The General and the Specific in MMT

There has been discussion on various blogs (for example, here, here and here) concerning the choice, frequently made by expositors of MMT, to present the theory in terms of a sovereign currency issuer not subject to self-imposed constraints (what Scott Fullwiler calls the ‘general case’) rather than grounding discussion in the particular operational realities of whatever monetary system happens to be the subject of the presentation (the ‘specific case’). Some commentators have also questioned the appropriateness of giving priority, in theory, to the ‘general case’ rather than the ‘specific case’.

My own view is colored by what attracts me to MMT in the first place. For me, what is most striking about MMT is its clear depiction of the social possibilities that are inherent in a flexible exchange-rate fiat-money system. MMT gives transparency to the various policy options under capitalism. It may also indicate ways in which fiat money could facilitate more fundamental change, including a transformation to a system other than capitalism.

From my perspective, I think it would have been a mistake for the leading MMTers to cast their theory narrowly. Instead they have developed an overall coherent framework that enables analysis of particular instances within it. The purpose of macroeconomic theory is not to describe every minute detail, but to achieve an understanding of the whole and how the parts relate to the whole. Certainly it should be possible to mine down to the smallest detail without violating the logic of the overall framework when such details are of interest. If this could not be done within the general framework, there would be something wrong. But I don’t think this is the case.

A comparison with neoclassical economics may illustrate my viewpoint. In neoclassical economics, the theorist begins by asking what constraints must be imposed on the model to achieve the desired result. Once these constraints have been identified, the theorist attempts successively to relax constraints to see how few can be imposed on the model without contradicting the desired result.

In MMT, the approach is different. By observing the actual system, the theorist tries to discern its key features. An attempt is then made to represent these features as simply as possible without missing anything essential. Many details will undoubtedly be ignored in the simplest models in an effort to illuminate the most important facets of the system in a clear way. Successive complications, encountered in particular (real-world) cases, can then be introduced to determine how the results of the model are modified, how the key processes operating within the system are attenuated or reinforced, and so on.

So in neoclassical theory, the result of the model is predetermined. The theorist then sees how many constraints on the model can be relaxed without altering the result. In contrast, in MMT the result of the model is not predetermined, and the constraints that are added in examining a particular instance of the base model reflect the actual system being studied.

The basic methodology of MMT can be observed in other Keynes influenced approaches. For example, a Keynesian might start with the simple two-sector closed economy model. The motive for doing so is that this simple model is thought to capture certain fundamental features of a market economy. It involves businesses and households. It shows how leakages endogenously adjust to exogenous injections, and how autonomous expenditures determine income through a multiplier process. It is not completely “realistic” and does not capture every detail, but the central processes it highlights continue to hold true when more institutional detail is introduced. In more complex models, leakages still adjust to injections. Autonomous demands still determine income. And so on.

In a similar way, the exposition of MMT sometimes starts with a two-sector model involving the government and non-government. In this simple form, some fundamental aspects of a fiat-money system are made clear. The non-government cannot net save unless the government is in deficit. The non-government is in no position to dictate the rate of interest government pays on its own liabilities. The government need not issue debt. If it chooses to do so, it is a self-imposed constraint. In considering particular cases, these constraints can be added to the model to consider what, if any, ramifications they have for the government’s policy capacity. If such constraints alter fundamental insights of the simple model, the simple model would need modification. Otherwise it could not be regarded as capturing the essence of the reality it is designed to explain.

Along similar lines, I think the distinction between the ‘general case’ and the ‘specific case’ described by Scott Fullwiler makes sense, as does the MMT judgment that the general case should refer to the position of a sovereign currency issuer prior to any self-imposed constraints. Since the number and strength of such self-imposed constraints are various – depicted, for example, in Fullwiler’s ‘strong form’, ‘semi-strong form’ and ‘weak form’ – attempting to organize the theory around one particular case – e.g. current U.S. monetary operations – would seem to deprive the approach of generality. As long as the basic monetary operations are playing the same function in the specific case as they would in the general case, the claim to generality seems well founded. Fullwiler gives the following example:

Having said that, MMT’ers are keenly aware that governments can and do write laws that their treasuries’ operations be legally bound in certain ways. For instance, the Fed is constrained by law to only purchase Treasury securities in the “open market,” is thereby forbidden from directly lending or providing overdrafts to the Treasury. In other words, “specific” cases can and do differ from the “general” case MMT’ers describe for a sovereign currency issuer under flexible exchange rates in the sense that self-imposed constraints specify particular operations. But, this does not mean that the operational function of the Treasury’s bond sales to aid the Fed has changed—to the contrary, with or without legal prohibition of overdrafts for the Treasury’s account, either the Fed or Treasury must offset flows to/from the Treasury’s account to achieve the Fed’s target rate (with the caveat that interest on reserve balances can potentially eliminate this necessity).

This is not to say that analysis of the specific case is unimportant. It will be appropriate, for example, when formulating policy proposals that enable the government to adhere to its self-imposed constraints. Analysis of the specific case also enables a consideration of what, if any, policy capacity is given up when particular self-imposed constraints are in place.

However, even when analysis of the specific case is appropriate, an understanding of the general case remains relevant. For the very reason that these constraints are self-imposed, they will not necessarily be observed when it comes to the crunch. So it makes little sense to lose sight of fundamental relations of authority and hierarchy within the system, even when analyzing the specific case. To quote Fullwiler again:

The overarching point here is to recognize who sits at the top of the hierarchy of money for a given monetary regime. Since under flexible exchange rates it is the currency issuing government, self-imposed constraints are simply that—self-imposed and not operational. … Indeed, it is the very fact that such self-imposed constraints can be and have been disregarded in the past when it has been deemed desirable (e.g., the law requiring that the Fed only purchase Treasury obligations in the open market has been periodically relaxed) that demonstrates who is in charge …

The fact that a constraint is self-imposed is in this sense a strong reason for not including it in the general case. Since such a constraint may be removed or replaced, and may not be adhered to by other sovereign currency issuers, it is not a general feature of a flexible exchange-rate fiat currency system.

Of course, at a still more general level, a flexible exchange-rate system is itself just a special case of all fiat-money systems, which in turn are a special case of all monetary systems. The level of generality desired is a function of the type of analysis we wish to undertake. As mentioned at the outset, my own preference, in this respect, is shaped by what I find most interesting in MMT.

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116 thoughts on “The General and the Specific in MMT

  1. Peterc: I do think in this context, with sensible people incl Lavoie, jkh and Ramanan assailing MMT’s presentational approach, it’s worth recapping the number of other distinct, yet complementary insights which MMT has either developed or at least embraced. For me, these would include sector financial balances, the endogeneity of broad money, and a good PK analysis of inflation. All of these are valuable additions to evaluating fiscal optionality and priorities.

    Also – I’d flag that the reserve drain is a very powerful tool, irrespective of where one sits on the ‘general’ vs ‘specific’, or ‘strong’ vs ‘weak’. ISTM that there is a very specific reason why the reserve drain doesn’t apply in the case of the EZ, although I don’t really understand why this is: it seems that Greek banks prefer to have a debit balance at the BoG, forming part of the Eurosystem and therefore almost ‘German’, instead of the Greek Treasury.

  2. Hugo, Anders: I should mention that I hadn’t read the latest thread at Winterspeak before composing this post. So this post was not intended as a response to anything argued in that thread. I had seen the earlier Winterspeak thread, which together with the threads at Mike Norman Economics and here (in the second post on Lavoie’s paper), was what I had in mind in preparing this post.

    I just had a quick read of the latest Winterspeak thread, but will need to go back to it. From what I saw, I don’t think there was much conflict between what JKH is arguing and the position, for instance, of Fullwiler (although those two will have a better idea of whether they have any differences). For example, I don’t think Fullwiler finds the consolidation of the government sector very helpful, similar to JKH.

    Personally, I actually like the device of the consolidated government sector, but I am still trying to comprehend the arguments expressed against it by JKH, Fullwiler, Ramanan and others. However, I don’t think this issue changes the basic point in my post. In the sense of the post, Congress – to take the US example – ultimately has authority over the Treasury and Fed, which would seem to imply basically the same effect as having a consolidated government sector in the ‘general case’. At least, that’s my current understanding.

  3. this is a very good piece, and I appreciate the help unraveling what I was getting at in my earlier post. for me, there are two related keys. the first is here, when you write this:

    “In MMT, the approach is different. By observing the actual system, the theorist tries to discern its key features. An attempt is then made to represent these features as simply as possible without missing anything essential. Many details will undoubtedly be ignored in the simplest models in an effort to illuminate the most important facets of the system in a clear way. Successive complications, encountered in particular (real-world) cases, can then be introduced to determine how the results of the model are modified, how the key processes operating within the system are attenuated or reinforced, and so on.”

    An example of this is my paper on the general principles of cb operations–the point was to go out and look and find what sort of general model could fit all the examples we have of cb operations if we alter the model a bit for specific circumstances.

    A second key is, as Paul Davidson always argues, the appropriate general theory in any science is that one which requires the fewest assumptions. It seems rather clear to me that the MMT general case has the fewest relative to the alternatives that have been put forth by critics and friends both in the journals and recently on the blogs. The consolidated CB/Tsy is an example of a simpler model with fewer assumptions, then the model can be given more assumptions to get to any other real-world or theoretical system one wants to work with without changing the overarching operational realities.

    My own rationale for not using the consolidated Treasury/CB (yet) is that (1) it doesn’t fit my social fabric matrix, systems-oriented approach to empirical research and (2) I have yet to write a “general principles” type of paper to describe tsy operations as I have for cb operations. for me, the former is how I get at the individual, or special, real-world cases, which I have done with Tsy operations, but the latter (2, that is) would be my view of the more general model, which I have yet to write. When i do, it’s possible that I will come down on the side of consolidation, but not guaranteed. At any rate, my own reasons for not doing it ultimately come down to the fact that I haven’t though hard enough about it yet to have an opinion as an expert.

    Let me say, lastly, that it’s too bad clearer explanation of the general vs. specific wasn’t done in an attempt to better explain MMT years ago. this is not to suggest everyone would have agreed, but the discussion we are having now is much more fruitful than the confusion caused by not previously describing the monetary system along the lines of our views of what the general is and what the special case is and often blending the two without noting that this is what was occurring.

