MMT and Russia

Whenever I post anything about taxation and public expenditure, it’s a good bet that someone will pop up in the comments section to claim that, according to Modern Monetary Theory, states that issue their own currency don’t need taxation to finance public expenditure. That’s a misunderstanding of the theory, but it’s proved hard to explain this. The current crisis in Russia provides a teachable moment.

Russia is facing a lot of difficulties because of the drastic fall in the price of oil (more on this soon I hope), along with sanctions imposed following the war with Ukraine. The government depends on oil for around half its revenue, and it looks as if the drop in the oil price will be sustained for a while. But of course the Russian government can print as many rubles as it wants[^1]

Why, then, is there a problem? Modern Monetary Theory says that governments should not worry about the budget deficit. Rather, they should determine the appropriate level of public expenditure on standard economic grounds, then work out the desired rate of monetary expansion (in effect, a tax on money balances) based on the macroeconomic needs of the economy. Ordinary tax revenue is then determined as a residual, the difference between the desired level of spending and the desired level on monetary growth.

That’s a useful way to look at things, but it doesn’t make the problem of financing public expenditure go away. If oil tax revenue drops, and nothing else changes, some other source of revenue (that is, tax) must be made to keep the rate of monetary growth at its desired level, or else spending must be reduced.

In Russia’s case, the economic downturn implies the desirability of some monetary expansion, but that’s limited by inflation, currently running at 9 per cent and likely to accelerate as the plunge in the value of the ruble feeds into import prices.

To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes

[^1]: And is suspected of doing so to help some of Putin’s friends, but that’s a side issue.

196 thoughts on “MMT and Russia

  1. @J-D
    That acctually means that government can still buy it since it has more money then private sector, inflation will be a sign that such buying is doing damage to private sector by taking away too much, more then it can produce of it. This damage will create political constraints. But government can still buy as much as it wants. Should it keep doing it is another question but it still does not prevent it from buying untill political constraint does not stop it.
    The example is the war economy where the price is also controlled and population readilly gives to government no matter if it needs to use it themselves. Copper drive, metal drive, bond drive etc in WWII. There was no political constraint and government kept buying no matter the damage to private sector while enabled private sector to accumulate savings and pay off the debts.
    Governments marketing campaign worked to create willingnes for sacrifice for a purpose. The environmental problem requiers the same willingness and national unity that specifys determination around a goal.

    Now consider that many things for sale come from imports, which requiers foreign currency to import if not 5 countries that import stuff using only their own currencies. These 5 countries can buy even world supply of goods and services without constraint and without creating inflation domestically.
    But those countries that can not buy internationaly using their own currency are in different position, especially if they have to import oil or food. ANy additional buying by such government is producing or inflation or exchange rate change, depending on the set up of monetary operations, sometimes both change procyclicaly.

  2. @J-D
    Yes J-D, you are not alone. It is a little perplexing to me as well. Under the current regime we have a federal reserve actively setting an inflation target which it achieves by manipulation of the money supply ( via interest rate settings ). What’s the difference.

  3. If governments face inflationary and political constraints, doesn’t that mean they can’t always afford to buy anything for sale and that their solvency is not absolute?

    No, because solvency means “can pay current debts”, not “can make new debts”.

  4. Doesn’t ‘constraint’ mean ‘something that limits freedom of action’? If I am subject to constraints, doesn’t that mean I am not absolutely free to do anything I want? What different meaning could it possibly have?

  5. They can still pay the bill if they’re willing to brave the constraints, which may or may not materialize. But if a Gov’t issues specie and alloys it or plugs it with copper (etc), and bingo, before anybody buys another thing you have inflation.

    You can also have cost-push inflation, where a critical import like oil suddenly increases in price, which means a lot of money is going to go to foreign savers unless you limit such imports. Then you’d have deflation unless you gave in and spent the extra $ or found an acceptable substitute.

  6. @John Hobgood

    If you’re saying that debasing specie coinage automatically causes inflation, while expanding the supply of fiat money does not automatically cause inflation, I don’t see why. It seems to me much more plausible that both debasing a specie coinage and expanding a supply of fiat money carry some risk of inflation, with more risk of inflation (and risk of more inflation) the more the money supply is expanded.

