    The thing I don't like is the way he wants to print money, he even admits it, can you trust the governments?
    What if someone got in the Presidency with no economic background who just shoots from the hip for short term gain. (Though this is unlikely) (note sarcasm).
     
  6. Ann

    Ann

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    He would want to avoid mentioning any green issues for fear of being called out as a green activist and muddy an economic argument.

    Couldn't happen Knobby, the US voters are too intelligent for that! (note sarcasm):D
     
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  7. Ann

    Ann

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    Pauline Hansen wants/wanted to print money as well.
     
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  8. ducati916

    ducati916

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    This chap https://www.pragcap.com/cant-debunk-mmt/ has been writing/discussing MMT for about 10yrs.

    When I first came across him, he was very pro-MMT. Seems somewhat less so now.

    Re. his position that MMT cannot be debunked because it has never been tried. I would argue that that is incorrect. The theory or a priori reasoning of MMT proposed [largely] by Warren Mosler can very much be debunked employing economic principles.

    jog on
    duc
     
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  9. qldfrog

    qldfrog

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    I think this is the policy used in Zimbabwe or Venezuela, but with the added Clause :we are different
    Much an irresponsable socialist dream
    Should and will end up in complete collapse of a currency value
    But what the heck, same results as current monetary policies ,a different fat cats, and allow you to buy votes
    Will soon be around in your next leftist agenda...
     
  10. ducati916

    ducati916

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    So looking at one of his arguments:


    • We think that interest rate cuts and QE will be significantly less effective in the next downturn for reasons we’ve described in depth elsewhere. We also don’t believe that monetary policy is producing adequate trickle-down. QE and interest rate cuts help the top earners more than the bottom (because they help drive up asset prices, helping those who already own a lot of assets). And those levers don’t target the money to the things that would be good investments like education, infrastructure, and R&D.

    He admits 'asset price inflation', which is: housing, financial assets [stocks, bonds], collectibles [art, cars, etc]. What he failed to mention were the increase in prices of groceries, petrol, rent and almost anything else that you can think of. Really the only thing that didn't go up in price, was wages. If you look at the Federal Reserve tracking of inflation, barring a blip down in 2008, inflation goes in one direction...straight up. What we don't have is the wage-price inflation of the 1970's.

    In the next breath;

    Funding such things with money printed by the central bank means that the government doesn’t have to worry about the classic problem of the larger deficits leading to more debt sales leading to higher interest rates because the central bank will fund the deficits with monetization (QE). As we’ve described several times before and have seen since the 2008 financial crisis, such monetization won’t cause too much inflation.

    Denies inflation.

    Which means either: (a) he does not really understand inflation, which I doubt, or (b) the only inflation that he is concerned about is wage-price inflation, which in dislocations causing [massive] unemployment is a non-issue.

    That is because inflation is determined by the total amount of spending divided by the quantity of goods and services sold. If the printed money simply offsets some of the decline in credit and spending that happens in an economic downturn, then it won’t produce inflation,

    Simply incorrect.

    Inflation must take into account the total volume of money and money substitutes in addition to the above. This is usually demonstrated as 'money velocity'.

    But in an economic downturn, the volume of goods and services will contract. More money and money substitutes competing for less goods and services, mean that the price [demand v supply] will rise, as evidenced.

    Screen Shot 2019-05-05 at 7.28.05 AM.png

    jog on
    duc
     
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  11. Ann

    Ann

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    Thanks duc, I would love to hear more from you about this.

    I agree with him about "We think that interest rate cuts and QE will be significantly less effective in the next downturn" because they really have nowhere to go.

    I have always found the concept of official 'core' inflation figures to be dodgy as they 'exclude' those essential things we need for survival such as food!

    The US annual inflation rate rose to 1.9 percent in March 2019 from a two-and-a-half-year low of 1.5 percent in the previous month, slightly above market consensus of 1.8 percent. Food prices rose at faster pace while energy deflation eased. The core inflation rate, which excludes volatile items such as food and energy, edged down to 2 percent from 2.1 percent in February, just below forecasts of 2.1 percent. Inflation Rate in the United States averaged 3.26 percent from 1914 until 2019, reaching an all time high of 23.70 percent in June of 1920 and a record low of -15.80 percent in June of 1921.ref.
     
  12. Ann

    Ann

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    Please understand I am not taking a position on MMT at this time, merely trying to get a firm grasp of the theory in words I can understand. I have no desire to enter a debate but I would value anyone who has a contra or pro view commenting on anything I put up here.