  4. “My own view is colored by what attracts me to MMT in the first place. For me, what is most striking about MMT is its clear depiction of the social possibilities that are inherent in a flexible exchange-rate fiat-money system. MMT gives transparency to the various policy options under capitalism. It may also indicate ways in which fiat money could facilitate more fundamental change, including a transformation to a system other than capitalism.”

    Well that confirms Lavoie:

    “It is my understanding that the emphasis on the analysis of the way in which central governments could finance their expenditures, thus on the analysis of the mechanics of clearing and settlement systems, arose because of the desire to demonstrate that ELR programs could always be financed. Neo-chartalists wished to demonstrate that the idea of functional finance could be taken very seriously, even if it led to huge deficits, because financing large deficits did not pose a problem for central governments, at least under certain conditions.”

  5. JP,

    It doesn’t confirm Lavoie because PeterC just wrote that and he isn’t the one Lavoie was talking about. Unless you know the motivations of Wray, etc., then Lavoie isn’t confirmed.

    It’s rather clear that Mosler came up with his understanding of the consolidated Tsy/CB during his trading days, as he explains in the biographical parts of his book. It had nothing to do with any particular policy. Forstater, Wray, etc., didn’t start looking to Lerner’s functional finance until after meeting Mosler, though Mosler may have had his ELR by then (but still, the ELR didn’t come first).

    Not that it matters. If it’s right, it’s right, regardless of which order or what the motivations were. I appreciate Lavoie’s paper, but this part of his argument makes something out of nothing.

  6. And might I add JP, you still don’t get Lavoie’s paper or MMT, because according to your comments at Winterspeak, you still think “MMT policy can’t be implemented” because the Fed/CB aren’t formally consolidated.

    I am still working on my understanding, but I do recognize Lavoie and Fullwiler don’t think the specific case of the US or UK or Japan introduces default risk more than the general case, as long as you’re in Fullwiler’s semi-strong or strong form model, as opposed to the weak form, which is always possible, barring Congressional blockage of debt issuance or operational / legal constraints placed on the Fed’s ability “to set the market rate on Treasuries as long as it is willing to buy all quantities offered at its bid price,” as the ECB has done informally (aha!).

    I’ll give you the benefit of the doubt and assume you are not trying to take a cheapshot at MMT by insinuating it’s full of disingenuous hippies. As Fullwiler says, if it is right, it is right, and ah hominem attacks don’t take anything away from it. I do think it is interesting, though, how motivations and personal interests may shape an approach to teaching.

  7. Scott,

    “Let me say, lastly, that it’s too bad clearer explanation of the general vs. specific wasn’t done in an attempt to better explain MMT years ago. this is not to suggest everyone would have agreed, but the discussion we are having now is much more fruitful than the confusion caused by not previously describing the monetary system along the lines of our views of what the general is and what the special case is and often blending the two without noting that this is what was occurring.”

    I agree. I can say, at least as MMT has been distributed across the blogosphere to random people like me, this certainly gets lost in translation and overwhelmed by the general case. I obviously know less about how it went and goes down in academic circles.

  8. Scott, thanks for your clarifications. They are very helpful as I try to piece things together in my mind.

    wh10, Scott: Sure, things might have been clearer earlier if the general/specific had been emphasized, but I think it is inevitable that the theoretical approach will get modified and strengthened over time. It is not always obvious what is clear until others react. The back and forth helps to show what needs further clarification or elaboration. The interaction with other theorists leads to further developments of the theory, and so on.

  9. Sorry, I need to clarify my above statement. I think perhaps it is more proper to say you can still be in the weak-form model, but by the Fed making clear its intention to set the market rate on Treasuries, you move back towards the semi-strong form and eliminate economic reasons for why “bond markets might at some point choose to repudiate even a currency-issuer’s debt with zero default risk.”

    Alas, I am still figuring it out :).

  10. You and me both. 🙂

    At least we know this: there’s something called a strong form, something called a semi-strong form, and something called a weak form. What exactly they are we will hopefully understand some time in the unforeseeable future. Surely that’s enough to be getting on with!

  11. Although the general case is highly needed, especially when explaining the general principles of MMT to the average person, the specific case (USA in particular) is also needed for exactly the same reasons. To show to the average person that USA, Canada, Australia, UK, Japan, do not carry either a default or an interest risk in their debt issuance.

    In regards to the specific case i do think that MMT literature describing the process in details is quite missing, especially since the EU debt crisis erupted.

  12. @Ryan Markov – agree, the Godley/Lavoie tome is a wonderful thing, but it’s borderline unreadable unless you sit there with a computer building their models – clearly not for everyone.

  13. @Kostas Kalevras

    “I think Wray and Mitchell are writing one though.”

    I thought the same but am not sure anymore… 🙁

  14. “you still think “MMT policy can’t be implemented” because the Fed/CB aren’t formally consolidated.”

    wh10. I leave a lot of comments on blogs. From which one are you directly quoting me?

  15. JP,

    “I disagree. The US institutional arrangements are not the world’s arrangements. In the UK, for example, the central bank *is* owned 100% by the Government.”

    Even with the BoE, the old way by which it could lend directly to government – via its “ways and means” advance/overdraft facility – has been effectively neutered. That facility was frozen in 1997 and has since been almost completely repaid. The upshot is that MMT can’t look to the BoE as an example of its idealized “consolidation”, and it can’t give policy recommendations as if these institutional rigidities didn’t exist.”

    Won’t give you the benefit of the doubt there because that was a cheapshot :). As long as you aren’t too belligerent, nice to have you straying into this realm of the blogosphere.

  16. Peter, a remarkably well-written post.

    > “Personally, I actually like the device of the consolidated government sector, but I am still trying to comprehend the arguments expressed against it by JKH, Fullwiler, Ramanan and others.”

    That is my position too, right now.

    It is being argued that technically the “Central Bank” is always the “currency issuer”. So, for example in the US the Treasury is a currency user like everybody else.

    I feel some vague uneasiness about this. (Hand waving follows.) Looking at it from a Chartalist perspective, there need not be a “central bank”. The Chartalist view is (I think) that historically money is a unit of account designated by some public authority to keep track of debt and credit (I think). In modern days (say the Neo-chartalists), governments impose tax-obligations on the population — again: obligations denominated in a unit of account designated by the government. This creates a demand for tokens representing the unit of account (the “currency” if you will). So the taxes drive the value of these tokens. Blah blah, you know the story. People will offer to work to acquire them. The government can thereby shift resources to public use. (Something like this. I’m not sure.)

    Given this perspective, I feel it is sort of irrelevant that there is usually a so called “central bank” involved in the administration nowadays. On the contrary, the core mechanism here rather seems to be the authority to designate a unit of account and impose tax obligations. A central bank alone can issue whatever currency it wants, but if there is no demand for the currency it’s no point. It takes two to tango. The taxing authority is needed too. So to say that the central bank is the sole currency issuer tells only half the story, I would argue (I think).

    Ok.. I may have most of this wrong, I don’t know. (And it does not explain how there is a difference between the U.S and Greece? More stuff needs to be said to flesh that out).

    But still.. you know. Just a hunch. I still feel there is some validity in the currency-issing-consolidated-government abstraction.

  17. Excellent, articulate post, as usual.

    I tried to summarize something here just now:

    http://www.winterspeak.com/2011/11/from-comments-technical-details-on-mmt.html?showComment=1322610298544#c5688248124931376395

    So on the one hand, the view that the central bank is the currency issuer may be interpreted as somewhat contractionary and regressive in conceptual scope, on the face of it at least, compared to the deeper view of the national sovereign as the issuer. On the other hand, the alignment of both the Fed and the ECB as currency issuers within such a framework is potentially expansionary in concept, in that both central banks are captured at the same level within the same framework. (And it is the case that the Euro zone is struggling right now with the issue of self imposed constraints at the ECB level.) I think this expands rather than contracts the powerfulness of the general case.

  18. This is a fascinating and thought-provoking post. But I would like to make some suggestions about the issue of levels of description.

    There is a significant difference between the general/specific distinction and the idealized/actual distinction. In the former case, when one gives a very general description of some region of economic reality, one abstracts away from the complexities of certain actual empirical details to reveal a simpler and more fundamental layer of empirical reality. Both the general and specific description will be equally true. The specific description just contains less detail.
    For example, compare the statements:

    1. The department can produce a written record of its transactions at any time.

    2. The manager of the department possesses a record of all department transactions on a private directory on her hard drive, and at any time, by supplying an appropriate password and issuing the appropriate commands with the appropriate software tools, she can cause the department printer to generate a written record of department transactions.

    Statement 1 is more general than statement 2, but they are both equally true. Statement 2 presents a more detailed description of those particular facts in which the general fact described in statement 1 consists. It presents a more detailed account of the sequence of operational capabilities which constitutes the general operational capability described in statement 1.

    In the case of an idealized description, on the other hand, one devises a simplified model that is not, strictly speaking, true to the empirical facts, but is very close to the truth. One gains the theoretical benefit of a simple, perspicuous model. In exchange one gives up strict correspondence to reality. Consider:

    3. The department can produce an exact written copy of its transactions at any time.

    4. The manager of the department already possesses a written record of all department transactions in her files, and at any time, by supplying an appropriate password and pushing the appropriate buttons on the department copier, she can cause the copier to generate a written record of department transactions.

    Here statement 3 is not quite true. It is an idealization, because no copy made on a copier will ever be exact. It will always deviate in some way from the original. But the idealization is very close to reality. And making the idealized statement is a useful and appropriate thing to do when faced with somebody who is saying something quite contrary like “the department’s reports on its transactions are of necessity very inexact.”

    One approach to MMT is to see it as describing an ideal of something we could call “monetary sovereignty”. A government that is monetarily sovereign has various options immediately available to it, without significant prior change in its existing legally mandated operational framework. Probably no actual government is monetarily sovereign. But many governments, such as the US government, are much closer to the ideal of monetary sovereignty than people generally realize. By examining the various ways in which the US government is near to ideal monetary sovereignty already, we can learn much about the potential efficacy of certain propose policies. We can learn how little would actually be required in order to implement those policies. We can also show what is wrong with analyses of current realities that posit constraints on government action that are much more stringent than those that actually exist.

