Embedded Files
Student debt (September 1, 2023)
Why can't we solve the student debt tragedy with a trillion dollar coin?
Let Biden bring one on stage, lose it there at a moment of absent-mindedness, only to be found by a representative of the student debtors.
Voilà.
Lags of monetary policy (August 10, 2023)
Actually the stylized facts before Covid (maybe even before 2008) were that monetary policy starts having an impact after 6 months, peaks after another 6 months, and disappears after another year.
The logic of trillion-$-coin / MMT (August 9, 2023)
There is an empirical consensus about how hyperinflation happens:
There is a huge crisis, such as a war, followed by a decision to print lots of money, resulting in hyperinlation.
Mainstream economists argue that this is the seqence because sane governments don't hyper-print for fun. They do so only in emergencies.
MMT says (#4b): If we hyper-print without a huge crisis then there won't be hyperinflation.
So it's the crisis that causes hyperinflation, not the printing... Amazing.
MMT and the Congressional Budget Office (August 3, 2023)
If the CBO misses so much in predicting debt/GDP, imagine Congress relying exclusively on its inflation predictions for post-Fed monetary policy.
That's what MMT wants.
Useful idiots (July 16, 2023)
MMT in a nutshell.
Today: Do-gooders.
Tomorrow: Some tyrant's useful idiots.
Different readings of "The Deficit Myth" by Stephanie Kelton (July 7, 2023)
A tale of two disciplines (July 2, 2023)
MMT: 97% of scientists say climate change is real and is our fault. So we should print as much money as needed to pay for the Green New Deal & kill fossil fuels. It's 97%! We must respect the majority of experts.
97% of economists to MMT: You are wrong.
Wrong column (June 28, 2023)
How do I upset both MMT and bitcoin maximalists? (June 25, 2023)
I observe two empirical regularities:
1. Today what functions as money depends mostly on government (I think because legal tender for taxes).
2. Money affects prices.
The MMT road to serfdom (June 20, 2023)
1. Flood an economy with money; claim it won't cause inflation.
2. Watch profit-maximizing firms raise prices (because buyers can pay them).
3. Before wages adjust, document higher profits.
4. Blame greed for inflation.
5. Control some prices.
6. Repeat.
The dark side of the monetary force (June 13, 2023)
So MMT convinced you that we must accept modern (gold-free) money because we must pay taxes with it.
Does it mean MMT is correct in general? No. You now possess the force of understanding why governments can so easily create inflation.
Don't use this force to create inflation.
dark MMT.mp4Adam Smith at 300 (June 5, 2023)
Adam Smith, born exactly 300 years ago, knew why legal tender status was important.
When government declares only one currency to be legal tender for taxes, it controls taxpayers' exchange: They usually must obtain this currency in trade to pay taxes.
MMT: That's awesome! That's how the government gets taxpayers by the balls and can print as much as it wants.
Me: That's terrible. That's how we get high inflation.
Killing inflation - and the private economy (May 11, 2023)
Money affects prices only when buyers take it to shops, so the idea below will work.
But it's a terrible idea, just like MMT's price & wage controls and rationing. Some people will do anything to crowd out the private economy and give more room to the wise, benevolent public spender.
How about a zillion-dollar platinum coin? (May 10, 2023)
MMT is becoming greedy. Now they want a $100 trillion platinum coin.
How silly and uninspring: A $1Z (zillion) coin would solve all our problems forever.
It is perfectly legal since the platinum coin law gives the Treasury the authority to determine the denomination. The Treasury can put a "zillion" on the coin, because it's a proper word in English. Then the Treasury will deposit it at the Fed and withdraw any amount of money it wants, forever. Why? Because "zillion" is not well-defined, the Treasury can always claim that the limit was not yet reached.
What does MMT have in common with AI alarmism? (April 11, 2023)
There is a similarity between areligious warnings of hell and promises of heaven:
Lessons from the money changers in the Temple: An Easter special (April 9, 2023)
A special Easter thread on the complicated relation between money and taxes, as exemplified by the money changers in the Temple.
According to the state theory of money / chartalism / cartalism / tax-foundation theory, a government can make an object circulate as money by accepting it for its own taxes.
The Jewish Temple in Jerusalem showed the limitations of this mechanism.
Jewish law required high-quality silver coins for the Temple tax. Coins of the Roman occupation didn't qualify. Only shekels from Tyre were.
