General

Re: MMT redux

filc — Thu, 03 Feb 2011 19:06:04 GMT

Operations:
Do you deny that money is financial asset with a matching liability, and more importantly do you deny that it is a balance sheet item?

Yes I do.

Re: MMT redux

AJ — Thu, 03 Feb 2011 17:25:55 GMT

Yeah this is gonna come down to definitions, and I predict much breath will be wasted talking about other things in the meantime. By the way, "[money] is a balance sheet item" also seems circular/vague, but perhaps the MMTers have a clearer definition.

Re: MMT redux

Autolykos — Thu, 03 Feb 2011 15:18:21 GMT

I'm going to cut straight to the heart of the issue: the MMT's definition of "money".

Operational:
The definition of money being used is that money is a financial asset with a matching liability. Do you deny that money is financial asset with a matching liability, and more importantly do you deny that it is a balance sheet item?

This is a very interesting definition. Let's take a look at the definition of the word it depends on the most, "financial". According to Wiktionary, "financial" is defined as "related to finances". Okay, so what's the definition of "finance"? Wiktionary gives three definitions, all of which I include below:

finance (plural finances)

The management of money and other assets.

The science of management of money and other assets.

In plural (finances), the monetary resources, especially those of a public entity or a company.

So here we can see that to define money as a financial asset with a matching liability, when "financial asset" means, in essence, "monetary asset", is an inherently circular definition. Either this definition cannot stand, or some different definition of "finance" is implicitly being used. Which is it in your case, Operational?

Re: MMT redux

filc — Thu, 03 Feb 2011 08:11:31 GMT

Operational:
In a closed economy without a government sector, the private sector cannot net save. Keep in mind we are referring to financial assets.

I agree this makes no sense what so ever. I feel like there exists an over-emphasize regarding money, and an unhealthy ignoring of underlying assets and services money represents. Savings isn't just about idle money sitting in bank accounts somewhere, its about the freeing up of actual natural resources which are then used for the creation of more round-about processes.

The one thing the MMTheorists seem to be ignoring in their theory is everything else in the economy besides money. The irony being that money is nothing but a tool which services everything else in an economy. Money is not the economy.

This is sounding more and more crankish to me.

Re: MMT redux

Smiling Dave — Thu, 03 Feb 2011 08:04:04 GMT

1. About taxes. I asked what the govt does with tax money it collects. You replied that there are all kinds of different and complicated bookkeeping schemes used to funnel the money here and there.

But the point I'm trying to make is that after all is said and done, tax money is spent by the govt to take away our resources. Even if it is deposited somewhere or other for a while, I don't believe it just sits there for eternity. If it does, why do politicians love raising taxes? They won't get to spend the money. And how is raising taxes a way of balancing the budget? The tax money won't get spent, so it can't be used to pay for things on the budget.

I admit that I don't intend to read the papers explaining what gets done with tax money. Because I cannot believe the IRS puts people in jail just to get money it won't spend.

You wrote "Once it is realized that bonds and taxes do not function to finance government spend, then it follows that these are separate operations from the act of spending."
But I deny this. I cannot believe that the money from selling bonds and collecting taxes is not spent. Of course it is.

I looked up Taxes in Wikipedia, and it mentions over and over that tax money is spent. Always. Not a word about its being shredded, or locked in a vault to rot. It is spent. So of course it "finances govt spending". Operational, you sound like a smart cookie. How can you fall for that crazy assumption, that taxes are collected and then burnt in some huge bonfire, or equivalent?

2. About accounting. I don't deny that we can probably learn something from looking at the books. But not basic principles, as I will explain.

Once you have agreed that accounting principles cannot magically make money and real good and services of equal value, then that pretty much ends the argument, as far as I'm concerned. Because I think I've detected instances of MMT implicitly assuming exactly that. I've mentioned it in posts scattered around here.

And my disagreement goes deeper than that. Ultimately, people don't want money, they want what money can buy. They don't pay for things [honestly] with money, but by exchanging what they have to offer [in goods or labor] for what they want. The true ebb and flow of an economy is really barter. Money is just a convenience for making exchanges easier. Real understanding of economics always depends on going back to the question, "What has been traded for what?"

