Modern Monetary Theory 2011

Got an education yesterday on modern monetary theory yesterday, and I have to say it is a lot to grasp. I was reading this MMT post over at Pragmatic Capitalism and I have to say it really gave me pause. It definitely lays out fundamentally how the US economy functions in reality (or as close to it as we can get via models). It more people in positions of power read it and then did what is best for The People, we might actually get somewhere towards a path of better economic growth.

The Problem with Modern Monetary Theory in the Wrong Hands

The biggest problem I see us facing with knowledge and understanding of Modern Monetary Theory is that politicians will opt to use the information for political gain rather than to promote economic health and recovery. We already see this in the extremely irresponsible actions of Congressmen John Boehner and Eric Cantor, and their partner in the Senate Mitch McConnell. That gang of three is insisting on hard line spending cuts (which according to MMT is akin to a tax hike) while at the same time desiring lower taxes. They have shown a willigness to use the credit-worthiness of the US as bargaining chip with their counterparts on the other side of the aisle.

What Modern Monetary Theory Says Is the Medicine for Increasing US Growth

As best I can decipher from my relative newness to MMT, the medicine the US economy needs is a combination of increased (productive) spending, a reduction in non-productive spending, and perhaps a selective reduction in taxes. By now you have to be scratching your head thinking… “But won’t that increase the debt? Won’t we hit the debt ceiling again?”

The short answer is yes, that will increase “the debt,” and yes, the debt ceiling would be in jeopardy. The important distinction however, is that the debt (as thought of by average Americans) is conceptually misunderstood, and according to MMT, the debt ceiling should be abolished outright.

Stepping Out of the Household Mindset in Order to Understand US Government Debt

The major problem average Americans (like me) have when trying to wrap our minds around economic models is we have a fundamentally flawed paradigm to work from. We conceptualize income, expense, debt, and cash based on our own household or business model paradigm. Concepts of successfully managing a household checking and savings account simply do not apply. Modern Monetary Theorists proclaim this paradigm is fundamentally WRONG when applied to the US economy and US government spending – and the MMT’ers are right!

“Why?” you ask? It is simply a function of the structure of government spending and money creation itself. For our good friend Uncle Sam, unlike you and I, money (literally) does grow on trees. Uncle Sam controls the level of money supply in the system. With the click of a mouse or push of a button on the printing press, an infinite supply of money is at its disposal. You might be attempted to argue, “But isn’t money printing to pay debt inflationary?” but you would be again basing your argument from a fundamentally flawed point of view. The act of money printing is in fact merely changing the duration (and interest rate) of already existing money spent. Money created by government spending is inflationary. Money issued by the Federal Reserve to purchase Treasury Bonds merely has the impact of reducing the interest rate on already existing money created via spending.

So What Is the Medicine for US Economic Growth in 2011-2012?

By now you should have the idea in your mind that the Modern Monetary Theory suggests that increased productive spending with lower taxation (increasing “debt” near term) is the answer. We need to further inflate spending but do so selectively in ways that increase the productivity of workers/citizens. Personally my favorite suggestion is to further expand the expenditure on renewable energy initiatives. Using solar power to create plentiful hot water is a no-brainer for virtually every household (and to a lesser extent apartment buildings) in America. Using solar PV panels to generate electricity is close to being economical for homeowners (and businesses!) – and should be a priority for spending. Scholarship programs for health care, social sciences, and engineering degrees should be a spending priority. Increasing the security and prosperity of other nations globally is more difficult but also should be priority – for it also increases our security and prosperity.

Any of the above suggested spending initiatives would result in increased productivity and standard of living along the lines of those suggested in Modern Monetary Theory. Government spending’s number 1 priority after all, should be to improve the lives for whom the money has been created and spent. I hope you take the time to comment with your own suggestions or criticisms of either my suggestions or my understanding of MMT.

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About S Wise

I teach others about the various uses of binary options as part of an options trading strategy. Learn to make money trading options and increase the performance of your portfolio without inducing excessive risk.
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9 Responses to Modern Monetary Theory 2011

  1. boatman1 says:

    i have read everything cullen has wrote for years…..and some of mosler too….cullen is brilliant in market timing….i actually helped him pick out a boat to buy.

    MMT ‘IS’ the description of a fiat currency issuing country, especially the one issuing the world’s reserve (thats not going to go on forever, however)

    the problem is prescient use by social, political, emotional human beings.

    while creating money out of air and stimulating the economy intelligently is great, its never happened and recognizing MMT as truth will not change giving harry reid a ‘bullet train’ from LA to Lost Wages so he can get reelected (a fact of the last stimulis)……not exactly prescient money use…and the other side of the isle is just as bad.

    the flip side is when times are great, we reel back in spending and PAY for something……..just like u can take away the keg at the frat party at midnite to save it for tomorrow nite….not happening….noda….never.

    we silly humans must be (revenue) constrained or we’ll drink ourselves to death…….communism doesn’t look bad on paper either……..but it ignores human nature.

    human nature is the key n thats not changing hardly at all, regardless of what the dreamers say.

