I was eavesdropping on a conversation about Credit Writedowns on another blog (Pragmatic Capitalism) and wanted to share some of my thoughts with you on the conversation.
One commenter, Mattay said:
Harrison is an MMTer. As I read him, he is making what amounts to a “moral” case that we should call QE “money printing” because it does not have any positive effects. But by inflating a temporary bubble, it has had negative effects, most of which are borne by ordinary citizens rather than well informed investors who realized that it was a bubble. But he’s not materially disagreeing with anything I have read here (found this blog a few weeks ago, great stuff!)
My response was:
Mattay,
That’s right, in essence I am an MMT’er in regards to the mechanics of how modern money works…
The question then goes to policy prescriptions where I am not in the same camp as most MMT’ers. I do believe they are coming to see my view of resource misallocation as fundamental – which is more from the Austrian School. I think of my views as a sort of non-ideological Kindleberger-Minsky-Mises blend…
QE is destructive because it pumps up asset prices artificially only to see fundamentals re-assert themselves in a way that is most destructive for ordinary citizens. We are living through a time which is fundamentally deflationary in nature. The monetary authorities will try to counteract this by ‘printing money’ but they will not be successful in stopping the deflationary forces (unless they are willing to go all-in). And yes, I use the phrase ‘printing money’ for a reason; QE will not create jobs. It is destructive – especially to ordinary working people.
CW is an eclectic blog. You see posts from hard core libertarians at Casey Research and from true advocates of fiscal policy like Marshall Auerback. Three years ago, you would have said I follow the Austrian School. I saw the Monetarists and the Keynesians as limited, with their emphasis on flow models and inability to understand the centrality of debt accumulation to secular economic forces. And this is still true today. I should point out that both groups are interventionists – Keynesians on the fiscal side and Monetarists on the monetary side. For that very reason, many see ‘statist’ tendencies in Milton Friedman’s prescriptions. Regarding the Austrians, the problem is three-fold.
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An Austrian prescription of lower aggregate demand and purging malinvestment works for an individual economy in isolation like Latvia or even Japan even if it creates a Depression temporarily. That was America’s experience in 1921. But, in my view, it won’t work across a broad swathe of the developed world, deleveraging and undergoing austerity at the same time. Invariably what would occur is a Depression with a capital D along with economic nationalism, protectionism, and so on. This is followed by riots and more muscular forms of government that lead to international military confrontation (see some of the thinking on this here – long post).
- Austrians are wedded to the gold standard. I like gold and silver too, but I don’t see them as some magic bullet that will make things better. All indications are that the gold standard actually made things worse during the Great Depression. Moreover, the gold standard was ineffective in its role at preventing external imbalances from building up pre-Depression. That’s what it is supposed to do, but it failed to do.
- The Austrians are too wedded to the inflationary thinking about money creation anchored in the gold standard. Quantitative easing is not inflationary in largest part because we still have a large output gap and the demand for credit is subdued. The money printing by the Fed will not pass through into the real economy. If the US government actually did a helicopter drop of money, it would do.
So, I find Modern Monetary Theory a refreshing change, in particular, because MMT isn’t really a theory. It is a description of how the fiat monetary system works. MMT explains what is different about fiat currency in terms of monetary or fiscal constraints. A lot of people are still anchored to a gold standard mentality and its inherent constraints 40 years later. Part of the objection to the phrase "money printing" comes from this – it is anchored in the gold standard. And, for the record, I have problems with fiat money but this is the system in which we operate.
I consider the economics of this blog "MMT for Austrians" because I come from an Austrian mind-set (suspicious of centralized planning and a strong advocate for individual liberty). But since I understand the inherent logic in the MMT approach, particularly regarding the financial sector balances, I use this to describe the mechanics of how modern money works. I will present MMT with an Austrian framing for that very reason. See the post, "Out of control US deficit spending" for when I decided to take this tack. My hope is that it can facilitate a better understanding of the concerns and thinking on all sides of the ideological spectrum. For those wanting a true MMT perspective, I suggest you wait for Randall Wray, Rob Parenteau, Scott Fulwiler or Marshall Auerback to post. And I should point out that Marshall once worked with David Tice, a hard core Austrian, so some of the MMT’ers do understand and appreciate the Austrian view (sort of like George Soros and Jim Rogers, isn’t it?)