Thus we can understand why govt spending cannot improve an economy. An improved economy is one where more things are created than before. This is done by not consuming everything, but using part of what we have to make new machinery etc. Just as new food comes from the seeds of uneaten foods, so too increased production comes from unconsumed previous production.

That being the case, we have to ask ourselves "What resources has the govt brought into the world when it prints money?" Answer: None. "What tangible resources does the govt underconsume when it prints money, thus making them available for new production?" Answer: None. "So how does govt spending grow or improve the economy?" Answer: It doesn't.

There are one or two other minor points I am not responding to, agreeing as I do that we should stick to the essentials.

OK, that's all I got.

Re: MMT redux

Smiling Dave — Thu, 03 Feb 2011 07:14:38 GMT

The govt is printing up piles of useless paper and taking away our resources.”

The MMT claim is that whenever the government spends, it credits private sector bank accounts, or issues a cheque, the end result is that reserves are created in the private sector. The transaction has a financial flow from the government to the private sector, and a real flow from the private sector to the government.

Reserves of paper money for the private sector, and a real flow of useful things to the govt. Sounds like we agree here, just using different words.

2. For this part, I will quote your psot and add my comments in bold:

The MMT and Post Keynesian definition of money is that money is a financial asset with a liability.

I see a few problems with that definition. Because there are plenty of financial assets with a liability that are not money.

Also, if we are discussing fiat money, as I assume we are, the govt incurs no liability when it prints money. In the old days, if the govt or a bank printed a note, it was redeemable for gold, or for something. Fiat money is not redeemable for anything.

I fail to understand how you can say that an economy operating below full capacity still adjusts by price rises.

It's called stagflation, and we had it in the 70's. Zimbabwe has it now, in fact all countries with high inflation usually are a big mess in other ways, certainly not operating at full capacity.

The reason for this is very simple. The price of a good is determined by three things: The supply of that good, the demand for that good, and the amount of money in the economy. As supply goes up, it will tend to lower the price, all other things being equal. Demand going up tends to raise the price. Amount of money going up tends to raise the price as well. [That last is a consequence of the law of supply and demand applied to money].

So that even if demand is very low, because a lot of people are unemployed, if enough new money is printed, that can overcome the low demand sooner or later and raise prices. It happens all the time.

This is how I am interpreting what you’re saying:

Imagine a situation where there is unemployment (excluding structural and frictional), then there must be idle resources in the economy. If the government was to purchase these unemployed persons, you are saying that this would be taking resources away from the private sector, and bidding up prices. My objection is that these resources are idle, and not being used, and therefore, the bidding up of prices will not occur.

My previous post explained this for resources other than labor. Labor and unemployment is a very messy subject, because so many distortions have been introduced into the economy by govt meddling. After all, the govt can make a law that will seem to defy economic laws. For instance, when there is a scarcity of some resource, the laws of economics say the price will go up. But the govt can impose price controls, so that prices will not go up. [Of course, all kinds of bad things will happen because of that. But that's another story].

Back in the day of small govt, there was no unemployment. Everyone had some job or other. So that absent govt meddling, when people get laid off they find another job pretty quickly. The unemploymet we suffer is caused by all kinds of govt meddling, from minimum wage laws to union laws to rules and regulations and taxes choking business opportunities.

So that I don't consider the whole unemployment situation to be one that can be discussed by citing the real world as it is now.

If the economy was at full capacity, then I would agree with you.

Post Keynesians and MMT argue that capitalist economies are almost always demand deficient, and hence operate below capacity.

"Demand deficient" makes it sound like the entrepeneur would like to manufacture more, but there is no one to buy the stuff.

For instance, Post Keynesians point to empirical studies which show firms usually operate at 70% to 80% capacity. They argue that this reason firms operate with excess capacity is the same reason why agents and entities hold monetary balances, lines of credit, and firms operate with stockpiled inventories, these function as a buffer to unplanned events; firms operate with excess capacity so that they can respond to demand fluctuations (such as an increase in demand).