    Another approach to MMT is to see it as offering a very general description of economic reality, a description that is already true. Monetary sovereignty for the US government is not just an idealization; it’s a fact. It’s just that government officials, working within the framework of existing laws, have to employ a variety of Rube Goldberg operational contraptions to execute the operational tasks that are inherent in a monetary sovereign government.

    Some of the arguments or disputes about MMT seem to be disputes about where the boundary between generality and idealization falls. Personally, I have over time found the MMT picture of a monetarily sovereign government to be a more convincing representation than I initially realized of the way things already really are. But I have also developed clearer ideas about the kinds of legal and policy changes that would be useful in order to unleash the full power of democratically controlled monetary sovereignty, and the institutional hurdles that still stand in the way.

  19. “Even with the BoE, the old way by which it could lend directly to government – via its “ways and means” advance/overdraft facility – has been effectively neutered. That facility was frozen in 1997 and has since been almost completely repaid. The upshot is that MMT can’t look to the BoE as an example of its idealized “consolidation”, and it can’t give policy recommendations as if these institutional rigidities didn’t exist.”

    And since that has been repeated here, I will again confirm that this view is incorrect. The statutes remain that allow UK Treasury to instruct the Bank of England. The BoE’s independence is entirely at the behest of the Executive in the UK. Parliament would not need to be involved to cancel it.

    A fact confirmed when the ‘Ways and Means account’ miraculously came back to life for several months to the tune of £19.5bn at the end of 2008 to cope with the bank failures and the nationalisation of Northern Rock.

    It is a matter of operational fact that the UK government can, and has, borrowed directly from the Bank of England.

  20. “I am still working on my understanding, but I do recognize Lavoie and Fullwiler don’t think the specific case of the US or UK or Japan introduces default risk more than the general case, as long as you’re in Fullwiler’s semi-strong or strong form model, as opposed to the weak form, which is always possible, barring Congressional blockage of debt issuance or operational / legal constraints placed on the Fed’s ability “to set the market rate on Treasuries as long as it is willing to buy all quantities offered at its bid price,” as the ECB has done informally (aha!).”

    Breathe, wh10, breathe. That was a long sentence. I’ll be kind of longish myself. Apologies if any of the previous was in poor taste.

    Anyways, no modern central bank that I’m aware of offers to buy up the government’s debt at a set price, nor has this happened in decades. Until this rather remote event happens, governments must continue to fund projects out of bond and tax issues.

    To make such a shift would go against decades of tradition, and tradition is a strong constraint. The last (and only) western central bank I’m aware of to set bond rates was the Fed, but that lasted for a mere nine years, ending in 1951 with a Fed-led revolt and an end to the policy.

    The reason I yap about overdrafts so much is because in the absence of a tradition of fixed bond rates, overdraft facilities have been one of the more common ways for governments to get direct and consistent access to central bank funding at a fixed rate.

    But even that is an idealization. Most of the overdraft facilities I’m aware of, including the old Fed overdraft facility, the Reserve Bank of India’s overdraft, and those of the Central Bank of Nigeria and the Bank of Canada have legislated funding limits and term limits.

    Becasue actual overdraft facilities have never been the sorts of overdrafts idealized in the strong-form version of the MMT, central banks that have offered actual overdraft facilities are far closer to the weak form end of things (I called it the white pole in that post you link to) than a central bank that fixes bond prices. Legislated limits on overdraft facilities prevent the government from infinite financing, but if a central bank promises to peg a bond price it could be setting itself up to buy all the government’s debt.

    In my way of seeing things, tradition has always dictated that fixed bond rates were off the table. We have been in a weak-form world for decades, one close to the white end of the pole. Overdraft facilities were one of the few structures that tilted things back to the black pole. But with overdraft facilities also being legislatively retired (the Fed, Eurozone) or operationally retired (BoE), that shows how institutionally constrained governments have become with respect to financing themselves via the central bank. That’s it!

  21. JP, I appreciate the history, and I understand why you believe we are more near the white pole.

    Here’s how I see things and would be curious to hear your thoughts.

    First, like JKH says, it’s more about reflexive reassurance than needing to actually execute. That means the Fed shouldn’t have to execute much on this ability, if at all. It seems you believe the Fed needs to do this, say, every 10 years to establish a firm tradition for markets to believe it is a real force. I say the evidence shows otherwise, currently.

    If the market doesn’t believe the Fed is there as a backstop, then it’s somewhat arbitrary that they choose to repudiate the debt at a debt:GDP ratio of 200% vs 100% vs 50% vs 10%. All things constant, there is no difference in the market’s ability to finance that debt at any of those ratios. It’s simply their choice to be spooked.

    Furthermore, if markets were truly considering repudiating the debt, then where is there any evidence of any meaningful default premia in US govt bonds?

    Not too long ago, there was much talk of an Operation Twist pegging bond rates. There are also many bond traders (Paul McCulley comes to mind) who frequently note that yields are on the leash of the Fed (obviously Gross recently begged to differ). Hard to know what the dominating force is in the mind of the market, but the evidence suggests there is no real worry.

    In any case, the point is, this is always a choice. If we ever get to the point where debt repudiation is a real concern, and we decide we’d rather not have markets repudiate the debt, that’s the only time that really matters for the Fed/Treasury to wield their full powers. If it only happens every 60 years, then that’s just how it is.

    Lastly, stepping away from descriptive MMT, I don’t really know of any policies that MMTers would suggest that would necessitate the constraint-free general case as opposed to a specific case, as you seem to believe.

  22. In trying to explain some MMT insights to friends, I sometimes use the following thought experiment. I will first pose the thought experiment and then ask a question.

    Suppose the Treasury Department were permitted to issue a special class of bonds – call them “M-bonds”. These bonds could not be sold on the open market, but could only be sold to the Fed directly. Suppose that the bonds carried no coupon payments and 0% interest, and matured in a year. If the Treasury sells a $1 million M-bond to the Fed today, next year they pay the Fed exactly $1 million.

    Suppose also that the Fed were not permitted to refuse to buy M-bonds. If Treasury issues an M-bond and offers it for sale to the Fed, the Fed has to buy it. But let’s also assume that Treasury is not permitted any overdrafts on its account at the Fed. Congress has mandated that any Treasury spending must be cleared through its Fed account, and that the only ways of funding that account are tax revenues, sales of ordinary Treasury bonds and bills and sales of M-bonds.

    Now let’s suppose that the Treasury Department has a standing policy of funding $100 billion of spending in the private sector each year through the sale of M-bonds. It also has a policy of issuing M-bonds to meet the full costs of servicing its M-bond debt. So, in Year One it sells the Fed $100 billion of M-bonds, and spends the proceeds. In Year Two, it sells $200 billion of M-bonds, spending $100 billion of the proceeds and using the other $100 billion to pay off the Year One debt. In Year Three, it borrows $300 billion, spends $100 billion and uses the remaining $200 billion to pay off the Year Two debt. Etc. etc.

    We can see that the Federal debt attributable to M-bond issuance grows arithmetically by $100 billion each year. (Oh my God! Runaway debt!) But we can also see that that portion of the debt is relatively meaningless. We can see that it wouldn’t matter if M-bonds were not 0%, but carried some positive interest rate – say 10%. Then the debt due to M-bonds would rapidly compound. But it would be just as meaningless. The whole quantity of the previous year’s M-bond debt would be borrowed from the Fed each year, and then paid back the next year.

    We can also see that the entire functional effect of all the borrowing and repayment could be accomplished by the following simpler operation. Congress mandates that each year the Fed directly credits $100 billion to the Treasury Department account. End of story.

    So why don’t we do things this way? I suppose it is a combination of contingent historical reasons and real policy reasons. Congress has delegated monetary operations to the Fed, and placed some hurdles in the way of a quick override of these delegations in the same way Odysseus tied himself to the mast in going past the Island of the Sirens. Perhaps the fear is that if the Congress kept direct operational control monetary authority in its own hands, they would fall too often into the temptation to engage in destabilizing and highly inflationary reliance on money creation.

    But in the current context, here is the most important question. Given the fact that Congress has mandated that Treasury fund its spending through taxes and private sector borrowing – a real but voluntary constraint on government policy – and given that (i) Congress has imposed a debt ceiling on Treasury, (ii) Treasury cannot overdraw its account at the Fed and (iii) Treasury can only sell debt to the Fed indirectly as the Fed purchases government debt on the open market at it’s own discretion, does it then follow that the same thing that is happening in Europe could happen here? That is, since Congress has mandated that Treasury funding stands at the mercy of borrowing from the private sector, could the bond vigilantes drive up Treasury borrowing costs? I know that right now we see no signs at all of a move in that direction. But could it happen?

  23. Dan,

    This is what JP and I are discussing. You need to understand Fullwiler’s strong, semi-strong, weak form frameworks (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198). You don’t understand them yet..

    As Fullwiler says, (ii) and (iii) are not real constraints *even if they are never abandoned* as long as the US Fed utilizes its ability, if need be, to defend interest rates on the debt by acting in the secondary market. If one day markets actually believe the Fed will not do this, then bond vigilantes with solvency concerns might bid up rates, and if the Fed actually does not control this, then what is happening in Greece can happen to the US.

    This is Lavoie’s point in his critique of MMT when discussing Europe, and it is also Fullwiler’s. What is happening in Europe is happening because their politics have made it taboo for the central banks to buy govt debt in the secondary markets. We don’t apply these constraints to the US Fed, so what is happening in Europe is less likely to happen here.

    Fullwiler’s semi-strong and weak form recognizes markets might at some point choose to repudiate US govt debt. The key though, is the Fed’s ability to set interest rates, which can entirely be a policy variable if it so chooses.

  24. In an uber ironic way, the whole key to ensuring sovereign solvency is the Fed’s ability to ‘monetize’ the debt, in the mainstream’s terms. Without that, you are at the mercy of the markets and are Greece.

  25. Thanks wh10. That all makes sense to me. But something makes me uncomfortable about the fact that the rates in the primary market are set by market expectations of Fed behavior in the secondary market.