Contrary to theory, shekels were not currency in Judea, so money changers in the Temple converted taxpayers' Roman coins to shekels just before the tax was paid.
Theory failed because:
A. The Temple tax was too small and infrequent.
B. Perhaps shekel supply was too low.
C. The economy was dominated by Roman taxes that required Roman coins ("render to Caesar" etc. was said in this exact context).
The lessons:
1. An object is legal tender for taxes? NOT guaranteed to have circulation. Sorry MMT.
2. Welfare state's huge taxes strengthen MMT's (risky) potential.
Price controls coming soon? (March 27, 2023)
That's what MMT plans for you after it floods the economy with money.
Price controls can only fight officially-measured inflation. The excess money will be used in a huge underground economy that will immediately develop.
Welcome to the USSR.
MMT's endgame: Is it communism? (March 20, 2023)
MMT's endgame: Heaven, hyperinflation, or ... communism?
The latter could happen inadvertently as the MMT plan unfolds.
Here are the stages:
Initially, the Fed is eliminated and Congress legislates the printing of new money to solve all the world's problems.
Politicians ignore the CBO's inflation warnings, because they can, and because they have a society and a planet to save. No political will for the huge taxes that could offset the money increase.
So inflation skyrockets. Congress doesn't cut its spending (=kill the planet)
but with inflation realized now there is a political will for enormous taxes to fight it.
Private demand - a nuisance - is reduced also by "regulation": general rationing, and prohibition of fossil fuels and farting livestock.
Price controls prevent inflation artificially.
To summarize:
- Massive expropriation.
- Rationing.
- Price controls.
- One of the largest expenses, a Job Guarantee program, makes the government the largest owner of means of production.
So: USA or USSR?
* All ingredients are in Kelton's writings, e.g., this endnote in her book:
Does China need MMT? (March 14, 2023)
The book whose subtitle ends with "the people's economy" might sell well in "The People's Republic."
China will be reminded of its old days, when private sector was considered a nuisance, government projects commanded all resources, 0 official unemployment, prices controlled, and goods rationed.
Is MMT serious about inflation? (February 26, 2023)
MMT’s worries about inflation are highly insufficient in my opinion. I’m not sure they amount to more than lip service:
1. Kelton's book has almost no explanation - in 2020 to Millennials who till then never saw inflation - of why inflation is even a problem. Now they know. Kelton mentions possible erosion of real wages. That’s all she says about the silent destroyer of societies - as claimed by Keynes, Copernicus, Friedman and others. The ratio of MMT’s potential heaven to inflation woes in Kelton's book, in number of pages, is something like 100:1.
2. MMT says in some places that taxes will take money out of the economy to prevent inflation, but in other places that money doesn't even cause inflation. Doesn’t seem to be consistent.
3. Most economists, say 97%, see that denial of the money-inflation relation just like MMT sees a denial of climate change (97% of scientists, right?). How can MMT be trusted to prevent inflation if it doesn’t recognize this relation?
4. MMT relies on the Congressional Budget Office to tell politicians if their budgets will create inflation. Why should CBO economists succeed where hundreds of Fed economists failed in predicting the current inflation? What if the CBO is politicized? Why trust politicians to listen to CBO when they used the title "Inflation Reduction Act" when the CBO said it wouldn’t reduce inflation?
I'm not with MMT - because it starts correctly (February 23, 2023)
Modern money circulates because we must pay taxes with it. [correct]
Moreover, taxpayers must accept this money, no matter how much is printed. [correct]
Here we part.
MMT: What a great opportunity to print as much as we want in order to eliminate (not just reduce) all social and climatic problems. The hell with inflation, we have a planet and a human race to save.
Me: On the contrary, this money is extremely powerful and therefore dangerous. We need to be extremely prudent to avoid inflation, with constitutional devices like an independent central bank, a price stability mandate, etc.
The trillion-dollar ... greenback! (February 3, 2023)
The Treasury can issue a "United States Note" (originating in the Civil War greenback) and deposit it at its Fed account:
The law is here .
The restrictions there mean nothing:
1. The upper bound of $0.0003T is only for "outstanding AND in circulation." In the Fed's vault it is by definition not "in circulation."
2. True, can't use it as a "reserve," but no need to: It's just a deposited asset. That's totally different.
Bring back the greenback!
Once again, it shall save the Union.
* Satire
Inconsistence regarding Congress (January 30, 2023)
I read in "The Deficit Myth" that the people's Congress, rather than the Fed, needs to control money.