    Also it seems to me that although (in both cases) it may be possible for governments to meet all their bills by expanding the money supply so long as they are willing to accept whatever inflationary risk accompanies that expansion, governments aren’t always willing to accept inflationary risks — and what’s more, I’d say governments shouldn’t always be willing to accept inflationary risks, not without limit.

  7. @J-D
    Up until recently the US were printing money faster than the trees could grow with their quantitative easing. As far as I can tell interest rates are still very low and inflation as well.

  8. @J-D

    You have hit on the reason why MMT and heterodox but non-neoclassical economists don’t really have any great disagreement in my opinion.

    It depends on how you define “constraints”. If you want to define constraints in a narrow, notional or formal system manner then a fiat currency issuing government has no constraints on “printing money”.

    But as soon as you move into the real economy and into other real systems, such as the ecosystem, constraints exist. Also, political system constraints exist as mentioned above.

    I think heterodox economists, when they say there are constraints on government spending, are using budget limits as proxies for real limits. They know as well as MMT theorists that the government could print any amount of money. They also know that that might cause problems.

    At the level of public discussion, heterodox economists, especially neoclassical economists, show little or no respect for the public’s understanding of economics (rightly or wrongly). Here the rhetoric is simplified and the notional limit as proxy for the real limit is simply portrayed as the real limit. The public think (or are thought to think) that money is as real as anything else ie. that is a real thing with real quantity not a notional thing with notional quantity.

    The fundamental problem exists in political economy. Here I use “political economy” to mean not just national economy but economics as conditioned by politics and ownership. Monopoly-finance capitalism prefers to operate with unutilised capacity. That is to say, it prefers to operate with an unemployment pool and some idle plant. The unemployment pool exists to discipline labour and reduce wages and conditions. Idle plant is tolerated as an outcome of unemployment and the cost of discipling labour and also as a buffer for surges in production when such surges are temporarily attractive in the business cycle.

    The promotion of budget constraints as real constraints in themselves suits neoclassical economics and the capitalist-oligarchs of monopoly-finance capitalism. The government’s spending capacity is not permitted to extend as far as it could, soaking up unemployment and reducing capacity under-utilisation. If this was permitted, the entire economy would be better off and workers would be both relatively better off compared to the rich and absolutely better off. On the other hand, the rich remain relatively better off and absolutely better off when the economy produces less but is made highly unequal in its rewards and heavily favours profit share over wage share.

  9. @Crocodile

    I am no expert on Quantitative Easing but I think almost any economist of any persuasion including an MMT economist will tell you that Q.E. is not the same as “printing money”. Text below in quotes is from Wikipedia.

    “A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base.”

    “In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) in a country is defined as the portion of the commercial banks’ reserves that are maintained in accounts with their central bank plus the total currency circulating in the public (arena) ….

    “The monetary base should not be confused with the money supply which consists of the total currency circulating in the public plus the non-bank deposits with commercial banks.”

    Q.E. increases commercial bank reverves held in the central bank.

    “Quantitative easing can help ensure that inflation does not fall below a target.”

    That is, it can help ensure the economy doesn’t fall into deflation.

    Theoretically, these reserves could also help commercial banks lend more but if there are no more credit worthy customers out there the commercial banks won’t lend more anyway. So Q.E. may do little to really stimulate the real economy. On the other hand, it might encourage rises in stock prices and lending and speculating for that purpose.

  10. @Ikonoclast

    Only to the degree that the Fed buys securities that end up being truly worthless.

    QE2/3 was more about stepping in front of buyers at the auctions of T-Securities, essentially telling them to take their Trillions and DO something with them, because welfare for rich guys is about to dry up. Paying attention to sectoral balances, you can see this type of thing actually acts like a tax on the Private Sector, through loss of interest income.

    That being said, one shouldn’t really howl at the rich. They’re typically as pro-cyclical as consumers are. This is where the Employer of Last Resort and fiscal adjustments like temporarily suspending payroll and self-employment taxes (while the Gov’t makes those payments in our stead) can work in a counter-cyclical fashion and provide a bottom to the market. That way you don’t get employees saying “hire me, hire me” while biz is saying “I’ll hire you when you start buying more stuff.” ELR and tax suspension would add to existing “automatic stabilizers” like Unemployment Insurance.

  11. @Ikonoclast

    I should have said “It’s “printing money” to the degree that the Fed ends up with securities that end up being less valuable than their purchase price”. Otherwise it’s basically a swap of one $ denominated asset for another, or preventing the market from purchasing Gov’t guaranteed interest bearing assets (T-Securities).

