E Modern Monetary Theory And Its Bad Assumptions

The purpose of this article is to entertain ideas and point out bad assumptions, rather than to solve the debate between Modern Monetary Theorists and the Archaic Monetarists. Trying to lay out the issues may be helpful for many. I did get a laugh out of William K. Black's analysis of Monetarists as being "archaic". The very best economists are divided, scholars, and PhDs. This is a civil war. 

MMT says stimulus is needed to maximize productivity.

Clearly, MMT has been practiced by the Republicans more than the Democrats. Seems that the Republicans use it mostly for war, rather than for domestic benefits. After all, it was Richard Cheney in the midst of war in 2002 who said: "Deficits don't matter".

We know both parties have abandoned free trade for tariff socialism. There are multiple forms of good and bad and very bad socialism. Yet even the Chinese are more capitalistic when it comes to trade. Historically, the US as a developing nation had far higher tariffs than does emerging China! 

Both parties are wrong in shedding and shredding free trade. So maybe both parties are also wrong about the virtues of their versions of MMT as well.

Before discussing the Fed, MMT, and helicopter money at the end of this article, we need to look into stimulus and how bonds are behaving.

Stimulus, Austerity, and Bond Reading

It has been said that US government largesse is better than European Austerity. Jim Edwards, editor of Business Insider London said this on Twitter. He liked my reply that supply-side economics is not very effective in times of low productivity and maybe only worked with Reagan because of productivity gains during his tenure as POTUS. But, I guess if you live in Europe, the worst thing is the relentless withering away of economies under the regime of Austerity.

We know that long interest rates are not rising in both prosperous times and in times of QE/QT. I think a big reason for this is because bonds as collateral are being hoarded. It could be that bonds have demand all their own, and are no longer an economic indicator of inflation or deflation or of GDP or whatever they used to portend.

So, the question for me is not whether MMT or the "archaic" guys like Scott Sumner or Rogoff are right, but whether we can really measure anything by how long bonds react and how bonds as collateral impact interest rates. And if bonds are paying out low interest because of a separate demand for bonds that is due to financialization, are we reading bonds wrong? 

1 2 3 4
View single page >> |

Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.