  2. boatman1 says:

    even if there are people to see what has to be done, no decision is good for everyone, and in a republic that takes millions of contibution $ to get elected, do you think there’s room for some pressure on those decisions?……the FED independant?…i know few are that niave.

    warren mosler and scott futwiller would disagree with all this( they even say no fed n govmint interest rates set at zero) …… but i have seen well meaning humans rationalize and reconcile all sorts of decisions w/dire consequences for others.

    milton friedman to phil donohue: “where are these angels that will control things for the good of all?….i don’t even trust myself to do something like that, much less you, phil”

    in effect, MMT has been our funding mechainism since nixon threw out bretton-woods and closed the gold window…….the decades long private debt/credit->public debt->soveriegn default bubble ensued–far from a head right now, tho it will come to one soon……with dire consequences…..

    now i don’t know what to replace this with…..some kinda constrained system,…some will say gold-i’m not sure that works….while it is my primary investment for years.

    • A constrained system is much more subject to abuse than one whose sheer size (and infinite ability to create and destroy units of itself) makes “cornering the market” extremely difficult.

      The constrained system in Europe is the current cause of their malaise, not the lack-of constraint (save for the spending habits of certain debtor nations).

      Gold and precious metals continue to climb, as they should, relative to the dollar as the present returns on other dollar priced assets appear less attractive. The problem, IMO, is not the monetary system per se, but the declining rate of growth in productivity of the assets and individuals in the economy as a whole.

      The assets remain productive, as do the people (at least those with jobs or those active in volunteerism), but the rate of *growth* in productivity has ebbed. People can tangibly feel either directly (in the size of their paycheck or lack thereof) or intuitively (via market perception and economic figure releases) this reduction in GDP/Asset value growth in the US.

      This is one of those topics that makes me feel in over my head, I have to admit. Market forex movements show steady long-term movement of forex into gold, and maybe that continues as more people decide to jump on the band-wagon, but ultimately won’t change the fact that gold (except in the hands of highly-skilled craftsmen or manufacturers) is useless as a productive asset and cumbersome to own, store, and insure.

      • boatman1 says:

        i understand the EU member countries problem of not being able to print to save (?) themselves but printing has other problems…..they got in their situation by BORROWING from EU member states which was made easier BY the eu currency union.

        up 300% in gold in last 3 years.

        one ounce of gold will buy the dow within 2-4 years steve…. on some level it already is a currency….for now…..tho selling day will come.

        this is just the beginning of the middle of this debt fiasco from an exponential credit bubble brought on by unconstrained money since ’71.

        along way from over…..un constrained humans ultimately screw anything up.

        just my take.

      • No argument vis a vis unconstrained humans lol

  3. Pingback: Daily Reading on the Financial Markets: 9/9/11 « Playing the Ponzi

  4. boatman1 says:

    well, i appreciate your commentary here,its one of the 30 sites i read everyday, and i know there’s alot to be learned from a trader such as yourself.

    maybe once in awhile i can show something from my point of view.

    if we all agreed, there wouldn’t be a market.

  5. Tom Hickey says:

    Welcome aboard.

    Don’t listen to the cynics that say understanding how the monetary system actually works is dangerous and either no one should be told else the system should be hobbled. The system has already been hobbled in most Western developed nations and look at how well that has worked out. It has simply served the interest of the plutocratic oligarchy and created a global depression that the entire world is still floundering in.

    The basis of liberal democracy is “Trust te process.” The ruling elite will try to corrupt any system that is put in place and use it to their benefit. Democracy is the only system that has been devised that gives the people a regular opportunity to correct that at the ballot box.

    An informed electorate is required in order for democracy to work, however, So spread the word on MMT.

    MMT has three aspects. 1) a description of monetary operations, 2) a macro theory based on SFC models, sectoral balances, functional finance, and 3) policy options following from 1 and 2. These policy options are also guided by knowledge of other analysis, such as Minsky’s financial instability hypothesis. The rage of policy optons extend across the political spectrum, and while MMT economists put forward various policy options, MMT as an economic theory is politically neutral.

    Yes, knowledge of MMT can be abused, just like any other knowledge. The remedy is democracy, not suppression of either the knowledge or the options that it makes available, which are capable of transforming the world. The alternative is more of the status quo, or moving backward toward a fixed rate system, limiting policy space.

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