  12. @Crocodile

    It may be true that the quantitative easing engaged in by the US has had no effect on the rate of inflation, but even if it is it may still be false (personally I’d bet it is) that the US has an unlimited capacity to engage in quantitative easing without causing rising inflation. I’m suggesting that the risk of inflation limits the capacity of any government to engage in monetary expansion (of any kind), but not that it limits that capacity to nil.

  13. @J-D

    Look at Japan. They’ve been at it for 25 years and have a “debt” to GDP ratio that makes the talking heads spin like studies for Linda Blair in The Exorcist.

    With a fully fiat currency, it all boils down to this:

    How much of your fiat tax credits (your currency) are in the private economy?

    Do you have enough real goods and services to satisfy the velocity of those credits?

    Yes: You’re good, stay at stationkeeping, but look lively and adjust for eventualities.

    No: Dial back spending/increase tax collection, find substitute goods/services where practical.

  14. According to MMT proponents, the constraints on government spending in the case of a sovereign currency issuer (such as the Australian Government) exist on the real side of the economy, not the financial side. The availability of labour, materials, energy, and technology determine how much money the government can spend while still maintaining price stability. Money is not the problem. A currency issuer can never run out of its own currency; it creates the currency at will; it is not revenue constrained.

    Taxation is necessary for four reasons: 1. To force households and firms to get their hands on currency so that they can pay their tax liabilities. The currency is in demand because it is the only thing that the government will accept as payment for tax liabilities. 2. To drain purchasing power out of the private sector to prevent inflation. 3. To achieved desired distributional goals (such as reducing the degree of inequality of wealth) 4. To encourage desirable behaviours (donating to charity) and discourage undesirable behaviours (consuming cigarettes and alcohol).

    Raising funds for the government to spend is not among the purposes of taxation (if the government is a sovereign currency issuer). Why would it need to collect its own dollars? The dollars it creates whenever it wants?

    Tax dollars are not gathered so much as extinguished. They constitute a depletion of the private sector’s purchasing power.

  15. @J-D

    “It may be true that the quantitative easing…without causing rising inflation.”

    Wholly incorrect. QE is not monetary expansion. It’s giving holders/prospective purchasers of T-Securities something they didn’t want in the first place (reserve balances). That’s why they showed up at the auction. They wanted the T-Securities and they got turned away because the Fed didn’t want to pay them interest for taking no risk. Unfortunately, QE decreases interest income to the private sector and so acts like a tax.

  16. @Nicholas

    So, just to be clear, are you saying that the Russian government can spend as much as it likes for any purpose, and doesn’t face any problems arising from the sharp drop in its oil revenues?

  17. First thing MMT assumes is very active government that serves the needs of its population.
    Second thing it assumes is that only real constraint is availability of labor.

    With activist government if any material is falling in supply, it will quickly find a substitute material that is needed and transform technology as needed. The government can organize new technology and production and also cover the adjusment costs in order to fill the needs of people.
    All that is possible if there is enough available labor to do it.
    If oil is needed but can not procure it in the market, then government will subsidize the cost of technology of pumping preassure into old wells to get some more of oil, or to get it it from shale. Subsidize gas production to get gas by fracking and subsidize adjustment to using gas instead of gasoline. If that is still not enough, it will subsidize alternatives to hydrocarbon sources of energy.

    It is not a problem to achieve that if you have activist government and available labor to employ that new technology requiers additionaly in order to supply substitute comodity.

    What matters is our pay, is everyone getting satisfactory wages to cover for needs. And all our pay is nominal which we replace for what we need. Government is not constrained to cover nominal pay. But, it is constrained by available labor to produce substitute materials/ comodities/ goods. Automatization is the way to have no limits to available labor for such new substitute. And globalization.

    Sure that it is hard to grasp the logic of MMT if you do not want active government that knows what is doing. But, they are explaining it to us all the time in this manner. The problem i see is that most of the government can not hear what ordinary people say to them but hear only what those close to them say. They hear only those that have huge organisational power. Corporations are becoming the biggest organisations of people all around us. People follow its leaders (CEOs) and government is listening to those CEOs that have huge swaths of people behind them.
    Corporations are organisations of people, just as states are organisations of people. Hierarcy of that is becoming somewhat messy tough.