This part contradicts the above, in that it says not operating at fuill capacity is a business decision fo various reasons, but not because of lack of demand. Esuric also pointed out a flaw in this part.

If these demand deficiencies are to be overcome, there are three options: the government runs a deficit, the current account balance turns to surplus, or the private sector engages in credit expansion.

They don't have to be "overcome". And there is a fourth option. That unprofitable business has to close down.

MMT argue for the first option, and argue that the second option is unrealistic for every country (because of an accounting identity, as not every country can run a current account surplus at the same time) and the last option is potentially unsustainable.

The first option involves destroying the purchasing power of the currency. How can this be considered "overcoming" the problem? It's like getting rid of a head ache by jumpoing off a building.

If as Esuric claims Austrians believe that the money supply is endogenous, then how can you claim that causation runs from the money supply to prices?

You lost me at endogenous.

Re: MMT redux

Esuric — Thu, 03 Feb 2011 06:29:23 GMT

In a closed economy without a government sector, the private sector cannot net save.

What does this mean? I could try to interpret this, but I don't want to misrepresent your positions.

I haven’t forgotten your posts. I’ll try and reply ASAP.

Please, take your time.

Re: MMT redux

Smiling Dave — Thu, 03 Feb 2011 06:17:50 GMT

Well, Operational, I must say I am pleased and impressed by your posts from Day 1. Your last was another good one.

Before we begin, here's a quote from Keynes.

"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

“2. I'm also glad we agree that I am describing things correctly when the economy is operating at full capacity. The thing is, I think I am right [IMHO] even when it is not.”

If any economy is not operating at full capacity, then we have idle resources, the notion that we are diverting resources away from some other use isn’t applicable. Increased demand, rather than divert resources away from other uses, and hence possibly bid up resources, will instead be met with an increase in production, as the economy moves towards its full capacity (or full utilization rate). I don’t understand how you can suggest otherwise. Could you please explain your reasoning.

Here is a real world example. GM makes builds a factory that makes gas guzzling SUVs, thinking people will love them. But it turns out they guessed wrong. People want economy cars. The GM SUV plant, due to lack of demand, makes 10% of the SUVs it could be making. It is not operating at full capacity. AND IT SHOULDN'T BE. The plant needs to be closed down, and a plant for economy cars should take its place. Maybe it should make way for an Ipod factory, in fact. How do we know what is the best use of the land and building and machinery and labor and raw materials that is being wasted in that SUV factory? We don't. We do know one thing, though. Since GM is not turning a profit from that factory, it should be closed down. It is a waste of resources. When someone buys them out and uses the resources profitably, then we know they are not being wasted.

It also goes deeper than that. Some things cannot be recycled. The money and labor and materials spent on specialized machinery that will just have to be scrapped was a waste of resources even before the plant opened, if the whole factory was doomed to failure from the start.

The whole concept of the govt buying stuff because people don't want it or can't afford it boggles the mind. People don't want it. They can't afford it. Why should it be manufactured at all? And all the resouces used up to manufacture things nobody wants, so the govt can buy them, is an incredible waste of resources. They could have been used to make other things.

Let's imagine some backward landlocked African country, where everyone is poor. There is a factory there that makes yachts. It cannot operate at full capacity, because for some mysterious reason nobody there wants or can afford yachts. So is the solution to take money away from the already poor Africans, give it to the govt, and have the govt buy yachts? Of course not. The solution is to close down the factory, and start making things they need and can afford. How can it be otherwise?

Closer examination tells us that those yachts use up tons of cloth which, instead of making clothes for the poor Africans, is being used to make curtains in the yachts. Now would anyone say that if the govt buys up all the yachts the factory makes then we have increased productivity and haven't wasted any resources? Sure, we have increased productivity of white elephants, but who needs them? And of course we have gobbled up desperately needed resources. The Africans, rather than being clothed and happy, are naked and miserable, all because someone noticed that the yacht factory is "not operating at full capacity".

The African yacht story also shows us that striving for "full utilization rate" is barking up the wrong tree. The correct goal is "making things people want and can afford". If the whole world is working full speed ahead making five legged trousers, we may have a full utilization rate, but we are going to be in a huge mess.

