Sep 9, 2020
Welcome to episode 45 of Activist #MMT. Today is part two of my three-part conversation with Texas Christian University economics professor, author, and Cowboy Economist, John Harvey. In part one, John talked about John himself, institutionalism, and discrimination. In the final two parts, John and I talk about inflation as seen through the lenses of both mainstream and Post-Keynesian economics. As people who challenge the overwhelmingly dominant school of economic thought, we must learn both schools. Another reason is because we want to efficiently communicate with and convince the masses who have been influenced by the dominant school – and the nearly infinite power that backs it.
I was inspired to talk with John after having an unpleasant debate with a local lawyer and history-buff. He was perfectly pleasant and respectful, but his views I found to be highly cynical and disappointing. (With his permission, the entire dialogue can be found in the show notes.)
As I understand it, his view is that it is essentially impossible for the central government, the one and only issuer of the currency, to safely do anything bold, without offsetting that spending one-to-one with taxation or bond sales, in advance. In his own words:
I simply believe the government has to pay for those programs through taxes or serious consequences will result. Often, the tradeoff is worth it - I'd gladly pay more taxes for universal healthcare for example.
This is because, regardless how desperate the program may be needed, creating the money to do it would increase the money supply, which would cause inflation, which would cause the people to rise up and literally bring down the entire government. In other words, the quantity theory of money is so volatile that even the state’s monopoly on violence is no match for the unbridled rage that would result from the inflation caused by the new money necessary to implement that bold policy.
So, for example, take the Green New Deal, which is required to prevent organized human civilization from devolving into literal worldwide chaos. Daring to create the money necessary to implement this program would cause revolution and bring down the government anyway. As Randy Wray and Yeva Nersisian say in a recent article, "it is irrational to fear deficits more than we fear the annihilation of human civilization."
The objection reminds me of the resistance I have received regarding the job guarantee: for example, if the job guarantee jobs are not "valuable," it would potentially demoralize workers, lead to corruption, and undermine the entire program. Another is that corruption in general would make it essentially impossible for the job guarantee to be properly managed.
[I’ve included some screenshots of this criticism in the show notes]
(See screenshots at the bottom for examples from a recent conversation.)
The idea that these micro concerns would somehow so-dramatically undermine the entire macro purpose of these programs is, of course, absurd. For example: how valuable are the jobs we have today? Right now? Even if a job guarantee job weren’t as valuable as the jobs we currently have, would they be so bad that it would completely outweigh the horrors of involuntary unemployment?
What kind of corruption do we have right now in the for-profit private sector? Even if there was some corruption in the administration of the job guarantee, again, would it be so detrimental that it would outweigh the horrors of involuntary unemployment? How much has corruption undermined other federal program such as the police, libraries, and public schools? (And of course, those who vehemently express these concerns are almost always not desperate for a job, or a better job.)
As John says, the job guarantee is "elegant in its simplicity" and "just so obviously simple and straightforward." The job guarantee is as beneficial to society as seatbelts are in cars. While padded dashboards and more flexible and stronger windshields may be a good idea, it is no replacement for the most important safety feature of all, which is seatbelts.
In these final two parts, John and I talk about the reality of inflation, and describe and refute several mainstream concepts related to it. The concepts include the quantity theory of money, the money illusion, rational expectations, and the never before seen NAIRU boogeyman of runaway inflation – the latter of which, in reality, is hyperinflation.
A couple of notes before we get started:
First: John talks about an interesting and revealing debate he had in the comment section of one of his Forbes articles. That full dialogue can be found in the show notes.
Second, you’ll hear me say that "runaway inflation is not possible unless government is complicit." What I mean to express is the following sentence from page 257 in chapter 17 (Unemployment and Inflation) from the MMT textbook, which applies less to a genuinely-hyperinflationary episode:
The role of government is also implicated. While it is the distributional conflict which initiates the inflationary spiral, government policy has to be compliant for the nascent inflation to persist.
JTH: The problem is that none of that addresses the fundamental fact that one cannot increase the money supply above money demand (Friedman’s key causal factor). Monetary policy can accommodate inflation, but it cannot cause it. In a modern, capitalist economy, inflation is never a monetary phenomenon.
