Modern Monetary Theory - MMT

[Ann]

Take your desert island with 2 inhabitants: neither of them work to gather food, build shelter etc. But they have discovered a printing press that can print paper money with enough ink/paper in the machine to print up a significant amount of cash. What is that cash worth, apart from possibly fuel for a fire?

Thanks duc, your comments are a great help.

Looking at it another way, let's say while I was on the desert island I had access to a computer and traded my way into wealth and had a surplus of dividends flowing in to my bank account for which I actually had to do nothing, it just kept flooding in. This would allow me to pay for a cruiser to come and pick us up and take us home. Having got home, I felt concern for my fellow islander who was no good at making money in the markets but I felt duty bound after what we went through together to give him a job as a handyman around my home and paid him above and beyond what I would normally expect to pay. He is happy doing his menial tasks and I am happy sitting on my bottom doing sweet fannie addams other than working out ways to invest my ever growing pile of cash.

This is sort of what I am beginning to feel about the meaning of MMT.....so far.

 

[ducati916]

Thanks duc, your comments are a great help.

Looking at it another way, let's say while I was on the desert island I had access to a computer and traded my way into wealth and had a surplus of dividends flowing in to my bank account for which I actually had to do nothing, it just kept flooding in. This would allow me to pay for a cruiser to come and pick us up and take us home. Having got home, I felt concern for my fellow islander who was no good at making money in the markets but I felt duty bound after what we went through together to give him a job as a handyman around my home and paid him above and beyond what I would normally expect to pay. He is happy doing his menial tasks and I am happy sitting on my bottom doing sweet fannie addams other than working out ways to invest my ever growing pile of cash.

This is sort of what I am beginning to feel about the meaning of MMT.....so far.

The point of using an example or model of a desert island, is to simplify the economic variable being studied. It is easier to understand what happens between limited numbers of participants, rather than whole economies.

So the point is: without goods and services, money has no utility.

So to your example: because MMT is not wealth, nor create wealth, there are no computers, no ships...there is nothing except an endless flow of paper money and you will still be stuck on the island.

An axiom of money is: any amount [value] will serve the purpose [function] of money. All that happens is that the exchange value of money is calculated against the exchange value of goods and services.

When there is a low volume of money: you get more goods, services per unit of money.
When a high volume of money: you get less goods, services per unit of money.

Therefore in an economy that has goods, services, these prices have adjusted to the existing volume of money.

You suddenly add an increased volume of money certeris parabis and then the prices readjust, viz. less goods, services per unit of money, or what is commonly known as inflation.

jog on
duc

 

[Ann]

You suddenly add an increased volume of money certeris parabis and then the prices readjust, viz. less goods, services per unit of money, or what is commonly known as inflation.

So the point is: without goods and services, money has no utility.

Yes, I can see that and these are discussions I had years ago with someone deeply into the Austrian school of economics. He explained the two different types of inflation...Inflation to the money supply and the other inflation is to the prices of goods. Currently the economists are using the term 'disinflation' for the world economies, I guess it sounds better than deflation which tends to be more frightening I guess. When there is inflation the interest rates go up so reducing the demand for money to reign back inflation of goods, I guess the opposite is true at the moment.

One could muse once the interest rate goes to zero or minus what will happen then, massive deflation?

Perhaps MMT is a way of putting money into the hands of the folks who spend it and build more infrastructure and products people need like affordable housing and supported accommodation for the drug addicted and perhaps free healthcare. All these would create productive work which in turn would inject more money into a deflationary/disinflationary economy. The fiat money supply would need to be inflated as there is more demand for it to buy more stuff which in turn would help the GDP.

Dunno, just the musings of one who knows little about this stuff. Your thoughts duc?

 

[ducati916]

Perhaps MMT is a way of putting money into the hands of the folks who spend it and build more infrastructure and products people need like affordable housing and supported accommodation for the drug addicted and perhaps free healthcare. All these would create productive work which in turn would inject more money into a deflationary/disinflationary economy. The fiat money supply would need to be inflated as there is more demand for it to buy more stuff which in turn would help the GDP.

Dunno, just the musings of one who knows little about this stuff. Your thoughts duc?

I think you are missing the central point which is 'money' does not create goods and services. Goods and services are the driving force or wealth of an economy.

So let's take one of your examples: free health care. To provide free health care you will need:

(a) land to build your hospital/infrastructure on; and
(b) someone to design your hospital; and
(c) someone to build your hospital; and
(d) equipment, which requires someone to design/build the equipment and transport it etc; and
(e) staff (doctors, nurses, cooks, physios, cleaners, etc) and have their wages paid etc; and
(f) consumables (food, drugs, drink, dressings, etc); and

The list goes on and on.