As Bob Dylan once said, the hour is getting late. I'll discuss the other points later.

Re: MMT redux

Esuric — Thu, 03 Feb 2011 06:05:47 GMT

Operational:
The MMT claim is that whenever the government spends, it credits private sector bank accounts, or issues a cheque, the end result is that reserves are created in the private sector.

Government expenditure does not create reserves in the banking system, period. The money that the government confiscates though taxation never leaves circulation; it does not shred it. The banking system gets additional reserves only when people increase their savings rate, or when the Federal Reserve system creates them ex nihilo. But there is no relationship between government expenditure and private savings; the latter is a function of time preference.You can have a positive savings rate when government expenditure is zero.

Operational:
Imagine a situation where there is unemployment (excluding structural and frictional), then there must be idle resources in the economy. If the government was to purchase these unemployed persons, you are saying that this would be taking resources away from the private sector, and bidding up prices. My objection is that these resources are idle, and not being used, and therefore, the bidding up of prices will not occur.

First, Austrian's don't differentiate between structural and cyclical unemployment; the two are intrinsically connected.

Next, If the government elevates the supply of money beyond the demand for money, in order to bid away resources from the private economy, then it must necessarily yield general price inflation. There is no relationship between the "utilization of resources" and the general price level. Again, we had a decade of simultaneous general price inflation and an "underutilization of resources" here in the U.S. and in the U.K. (and there have been hyper-inflationary depressions).

Additionally, the fact that the economy operates under full capacity during recessions is actually an efficient economic condition. Entrepreneurs are rationally responding to heightened uncertainty, and this will set in motion the liquidation and realignment process required for recovery. Any attempt to prevent this liquidation/readjustment process will yield extended stagnation (e.g., Japan)

But let's hold off on trade cycle theory. I want to understand and judge the MMT's underlying premises.

Operational:
Post Keynesians and MMT argue that capitalist economies are almost always demand deficient, and hence operate below capacity. For instance, Post Keynesians point to empirical studies which show firms usually operate at 70% to 80% capacity."

This doesn't prove that there's "demand deficiency;" it only proves that entrepreneurs take precautions, i.e., they rationally deal with uncertainty. Prices fall whenever there's "excess demand." Additionally, there cannot be any general demand deficiency (but the demand for current and future goods may fall due to an elevated demand for money).

Operational:
If these demand deficiencies are to be overcome, there are three options: the government runs a deficit, the current account balance turns to surplus, or the private sector engages in credit expansion.

First, fiscal deficits don't necessarily yield current account surpluses. The U.S. currently has large fiscal deficits and a current account deficit. Furthermore, credit expansion, consumption, and government deficits were at, or close to, all-time high's right before this recession.

Operational:
If as Esuric claims Austrians believe that the money supply is endogenous, then how can you claim that causation runs from the money supply to prices?

I don't understand this question.

Re: MMT redux

Operational — Thu, 03 Feb 2011 05:32:05 GMT

Jonathan M. F. Catalán,

Keep in mind that there are two components of MMT:

1.Descriptive component based of accounting principles and operational realities of our current monetary system.

2.Normative component, such as policy proposals and what the government should do.

It’s perfectly fine to accept the former, but reject the latter.

A good place to start would be:

Edit: Warren Mosler - Soft Currency economics: http://129.3.20.41/eps/mac/papers/9502/9502007.txt (sorry about the format, there's plenty of other versions online)

Understanding Modern Money: the key to Full employment and price stability – L. Randall Wray.

Bill Mitchell’s blog: Particularly debriefing 101: http://bilbo.economicoutlook.net/blog/?cat=11&paged=5

Articles:

Bell, S. Do taxes and bonds finance government spending? Journal of Economic issues. Vol. XXXIV no. 3 September 2000. Pp. 603 – 618.

Fullwiler, S.T. 2007. Interest rates and fiscal sustainability. Journal of Economic issues.Vol. XLI. No. 4. Pp. 1003 – 1042.

If you have trouble tracking them down I will see what I can do. I might be able to find the working papers.
If you have any questions when reading them don’t hesitate to ask.