    I have been reading the ECB web site to try to understand the roles of the ECB and the NCBs in the Eurosystem. There is not a lot of detailed information at first pass, and much seems to depend on vague voluntary understandings about shared responsibilities. There is a lot of general philosophical discussion of decentralization. But I don’t understand what enforcement mechanisms the ECB possesses for making sure the NCBs implement to CB monetary policy.

  26. Dan,

    As I see it currently, underneath it all, that is the expectation that matters. The key is that, with that expectation, govt debt then appears risk free. Once govt debt appears risk free, then markets bid rates on govt debt down to the risk free rate, which means anticipating how the Fed will set future FFRs. However, in practice, I don’t know how often the relevant traders are constantly pontificating whether there is the risk that the Fed turns soft. I would think after a certain while of interest rates on govt debt becoming a function of future expected FFRs, that’s what traders spend most of their time thinking about, and solvency is taken for granted.

  27. Another thought I had this morning is as much as we have criticized QE2, it is very close to the Fed announcing itself as an unlimited buyer at a stated rate in secondary markets. In fact, the Fed said they were going to try to affect interest rates through QE2. To me, this reinforces the message to markets that the Fed does have very special powers no one else has, and they haven’t forgotten about them. Perhaps the Fed did this, in addition to their stated purpose, to allay concerns in US markets that are more potent in the EU. I see this as also contrary to the story JP Koning tells.

  28. This and the related conversation at Winterspeak’s blog are the two best and most important MMT related discussions I’ve seen in a long time. Bravo to all the participants and thank you for the thought, time and effort you put into this.

  29. I think the whole argument about who spends first is very much counter-productive. From the history of relationships between banks and governments it is quite clear that money did not really come from governments but rather from banks. Governments just legalized liabilities of some bank, then called these liability “money” and renamed the bank into central bank. The most common example of this is the history of the Bank of England. Banks existed long before the current central bank / treasury system. Payments systems existed long before central banks were created. Therefore the whole chicken and egg discussion is just counter-productive. It can also be the reason it is so counter-intuitive to many because it denies the history. MMT will never-ever win this case because it is simply wrong. And it does not matter how hard one tries into generalizing. It is plain wrong.

  30. @wh10

    Is the following summary vaguely resemblant of your arguments? Or am I totally out of control?

    * The Treasury has to sell bonds in the market (in order to acquire “funds” to spend). And the Fed is not allowed to buy bonds directly from the Treasury. It can only buy them in the secondary market.

    * This leads some to believe that the Treasury is dependent on the market’s willingness to lend.

    * But this is not so. Even though the Fed is not allowed to buy Treasury bonds directly from the Treasury, it still has sufficient mandate to resolve the situation.

    * The Fed namely has the mandate to manage interest rates. Arguably, this is the primary function and mandate of the Fed. Usually, it alters and maintain short term interest rates, but it could also manage long term interest rates if that is deemed appropriate.

    * The following hypothetical story shows the mechanisms involved.

    (1) The Fed sees that the market is not very interested in purchasing Treasury securities. Maybe some auction has failed. Interest rates are a bit high (for some particular maturity).

    (2) In that case, the Fed could announce that it has decided to set some other, lower, rate (for that maturity). The announcement includes an offer to purchase any Treasury bonds yielding higher rates than that in the secondary market. (Hmm… the Fed offers to pay the face value for the bond..?)

    (3) The market will then bid down the interest rate of the Treasury securities, to a level just above the level announced by the Fed. (Heh.. I’m sure this is not really how it works though..?)

    * All in all, the Fed and the Treasury together has mandate enough to not depend on the market’s willingness to lend whatsoever. In spite of appearances. The convoluted procedure with the Treasury having to sell bonds to the market is pretty irrelevant.

    Is this… in principle.. well? Is this something that vaguely sounds like what you’re saying?

  31. Yeah, Hugo, that sounds about right to me. The Fed just says “we will buy all Z year bonds at x%.” The market then moves there.

    However, IMO, I don’t think we have to be afraid of saying “the Treasury is dependent on the market’s willingness to lend.” The Treasury is dependent under current constraints, but the market has no good reason to not lend. And if it thinks it doesn’t because of random concerns, the Fed can give a wake up call.

  32. Even with current institutional arrangements, government debt is a risk-free asset. First of all, primary dealers are required to buy 100% of the offered amount on every Treasury auction (http://www.ny.frb.org/markets/pridealers_policies.html). That makes the debt default-free and requires any other participant to outbid the primary dealers in the offered yield. Furthermore, PD finance their purchases through repos with the Fed. As long as the Fed stands ready to defend the bond market prices (either indirectly through its margining policy in repos or directly through outright purchases), repo rates will arbitrage with the federal funds rate and so will the bond rates. More or less, the Fed is required to defend the market values since not doing so will severely limit the market’s ability to refinance its liquidity needs (through money/repo markets). 2008 was a large margin call in any case and we saw the Fed’s reaction to that.

    That’s my understanding of the US bond market (the special case).

  33. @wh10 — follow-up question: The argument I laid out there, is that at all resemblant of what Scott is saying when talking about strong, semi-strong, and weak “forms”? Did I sort of describe how the weak form works? Or is that totally different stuff?

  34. @Kostas

    > “Even with current institutional arrangements, government debt is a risk-free asset. First of all, primary dealers are required to buy 100% of the offered amount on every Treasury auction”

    You mean to say that Treasury bond auctions can’t fail? I’ve recently learned that they can indeed fail.. I think. Argh, confused. (And the rest of your comment I couldn’t really follow (beginner level here))

  35. Kostas, see Fullwiler in the Lavoie comment thread. He said PDs are not legally required to make every auction succeed. They can and have failed in the past, though they rarely will.

    Hugo, yeah, you described what could happen if markets consider repudiating the debt, but the Fed steps in. This is more weak form, though it’s also semi-strong, ‘in the medium term’ in Fullwiler’s words.

  36. ” MMT will never-ever win this case because it is simply wrong.”

    And the reason is that is not MMT’s case. MMT’s case is stated clearly:

    Spending is *best seen* as coming first.

    Spending coming after taxation and funding is also ‘wrong’ because the process is circular and concurrent with a daily clearing process.

    When linearising a circular process it is valid to start at any point on the circle, and where you start and end depends upon what you want to see.

  37. Sergei,

    The MMT argument on this point is nothing like the one you are critiquing. Sorry. Nobody in MMT ever argued that the first money was created and spent into existing by govt. Randy’s written the opposite several times, in fact.

  38. Sergei/Ramanan,

    You may not be going back far enough, I dont think Caesar borrowed these from a bank:

    http://en.wikipedia.org/wiki/Frome_Hoard

    And had to pay extra interest to get them to put his image on them. This looks like back then it was direct government spending (had to be seems like). Rome probably had some sort of “Monetary Authority/Mint” in the government sector, but I dont see them borrowing it from a bank.

    The switch to ‘Banking’ that you point out seems to be a more recent development.

    Resp,

  39. Yes, I agree with Sergei. In my view (and I don’t want to offend anyone) this diatribe is really useless. Every post-keynesian school agrees on investment -> saving and on spending -> saving. and every post-keynesian school I think that agrees on the nonsense of a statement like “private saving + government saving = total saving”.

    You can interpret the monetary system and the relation between Treaury-CB and banks, in terms of rules (like Lavoie does in his critique of Neo-Chartalism and like every non-chartalist does) or in terms of reserves/base money and hierarchy of money, like MMT and also Alain Parguez does (like in http://cas.umkc.edu/econ/economics/faculty/wray/631Wray/Week%205/Parguez.pdf). and Parguez, ten years ago was very caustic, talkin about Wray and others Chartalist works, in a paper written with Seccareccia.

    Probably, in my view, the critique and the debate should be focused more on differences between the Godley/Lavoie and MMT analysis of an open economy, current account deficit, imbalances etc. There is a difference (and I have yet to study a lot), and substantial considering what I’ve read.

    Anyway, great blog, thanks.

  40. To be more precise, I agree talkin about history or the chicken egg argument. But MMT has a perfect logic, in my view, talkin about spending that comes first.

  41. “Furthermore, if markets were truly considering repudiating the debt, then where is there any evidence of any meaningful default premia in US govt bonds?”

    I don’t recall ever saying markets were considering repudiating US bonds. On the whole, markets seem to feel comfortable with US solvency. They probably feel comfortable because of the future expected solidity of US tax payments.

    “First, like JKH says, it’s more about reflexive reassurance than needing to actually execute. That means the Fed shouldn’t have to execute much on this ability, if at all. It seems you believe the Fed needs to do this, say, every 10 years to establish a firm tradition for markets to believe it is a real force. I say the evidence shows otherwise, currently.”

    I agree there is some reflexivity at work, but the reflexive force initiated by the Fed acts just as much on the Treasury as it does on markets. Since the Fed has effectively threatened not to purchase government debt at fixed prices (1951 Accord) and has legally removed its government overdraft facility, the government is being told to constrain its various exploits, including wars, and keep a cap on the issues of debt necessary to fund them. Thus the US government has reflexively withheld itself from issuing more debt than it would have were the Fed to have promised some sort of backstop, and as a result the Treasury’s credit has remained pristine. This reflexive disciplining of the Treasury means that the Fed hasn’t had to carry through on its threat since 1951.

  42. @Hugo and wh10

    “Primary dealers should participate similarly in support of Treasury auctions: the New York Fed will expect a primary dealer to bid in every auction, for, at a minimum, an amount of securities representing its pro rata share, based on the number of primary dealers at the time of the auction, of the offered amount. Its bid prices should be reasonable when compared to the range of rates trading in the when-issued market, taking into account market volatility and other risk factors.”

    I ‘m not aware of any failed auctions in the USA. I think you ‘re confusing the case with UK where there have been failed auctions.

  43. JP,

    The only way I can make sense of your hypothesis is if I believe the bond markets are more irrational than rational. Here’s why I think that.

    What does ‘the future expected solidity of US tax payments’ mean?