MARCUS THE MONETARIST: If you cannot increase the money supply above money demand, you would never have inflation! Check the first 2 graphs on this post: http://thefaintofheart.wordpress.com/2011/04/04/delong%c2%b4s-%e2%80%9canatomy-of-a-slo w-recovery%e2%80%9d/ Why did you have the “great inflation” in the seventies? Why did inflation “dissapear” after the early 80 ́s? Who, if not the Central Bank, controls nominal quantities – like NGDP?
The analogy I make of the monetary nature of inflation to freshman students is: Can you keep the fire in the fireplace burning without adding wood? No, if you stop “stocking”, the fire will peter out. The same with inflation (defined as a sustained rise in the “overall price level”.
JTH: Explain how this happens in the real world–how does the Fed increase the supply of money in the absence of demand? Specifically.
MARCUS THE MONETARIST: So why during inflation money becomes a “hot patato” and during hiperinflations a “boiling patato”, something no one is eager to hold?
JTH: You see, Marcus, you cannot answer the question without invoking a fireplace or helicopter. If it is true that the Fed can raise the money supply in the absence of demand, then this should be a very simple, even fundamental, question to answer. How does it do it? What is the mechanism? Where is the line of causation?
MARCUS THE MONETARIST: Our postions are so diametrically opposed that I don ́t think this conversation will lead “somewhre”. In any case, for what it ́s worth below my answer: By your reasoning “apple growth” would not cause “apple inflation” unless the apples were dropped out of a helicopter. Think about a big harvest of apples. The apples are sold for other assets, and the value of apples drops in the marketplace. Now think about a big harvest of money. The Fed sells the money in the marketplace for other assets, and the value of money falls. When the value of apples falls, the nominal price of apples falls. When the value of money falls, the nominal price remains unchanged. Instead, a falling value of money can only occur via inflation. Nick Rowe has some great posts on this topic.
JTH: Thank you for posting a reply, Marcus. Again, however, I’m afraid I don’t see a direct answer to my question. I asked what mechanism in the real world the Fed has available to raise money supply above money demand (something that you said above is necessary if inflation is to occur). Money supply can rise if the Fed buys assets or if loans are made from available reserves. To my way of thinking, neither of these can occur without the full and conscious participation of the other side of the transaction. Hence, the supply of money cannot be increased in the absence of demand.
Yet you say (above) that inflation only occurs when money supply is in excess of money demand. You have defended this with analogies, but not with real-world examples of the underlying process. I am a huge fan of using analogies to get the essential idea across; however, unless these mirror something that is going on in the real world (and in a very real and tangible sense), then recommending policies based on such stories is dangerous to say the least.
I hope you don’t think I’m being rude, but I think this is a key question and one that I have never found a monetarist able to answer: how is it in the real world that the central bank raises money supply above money demand? Can you please tell me this and in the context of actual Federal reserve policy tools? This is not a trivial question. The entire monetarist superstructure rests on it. If the answer is that in reality this cannot happen, then I’m not sure how the rest of the monetarist analysis survives. MARCUS THE MONETARIST: *crickets*
[NOTE: My hypothetical Pony For All Act example would literally give everyone a pony who wanted one. It is admittedly a highly resource intensive [and possibly impossible?] project, only meant to make it clear that resources, not money, is important regarding the implementation of a federal program. It’s a chapter in my old MMT-101 presentation. See here: https://youtu.be/mTvgG1Y9GKQ. It was inspired by this 2017 article by Stephanie Kelton.] Below is the text of a Facebook post, containing the full text of my debate, shared with his blessing, and a bit of background.
I had a pretty upsetting conversation with a lawyer and history-buff. Not because he was disrespectful or anything, but rather how darkly cynical and suffocating (and confident) the point of view is.
He, in so many words (roughly) said that "printing money causes inflation/devaluation" is such a sure and harmful thing (specifically, the issuance of currency increases the money supply which devalues the dollar) that it renders chartalism, the state theory of money, pointless. In other words, if the government dared to use it’s power of money creation for an ambitious project, it would cause severe inflation, which would cause people to no longer accept the dollar (despite taxation!), which would cause revolution, which would end the state.