-------------
Filc,

How do MMT theorists explain mediums of exchange prior to fiat?

MMT isn’t denying that money cannot exist without the government. They are arguing that the state has had a role in its evolution. MMter’s claim that in our current monetary system, there exists a hierarchy of credit, with state credit at the top (which performs the function of money), bank credit below, and other forms of private credit below that. State money performs the function of a clearing mechanism for the banking sector, and bank credit performs the clearing function for the non-bank private sector.

There are quite a few sources on the history of money which take the chartalist position. I can have a look around and try and find them if you’d like. An example off of the top of my head is Babylon and the Hut taxes.

Of course, an argument could be made that regardless of the history of money, how it current functions

What is the role of the Treasury, and the Fed as described by MMTheorists?

If you’ve got the time I’d suggest reading the two articles I have listed above, they go through what the central bank and treasuries role is in our current monetary system.

How do they reconcile the widely accepted contrary understanding to how those institutes operate?

This is a good question.

How do Austrians reconcile their understanding of economic issues (including methodology), with common understanding? I believe your answer would be much the same as MMT; ignorance, intentional, etc.

Other reasons include: The current state of macro methodology is poor. Stock-flow consistency isn’t appreciated and isn’t understood, and because of that economists have failed to understand the different operational realities of the government in our current monetary system versus previous monetary systems; they haven’t made the jump, and are stuck using outdated models from a previous monetary system.

-------------------
Esuric,

I haven’t forgotten your posts. I’ll try and reply ASAP. In the meantime.

Denying MMT, on the other hand, just means that you understand basic economic theory (you don't believe that private savings exist because of government deficits, or that the government is not constrained in its spending, or that the government shreds the revenue it receives in taxes, etc...).

Please stop doing this. No MMTer and no where in the MMT literature does it say private savings exist because of government deficits. You just made that up. What they say is that non-government net savings is equal to the governments; private sector net savings is equal to the governments balance plus the current account balance. In a closed economy without a government sector, the private sector cannot net save. Keep in mind we are referring to financial assets.

Re: MMT redux

Operational — Thu, 03 Feb 2011 05:12:02 GMT

Smiling Dave,

“The place to learn AE is not from my poor posts, but from the free books available here. Economics in One Lesson is a great place to start. It's short, it's clear, it's important.”

I’ve actually got some Austrian books (e.g. mises: TMC). I’ve briefly read through them, but nothing substantial. At some stage I would like to read more and if I want to be an economist when I finish studies I owe it to myself to look into it. I’ve said it here and I’ve said it in other places, at my current limited understanding of ABCT I believe that there are some important questions which the ABCT raises. I also like Schumpeter, but I know most Austrians do not consider him an Austrian (e.g. Rothbard).

“1. I'm glad we agree that the govt operates by force and violence, and that therefore there is a huge moral and ethical issue here.”

I don’t believe any of the MMT economists would deny this point. If my memory serves me correctly, Wray has often started with this point.

“2. I'm also glad we agree that I am describing things correctly when the economy is operating at full capacity. The thing is, I think I am right [IMHO] even when it is not.”

If any economy is not operating at full capacity, then we have idle resources, the notion that we are diverting resources away from some other use isn’t applicable. Increased demand, rather than divert resources away from other uses, and hence possibly bid up resources, will instead be met with an increase in production, as the economy moves towards its full capacity (or full utilization rate). I don’t understand how you can suggest otherwise. Could you please explain your reasoning.

“This point lies at the heart of the difference between AE and Keynesian economics [in all its flavors]. Keynes starts with the economy in a recession. Plenty of unemployment, little buying, why did this happen? It's animal spirts, replies Keynes, meaning people being perverse and stupid, suddenly not buying for no reason at all. But it doesn't matter why, really, says Keynes. We have to do something about it. Gobble up what is in the factories, which will force them to make more, hire more people, and all will be well.”

I have to disagree with your assessment of Post Keynesians and Keynes. It is my understanding that Post Keynesians and MMT, posit that the capitalist system will normally operate below full capacity. That is, the economy is almost always demand deficit, and there will always been some slack and room to absorb increases in demand. MMT take it further and claims that the reason for unemployment is because of state money and if we are to live in this monetary system, then it is the government’s responsibility to reduce this unemployment.