    The vast majority of US history, we’ve run deficits. That means tax payments have never been enough to ‘pay back the debt.’ For example, if we issue $100 in bonds this year, to ‘pay that back’ through taxes means the next year we need to run a surplus of $100. The country has never run its finances this way, and all predictions going forward indicate deficits will grow to unforeseen levels. And I won’t even argue why it’d be a terrible decision to run it that way.

    So that means the bond market is always exposed to a situation where taxes aren’t enough to pay them back. That means the market needs to have collective confidence that either it will arbitrarily keep purchasing bonds or if things get spooky, the Fed or Treasury will step in.

    So, I therefore struggle with your reflexivity hypothesis, because it doesn’t adequately address my point above that whenever you’re in the territory of net deficits (and the Accord hasn’t changed this), the bond market is exposed to inadequate funding from taxes and thus default risk. That means, in a rational world, the market *must* believe there is a buyer of last resort.

    If they truly do not, that means they are subscribing to the arbitrary belief that markets will simply keep returning to the auction despite real default risk (given the history of spending always exceeding tax payments). Furthermore, that default risk is simply at the whim of the market, and fundamentally, *nothing changes at one debt level vs another that economically reduces the market’s capability to purchase the debt.*

    That last sentence means that if your argument is true, that the Accord reduces the amount of debt that would have been otherwise issued and has made the Treasury appear more creditworthy, then the Accord provides an irrational sense of security to markets.

    As for how I view the Accord, nothing in it suggests to me that the Fed has precluded itself from fixing rates in the future if it deems it appropriate. It appears what happened was that the Fed didn’t think it was a good policy decision *at the time* and *didn’t want to be forced into doing it by the Treasury at the time.* Note, the Fed has come close to fixing rates recently, showing their brazenness with QE, which they expressed was intended to affect rates, even though it barely did this at all.

    Most importantly, there is the very strong legal argument that if the Govt took this to the courts, it would win this one over the Fed.

    —–

    Kostas, it says the Fed will ‘expect.’ No guarantees, but good enough to work 99%+ of the time it seems. I’m just going off of what Fullwiler said. If an MMTer, of all people, says there have been failures, and there could be, then I trust him. What happened in the UK and why?

  44. Let me summarize.

    -If there is no belief in a buyer of last resort, then default is at the whim of the markets. This is Lavoie’s and Fullwiler’s point, and it is what we are seeing in the EZ.

    -There is no rational reason for the market to decide that default is coming at say, 10% debt:GDP vs 200% debt:GDP. The market can always fund it at either level if it wants to. There’s no hard threshold. It’s a whim. A spook.

    -Thus, if the Accord has done anything for the market’s perception of US solvency along the lines of it restraining how much the US spends, it’s providing an irrational sense of security. In reality, it hasn’t changed anything fundamentally in terms of the market’s ability to afford buying the debt.

    Now, I suppose this could all be true. We will only know if at some point the market’s arbitrarily decide to start driving up interest rates to default worry like levels (in absence of expectations of FFR hikes or threats regarding Congress preventing debt auctions a la debt ceiling). If it escalates like in the EZ, then we will see what the US govt decides to do, and how that impact’s mkt behavior going forward. We always have the choice to step in. That is MMT’s point, not that the world necessarily works strong form vs weak form. Fullwiler said straight out a weak form / white pole default outcome is possible.

  45. I guess that wasn’t the best summary. Looks better if you ignore the last paragraph, but there I am conceding you victory.

  46. Let me just add though, this makes me realize why MMT is so big on what’s special about the capabilities inherent in the strong to weak form cases, as opposed to countries that aren’t in that set up since they are not monetarily sovereign.

    Because from a predictive standpoint, in the history of the world, I don’t think anyone has ever identified any examples of countries with a fiat floating rate non-convertible currency (which the strong, semi-strong, and weak form all qualify as) that suffered a financial crisis arising from debt default. If this has happened, they are dwarfed by the examples of nations that run pegs or do not have the proper institutional set up for monetary sovereignty (like the EZ, though even they haven’t yet defaulted). And if those examples exist, then it was always a choice to default, not a necessity.

  47. Scott: “Suggesting that MMT says “state money comes first” or something like that is a gross misrepresentation”

    Well, “spending comes first” is all over the place including this post/thread. History is full of opposite examples, i.e. that money c*A*me first and government borrowed to spend. Probably not always. But even ONE single historical case is enough to ridicule MMT. You just kill your own golden goose 🙂 And there is not just ONE example but MANY if not majority.

    Instead of wasting gigawatts of energy trying to prove unprovable, I guess, it would be more productive to spend this energy on investigating whether current account imbalances in a floating regime are really so harmless as most MMTers claim. I have serious doubts they are and I have serious doubts it is even a sensible position to even *try* to check in real life whether they really are.

    ps. Ramanan, you have won me on this 🙂 I might not be fully supporting your arguments but you seeded the doubts .

  48. Sergei, you are still not getting it because you aren’t thinking in a rigorous, nuanced, and scientific manner.

    “State money comes first” does not “equal spending comes first.” Furthermore, the latter is a theoretical, general construct, from which other real world cases can be derived. MMT doesn’t purport the general construct is reality, but it uses it as part of the explanation for why specific cases can function in the same manner as the general case. However, even Fullwiler’s viewpoint is that the emphasis on spending coming first is overdone and not necessary.

  49. Now, I have a doubt.

    I have read 5 or 6 papers by Prof. Fullwiler, by Prof. Wray, the classic by Stephanie Bell/Kelton on the issue. I’ve never read something that looks like “Treasury spends first and after – in a chronological sense – issues bonds”.

    Could someone indicate to me some official (official means academic documents, where the author hasn’t an informal purpose like in a blog) paper where MMT authors say something like the statement above?

    Thanks

  50. Scott: EXACTLY.

    Lol. Overdone? Overblown out of any proportions. Get over it and FORGET! Noone is interested in general cases. If the public needs stories about sex – tell it them. But do not bother with high matters which DO NOT MATTER.

  51. “Lol. Overdone? Overblown out of any proportions. Get over it and FORGET! Noone is interested in general cases. If the public needs stories about sex – tell it them. But do not bother with high matters which DO NOT MATTER.”

    clearly, people are interested in general cases. but the rest of the above statement is gibberish

  52. Thanks to everyone who has participated in the discussion. Special thanks to Scott for clarifying his position in this and the earlier thread on the Lavoie paper, and to JKH for the link to his contributions at Winterspeak, which I am following closely. For me personally, wh10 and Neil have also helped a lot to clarify matters, and many others have made helpful contributions. I think the discussion (still going at Winterspeak) is very healthy. Cheers.

  53. “clearly, people are interested in general cases.”

    The general case, as per history of this civilization, is that government is a borrower.

    It is more important to argue why governments borrowed and *still*borrow* rather than to say that in a fiat with floating rates governments do not need to borrow and anyways spending comes first. There have been a couple of threads on moslers where people *in* the paradigm clearly oppose the no-need-to-issue-bonds or whether people have a right for risk-free savings. So what do we really argue about? Or is it a part of the hidden MMT ideology? This is a way more important point to educate than who spends first and that there are useless operational constraints. When MMTers come and say that it is a self-imposed, not needed, free-lunch etc. normal people say these guys are nuts. People everywhere see inflation as a tax imposed by the government. There are not operational constraints. These are political requirements! And that is why MMT will NOT be able to popularize *its* self-made general case. It is a self-made political story with a hidden agenda. And if I imagine that there is a chance to get an MMT government and I need to vote, then I am not sure who gets my vote.

  54. Sergei,

    “ps. Ramanan, you have won me on this I might not be fully supporting your arguments but you seeded the doubts .”

    Thanks!

  55. Sergei,

    When you actually try and understand MMT instead of completely misrepresenting it and repeatedly labeling it to be “ideology” (which is interesting, since the key discussants–JKH, Lavoie, etc.–have acknowledged complete agreement with MMT’s explanation of how things work while simply having disagreements with the presentation), then I will be happy to engage in discussion.

    Best,
    Scott

  56. @ Scott Fullwiler,

    After reading this article:

    http://app.ny.frb.org/research/current_issues/ci15-4.pdf

    I understand that before March 16 2008, when the Fed created Primary Dealer Credit Facility (PDCF), primary dealers relied on repo market for financing – horizontal money (leveraged vertical money).

    In this regard shouldn’t Step A from your paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1825303 also include primary dealers borrow from banks or other private sector repo market participants the funds necessary for the purchase of treasury securities from the Treasury?
    It doesn’t change anything in your paper’s conclusions as the Fed will automatically cover the overdrafts of the bank-lender’s account at the Fed with a loan when the Treasury account at the Fed is credited after the primary dealers bought the treasury securities from the Treasury.

    How the primary dealers make profit from their business, by reselling the treasuries on higher price then the one they paid for them from the Treasury?

  57. Sergei,

    “Free Lunch”: I dont think MMTers look at Govt bonds and the interest they pay as the ‘free lunch’ per se. Warren I believe advocates for only short term bonds to be issued (<90 days), but this is still Treasury Securities being issued.

    Perhaps the MMT 'opposition ' to a 'free lunch' you perceive is in and around the "Dealer" function. This seems like a "free lunch" type of thing (if the dealers can even make a decent spread anymore).

    Here in the US, the Treasury Direct program continues to grow, cutting into the volume that the Dealers have traditionally handled. This TD program gets ever closer to a Direct Public Offering the more % volume of the auctions it continues to absorb. At some point Treasury will have to overhaul the arrangements even if they and the dealers are in denial right now.

    So it may be not that the Dealers are feeling pressure from the opponents of a "free lunch", they need to just realize that this is life with the IT systems now available; the necessity for Dealers is naturally eroding with the ability of the general public to interface with the Treasury directly, without the need for dealers. Same with Amazon vs brick and mortar retailers, etc.

    I saw Bill Mitchell give a talk one time where he relayed the story where a few years back, the AUS Treasury went into a surplus for a time so of course volume for the AUS treasury/derivatives Dealers collapsed; Bill said the Dealers lobby went in and got the govt to actually issue securities for balances that were not even needed in the Treasury account. This I believe is the "free lunch" type of thing that is complained about from the MMT side.

    It would be best if representatives of the big Dealer banks (perhaps you are one) face the facts and come up with a game plan to operate in a world that is changing. The 'internet' is forcing all of us to change the way we do business and the Dealers are not exempt. This part of the traditional business is shrinking, you have to deal with it.