     
  13. Ann

    Ann

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  14. Ann

    Ann

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    The Truth About Modern Monetary Theory (w/ Richard Wolff)

     
  15. Ann

    Ann

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    Here is Ray Dalio with a cartoon Primer on the economy even a ten year old could understand. Warning! This is highly simplistic and may offend the more economically sophisticated amongst us! :)

    How The Economic Machine Works by Ray Dalio

     
  16. Ann

    Ann

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    In an effort to give balance to this thread....

    The Three Stages of Modern Monetary Theory

    Stage One: Yielding to Dreamers

    Some ideas are so bad they’re best ignored. Like resentments – or stray cats – if you don’t feed them, they’ll go away. Before long, they’re forgotten altogether.


    That has been our approach to Modern Monetary Theory (MMT). The idea’s so obviously foolish, reckless, and outright suicidal. Why feed this dorkus maximus of economic thought?


    Alas, there are times when promises of social utopia prove too intoxicating to pass up. It doesn’t matter if the promises are absolute fantasy. When hopes are diminished beyond redemption, any old falsehood will warm the hearts and soften the minds of otherwise intelligent people to ideas of pure madness. More...
     
  17. ducati916

    ducati916

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    It addresses the 'history', but the underlying fundamental principles of why MMT is poor theory are not addressed.

    1. If there is no 'money', then exchange of goods/services is direct. I need bread, I can offer my service of labour. If the person offering bread does not need [my] labour, no exchange will take place.

    2. If there is 'money', now indirect exchange can take place. I offered labour to 'X' for $1. I completed the labour he gave me $1. The transaction is not complete from my point of view. I have $1 ready to exchange for bread. That $1 is merely a means to an end, of obtaining bread.

    3. I exchange my $1 for bread. My transaction is now complete. The baker, who received my $1, has an open transaction, the $1 standing ready to complete his desired exchange.

    4. The point being: 'money' is a good that facilitates indirect exchange.When exchanged, it retains the ability to transact at a later date, if the goods/services desired are not then available.

    5. It has an exchange value and it [to a point] acts as a store of value, its fluctuations respond to the change in availability of goods. Herein lies the theory of credit and the time value of money: another significant reality of money that is beyond the scope of this post.

    6. Money is not in of itself 'wealth': ie. it is not a good or service that is a consumption good. Its function is to facilitate trade through the mechanism of indirect exchange.

    7. For this function, the volume of money in circulation is irrelevant. Money, 'X' quantity, will adjust through the function of price, relative exchange ratios with all goods/services.

    8. If on a desert island there is a single $1 coin that can be used to facilitate exchange between the only two inhabitants, when direct exchange is not possible, for example, I fish, but have been ill, so I have no fish currently, but, from a previous exchange I have the $1 coin: I can exchange that coin for berries, providing the coin, knowing that when I have fish, my neighbour can present the coin for some of my catch.

    9. Those ratios will be fairly consistent, 3 fish for the coin +/- on availability of fish. If I have many fish, it may rise, $1 = 5 fish. Less in hard times.

    10. What happens if while fishing, I catch a fish that has a second $1 coin in its entrails?

    11. The money supply is doubled. All the ratios change. Less goods will be available per coin. The price has risen. That is inflation.

    12. MMT through manipulating the volume/supply of money does nothing to increase the wealth of an economy. There is no more 'sustainable' production of consumer goods. There is only an increase/decrease in the supply of money, which is irrelevant to money performing its task - the indirect exchange of goods.

    13. Even when 'money' flows to production goods, which is where the time value of money and credit step into the picture, there is no requirement to change the volume of money: in fact by doing so, you distort market signals and waste valuable resources.

    Obviously, there is a great more detail required to fully explain the concept. Many books have been written on the subject.

    jog on
    duc
     
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  18. Ann

    Ann

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    Thanks duc, as you say, there has been much written on this subject and also many debates from various economic schools. In my simplistic mind, I see the need for fiat (or an exchange token) once we get beyond a small community bartering system.

    I came across an interesting (to me) chart today. It was a historical chart showing the net savings of various sectors. I was more interested in the chart than the article as it was an historic chart.
    What I found so interesting about it was after the stockmarket crash in 1929, note how long the government took to put money into the community (as seen by reduced government savings). It wasn't until 1944. Then look at the recent crash we had in 2008, they immediately pushed money into the community (as seen by reduced government savings) and may well have saved us from a far worse depression than the 1930s. However I could see a situation where if the government kept pushing money into the community, the impetus for private saving would fall away and might well have a de-stabilizing impact if there is a need for people to have some personal financial protection as in the recent government shutdown in the US.

    savings.png Ref:
     
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