I got his permission to share the conversation. I did my best but I’m clearly not educated enough to compete against such confidence that MMT and the foundations it’s built upon, are wrong.
I’m not interested in bashing him (he’s a nice guy I know personally), but rather to get a few steps closer to being able to handle this kind of deep skepticism properly. Perhaps a small set of academic papers or lectures that best address these concerns.
[DIALOGUE STARTS HERE]
[He saw one of my old presentations and I started by defining and distinguishing between currency creation and bank credit creation.]
HIM: Question to challenge your view of money. Regarding a bank loan at the beginning of the nation:
Obviously the new American bank in 1789 would love to charge Citizen Farmer as much as possible and Citizen Farmer would like the loan to essentially be free. So yes, they negotiate and the answer is somewhere in the middle.
But this still begs the question. In this new country with the new money system, what determines how many of the new dollars the farmer will be willing to accept for his farm?
I'll direct you even further: people in this new America know that a farm is worth more than a single chicken and less than 10 farms. But what is everything worth in terms of these new dollars if nothing has ever been priced before?
What is the formula to determine how many dollars the marketplace will on average pay for and accept for a farm if everyone is negotiating out of self interest and is rational?
You don't need a degree in microeconomics to answer the question; you just have to think about it.
The government in my story isn't hiring anyone or setting the price of anything. The bank is holding the dollars and can loan them as it sees fit. So what determines the price of the farm in our new country with these new dollar bills?
Hint: A pizza in bitcoin might cost. .0000001, 20,000 yen, or $20.
ME: There is a tax obligation. People must accumulate enough tax credits in order to extinguish their taxes when they come due. That’s part of the equation.
But I’m not sure what you’re getting at. Another hint?
HIM: Another hint: you're on an island. There is only one good on the entire island that you don't ever want and you have. The only other person on the entire island has $5. What is the cost of the item? Answer: $5. Now the same problem but the other person has $10. What is the cost of the item?
The answer to the above is the same formula as what determines the price of the farm the farmer will be willing to accept in this new currency we've created.
ME: You say the central government isn’t in your story. Since that’s the case, then there is no such thing as the government’s money. So the money being held by the banks in your story has nothing to do with “society’s money.“
(There’s no evidence that any major society in the past 5,000 years ran on barter [which was then “taken over” by a government and its money to make the barter more efficient]. There is plenty of evidence to suggest that the major money of all major economies was state based money: The government imposed a tax obligation and then spent its money – the only thing that could extinguish that tax – into existence. This is called chartalism or the state theory of money.)
So, as best as I’m understanding you, the money in each bank in your story is **that bank’s** money and no more. Each bank is essentially its own little government. This is like wildcat banking before the Federal Reserve existed. No one could be sure that their dollar would be accepted in any other state or bank (at a 100% exchange rate), because there was no centralized entity to ensure it.
I don’t know where you’re going with this. I’m obviously missing something.
You’re welcome to keep going if you like, but I have a strange feeling that our foundations of reality are not compatible.
Whatever the answer is, it’s only applicable to that bank’s dollar. There’s no way to tell what that value will be compared to any other bank’s.
HIM: The central government exists in my story - it was just created and we are a new country.
A private bank is holding some of the money. It's not a wildcat bank and it deals in dollars.
The bank, not the government, wants to loan money to a private farmer. The farmer will put the deed to his farm up for collateral.
What determines the result of the negotiation between the bank and the farmer to determine the size of the loan?
The answer is the amount of money in circulation. If there is only 1 dollar infinitely divisible into fractions, the farmer might take $.0000001. If there is $10 million in circulation, the farmer of going to require much more money to risk his farm. If there is $1 quintillion in circulation, the farmer would be reasonable to ask for $10 million. This is why for example things cost so much more yen in Japan than dollars in America - there is more yen in circulation.
The formula for the price of goods is the amount of dollars chasing the amount of goods.
Thus, for example, if you have a lot of high value earners in an area with a limited number of houses, home prices will be high and vice versa.