    Don't blame it on MMT. Resp,

  58. Matt, I do not blame MMT. I discovered it about 2 years ago and consider myself to be a convert. MMT has already helped me enormously to live my private as well as professional life. Full credit and respect for that!

    However, and I almost finished reading both threads on winterspeak, I completely agree with JKH: MMTers have serious presentation issues. It was easy for them to quickly convert the first x people but every additional mind will cost them more and more. And instead of slowly adjusting and/or improving their presentation skills (like make topic “sexier” as I mentioned above) MMTers tend to almost blindly stick to certain dogmas. As if these dogmas have lots of value, scientific or educational. That is why I mentioned ideology because as soon as any scholar starts showing such intellectual inflexibility then he start turning himself into an ideological machine.

    The obvious presentational issues of MMT are quite clear. For instance, after the Marshal’s longest certain aspects of even discussed here operational realities, I believe, have been adjusted (credit to anon). Next, Ramanan tried to draw attention to the issue of current account deficits but ended up being ridiculed for that by every MMTer and alike (including me, I have to add). But I personally slowly start to agree with him that current account is at least an important issue which clearly requires attention. Then Neil is asking questions regarding price versus volume expansion of production in fiscal stimulation mode. And so on. These are the questions which are almost ignored by MMTers but these are valid questions. After the first “oh my god” people start thinking and start asking tougher and tougher questions. But instead of standing up to the challenge MMTers try to stick to their lovely operational details of an idealized monetary system and to say that everybody else is evil and misrepresents them. Well, the problem is clear – they can not and probably DO NOT want to present themselves. And now I am not sure whether they have intellectual flexibility to adjust. Jeez, I do not care whether spending or taxing was first. It might have been an eye opener for me two years ago but today I need more. Sorry, this whole “problem” is a “self-imposed constraint” and has zero relevance for our *today* and our future. And I do not care whether it is a general or specific case that we live in. I want and need answers to questions that worry me. And what I get is endless repetitions of self-imposed truisms. Truisms which *can* be true in the dreamed up MMT world. And “can” does not mean “ought”. But we are not there. And getting there will be a complex and difficult process because we just can not start from a clean plate. We need to change what we already have and this is a very-very-very heavy baggage that we need to carry.

    I do not blame MMT. But saying that I do-not-try-to-understand MMT is a gross misrepresentation. This is an outright lie because I DO try to understand it and therefore looking for answers to questions. I do not care whether these questions are considered “convenient” by MMTers or not. That is their problem. But in response I only get an increasing frustration and endless, sorry, murmuring about something which they think is super-important but in reality of this world is quite irrelevant. MMTers a very smart people and should better direct their energy into higher value-adding issues rather than defending their pet topics.

  59. I have one question to those who want to harp on the “spending comes first” idea.

    How could it be any other way if at the end of the operation there are more NFAs in the economy? IOW if all govt spending is simply borrowed out of exisiting accounts, you are describing a simple zero sum operation that simply takes one guys savings and spends it to someone else but there is no net change in the amount of money. We know for a fact that all govt spending operations result in MORE money in the system. We do have rules which require this new spending to be offset with a new bond issue but the fact remains there are more NFAs after this operation than before. If there werent no one would be screaming about the inflationary affects of them.

    So its absolutely true to say the money is used to buy the new bonds actually is made available by the govt spending. Spending comes first in order for the money supply to grow.

  60. Sergei,

    “As if these dogmas have lots of value, scientific or educational.”

    Again, it’s not dogma. It is certainly a viewpoint, but as I explained at the very beginning of this thread, the “general” approach is grounded in how science is actually done, regardless what JKH thinks. In fact, I’m reading a book right now discussing various views from the academic field of psychology on cognitive process and every single viewpoint does exactly as MMT and exactly what JKH criticized–go out and look as best you can to get evidence on how things work, then move backward to a general viewpoint. EVERY SINGLE ONE OF THEM. That’s one of the key things scientists do.

    To argue against the fact that MMT has done this is to argue against science. It could very well be true that there is a better general view than MMT’s, but (a) that doesn’t invalidate MMT’s approach, and (b) that alternative had better be able to provide users with a simpler way to get at the very same and very impressive predictive success MMT has demonstrated over the past few decades. If someone can provide a general view that does this with fewer assumptions than MMT’s general view (which is what would be necessary to be simpler), than I’m all ears. Until then, this whole discussion–JKH included–has been less than impressive from a scientific viewpoint.

    If you have an intelligent response to this that does not include the words “dogma,” “ideology,” and similar words that are basically ad hominems, then please provide it. Otherwise, please shut up.

    Best,
    Scott

  61. Ryan,

    Thank you for the quesiton. You are correct. Please note that I made exactly this point in the parenthetical paragraph following point 4 on page 7.

    Best,
    Scott

  62. @Sergei,

    Addendum:

    I should not have told you to “shut up.” It is not my blog so not my prerogative in that regard. But, in my opinion, you have not contributed anything of substance to this discussion–you are doing precisely what you accuse MMT’ers of, which is being ideological and dogmatic, only in your case your ideology and dogmatism is just anti-MMT ideology, rather than pro-MMT ideology. Not very interesting.

  63. @Sergei,

    Now it’s my turn to have egg on the face. Rereading your response to Matt, I find it very thought provoking, honest, and engaging, so I am going to retract most of what I said. I do wish you would stop using the words “dogma” and “ideology,” though. It alienates us, just as you claim we alienate you, and then we find no reason to spend time writing a thoughtful response.

    Best,
    Scott

  64. Sorry for all the posts . . . thoughts are arriving incrementally rather than all at once.

    @Sergei

    Please understand where MMT’ers are coming from. We’ve been doing this for 20 years. We had already heard EVERY argument that has been levied against us on the blogs (and I mean ALL of them–I’ve never seen a new one, and I mean that honestly) many years before we ever started blogging in the academic literature, at conferences, and just in conversation with other economists. Even Lavoie’s paper offers nothing new, and I think he would admit that–his point was to do it in a more friendly way (as he is one of the nicest people anyone could meet), and also in recognition of our increasingly larger profile in the field due to the blogs.

    We didn’t find the arguments convincing then, and still do not–sometimes admittedly MMT’ers have written off such critics, but recognize that it’s the product of years of being treated far worse, in our view (even though that’s not an excuse for acting poorly). With the blog regulars that have disagreements, we’ve all expressed our views and cannot do more but agree to disagree; there’s no point continuously repeating the same disagreements. Those commenters might think of getting their own blogs and explaining clearly their own views with evidence and see where that goes; we don’t find much reason to respond to the same things from the same people repeatedly.

    Finally, where you see MMT “ideology,” we similarly see “anti-MMT ideology.” For instance, I have not seen an MMT’er refer to Ramanan’s disagreements with MMT explicitly in any blog or without instigation, but I have seen Ramanan post without instigation comments such as “MMT’ers are living in a dream world.” Similarly, the points Marc raises are, by and large in our view, misinterpretations of MMT that continue (“leverage” and “vertical,” for instance), and there’s also the far more blatant mirepresentation by the likes of Krugman, etc. And, again, we’ve had that stuff thrown at us for the better part of 20 years–it does tend to make one less interested in responding or offering a patient response.

    Best,
    Scott

  65. And I do not mean to imply that I have a problem with Ramanan. He and I agree on 90% of how things work, perhaps more. I consider him an ally, overall, and I’m continuously impressed with his knowledge and the amount of research he has done starting just a few years ago to learn how the monetary systems of the world function.

  66. “The “general” approach is grounded in how science is actually done … go out and look as best you can to get evidence on how things work, then move backward to a general viewpoint.”

    MMT’s choice of base case can be represented by institutional arrangements and rules. Rules include what is allowable in addition to what is not allowed. That choice of base case happens to make the separation of the Treasury function and the central bank function redundant. So I would consider it as a base case for exactly that – but not necessarily a base case for a central banking function, for example. Why shouldn’t the base case for a monetary system be anchored on the central bank? Who is to say it shouldn’t be? The answer depends on ideological orientation. The difference is that MMT assumes that an independent central banking function and a dependent Treasury function is an evil situation; so its choice of base case reflects the effective elimination of that dependency function. So MMT’s base case is particular to MMT. It is not necessarily a universal base case for a monetary system, other than in MMT’s chosen universe. MMT simply unravels those issues that form the basis of a base case that is anchored on the function of the central bank. Base cases are arguable depending on what you want your starting point to be. Given that any monetary system, actual or imagined, must have an institutional representation, I don’t consider choosing a representation that anchors a base case on the central bank function as one that is necessarily unscientific. There are definitive technocratic steps that can be taken to make the transition from the existing system to what MMT defines to be the base case. That proves to me that choosing the central bank as the base case anchor accommodates the desired flexibility to think about monetary system design. It accommodates transition to any other institutional choice. And apart from that, I’ve never criticized MMT’s choice of base case. What I’ve criticized is the implication that you can’t derive the base case from the current system just as easily as you can derive the current system from the base case. The choice of derivative and anti-derivative is completely discretionary, because the transformation is a commutative function. So the choice of base case is discretionary, depend on where you want to anchor you beliefs about monetary system design.

  67. JKH,

    Thank you for that.

    1. As you know, I’ve never personally invoked the consolidated tsy/cb view in my own research, and I consider my own research to be consistent with a sound methodological approach, so obviously I would not a priori “consider choosing a representation that anchors a base case on the central bank function as one that is necessarily unscientific.”

    2. Given 1, obviously the choice of base case is discretionary, but as in my original comment above, there are ways to determine which is better if criteria for such a selection can be agreed upon.

    3. The desire for “symmetry” is just as “ideological” as any choice MMT has made in its own selection. Again, refer to 2. In any event, I would find it rather easy to add relatively few assumptions to MMT’s general case and arrive at any real world monetary system including both cb and govt, and similarly from the latter remove such assumptions and return to the base case. That’s symmetry, too, in my view. And thus the selection of “which” symmetry is also “ideological.”