I also don’t agree with how you’ve identified ‘animal spirits’. You have to read Keynes 1936 to understand how he believes decision making occurs:

1.   Individuals use the past as a guide to what will happen in the future.
2.   Individuals use prices as a guide
3.   Individuals look to see what others are doing and use that to inform their decisions (herd mentality).

It is easier then to understand the role of animal spirits. For instance, prior to the great recession, most economists were carrying on as if nothing was wrong. For various sociological reasons, such as, most people lacking insights into economics, or whose training in economics deluded them to the crisis would also accept this. The other point which Minsky emphasizes is that in periods of stability human beings become more complacent. We have this tendency to assume that the good times will last forever. For minsky, this means that we continually revise our previous assessments of risk: If we imagine a recession that had occurred recently, most investors will be rather conservative with their estimates and assess of risk. When these projects succeed, they realize that they could have taken on more risk, and have been less conservative, they then take on more riskier projects, and so on. This process transforms the liability structure of the economy from one that is sustainable to one that is unsustainable.

When a crisis does hit the belief system and expectations which fueled the boom collapse. In the banking sector it becomes a situation of not knowing who to trust, in terms of who to lend reserves to, and credit worthy borrowers. This credit rationing then reduces income, which in turn reduces the flows necessary to service the debt. The complex web of financial liabilities and debt which was constructed during the boom can no longer be supported. Firms have the option of either firing staff or reducing staff hours. Both options reduce effect demand within the economy and push the economy down from its full capacity.

Honestly though, I’d prefer if we narrowed our discussion solely to the operational realities as described by MMT and whether this is correct.

“3. We also seem to diagree about the power of accounting principles to enlighten. Do you agree or disagree with what I wrote earlier, and will copy here for you?”

It’s not so much to enlighten, rather if you want your description of the world to more accurate, then your description must be consistent with accounting principles, and thus be stock-flow consistent. In other words, if you want to have a theory about an economic system, then that theory must be constrained by the boundaries of accounting principles and stock flow consistency.

“But no accounting identity in the world can claim, or does claim, that paper money has the same value and usefulness as "what money can buy".

Yes, no accounting identity can say that.

The govt is printing up piles of useless paper and taking away our resources.”

The MMT claim is that whenever the government spends, it credits private sector bank accounts, or issues a cheque, the end result is that reserves are created in the private sector. The transaction has a financial flow from the government to the private sector, and a real flow from the private sector to the government.

“If you disagree, please tell me why.”

I don’t disagree.

“4. A lot of your points stem from my not being precise in my use of the word money. When I say that the govt takes our money, for example, you reply that the govt spends by printing money, not taking ours. So replace "money" with "wealth" and you'll have it. For example, printing money takes away our purchasing power. Always. By the law of supply and demand. This is true even if the economy is not "running at full capacity". Which I have explained above is a mythical situation. What you call "not running at full capacity" I call "running at correct capacity".”

The MMT and Post Keynesian definition of money is that money is a financial asset with a liability.

I fail to understand how you can say that an economy operating below full capacity still adjusts by price rises. This is how I am interpreting what you’re saying:

Imagine a situation where there is unemployment (excluding structural and frictional), then there must be idle resources in the economy. If the government was to purchase these unemployed persons, you are saying that this would be taking resources away from the private sector, and bidding up prices. My objection is that these resources are idle, and not being used, and therefore, the bidding up of prices will not occur. If the economy was at full capacity, then I would agree with you.

Post Keynesians and MMT argue that capitalist economies are almost always demand deficient, and hence operate below capacity. For instance, Post Keynesians point to empirical studies which show firms usually operate at 70% to 80% capacity. They argue that this reason firms operate with excess capacity is the same reason why agents and entities hold monetary balances, lines of credit, and firms operate with stockpiled inventories, these function as a buffer to unplanned events; firms operate with excess capacity so that they can respond to demand fluctuations (such as an increase in demand).