So in our economy, which operates on a money basis, all of those costs are met by in this example government. The government collects/earns/creates its money by:

(a) exchanging goods and services that we produce, for money, which we then exchange for something on the above list; or
(b) increasing taxation; or
(c) borrowing; or
(d) creating new money.

So: (b) is not free, the taxpayer pays. The taxpayer earns their money by exchanging their goods and services for money and having that money taxed away to government, who then provide from the original list, healthcare. Clearly not free. Simply redistribution.

Neither is (c) free. A loan needs to be repaid + interest. Again, someone must earn [exchange goods services for money] to service the loan.

As far as (a) is concerned, some would have that the Police/Army etc and suchlike are services provided by the State. So let's accept that a certain % of taxes are earned by government. If we had a payment dedicated and clearly allocated to those services [at cost], then there will be a shortfall when you look at providing 'free' whatever, in this case healthcare.

So option (d): by simply creating new money, suddenly the government is flush. It can now provide the free whatever, this is the theory of MMT and all inflationary theories.

All that has happened is that government has increased the volume of fiat money in the system. There are no increases in the volume of goods and services and now resources. They are the same. So what happens?

The government undertakes to provide free healthcare and because more money is required in starting from scratch, [from our list] that is the way they choose.

Land is purchased for a hospital. That land might have been used for something else, but government can, if required bid the price higher than any other buyer, because they simply create money. The same happens with each item on the list.

The net effect is that resources are consumed by government at [usually] inflated prices through the increase in the volume of money and resources, goods, and services which are now re-allocated towards the government's largesse, removing them from the area of the economy they were previously employed.

MMT talks about providing the bottom of the food-chain consumers [you and me], free new money. Exactly the same phenomenon occurs, but it is far harder to see and understand.

Take a product: coffee.

It is produced through stages from growing it, to all the stages inbetween, to the shelf on the supermarket, where we, the end consumer buy it.

At each stage of production, there will be a profit earned to each stage of production, that is roughly equivalent in % terms. This is so because if it were not, then those factors and stages of production would move to the area of greatest profit, let's say coffee on the supermarket shelf.

If/when that happened, the area vacated, or all other areas, would:

(a) in the short term reduce their supply or their supply could not match the demand to the more profitable stage; and
(b) their prices would rise as the consumer demanded more coffee; and
(c) over time, the vacated areas would attract new producers to fill the gaps in production.

Where do those new producers come from? Other areas of the economy, that are less profitable. For example, let's say I'm in trucking and I used to haul bricks to building sites. Now, I'll haul coffee from producers to supermarkets. The brick producer will either have to match or exceed the payment from the coffee chap to get me back.

Now obviously, give free money to all consumers, they will spread the love so to speak. Again, the final stage of production, sales to the consumer become the most profitable across the whole range.

Some [many] of those products will have vertical production [supply] chains. The demand from consumers goes up from the free money, across the board. Supply stays constant. Some producers may move to the final stage to try and cash in, reducing supply, some will stay put and simply increase their prices to once again, return profit levels to the equilibrium of previous levels.

The result is that you simply have a rise in prices generally. Prices will not stay constant, for all the reasons above and they will not fall, because there is no increase in supply above demand.

The consumer, who had that free money, is no better off than a one time gift, as the general price rise eats up any benefit gained. In fact, they are worse off because with the general price rise, they remain at their pre-gift levels of earnings, but now prices are higher.

So another injection of cash, rinse and repeat, until you reach a critical point and create a hyper-inflation which destroys that fiat currency and topples the government, unless they are a military junta.

Money is simply a tool, not a means to an end re. wealth.

That is the massively simplified version of essentially the theory of the natural rate of interest.

There is no free lunch.

jog on
duc

 

[3 hound]

Anyone feel different about MMT as the economy has ticked on?

 

[wayneL]

Anyone feel different about MMT as the economy has ticked on?

No, it's a dumb idea. Like socialism/communism, it cannot work in a liberal society. It can only exist in a authoritarian/totalitarian regime.

 

[3 hound]

No, it's a dumb idea. Like socialism/communism, it cannot work in a liberal society. It can only exist in a authoritarian/totalitarian regime.

I thought the idea seemed fantastical when I first heard it but my engineering instincts kicked in and I started to think it sounded more like the economics version of perpetual motion at no energy cost.

Still some highly educated people and high level government officials stand by it and the theory has even filtered down to the layman like myself.