But now and then MMT wants to "Mint the Coin" (the trillion-dollar coin) to get around a problematic Congress.
How can Congress be the solution when often it is the problem?
Three central banks and one coin (January 29, 2023)
Why won't the Fed accept the trillion-dollar coin?
Because it will be suicidal: The next Republican Congress+President will end the Fed.
The US is the #1 central-bank slayer. No other country has ever killed two central banks. Killed, not replaced.
Here Richard Sylla shows me in 2012 the carcass of the 1st Bank of the United States in Philadelphia. The corpse of the 2nd Bank of the United States is nearby.
On the proposed trillion-dollar platinum coin (January 24, 2022)
Never underestimate a government's determination to pay its debt - in spite of legal constraints.
In 1690, Massachusetts was prohibited by England from issuing proper money so it did something equally unprecedented: It minted the debt itself. How?
Soldiers held named government bonds in large, non-round sums. The government converted them to bearer "bills" in small, round denominations. Both were legal tender for taxes; only the latter became money.
Inflation? No, taxes were raised in the same amount. Puritan discipline.
A key MMT "ramification" (October 26, 2022)
MMT, according to its white paper, is against “mainstream economic models and the rhetoric that states the US government must tax to get US dollars to spend”
be like:
"I can drive my car without a seatbelt!"
Yes, we know it's technically possible.
We also know it's irresponsible.
My only agreement with MMT: Taxes help money circulate (September 27-29, 2022)
For 50 years before bitcoin, monetary theorists (myself included) have used math to study the simplest possible objects: no intrinsic value, not supported by laws, fixed supply, easy storage and transfer, no theft or counterfeiting.
The similarity to bitcoin is striking. We studied the monetary potential of such objects for simplicity (less parameters and variables in models) and hoped they resembled money in reality.
Our findings about such bitcoin-like objects:
A. Such objects could be money.
B. Competition from state money is fatal for such objects.
A. Such objects could be money
Paul Samuelson, a brilliant mathematician but with a challenged view of reality, was the first to study such objects in 1958.
It took three more decades to show that such objects could be money within the solution concept known as Nash equilibrium: Kiyotaki and Wright (1989) proved there is a Nash equilibrium in which it is a best response to accept such an object as money if everyone else accepts it. But there is also a Nash equilibrium in which it is a best response not to accept such an object as money if everyone else rejects it.
Oddly, by that point, through sloppiness of earlier works by Keynes, Friedman, and others, this theoretical object acquired the misleading name "fiat money." There were no laws or government in these simplistic models to justify the term. Nobody was bothered by that. That was the terminology and anyone playing the game had to obey it. I worked with such models and the sorry terminology myself, as in this 2007 article in the Journal of Monetary Economics, later played by students in an experiment in this 2020 article published in the Journal of the European Economic Association.
B1. Competition with state money is fatal for such objects
I started graduate studies at the University of Rochester in 1997 and quickly got into this line of research. With a law degree at hand I thought it would be obvious to add a legal tender law to these simplistic models. If these objects are called "fiat money" let's make them real fiat money! So what is "fiat money" in English rather than in ivory-tower economics jargon? It means legal tender, as in the United States Code (Title 31, Section 5103):
"Legal tender" applies only to pre-existing monetary obligations denominated in the state's currency. It has nothing to say about spot transactions! Of all the obligations enumerated in the American legal tender law I chose to foucs on taxes. Taxes are not voluntary and the taxpayers cannot choose to avoid them or to denominate them in other units of account as they can with contracts. Taxes were mentioned by Adam smith in this exact context. Taxes were also mentioned by my father, a businessman, when I inquired why he did not abandon Israeli currency that suffered from 450% inflation.
So in 1998-2000 I worked, under the guidance of Per Krusell, on a mathematical model of money that included occasional tax payments that had to be paid in only one object and not others. It became chapter 1 of my 2002 dissertation.
This model evolved over time and eventually I reached the following findings:
By punishing those who don't have the legal tender object to pay taxes, the state can guarantee there is a Nash equilibrium with the legal tender object as money at the expense of all other objects.
The state can similarly eliminate all Nash equilibria in which the legal tender object is not money.
The mechanism is neutral with regard to the quantity of money: Doubling the quantity of money doubles the price level and therefore doubles the tax obligations, leaving the mechanism as strong as ever. This is how governments can create inflation without their currencies being abandoned.