    When labor is not available anymore then it is inflation that is taking over. Under assumption that inflation is comming from wage increase and as such from the increase in buying power.
    Activist government can predict and prevent any comodity supply constraint. It can also use buffers in supply like National Oil Reserve Agency to smooth out short term demand.

    MMT is also proposing the labor buffer such as Job Guarantee and Basic Income Guarantee against inflation preassures.

  18. @John Quiggin

    I think he’s saying that MMT says that for a fully fiat currency issuer, it’s not a nominal question, but a question of real resources.

    Example:

    A: You offer no old age pension, but allow seniors to contribute to a tax-free (no tax in or out) self-directed investment account. They manage to retire at 62 on at least $2k/mo proceeds from the account and never have to work again.

    B: You guarantee seniors, for their service to the economy will get USD 2k/mo minimum upon retirement, gratis.

    In either case, it’s a question of whether or not enough real goods and services are available to service their needs. Perhaps not so evident, the net $ ultimately come from the same source.

  19. @John Quiggin

    are you saying that the Russian government can spend as much as it likes for any purpose, and doesn’t face any problems arising from the sharp drop in its oil revenues?

    Only in combination with activist government that will organise production of previously imported goods. In the meantime they have the rest of the world, besides west, to import what it needs.

    But why need to specify “for any purpose” when the production of previously imported goods is sufficient purpose to spend what it wants to prevent problems.

    If the government does not want to do anything but only apropriate spending, does not want to meddle actively into economy, then it will have to spend much much more and make prevention of problems from drop in oil revenue allmost impossible. SInce the time it will last will also be much longer.
    On the other hand, really activist government can reduce amount of spending and time needed to make problems go away.

    Many anallysts of present Russian problems are saying that these sanctions and oil price drop is an oportunity not a burden. Depending on what road will Putin go. Activist government/ anti-neoliberal or passive/neoliberal.

  20. @John Hobgood
    Imports are cheap only to users of truly fiat currency, to those 5-6 countries that got to force others to trade in and accept only their currencies.
    Those currencies are used for international trade and as such can prevent inflation from domestic supply drop. Russia is not one of them.
    As long as other countries accept your currency for their goods, you will feel no lack of supply domesticaly. And that is cheap.
    Other countries can import up to one point and then due to debt in foreign currencies, have to start exporting. They have to return the favor of previously receiving goods for cheap. That is thanks to not using fiat money, but tying exchange rate to other asset, like gold or foreign money.

  21. @John Hobgood

    You quote what I wrote, describe it as ‘wholly incorrect’, and then continue that quantitative easing is not monetary expansion.

    Your statement that quantitative easing is not monetary expansion would contradict any statement that quantitative easing is monetary expansion; in other words, if your statement that quantitative easing is not monetary expansion is a correct statement, any statement that quantitative easing is monetary expansion would be an incorrect statement.

    But I never made any statement that quantitative easing is monetary expansion. Did you think I did? If so you weren’t following carefully enough.

    I was discussing quantitative easing not on the basis of any views of my own about any connection (or lack of it) between quantitative easing and monetary expansion, but in response to an earlier comment by Crocodile, which, now that I reread it, does look a lot as if Crocodile thinks quantitative easing is a form of monetary expansion, or equivalent to it. If you disagree with that statement, you’re disagreeing with what Crocodile wrote, not with what I wrote.

    I am not a crocodile, as you would realise if you could see me. But you can’t. Perhaps that helps to explain any misunderstanding.

  22. @John Hobgood

    Crocodile thinks quantitative easing is a form of monetary expansion, or equivalent to it. If you disagree with that statement, you’re disagreeing with what Crocodile wrote, not with what I wrote.

    I am not a crocodile, as you would realise if you could see me. But you can’t. Perhaps that helps to explain any misunderstanding.

    Well I’m certainly a crocodile. Maybe I’m not quite following you correctly. Surely, if assets are procured from the private sector regardless of their worth with money that didn’t exist before the money supply must have expanded.

