Happy New Year to all PRIME readers, and welcome to my latest PRIME publication, The power to create money out of thin air. At first sight, this is a long-delayed review of Geoffrey Ingham’s book, Capitalism (Polity Press, first published 2008). However like all the best reviews, it has become a hook on which to hang discussion of the author’s contemporary pet themes. Here, these include primarily, capitalism’s ‘elastic production of money’. However, I also take the opportunity of explaining why misunderstanding about the creation of money out of thin air is so widespread, and why orthodox economists are mainly responsible for the confusion.
Out of this discussion arises a further one about ‘fractional reserve banking’ – currently at the heart of debate surrounding an IMF Working Paper by Kumhof and Benes. Then I take a pop at the theory and policy frameworks that prevent (or claim to prevent) co-ordination between monetary and fiscal authorities.
The review challenges, too, the widespread assumption (long promulgated by the enemies of labour, but also held by others) that wage claims by trade unionists caused, or led to, the inflation of the 1970s.
But Ingham’s book raises important issues which are and will be at the heart of politics and economics in 2013: with a deeper understanding of capitalism’s ability to create ever expanding amounts of credit-money, how does a democratic society once again rein in, regulate and subordinate the private finance sector to the wider public interest? How does society regain control over the public good that is credit and a sound banking system, and use both for financing society’s most important needs – including the need to tackle the threat of climate change?
And finally, how can public goods (including liquidity) avoid being confiscated by the finance economy? And how can they be restored to public accountability?PRIME — Policy Research in Macroeconomics
The power to create money 'out of thin air'
Ann Pettifor | Director of Policy Research in Macroeconomics (PRIME) and a fellow of the New Economics Foundation, London
Note: Geoffrey Ingham is also the author of The Nature of Money.
From the comments there:
From the comments there:
Andi : So is PRIME advocating MMT?
Ann Pettifor: Andi, thanks for your query. First, this analysis is mine, and does not represent the views of all the network of economists linked to PRIME. Indeed we disagree on some points. Second, as a network we have many good friends in the MMT community, have great respect for their work, and many of our approaches are aligned. But cannot say that PRIME as a network of economists is ‘advocating MMT’. But we sure are closer to them than to the orthodox community…
21 comments:
I like Ann Pettifor and have plenty of respect for her. I've heard her speak at conferences I've been to.
But having just skimmed thru that "money out of thin air" work, I'm not impressed. It's not one of her best efforts.
"Advocating MMT."
What the hell does that mean?
MMT is just a description of how fiat money/sovereign currency systems function.
That's like saying you're close to the belief that the earth revolves around the sun, but you're not advocating it.
These people are all egomaniacs and don't want to embrace MMT because they feel it detracts from all their precious and "brilliant" insights.
MIke, I think that there is still some disagreement among allies over the correct description of the system. The question is was not to Pettifor personally about where she stands, as I read it, but where her org stands. She is also a member of New Economics Foundation, and they are not all on exactly the same page as MMT either.
So I think that this is still being debated within the circle of Post Keynesianism, where not everyone agrees completely with the MMT monetary description.
I don't know Pettifor's personal stance on this.
"MIke, I think that there is still some disagreement among allies over the correct description of the system" - Tom
Tom, that is true, however it appears that there are no math errors or errors in logic in the MMT view and so far all of the arguments I've seen that claim MMT has it wrong have been semantic presentations…none have yet challenged the arithmetic…none have even tried.
That's where the rubber meets the road.
This has again been the case in the flurry of objections we saw in yesterdays posts.
The economy runs according to the rules of arithmetic bounded by closed system constraints, not the rules of language.
If the naysayers think they know so much about the system then they should be expected to describe it in system arithmetic terms.
Personally I haven't found any math or logical flaws in the MMT view…and I've been working hard to find them if they exist.
The system has behaved over a string of decades exactly the way MMT forecasts that it should have. This sets the bar pretty high in my view.
I don't think that there is disagreement over the math or the accounting (except in a few cases like Steve Keen's accounting), in that this is easily established thru analysis. However, there are still some issues to be iron out regarding particulars when dealing with aggregates.
But what the math and accounting mean and what needs to be done is another matter. There may be agreement over the theory but not the proposals, for instance.
"I don't think that there is disagreement over the math or the accounting" - Tom
Tom I believe there is. And it's a big one.
The folks that believe that public debt is a financial obligation of the non-government, or that monetarism can do anything more than change the distribution of existing NFA within a sector, or that the market determines bond rates, these are all fundamentally math, or system errors.
They don't understand the boundaries or the interactions between different systems, which makes it literally impossible for them to analyze the behavior of either system with any degree of confidence.
Thus they include the Fed/Treasury with the non-government, and then can't seem to figure out what $NFA is.