If these demand deficiencies are to be overcome, there are three options: the government runs a deficit, the current account balance turns to surplus, or the private sector engages in credit expansion. MMT argue for the first option, and argue that the second option is unrealistic for every country (because of an accounting identity, as not every country can run a current account surplus at the same time) and the last option is potentially unsustainable.

If as Esuric claims Austrians believe that the money supply is endogenous, then how can you claim that causation runs from the money supply to prices?

“5. About taxes. Please explain to me what the govt does with the money it collects in taxes?”

It depends, on the country and the size of the transaction. Normally though, the central bank and treasury will coordinate their operations (complex) to offset the ‘reserve effect’. So for instance, those reserves may not even leave the private sector and instead be transferred to tax and loan accounts, or if they do leave the private sector, the central bank may have to engage in operations, such as repo, of buying treasury securities.

Honestly, the best advice I can give you is to read the following papers, they go through the complex operations and provide an enormous number of sources to follow up on. I don’t want you to feel that this is a cop out by me. I just feel that it would be beneficial as 1. You are getting information about MMT directly from the source 2. The actual operations require looking at balance sheets and graphs, which are too hard to reproduce here. 3. They reference a range of sources that you can follow up on.

The papers:

Edit: Warren Mosler - Soft Currency economics: http://129.3.20.41/eps/mac/papers/9502/9502007.txt (sorry about the format, there's plenty of other versions online)

Bell, S. Do taxes and bonds finance government spending? Journal of Economic issues. Vol. XXXIV no. 3 September 2000. Pp. 603 – 618.

Fullwiler, S.T. 2007. Interest rates and fiscal sustainability. Journal of Economic issues.Vol. XLI. No. 4. Pp. 1003 – 1042.

If you have trouble tracking them down I will see what I can do. I might be able to find the working papers.

I’d also suggest this blog post by Bill Mitchell (a MMTer. His blog is a good source for MMT information. Check out debriefing 101. Be warned that Bill does introduce a lot of normative claims into his posts. You should remember that MMT has two components, a descriptive component and a normative component. You don’t have to and most likely won’t agree with his beliefs on what the government should do) which goes through central bank operations:

http://bilbo.economicoutlook.net/blog/?p=9392

Does it buy things with it? I assume the answer is yes. Once the govt takes away my money by taxing me, can I spend that money? I assume the answer is no. So basic accounting principles tell me that the govt, by taxing me, has taken away my purchasing power, and then takes away resources from the private sector. Thus taxes impoverish us all [except for the govt] in two ways”

Once it is realized that bonds and taxes do not function to finance government spend, then it follows that these are separate operations from the act of spending.
You are correct, you cannot spend that money once you have been taxed. The taxation has reduced your purchasing power, and it has decreased your financial assets, but it has taken real resources from the private sector. Your last point doesn’t follow.

“I think I see what the OP meant when he said taxes reduce aggregate demand and the money supply. He meant they reduce it from the priavte sector. But that is a meaningless fact. Because when the govt goes to the store, it spends money just like everybody else. If we take all the people in California and rename them "outside the private sector", then we can say that money spent by Californians is spent outside the private sector. But so what? it gives us no furthe understanding of what's going on, in fact it creates misunderstanding”

Your first part is correct. Taxation destroys reserves in the private sector, spending creates reserves in the private sector. It’s hardly a meaningless fact, because nearly all treasury and central bank operations are based around managing the treasury’s impact on reserves.

Those other entities you referred exist inside the private sector, they are financially constrained like households. The government (consolidated) is the monopoly issuer of state money. It is not financially constrained like a household and its operations have enormous effects on interest rates, the payment system, the banking system, etc.

“6. The advantage of a gold standard is not that eliminates fractional reserve banking. The chance of a run on a bank is the same whether they have to keep reserves of paper money or of gold.”

(most) Post Keynesians argue that the money supply is always endogenous regardless of the institutional settings. It’s been awhile since I’ve looked into the arguments why a 100% standard wouldn’t work, so it might be better to consult the following:

http://bilbo.economicoutlook.net/blog/?p=7299

http://bilbo.economicoutlook.net/blog/?p=9075

“The advantage is that the govt cannot print all the money it wants. because every single pice of paper they print is a promise to give someone gold. If they print too much paper, more than the gold they have, they will run into trouble, obviously. Which is exactly why all govts hate the gold standard. It restricts how much they can spend.”