As for quantitative easing, I spelled it out yesterday. It is the closest thing to money printing the Fed can do.
Now, if the US had interest rates at 4 or 5 percent instead of zero percent or if fiscal policy weren’t dead, we wouldn’t see the Fed doing quantitative easing. Instead the Fed would be acting to supplement fiscal policy, using ‘conventional monetary policy’ to boost aggregate demand, which means lowering the Fed Funds interest rate. The effect on the exchange rate of this policy response is to weaken it. But, of course, rates are zero percent, not 4 or 5 percent. So the Fed is forced into QE.
The Federal Reserve can create dollar credits and buy existing financial assets like Treasuries; that’s what QE is. With Congressional approval, it could even buy other assets by the way (see here). But the Federal Reserve is not permitted to print physical dollar bills. Nor is the Fed permitted to buy Treasuries directly from the US Treasury – precisely because it is supposed to be independent and not a facilitator of money printing and currency debasement. I should also point out that the Treasury is also forbidden from printing money to cover deficits and must actually go through the process of issuing bonds equivalent in value to its cash deficit (see here).
I think the point here is that libertarians like myself are suspicious of centralized planning. They don’t want the Fed monetising debt or printing money. They don’t want the Fed expanding its balance sheet. That’s why you hear terms like debasing the currency and money printing a lot in these circles. You would never hear a ‘real’ MMT’er using those terms. The Pragmatic Capitalist, for example, objects to this terminology. But many MMT’ers like Randall Wray don’t want an activist Fed either because the Fed has already shown over the past generation what happens when it intervenes asymmetrically by supporting asset prices. The key distinction is fiscal policy. I laid out the ideological boundaries last November in "A few thoughts about the limitations of government." The question is whether to allow an ‘activist’ government fiscal policy in a deep downturn.
My view is that fiscal policy is a more legitimate way of dealing with a deep downturn than monetary policy. However, we have seen the Obama Administration use fiscal policy with incomplete results. The conclusion for some like Paul Krugman is that Obama has not done enough. The conclusion by others is that he has done too much. Either way you look at it, the Obama Administration’s inability to get the economy fully re-started has called the legitimacy of fiscal policy into question. And with the economy still operating well below capacity, battle lines have hardened.
I am tired of this ideological debate. I think most people are too. They just want a better economy. As I said last month there will be less policy advocacy and more policy forecasting at Credit Writedowns. Politically, Americans seem to have sided with the ‘fiscal policy doesn’t work’ school of thought for now. The mid-term elections suggest this. At a minimum, the incoming Congress is going to be less pre-disposed to fiscal policy. So what does that mean from a forecasting perspective? To me, it means wrangles over the debt ceiling, over tax cuts, spending and unemployment benefits. And it means a more austere future for the US.
Anyway, those are my thoughts on MMT for Austrians.
P.S. – I am toying with how to update the thinking from Paul Brodsky and Lee Quantaince from their post. QE3: A plan to stabilize the global monetary system. While they are essentially Austrian-types, this proposal is a monetarist one that calls for a simultaneous and across the board depreciation in all currencies against hard assets. It is very intriguing because it is designed to prevent a deflationary spiral and to prevent a ‘gaming’ of the system as all prices adjust in concert. It is kind of like Barry Eichengreen, who keeps saying (if I understand him correctly) everyone should be printing money or trying to depreciate their currencies, but that this is the preferred approach. The logic I believe is that this crisis is not a fiscal crisis but a monetary one and thus mandates a monetary solution.