  23. JQ, I’m not the best person to answer – L. Randall Wray, Warren Mosler, Stephanie Kelton or Bill Mitchell could write with authority, but my tentative reply is that MMT proponents do not advocate government spending “for any purpose”. The literature emphasizes productive purposes and keeping within the real economy’s constraints. If there is labour, materials, energy and so on that are not being used, increasing government spending to mobilize those real resources into creating real goods and services will not cause inflation. It will make useful goods and services which otherwise would not have been made. It will increase sales, profits, hiring, investment, and incomes. If, on the other hand, the economy’s real resources are already fully employed, then government spending cannot be increased without causing inflation.

    Russian firms have a large amount of debt denominated in Euros and USD. The sanctions impede their ability to earn the foreign currency they need to service those debts. The Bank of Russia is lending its own reserves of foreign currency to the firms. The Bank obviously cannot create USD and Euros – it can only get its hands on them through the international trade transactions which are currently restricted. Its reserves of those currencies are dwindling. It is not clear that the Russian Government is truly a sovereign currency issuer when the country’s economy is so heavily exposed to debts denominated in other currencies. I also note that the Russian Government has turned itself into a world pariah, which exposes its currency to coordinated speculatative attacks. These attacks its currency sovereignty.

    The other point that occurs to me is that MMT proponents emphasize the importance of a functional tax system which creates demand for the currency and drains purchasing power out of the private sector to prevent inflation. Russia’s tax laws are enforced arbitrarily. This may result in not enough roubles being drained from the private sector to give the government the space it needs to increase spending without destablizing prices.

    If the Russian Government stopped being a pariah that is subject to sanctions and currency attacks, stopped Russian firms from incurring Euro and USD debt, and created a well-administered tax system, it might become a sovereign currency issuer not just in name but in practice.

  24. @John Quiggin

    Sorry I didn’t know you replied especially since MMT’s confinement to the sandpit.

    Well why do all other economists talk about tax revenues as if they are a real thing? Its nominal and a data point, nothing more.

    I don’t know much about the Russian situation so can’t speak to your point there. If its anything like Norway you would be talking about Current Accounts but like I said I don’t know.

    Tax revenues from within a country are as you suggested are to control effective demand.

    it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes

    Reverse that equation so you start from origin point zero – taxes are paid by public expenditure. And since taxes are used to transfer real resources it appears as if public expenditure is paid for taxes but that is an inaccurate statement.

    A lot of your MMT comments seem to say MMT commenters and proponents are saying “x” & I could be wrong as I haven’t seen all those comments but I think you may be taking them out of context & that’s primarily because you’re looking through your paradigm instead of their paradigm. You do manage to exclude the major MMT economists from this commentary.

    I wont link to my site but over there Tom Hickey wrote into one of my blogs about you:

    It is not the case that “more expenditure necessitates higher taxes,” but that beyond a certain point greater expenditure can require raising taxes to control inflation per functional finance. But recent inflations have arguably been more influenced by supply shortages and rising prices of vital materials affecting the price level continuously than demand driven inflation resulting from too much money chasing too few goods when the economy reaches full capacity and cannot adequately respond to increased demand.

    And from what I can see that may be what is you may be getting hung up on.

    I hate all the jargon in econ but I do like MMT in its simplest form

    There are only three ways to put the private sector in surplus (unfortunately this implies a policy goal)

    Run a government deficit & a current account surplus
    Run a government deficit > current account deficit
    Run a government surplus < current account surplus

    However I would rather have $ in my pocket than the governments & yes private sector here includes the ROW

  25. John Quiggin :
    @Senexx

    “public expenditure is paid for by resources” (i.e. not taxes)

    This is common ground for just about all economists. All expenditure is paid for by resources (more precisely, consists of the allocation of resources to some particular goal.
    Taxes are the primary instrument by which resources are transferred from private to public expenditure, so it’s usual to speak of public expenditure being paid for by taxes (or, better, tax revenues), but it’s really the resources these revenues command that matters.
    But, as someone above said, the point that public expenditure is resource allocation is neither modern, nor monetary nor a theory. It’s a fact about the real economy that has been known since time immemorial.

    I just re-read what you wrote but what it is “usual to speak of” is exactly what gives the wrong impression – even the impression to some that surpluses are good. I find it is this wording that is the problem not the wording of MMT.

    Taxes are the primary instrument by which resources are transferred from private to public expenditure

    It would be more useful to say Taxes are the primary instrument by which resources are transferred from private to public sector – as the expenditure is not the relevant part, its the resources. This provides clarity.

    It’s a fact about the real economy that has been known since time immemorial.