It’s interesting that you bring this point up, as this is exactly what MMT have been trying to argue and I tried to argue here (check the other post, I believe my post was in reply to Isaac): different monetary systems, have different operational realities.

Also you’ve made the same argument that MMTer’s make: in our current monetary system the government is not financially constrained (but it is constrained by real resources).
As to whether we should go back to the a gold standard or another monetary system, well that is a separate issue from the one I want to discuss: how our current monetary system currently works
.

“7. As for the use of the word "credit" in an accounting sense. Are you agreeing that the sentence ""Govt deficit spending credits the private sector" can be accurately and truthfully restated as "Govt spending gobbles up resources from the private sector and gives the private sector paper money"?

There is a propaganda difference between the two. The first makes it sound like the private sector got something worthwhile. The second tell us what is really going on. Which is the kind of error made over and over by the MMT analysis. It thinks accounting teaches us something. I explained this earlier.”

The first statement should read: governments spend by either crediting bank accounts or issuing a cheque. The end result is that reserves are added to the private sector. All else equal.
This is different from your statement: Govt spending gobbles up resources from the private sector and gives the private sector paper money

Your statement is obviously highly emotionally charged, but yes, when a government spends, it is normally purchasing a real resource form the economy. The transaction involves a financial flow from the government to the private sector and a real resource flow from the private sector to the government. MMTer’s always state this, so you are incorrect to asset that MMTer’s make this error over and over.

Whether it is beneficial depends on the current state of the economy. MMTer’s argue that if households are deleveraging, and restoring their balance sheets, then the government should step in and assist this process (this is a separate question of whether we should allow firms to fail. Most MMTer’s I’ve read have argued that they should). Otherwise we risk the possibility of debt deflation 9which becomes more pronounced depending upon the liability structure of the economy).

I think we can reduce a number of the points discussed to: whether or not the economy is normally operating at full capacity, whether or not this distinction is meaning, what we can infer from accounting principles, whether MMT has correctly described the accounting realities, treasury and central bank operations, if I have missed it please let me know. But I think that might aid in reducing post lengths, and repeating ourselves.

Look forward to your reply and I hope we can continue this discussion with mutual respect. I’d suggest having a look through the articles and links I provided to get a first hand account of MMT.

I’ll try and reply to the other posts as soon as possible. Sorry about taking so long, been really busy the last couple of weeks and I am using what little available free time I have to respond. I appreciate your patience.

Re: MMT redux

Jonathan M. F. Catalán — Wed, 02 Feb 2011 19:17:46 GMT

How do MMTheorists explain mediums of exchange prior to fiat?

Believe it or not, there are quite a bit of economists who believe that money was created by the state.

Re: MMT redux

Esuric — Wed, 02 Feb 2011 17:33:16 GMT

Reminds one of the proof of the Action Axiom; to deny it is to affirm it.

The two are entirely different. To deny the action axiom is to engage in a performative contradiction (saying that individuals do not act is an action in itself). Denying MMT, on the other hand, just means that you understand basic economic theory (you don't believe that private savings exist because of government deficits, or that the government is not constrained in its spending, or that the government shreds the revenue it receives in taxes, etc...).

Re: MMT redux

Autolykos — Wed, 02 Feb 2011 17:32:30 GMT

Esuric:
MMter:
There is no such thing as critiquing or refuting MMT since it is only a description of the way the monetary system actually works. You can't refute it because to do so is to admit that you don't understand how the monetary system actually works.

Solid argumentation!

Indeed. To build on this, MMter's quote above is a great example of question-begging or circular reasoning. His "argument" can be re-stated as follows:

MMT is an accurate description of the way the monetary system works.
To refute MMT is to admit misunderstanding how the monetary system works.
Therefore, MMT is an accurate description of the way the monetary system works.

Re: MMT redux

Smiling Dave — Wed, 02 Feb 2011 17:12:27 GMT

Reminds one of the proof of the Action Axiom; to deny it is to affirm it.