Surely the current world economic situation should give more evidence to support or refute it?

The whole thing is fascinating in its simplicity, if it's real all economic problems are solved like cold fusion would solve the energy problem.

 

[wayneL]

The fundamental principle of money is that it is a unit of account of somebody's production. The motivation to create money *is production, no matter how tangential that has become in modern society.

Like pure socialism, mmt removes that connection and therefore the motivation for people to produce beyond what is mandated for them to do by the state.

What you will end up with is some mongrel cross bred society somewhere between "Idiocracy" and "Nineteeneightyfour".

 

[tech/a]

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Sovereign Countries have a license to print money and a license to cancel their debt to themselves.
One of the main reasons the UK wanted out of the European Union.
If they owed money to the EU they couldn't write it off.

 

[3 hound]

What you will end up with is some mongrel cross bred society somewhere between "Idiocracy" and "Nineteeneightyfour".

Have said elsewhere the type of society you describe will be welcomed by the majority.

 

[qldfrog]

Have said elsewhere the type of society you describe will be welcomed by the majority.

Sadly yes, look at french elections...majority will reelect macron as opposed to facing the issues

 

[divs4ever]

The fundamental principle of money is that it is a unit of account of somebody's production. The motivation to create money *is production, no matter how tangential that has become in modern society.

Like pure socialism, mmt removes that connection and therefore the motivation for people to produce beyond what is mandated for them to do by the state.

What you will end up with is some mongrel cross bred society somewhere between "Idiocracy" and "Nineteeneightyfour".

well we can clearly see how it is working ( if we care to look )

the 'human factor' was always the fatal flaw

STORY OF THE C0MM0N-W3ALTH BANK-TH3FT OF AUSTRAL1AN MON3Y SYST3M​

here is i cute tale of when it DID work , and also the reasons why it will nearly always fail ( in a 'modern society ' )

 

[3 hound]

well we can clearly see how it is working ( if we care to look )

the 'human factor' was always the fatal flaw

STORY OF THE C0MM0N-W3ALTH BANK-TH3FT OF AUSTRAL1AN MON3Y SYST3M​

here is i cute tale of when it DID work , and also the reasons why it will nearly always fail ( in a 'modern society ' )

Sadly didn't age well. We chose narcissistic pleasure seeking and cheap stuff instead.

 

[qldfrog]

Sadly didn't age well. We chose narcissistic pleasure seeking and cheap stuff instead.

Not talking about our wives are you??
I hope mine is on ignore ?, seems it is when i talk to her.....

 

[3 hound]

Not talking about our wives are you

Lol.

 

[divs4ever]

Sadly didn't age well. We chose narcissistic pleasure seeking and cheap stuff instead.

and that is part of the reason MMT will probably never work again

not that i am touting it as a full-time policy , BUT with the correct people in charge ( almost completely unlikely ) it is a possibility in dire circumstances , one might note it was used in the 'nation-building ' railway line in Australia , while others use it now to rescue fiscally irresponsible corporations , who will do nothing to build the nation later .

but the big flaw in MMT , is ( normally ) human nature , but of course the fiscally responsible will hardly ever need MMT

 

[3 hound]

and that is part of the reason MMT will probably never work again

not that i am touting it as a full-time policy , BUT with the correct people in charge ( almost completely unlikely ) it is a possibility in dire circumstances , one might note it was used in the 'nation-building ' railway line in Australia , while others use it now to rescue fiscally irresponsible corporations , who will do nothing to build the nation later .

but the big flaw in MMT , is ( normally ) human nature , but of course the fiscally responsible will hardly ever need MMT

I think governments have developed an addiction to MMT no different to a delirious junky on DMT. They both think they are creating a better world with their fix.

 

[Smurf1976]

I think governments have developed an addiction to MMT no different to a delirious junky on DMT. They both think they are creating a better world with their fix.

And in both cases keep doing it and it won't end well.

 

[divs4ever]

i was initially surprised to hear/see the Australian example of what appears to be an example of MMT successfully applied , but i worry that Australian bank manager was a truly unique individual ( and we won't have an equal if we really need one again )

 

[wayneL]

.but of course the fiscally responsible will hardly ever need MMT

This is the part that s**ts me off the most. It's moral hazard and that is the reason that anything over the short term it will blow the f*** up.... And the reason certain hetrodox economists light Steve Keen should give themselves an uppercut.

IOW, what is that leaves the large proportion of the population who have been fiscally responsible over the course of their lives only to see the profligate get rewarded for their profligacy.

Those that feel responsible for their own futures will be severely cheated, and that kind of end well.