    Whether it is a fact or not economists-at-large in the mainstream clearly use inappropriate wording.

    As for MMT which is largely an operational description of macroeconomic operations and its constraints depending on whether currencies are free floating etc. includes much more than what is being discussed here. So will be happy to discuss the definition of modern, monetary, & the misnomer of theory another time – though largely previously discussed in one of your other earlier threads.

  26. @ alfred venison
    Berkshares is not social credit, it is only a way to keep more transactions in local area. It is not social credit because of this

    Federal currency is exchanged for BerkShares

    from your link.

    WIR Credit is social credit because it is not exchanged for Swiss Franc and it is credited as needed.
    Berkshares replace prime currency while WIR is added, it is a paralel economy, complementary.

    Although WIR started with only 16 members, today it has grown to include 62,000. Total assets are approximately 3.0 billion CHF, annual sales in the range of 6.5 billion, as of 2005.[4] As of 1998, assets held by the credit system were 885 million and liabilities of 844 million, i.e. the circulating WIR money, with equity in the system of 44 million. These WIR obligations being interest free have a cost of zero. Income from interest and credit clearing activities were 38 million francs.

    And yes, those complementary currencies are using full power of MMT knowledge.
    Fiat money is also MMT but it is masked by sheer size and complexities of a monetary system. And difference is that fiat money is crediting people’s needs basing on the size of income, while complementary/ paralel/ ‘funny money’ is credited basing it on needs.

    ‘Funny money’ never suffered evolution from Gold Standard as Dollars/Franc/ Yen has, so they went right for human needs as the base for issuing the credits. And they usually do not cost, there is no interest attached to crediting the ‘funny money'(usually).
    A bank issuing the credit in US$ or AUS$ is also ‘funny money’ since it gives you what you need, it gives you aditional buying power to fulfill your need, but it limits it by your ability to pay it back.

    Social credit can be payed back with goods or labour directly to issuer or to whome they direct you, while credits in US$ can be payed back only with same. That is another difference.

    Other fiat moneys also are in evolution toward the social credit set up. Slowly but surely they are changing. By today, it is only that corporations, mostly banks, are enjoying such evolution of fiat money, but in time, people will be using it because automatization demands it.

  27. @J-D

    I’m going to have to backtrack and say while QE is indeed “monetary expansion”, it isn’t an increase in the “money supply” (unless the Fed buys an asset that ends up being worthless). Generally, QE increases the level of reserves in the banking system in hopes of stimulating lending.

    What I was responding to was your statement (page 4, #15) wherein you mention QE in the 1st sentence and seem to consider it a form of monetary expansion in the 2nd sentence. Well, QE is “monetary expansion”, but we have seen that, in general, it really doesn’t have the ability to counter deflation/increase inflation. Why is this? Because bank lending is capital constrained, not reserve constrained. If a bank finds a creditworthy customer and figures it can make a profit on the loan, it can just go ahead and make the loan without regards to the level reserves in the banking system (where you have a “Lender of Last Resort” like the Fed). If, having made the loan, they find themselves short of reserves and they can’t borrow them from another bank, they will have an overdraft at the Fed. The Fed doesn’t allow this and will automatically lend that bank the required reserves via the Fed’s “Discount Window” or their Term Loan Facility. But all of this hinges on being able to find a creditworthy customer that actually wants to take out a new loan. Otherwise, increasing the level of reserves in the system via QE/Monetary Expansion is just pushing on a string. Meanwhile, QE acts as a tax on the private sector by decreasing the amount of interest income it gets from investing in T-Securities.

  28. @Crocodile

    “Surely, if assets are procured from the private sector regardless of their worth with money that didn’t exist before the money supply must have expanded.”

    Yes, less any “profit” the Fed has made on other assets it has procured from the private sector, as the Fed sweep it’s profits into the Treasury’s General Account.

    Please see my reply to J-D in #35.

  29. @John Hobgood

    It’s hard for me to tell, but it looks as if the structure of the argument you’re making here goes something like this, in outline:

    Quantitative easing can never affect bank lending; therefore, quantitative easing can never affect inflation.

    If that is a correct interpretation, then there’s a great big gap in the middle that needs to be filled in.

    But perhaps I have misunderstood, and in some way your argument is different from what it seems to me to be.