So, yes, the government can print let's say $2 trillion to finance your Pony For All Act out of thin air. But what government cannot do is control the resulting price increases that those additional dollars will command for the same limited number of goods elsewhere in the economy. Government also cannot mandate that the original horse owners will sell their horses or labor to the government for the listed price in the first place or continue to do later on.
Why would I sell my limited number of horses, for example, to the government for $X dollars if the government is going to print more money and reduce its value relative to the number of other goods in society? More dollars chasing the same number of goods means higher prices.
If government keeps printing money, yes, it can pay for its own obligations indefinitely. But what it can not do is force its citizens to keep accepting the money, even if it has a law and the force behind it as a mandate. This is what happened in America during the Articles of Confederation - America simply refused to accept these dollars in exchange for their goods or labor.
I'm not putting my farm up for collateral in exchange for $X if the amount of dollars in existence will double tomorrow - other people will have double the money for their goods and my money will only be worth half.
Yes, government printing money can have a stimulative effect of creating more resources, but many goods are quite limited. For example, there is a completely limited amount of land. When government doubles the money supply, the price I will be willing to sell my land for doubles. Do this enough and no one will accept the money at all.
ME: Okay. You said “The government in my story isn't hiring anyone or setting the price of anything..” Not “The government doesn’t exist.” But it’s not that much of a difference given your scenario of the country just beginning.
You say, in so many words, that “printing money causes inflation” or devalues the dollar. This is incorrect. Unfortunately, I am not educated enough to speak deeply on it. Especially given your apparent confidence, not to mention being a lawyer.
You also seem to be suggesting that once issuer-created money enters the economy that the issuer loses control of the situation. That is incorrect.
Money is a human created concept. Humans have literally infinite control over human created concepts. Issuing currency causes inflation only if we let it. The issuer has literally infinite power over its own money. They can redefine prices, tax any amount, implement better laws and regulations, enforce existing laws and regulations, eliminate bad laws and regulations. Put CEOs in jail, provide better for the people to prevent major problems, empower workers and disempower capital, etc.
Our corrupt government CHOOSES to do little, but that’s an arbitrary human choice. That political reality does not change the inherent legal reality.
Sure, things happen in the real world that we can’t control and that could cause inflationary pressures, but money and economic policy (both fiscal and monetary) can always be managed in order to minimize them. Not just reactively but preventatively, such as through automatic stabilizers like a federal job guarantee.
There will always be real world problems that cause financial problems but we can always manage and minimize the financial problems. Real problems being created by financial problems however, is always due to ignorance, incompetence, or corruption. Here’s a good article elaborating on this concept:
Two more points:
Printing money barely even exists as a concept since physical money creation is not involved in the issuance of currency at any point. Physical money creation does not occur until bank customers explicitly request it from a teller or ATM machine, at which point the same amount of reserves is removed.
“But what it can not do is force its citizens to keep accepting the money, even if it has a law and the force behind it as a mandate.” This is plainly incorrect. Federal taxation drives demand for the dollar. They will accept the dollar or they will go to jail (when they don’t have enough to pay taxes). There’s no law, per se, that requires usage of the dollar beyond taxation.
Like I said, our assumptions of reality are simply incompatible.
HIM: How does the American government have the power to set price controls? If Congress and Donald Trump sign a law that requires you to work for less money per hour to fight inflation, do you have to listen to them? If Congress and Donald Trump say you cannot sell your home for more than X to fight inflation, do you have to listen to them? Is that constitutional, and even if it is, is the US government revolution proof if the people choose not to listen?
[My emphasis:] The only way the federal government currently has the power to set prices is the very thing you don't want it to do - by destroying the money supply or by spending less. Otherwise, the pony owners who just got a $2 trillion dollar raise in their salary to sell horses to the government are free to spend that income in the economy. That $2 trillion chasing the same number of homes will result in increased home prices.
ME: One of the foundations of MMT is chartalism (the state theory of money). It requires a sovereign that has a monopoly on projecting violence within its borders. If it wants to retain that monopoly then it’s going to treat its people well ENOUGH in order to prevent revolution (or it will successfully prevent or crush that revolution).