Journals editors, referees, and other researchers in the field did not like this article. The most generous response was that this was irrelevant and not interesting. An editor in a leading journal said legal tender laws applied to all transactions, proving that he never read either the law or Friedman's classic works. A senior researcher in the field told me he could pay his taxes in chicken if he wanted to. I should have dared him to try it. More than anything I encountered animosity for polluting the pristine mathematical models with realistic assumptions.
Eventually, after 12 years, the article was published in 2012. This published version includes only competition between a legal tender object and barter. The editor took out of it the part in which the legal tender object competes with a bitcoin-like object and beats it. The full version is available here. It was eventually invited for publication, also in 2012, in this book. Editor Randall Wray and I agree that tax receivability maintains modern money but we totally disagree about policy implications. He is MMT. He celebrates state control of money for the effectiveness of proactive economic policies; I lament the state control of money because of its inflationary consequences.
The conclusion: In simplistic mathematical theory, the necessity to pay taxes in the state money is an enormous obstacle to competitors. It helps explaining why bitcoin can't beat the dollar or any other national currency that is not badly abused (inflated) by its government.
One caveat should be noted: the model is extremely simplistic. If taxpayers can better prepare for tax day (which in this model is random - for mathematical simplicity), results might change.
MMT (July 21, 2022)
"Modern Monetary Theory:" A pretentious, grossly inaccurate name for a theory.
How did it happen?
It is a theory about “modern money” – the money we all have since gold was ousted in 1971, money that was left only with a legal tender status for monetary obligations (most critically – taxes).
As far as I know, this accurate definition of “modern money” is by post-Keynesian Randall Wray, who published the books “Understanding Modern Money” (1998) and “Modern Money Theory” (2012).
I used this definition myself in a 2009 article.
Then someone added tar to Wray’s work and got “Modern Monetary Theory,” which has a very different meaning.
What's “modern monetary theory”? Literally - the body of knowledge prevalent among monetary theorists now. I innocently used that term in that sense in that 2009 paper.
But MMT is not that! Only a tiny fraction of economists subscribe to it.
Or perhaps the use of the term is a claim that all the other current monetary theories are antiquated? But economists have long ignored the defunt gold constraint as the 20th century progressed.
To summarize, the term “modern monetary theory” for that branch of post-Keynesianism makes as much sense as if the Soviet Trofim Lysenko named his unorthodox theory “modern agricultural theory.”
And, in my opinion, it is just as wrong.
MMT in action (July 14, 2022)
When a central bank adopts MMT: Sri Lanke collapses.
The first Bank of Israel law (1954) was modelled after Sri Lanka's central bank law, by IMF advice (also a small open economy with recent British rule).
Let's not follow them again!
MMT criticism (July 3-4, 2022)
Having celebrated the anniversary of ending Israel’s high inflation in 1985, let’s reflect on MMT.
MMT spokeswoman Stephanie Kelton’s checklist of all the social and climatic problems she wants to solve with printing money, reminds me of the overly-ambitious 1980s Israeli government, which expanded the welfare state, occupied half of terror-exporting Lebanon, developed a jet fighter, and bailed out all banks. That was MMT (pronounce 'mammoth') spending.
Thus I grew up with an inflation rate of 3%—per week.
So, MMT = inflation?
Inflation could be the least of our problems with MMT.
MMT is dangerous because it is NOT all wrong.
So let's consider it carefully:
MMT: The good, the bad, and the ugly.
Its starting point is right on the mark, but its policies are way off, economically and even morally.
THE GOOD:
MMT is correct that modern money circulates because government accepts it in taxes. That’s why gold isn't necessary, and that’s why private crypto fails. Adam Smith wrote about it, as did Charles Goodhart and myself.
Conclusion: Indeed, government CAN print as much as it wants, because anyone paying taxes will have to keep accepting it – even with high inflation.
The real dilemma is here: SHOULD government do it?
Mainstream economics (and me): No! Take power from politicians because they WOULD do so, and give it to an independent central bank committed to low inflation.
THE BAD:
MMT: Yes! Let’s party.
MMT did not learn the lessons of the 1960s and 1970s. The economy CAN’T be fine-tuned to full employment at all times. The result is inflation without increasing employment, as explained by John Cochrane.
THE UGLY:
Knowing that mammoth government spending means inflation, MMT will resort to price controls, and rationing to crowd out the private economy. A note from Kelton's book:
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