  30. I have philosophically solved the issue of the apparent disagreement between orthodox academic economics and MMT. Note: I exclude cheap, politicised neoliberal economics from the category “orthodox academic economics”.

    The MMT argument occurs when people fail to note a fundamental fact. There are formal systems (e.g. the fiat money system and the financial economy) and there are real systems (e.g. the real economy and the biosphere). Economics is difficult to grapple with and one reason is that it involves interactions and feedbacks between formal systems and real systems.

    The apparent paradoxes and contradictions between orthodox academic economics and MMT occur because of reification mistakes followed by category mistakes in the hands of amateur proponents on each side. The reification mistakes are often quite subtle. On the MMT side, proponents begin by explicitly noting the Formal and entirely notional nature of fiat money. However, the drift to a reification mistake occurs when the potential to create money without limit is asserted as meaningful in isolation from the real economy. It is not meaningful or real on its own so it is not worth saying except to counter some of the more absurd neoliberal propaganda. The attempt to make it independently real and meaningful is to reify it. It must be linked via macroeconomics to the real economy and thus to real limits in the real economy and the real environment. In this sense, the statement “the government is not spending constrained” is meaningless and indeed false.

    On the other hand, orthodox academic economists use a shorthand which appears to reify money too. They use “taxes” as a shorthand and proxy for real costs. Orthodox academic economists know what they really mean. With their integrated understanding of economics, the one wholly implies the other. But MMT proponents take this apparent or implied reification as literally intended. This might true when it comes from neoliberal economists (though even there it is often intended as obscuring propaganda).

    The whole thing is a failure to communicate between MMT proponents and orthodox economics proponents. It is even doubtful that this disagreement amounts to anything at the academic level as opposed to the amateur proponent level. There is really no fundamental disagreement except with neoliberal propaganda and practice.

  31. @Ikonoclast
    From reading “Economics and the powerful” (Haering and Douglas), it would seem that many “orthodox” economics are engaged in neoliberal propaganda and practice. In fact, almost all economists commenting in the MSM, as well as many of those in Treasury, appear to belong in this camp. They will deny that “taxes” is a form of shorthand.

  32. @Totaram

    NB, Greenspan told Paul Ryan “…that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”

    Mr. Greenspan’s comments in later days suddenly shifted towards deficit hysteria.

    Imagine that.

  33. @J-D

    I’ll give you a couple of clues:

    1. QE, to the extent it lowers interest rates, is deflationary. It removes net interest income from the private sector.

    2. Consumer spending is necessarily pro-cyclical.

  34. @Totaram

    Exactly, that’s why I delineated “orthodox academic economics” from “neoliberal economics”. Neoliberal economics never earned the term “academic economics”. I refer especially to those charlatans, Milton Friedman and the Chicago school. Mere situation in academe does not earn the honour of “academic”. Neither does singing tunes for pay from the rich men. There is more to it than that.

  35. @J-D

    Quantitative easing can never affect bank lending; therefore, quantitative easing can never affect inflation.

    That would be correct only in normal times, not when banks are insolvent as today. Zombie banks would reduce lending by increasing interest rates. Something like what happened in 2008-9 by raising rates on credit cards. ANy excuse to raise rates was used. Customers refused to increase borrowing at such rates. So lending fell.

    QE helps bank become solvent by giving them chance to earn money when they lost a lot if not for QE. QE was acctually about saving banks, full stop.
    Interest rates for government borrowing was allready very low and did not need to go lower. A large part of buying assets from banks was to buy assets at face value, not at market value. Many assets were worthless.

    John Hobgood acctually noted importance of that in comment #36

    I’m going to have to backtrack and say while QE is indeed “monetary expansion”, it isn’t an increase in the “money supply” (unless the Fed buys an asset that ends up being worthless).

  36. @Ikonoclast
    Nice work there about phylosophical solution, even tough i should warn you about your own excellent warnings about “one shot cure for all problems” ideas.

    Yes, MMT often jumps between nominal and real terminology trying to recognize feedbacks.
    2) MMT often accounts only change part. Yestrday was allready determined; change is today; what effect will change have on tomorrow. While ortodox economic always count the whole, valued in nominal, Calculate whole of yestrday, calculate whole of today and what trend is? But “in long term, we all are dead” because there will be change tomorrow too. Only chnge from yestrday matter.
    3) Arguing in nominal terms is better suited for prediction since goods follow where money is, not opposite.

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