That is like including the power company operations in your analysis of the operation of your TV set. Th eonly thing that matters wrt the power company is that electricity at the right voltage comes out of it and that it can deliver what current is needed on demand.
These folks are subject to believe that there is a feedback mechanism between the Earth and the Sun that limits how much energy the Earth is able to extract from it.
1. None of these people are monetarists.
2. Govt securities other than consols are financial (liabilities maturing in time) and legal (contractual) obligations to non-govt holders.
1. None of these people are monetarists.
What would be the proper rubric under which to group the people who adhere to belief in an omnipotent Fed?
None of these people that I know of anyway agree with an omnipotent Fed.
Who are you thinking of.
"1. None of these people are monetarists." - Tom
They don't self-identify as monetarists but they seem to hold some inadvertent monetarist beliefs.
If one believes the Fed can drive the economy (rather than goose it)…or that there is some feedback loop between the non-government and the government that limits money creation or creates a future debt burden, then one has at least some monetarist beliefs, regardless of what they call themselves.
This includes some so-called Post-Keynesians in my view.
This includes some so-called Post-Keynesians in my view.
Like?
(reposted to fix link)
Noah Smith offers a good elaboration of the Omnipotent Fed idea here. Basically it amounts to a belief that the Fed can set price level. That it can control inflation in a direct turn-the-dial up and down fashion.
Those are the sort of people that came to mind when paul said "The folks that believe that [...] monetarism can do anything more than change the distribution of existing NFA within a sector". If those aren't "monetarists" what's a good name for them?
Who subscribes to (something that walks and quacks like a monetarist duck but might possibly have a more appropriate label)? To start with, Sumner and the troupe of "market monetarists" who advocate for ngdp targeting with the unquestioned belief that the Fed can dial ngdp up and down at will. To them, I'd add all the people outside that camp who meet that discussion on those same terms--it's not a question of whether the Fed directly controls inflation but whether it should target inflation or ngdp and what the appropriate target to be. Then throw in everyone who said QE will be inflationary, still thinks it will be inflationary or buys the idea of it being "stimulus".
Lavoie, Garrido, and a number of other PKers or hetero's who have had blog posts cross-posted over here in disagreement with this or that particular aspect of MMT. I don't remember names well, but ido remember what group they are associated with.
Cullen Roach.
And now Anne Pettifor.
Of course, what all of these folks have in common is that they aren't part of the MMT school.
It's OK to have disagreements, but so far the criticisms of parts of MMT have been very weak, at least as far as I'm concerned.
That doesn't mean I want to tar-and-feather them but I'm not buying what they are selling. YMMV.
What Congress does is irrelevant…a completely different problem. It can affect the function of the MMT system but it doesn't help to analyze the problem with MMT when the proximate cause is Congress. This seems to be a confusion shared by many folks involved in these discussions.
They don't know how to identify THE problem.
No adjustment to MMT thinking can fix that.
"Govt securities other than consols are financial (liabilities maturing in time) and legal (contractual) obligations to non-govt holders." - Tom
Financial obligations of the government TO the non-government…the holder of the asset has no liability, nor does nay other member of the non-government.
To say that agents in the non-government have a financial obligation as a result of government bonds held by other agents is to say that taxes DO fund spending since interest accruing on the bonds is a line-item on the budget.
I thought we agreed that taxes don't fund spending.
I said that govt securities are fiancial obligations TO non-govt holders. All govt securities (tsys) other than consols (UK) mature in time and must be redeemed at par at that time as a contractual obligation of the state.
"I said that govt securities are fiancial obligations TO non-govt holders." - Tom
Right, Thus there is no obligation of non-government agents wrt the "National Debt" or as we should say "National Savings".
There is no "burden" on future generations, or any inter-generational "burden", implied or explicit, as a result of "debt" in a county's own currency, otherwise logically taxes would be funding spending, at least to some extent.
So it would be logically inconsistent to agree with both statements, ie that taxes don't fund spending and we have a future obligation to pay higher taxes as a result of the "debt".
Taxes dont's fund spend, clearly. The financial obligation is a Treasury liability and to met it by redeeming the security, the Treasury must procure reserves, which it cannot create. So it must either tax to get them or else roll the security over.
Tom, apparently we can read the same thing and come to completely different conclusions.
http://larspsyll.wordpress.com/2013/01/04/governments-never-have-to-print-money-to-finance-deficits/
I don't think that says the the Treasury doesn't need reserves in its account to redeem bonds maturing. To cancel the liability on its books, the Treasury has to "buy back" its securities as they mature, reducing the total liabilities outstanding, or else roll them over, leaving the total the same (disregarding interest payment, which the Treasury also has to get rb to meet). Simple d-e accounting.
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