    4. Regarding this–“What I’ve criticized is the implication that you can’t derive the base case from the current system just as easily as you can derive the current system from the base case.” I’ve never seen such an implication made. Indeed, the MMT base case WAS derived from the current system, as I explained to Sergei above. The MMT argument is that there is a particular base case and that this base case is useful for then understanding real world monetary systems and doing policy analysis. Obviously, there is a preference for this particular base case, and I think it’s largely because it is seen as being “more general,” but beyond this I don’t know how to decide this one is better than, say, Lavoie’s without agreeing on normative criteria. My own research attempted to do exactly what you say we are against–derive the MMT base case by going out and looking at the real-world examples, but this time with a rigorous methodological approach. Mosler did the same–go read the autobiographical parts of his book; I’ve used it in class and it’s rather clear, in my view.

    5. The point I was mostly referring to earlier was a comment you made regarding how “illogical” or something like that it was to move from the real-world case backward to the general case. I can’t find the exact quote now, though, after looking for the past 10 minutes, so maybe I misinterpreted. Apologies if so.

    6. I find your desire to emphasize institutional detail (as I also have, as does MMT), and your desire to ignore hierarchy absolutely contradictory and irreconcilable. Where does institutional detail come from in the first place? And which details are more important?

    Best,
    Scott

  68. Forgot this one:

    “The difference is that MMT assumes that an independent central banking function and a dependent Treasury function is an evil situation; so its choice of base case reflects the effective elimination of that dependency function.”

    I think that’s completely wrong. Randy just wrote on his economonitor blog that he always assumed that Andrew Jackson’s choice to kill the US CB was wrong and only recently has begun to see it differently. The point is that–from the general case of a govt under flexible fx–the separation of CB and Tsy is seen as redundant and clouding one’s understanding on the true nature of a currency issuer under flexible fx. Policy wise it doesn’t matter if you consolidate or not if you design policy based on the appropriate understanding of a currency issuer. The point is always to understand this nature, not necessarily to get rid of the cb (again, Randy may be changing his view here).

    This is a bit like my paper on IOR from 2004–most interpreted it as though I was totally in favor of IOR, whereas my position on that seemed to me to be clearly agnostic, only emphasizing that if one understands IOR one can more readily understand monetary operations.

  69. Scott Fullwiler:

    “My own research attempted to do exactly what you say we are against–derive the MMT base case by going out and looking at the real-world examples, but this time with a rigorous methodological approach. Mosler did the same–go read the autobiographical parts of his book; I’ve used it in class and it’s rather clear, in my view.”

    Warren Mosler discovered MMT general case entirely from his everyday real life business experiences.

  70. Scott,

    Thanks. I’ll split this into several brief parts.

    First, I don’t think I’ve criticized your choice of base case per se. I did say I found it “awkward” to deal with, in the context of interpreting MMT overall. That personal awkwardness gives rise to my preference for a different anchor.

    Here are the two quotes that are most related. The second one is the one you were looking for. I don’t see why we need to be huge miles apart in this area. I think the choice of a base case has some reasonable discretion around it and it appears you may agree with that:

    http://www.winterspeak.com/2011/11/between-depression-and-hyperinflation.html?showComment=1322231347210#c1020045517784042520

    “It is not logically possible to present any interpretation of a monetary system that does not reference explicit institutional design assumptions. Monetary systems don’t exist without specific institutional design. In this regard, there are facts of actual prevailing design, and there are counterfactuals, and there are differences between those two things.

    It is certainly possible to design an institutional monetary configuration in which “the government neither has nor doesn’t have money”. But the existing system as it is designed does not have this property.

    I’d love to see MMT turned upside down in its expositional approach.”

    http://www.winterspeak.com/2011/11/between-depression-and-hyperinflation.html?showComment=1322322372504#c1084115006120991093

    “My impression is that the MMT model derives a “base case” by assuming (implicitly or explicitly) the elimination of such self-imposed constraints from the actual monetary system we now have. The consolidation meme tends to describe things implicitly as a reflection of that base case. On the other hand, Scott Fullwiler speaks explicitly of that sort of base case for monetary design.

    I find the specification of a “base case” which is itself the result of a backward structural derivation to be awkward logically. I’d prefer a model that starts with current operations, and treats adjustments to current constraints, operations, and institutions exactly for what they are – hypothesized changes to the current system. One can then deal with the economic consequences of the system we have in terms of probabilities for the feasibility of such hypothesized changes should they become desirable or necessary.”

  71. STF,

    “I find your desire to emphasize institutional detail (as I also have, as does MMT), and your desire to ignore hierarchy absolutely contradictory and irreconcilable”

    Sorry. No idea what you’re talking about there. How do you conclude I desire to ignore hierarchy?

  72. STF,

    “Policy wise it doesn’t matter if you consolidate or not if you design policy based on the appropriate understanding of a currency issuer. The point is always to understand this nature, not necessarily to get rid of the cb (again, Randy may be changing his view here).”

    Look closely. I didn’t say get rid of the CB. I said it gets rid of the dependency function. You can do that with overdraft under existing institutional arrangements. But if you go the overdraft route, you EFFECTIVELY eliminate the independent/dependent nexus of the existing institutional relationship.

    And you know my views on who I would like to classify as the currency issuer.

  73. “And you know my views on who I would like to classify as the currency issuer.”

    And that goes to my point on hierarchy. But I just went back to find a quote at Winterspeak’s and found your lengthy response from 7:44pm (it doesn’t say the date) and now I understand (finally! :)) that you do include hierarchy; the difference is you don’t use hierarchy to define who is the issuer and who is the user. You define those strictly tactically. I prefer the MMT approach to determine user vs. issuer in terms of hierarchy instead of tactics, Your explanation works, too, though–potato po-tah-to, as you said–as there is no non-normative way of choosing between those. My apologies for the earlier misunderstanding–I thought your initial contributions were suggesting you were ignoring hierarchy altogether.

  74. “Look closely. I didn’t say get rid of the CB. I said it gets rid of the dependency function. You can do that with overdraft under existing institutional arrangements. But if you go the overdraft route, you EFFECTIVELY eliminate the independent/dependent nexus of the existing institutional relationship.”

    Yes, of course. I was referring to the MMT view of consolidation–it’s a mental construct for understanding what we call the currency issuer, not necessarily a policy proposal. As you note, you can get to any MMT policy proposal without actually consolidating (which may be why I never have done the latter).

  75. Ryan,

    Yes, exactly, which involved trading in sovereign govt bonds, and thus undersatnding how operations worked in each of those countries. That came before the general view, necessarily.

  76. Scott,

    “You do include hierarchy; the difference is you don’t use hierarchy to define who is the issuer and who is the user. You define those strictly tactically. I prefer the MMT approach to determine user vs. issuer in terms of hierarchy instead of tactics, Your explanation works, too, though–potato po-tah-to, as you said–as there is no non-normative way of choosing between those.”

    Excellent.

    Let me just add that I would describe what I do a bit differently than “hierarchy instead of tactics”, although I recognize that as your language framework from “operational realities” et al.

    In fact, I think I use hierarchy. It’s just that I locate the anchor below the top level of the hierarchy. I anchor it as the definition of currency issuer at the level of the Fed and the ECB, and then try and develop a symmetric framework for the crucial authorities that supervise the Fed and the ECB. The authority over the Fed is simple and single sovereign. The authority over the ECB is complex, multi-sovereign, bureaucratically cumbersome, and in dynamic development as we debate. But it exists as a force.

    I think we agree on a lot more than we yet know.

    Finally, it is possible that Tractatus-Logico-MMT can accommodate the flexibility of different views on a friendly basis of mutual understanding:

    http://www.winterspeak.com/2011/11/to-read.html?showComment=1322950940222#c4835567683186328359

  77. JKH,

    “I’d prefer a model that starts with current operations, and treats adjustments to current constraints, operations, and institutions exactly for what they are – hypothesized changes to the current system.”

    This is probably more related to the different audiences we are working with. I am concerned with designing a framework consistent with the way economists build them. The “general vs. specific” does that; your approach is not. At the same time, that does not mean that general = consolidated cb/Tsy. As I’ve said, I’ve never used that, and my own approach also places a premium on institutional detail. At any rate, I know this world, and my view is the general/special works better if explicitly defined (and it hasn’t been, in my view, aside from my small attempt) and the two are not mashed together unknowingly. An example of what I would do here might be a Tsy operations version of my “general principles of modern cb operations” paper–having not written such a paper yet, I may yet find that I come down more near Marc’s preferred description, but I wouldn’t know until I actually do it.

    On the other hand, your approach might be the sort of approach for non-economists that have some professional link to the subject. These are the individuals that know enough to cringe at some of the highly general things some MMT’ers say or write, particularly when it is not made clear that the perspective is the general one (though it’s understandable if everyone finds that cringeworthy). I’m thinking here of folks like RebelEconomist that clearly understand operations, but also the typical commentator at Cullen’s blog that works in moderately close proximity to the subject matter. People like Sergei, too (though I don’t know his background)–he clearly has no use for a “general” model and would seem to clearly prefer the sort of approach you take.

    I’m not exactly sure what to do about everyone else–the lay public, non-experts and those whose professions aren’t related that visit the blogs, and students taking economics 101. But I don’t pretend to have that as my specialty.

    Unfortunately, if anything, I just one-upped Tom and suggested that we actually need three or more different “frames.” I’m going to have to shut up before it gets worse.

    Thankfully, Tom was wrong about 1 thing–we do understand the normative nature of evaluating these frames. As I explained above to Sergei, the MMT defensiveness Marc describes has more to do with a perception that we were being marginalized even by our own kind (Post Keynesians) for 15+ years. There’s been a distinct “us against the world” feel to MMT’ers for most of that entire period, and it’s generally carried over into the blogosphere, though some like Warren don’t seem to allow anything to phase them.

  78. I like where this has arrived, including Scott’s acknowledgment that other MMTers should be more explicit about when they invoke general vs. specific, the potential usefulness of JKH’s framework, and that multiple frameworks may be needed for different audiences.

    “The “general vs. specific” does that; your approach is not. At the same time, that does not mean that general = consolidated cb/Tsy.”

    Are you saying that in the world of academia, the general v specific approach is more appropriate than explicitly using the real world as the starting point from which to make other derivations? So ‘specific’ and ‘general’ can be defined as whatever, but that is the framework that should be used?