Chartalism requires a sovereign. If it treats them so badly that a revolution is caused, such that the sovereign itself is eliminated or its constitution fundamentally rewritten, then all bets are off.
HIM: Right, and one of the conditions of, "treating the citizens fairly" is not inflating the money supply. If I worked my whole life and saved up $X and then overnight the government puts $2 trillion into the hands of pony owners, my savings is worth much less as those pony owners are free to drive up prices of consumer goods and I am not. I have the same number of dollars as before and the pony workers have much more; they can buy much more than me.
This government control isn't a matter of will, it's physics. Raise the money supply in real or electronic form and prices go up.
[[[[[[[At the suggestion of a commenter on Facebook, I passed him John Harvey’s Money growth does not cause inflation article, at the suggestion of Facebook commenters.]]]]]]]
HIM: Harvey's article doesn't address what is happening in your pony law [from my MMT-101 video lesson, which is admittedly a highly resource-intensive example].
Harvey says that supplying money is like supplying haircuts - someone has to be willing to accept one in order for more haircuts to happen.
Right, but in your pony law the people who sell their ponies to the government in exchange for the higher amount of money the government has borrowed and given them very much accept those dollars. And they very much have the freedom to spend those dollars in other places in the economy.
So say I'm selling my home. On one hand is a retiree who wants to buy it. He has $200k, which I thought was a fair price. Now the pony sellers have far more money because of the new government program and also want my house. They can and do offer me more. What happens to the value of my home? It goes up. What happens to the relative purchasing power of the retiree's savings? It goes down.
ME [integrating the feedback in this post]:
(This is mostly not responding to your thoughts on the Harvey article. My hypothetical Pony Act example, which would literally give everyone a pony who wanted one, is admittedly a highly resource intensive project, affecting much of the economy.)
Most of the dollars in the economy are hoarded by the super-wealthy in investments (interest bearing US treasuries). They’re not being *spent* on, or chasing, anything. Only the dollars people are currently attempting to *spend* can contribute to inflation.
If you believe that spending new dollars devalues the dollars already in the economy, then the dollars already in the economy must be redistributed. This means they must be ripped from the hands of the super-wealthy and given to the poor like Robin Hood. This is a pointless battle when the issuer has the power to create more.
The super-wealthy may want more yachts and homes, but they certainly are not purchasing massive amounts of food, clothing, or healthcare – not to such an extent that it makes food, clothing, or healthcare inflationary for the entire economy. So the issuer spending new money to provide more food or healthcare for those desperate for it, for example, would clearly not be inflationary.
Also, paying off debts is also not inflationary since debt is essentially negative money – a vacuum. People are forced to not earn income during this quarantine but still have to pay rent and bills. Landlords depend on rent to pay their own vendors. The vendors depend on that income to pay their *own* vendors. And so on. Filling this vacuum would not cause (unmanageable) inflation. NOT filling this vacuum definitely will cause lots of real world suffering. Only the issuer has the power to fill this vacuum in such a way that all parties are made whole.
A final example: Spending new money to prevent, stop, and rectify horrible things (such as cleaning up from and reversing pollution) is also clearly not inflationary because no dollars are currently attempting to purchase that negative externality.
New spending to help the desperate and suffering, from whom wealth is being **sucked away from** (or never given to in the first place), does not cause (unmanageable) inflationary pressures. The idea that the super-wealthy, because they happen to hoard well over 90% of the nation’s wealth in investments, just sitting there, holds the vast majority of us hostage like this, is a pretty terrible one.
Finally, around six trillion dollars was keystroked into existence in the past month or two in response to coronavirus. At the same time, inflation has plummeted. That pretty clearly contradicts you. Sure there may be some examples that demonstrate the idea, such as the hypothetical, simplistic, and highly resource intensive Pony Act, but to say it’s a steadfast rule that “increasing the money supply devalues the dollar”, for the entire economy, every time, is incorrect. The concept serves to withhold even more from the millions upon millions who are desperate.
You can have the last word if you like, but I think I’m going to stop. I’m not going to pretend this wasn’t very disappointing in a way but it was also quite interesting. So thanks.
HIM: It was a pleasure debating with you.