  79. “We do have rules which require this new spending to be offset with a new bond issue”

    Bonds are just as much money as bank reserves. They are another thing that is embodied with traditional mystical powers that turn out not to be the case in a modern credit system and they should simply be scrapped.

  80. “This is probably more related to the different audiences we are working with. ”

    That is the key point IMV. The economists have to talk to the economic audience – generally the academic one. I’ve already seen Steve Keen take quotes from Warren’s 7DIF book as evidence that MMT is wrong, when that book is clearly a heavy simplification for general consumption.

    What is happening now is that that the general MMT and wider Post Keynesian theories are being morphed into a number of political positions. That has to happen, and it requires a completely different angle.

    In other words the marketing people have to be allowed to create a version of the model for best presentation. That means the language will change and the definition of the words will change from the scientific to the vernacular.

    So all these versions that are being created are correct, and actually all you need to do is show that one can be transformed into the other via a series of standard transactions. Generally via a set of write backs or write outs in the accounts.

    If you can do that then they are just different views of the same model constructed for different audiences – the economists, the bankers, the right, the left, the centre, the public, etc.

  81. Scott,

    This has been very useful, IMO. One of the problems with the existence of multiple different interpretations for one subject is that it’s quite difficult to focus on any particular one of them that’s different from one’s own way of looking at, when you know there are even more of them swimming around in the sea. The mere presence of these competing creatures can be distracting. For example, I’ve probably been guilty of not thinking hard enough about your general/special presentation, because you do make it pretty explicit. But I’ve found it difficult to focus on it properly when I’ve got “neither has nor doesn’t have” ringing in my ears. And then I have my own way of looking at. So I agree with wh10 and Neil in that there is in effect a likely menu of interpretive paradigms (although Mosler wouldn’t like the plural use of paradigm there). All that said, I think it’s only respectful that your own view be the official epicentre of interpretation, with planets orbiting, if that’s the case.

    I think it would be good if some taxonomy of these views were to develop gradually over time. And while it should be possible to develop an effective version for main street consumption, I’m not sure the full suite of alternative interpretations would turn out to be so simple. And there may not be anything wrong with that. In fact it may be the right way to go. Understanding the complexity of the thing in its entirety may help to create the most effective version for main street consumption. Now if that version is already deemed to be the 7, so be it. But that’s a declaration of mission accomplished that MMT has to be satisfied with. Or is the 7 both an arrival and departure point on the journey? Over at the Wittgenstein branch office of MMT, Tom Hickey seems to have his doubts that he has exactly what needs for his purpose. (Sorry Tom, just can’t resist some fun with that meme.)

    I found it quite interesting that Lavoie correctly describes the same superstructure for MMT that STF documents as an MMT’er – two components, reflecting monetary operations and policy. MMT tends to emphasize its belief that the monetary operations component is ideologically neutral. In sympathy with that belief, I’ve heard Mosler a few times express the connection between the two components along the lines that the monetary operations component opens up possibilities for the policy sphere, and that there is no preconceived ideology that is implied in such policy sphere choices. At the same, I think it’s reasonable to say that the actual ideological orientation of the MMT leadership group is “left leaning”. Now it may be the case that I’m not being perfectly accurate or correct in using a sweeping “left” description here, but I think the drift is fairly reflective of such a policy orientation for the most part.

    Given the largely “left wing” lean of MMT blogs that have grown in number over time, I’d say there’s a risk that a dual barrel MMT may have become too big to be manageable. Beneath the surface, this may have something to do with the stuff of the communication challenge, as well as the criticisms of Lavoie, although the effect if it exists is probably subliminal more than overt. I’m not sure my own analysis of form per se has that much to do directly with ideological influence, but I suppose it’s possible in an indirect way.

    For Tom’s purpose, I see advantages in general humanistic terms to understanding how the monetary system works – understanding one component in order to market the second. But I’m not sure that this is an important requirement for his key message. Is an assumption about the neutrality of a description of monetary operations actually required for the purpose of marketing a left leaning policy? Why would monetary description neutrality even be interesting for that purpose? What is the benefit, given the tilt of the policy message?

    I have to admit that when I analyze anything in MMT, I really don’t think much about the issue of differentiating the economics profession from the rest of world. I think about describing something in terms that are hopefully as accurate and unambiguous as possible. But that purpose should apply to economists and non economists. That said, the full category of interested economists or non economists can’t overlap that heavily with Tom’s target audience. Most O movement people are not burning the midnight oil studying monetary operations.

    So I think the suite of audiences is potentially complex.

  82. “”Be paying, then, Caesar’s to Caesar” – Mat 22:21

    Caesar wasn’t simply the Chairman of the Roman CB.

    Resp,

  83. JKH, WH10, Neil

    Thanks! Very helpful.

    Regarding “general vs. specific,” think of Rowe. He can’t engage in a conversation at all until there is a “general” model he can put into something he already understands. I’m not criticizing, just pointing out. The Krugman’s and Delong’s similarly repeatedly misinterpret because there is not a clear general framework that they can readily interpret from their own backgrounds. Tom may be right, though, it may be not possible, but my point is academics learn in general frameworks.

    The difference from my own perspective–systems theory and the social fabric matrix–is that the “general framework” has been an approach to going out and looking, rather than an actual model of some part of the world; this enables me to go out and look first, then from that develop a general model. This is not the usual approach in the mainstream of economics, which is largely deductive from “first principles” of assumed behavior (‘utility maximization’) and some basic market structure (perfect competition, etc.–all the stuff Keen critiques).

  84. Lastly, I do think that with the different frames it should be clear to those that care how one can rather easily go back and forth between them. That’s a must, particulary given complexity. As my dissertation advisor said, though, “seek complexity and order it.”

  85. @ Scott Fullwiler

    You did great job in revealing and ordering the complex moves in religious-like dance of US deficit spending today step by step – thank you very much! Case closed.

  86. Ram,

    “The university administration, which had heard about the planned protest, sent several police officers to sit in my class for the day as a precautionary measure. Luckily, they weren’t needed.

    “Luckily, they weren’t needed.” LOL! Poor baby! Moron.

    Resp,

  87. Those based in economics that are unable to grasp the operational realities of MMT as Scott explains are unable to look outside their own paradigm of models (which Scott also explains).

    If I was to use political ideology I would call this conservative (status quo) – wants things to stay the same – and that’s usually because they receive monetary rewards for that view.

    Oddly enough I could call MMT conservative as well (status quo ante – the way things were before 1945-1974). Admittedly it wasn’t exactly sovereign fiat.

    I recently saw a tweet from an econ PHD student that seems to sum up the way mainstream economics looks today and it seemed to me the student was defending that (though it could be interpreted differently):

    “If I see one more person criticise economic models because they don’t include every detail of every single thing, I’m going to throw down. The model is not supposed to replicate reality, it is supposed to isolate the key mechanics that drive an observed phenomenon.”

  88. Senexx,

    I would argue that the tweeter is confusing applicability with general vs. specific. A general model does not need to have all the details of the real world in it, and indeed cannot, but the details it does have must provide insight into the workings of the real-world to the degree that adding some detail in a non-ad hoc manner gets you pretty close to the real world without changing the nature of the general model or its core conclusions.

    On the other hand, a general or even specific model can be inapplicable, for instance where a model intended to describe a gold standard monetary system is used to understand a flexible exchange rate monetary system. In this case, the problem is not “not including every detail” but rather not including the details that matter for understanding the nature of the system and enabling better predictions.

  89. Scott says in his primer:

    “At its core, there are two parts to MMT. The first is a description of how the monetary system actually works, mostly focusing upon interactions between the central bank, the treasury, and the financial system, though this part also requires a very thorough understanding of the Minskyan-related literature of many MMT’ers (I note this because so many critics of MMT ignore or not aware of the vast MMT literature on financial instability and reforming the financial system). The second is a set of policy proposals that arise from this description and is largely outside the scope of this particular post but which can be found in any number of MMT publications and blogposts (and, again, including the sizeable MMT literature on reforming the financial system).”

    Its one thing to observe that one could easily use the MMT monetary description to argue for right wing oriented military spending and tax cuts for the rich. It’s quite another to suggest that MMT’s own policy proposals or policy orientation favours this. I’d say the test of the thesis of this post is the latter rather than the former. In that regard, I’d look to the views of MMT leadership. With the possible exception of Warren Mosler, and given the assigned task of choosing between left or right, I’d say the leadership is left oriented, and this shows up “in any number of MMT publications and blogposts.” Is that not a reasonably accurate assessment?

  90. I’d probably agree, but what are we arguing about, why does it matter, and how does it affect the descriptive element of MMT?

  91. Scott, that’s why I like the MMT terms, operational realities – which if I’ve got it right is the general case and then the specific case is overlaid with the institutional and legal rules.

    I note non-professional MMT advocates see the general case as the goose that laid the golden eggs though

  92. JKH, perhaps it is not altogether surprising that you initially put your response here. My post started out as a response to Senexx in this thread (December 5:53 AM) but turned into a new post. I have responded to your comment in the other thread, but since others have also engaged with your comment here, I will leave it in both threads. Cheers.

  93. @ Scott fullwiler

    I forgot to ask one thing before closing the case. 🙂

    What happens when primary dealers or anybody else from private sector, for some reason, don’t want to buy the new treasury securities and don’t start and participate in the repo operation in step A of your paper ? No repo operation, failed auction for new treasury securities leading to empty Treasury account at the Fed, leading to inability for net government spending?

    I don’t know if this question was answered.

  94. Ryan-

    My understanding is that there is no economic reason for this to happen as long as all those investors can get funding to buy the treasuries. If they know the Fed is willing to defend interest rates, by buying in the secondary mkt if necessary, then they will profit by bidding interest rates down to the risk free rate (or where they think the Fed will defend rates).

  95. Thanks, Senexx. I did take that to be your meaning. I agree with you. I think, though, that I may have created confusion in the subsequent post by not being clear enough in what I meant by “MMT”. I have put up a new post trying to spell out my thinking on the matter. It seems likely, judging from the comments, that my current conception of MMT is not shared by everyone.

Comments are closed.