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Inflation Predictions and Broken Models
December 18, 2011 5:46 PM   Subscribe

Paul Krugman has really been laying into the hyperinflationists in recent days. And rightfully so... these predictions, as Dr. Krugman notes, were based on a model that is completely wrong.

But is Krugman's own model correct? Cullen Roche compares the traditional Liquidity Trap theory with the concept of a Balance Sheet Recession.
posted by moorooka (57 comments total) 19 users marked this as a favorite

 
Mmf. If I understand correctly, Cullen Roche belongs to a, er, heterodox school of thought (Modern Monetary Theory) which holds that deficits can never lead to hyperinflation. Paul Krugman responds:
In a way, I really should not spend time debating the Modern Monetary Theory guys. They’re on my side in current policy debates, and it’s unlikely that they’ll ever have the kind of real — and really bad — influence that the Austrians have lately acquired. But I really don’t feel like getting right back to textbook revision, so here’s another shot.

First of all, yes, I have read various MMT manifestos — this one is fairly clear as they go. I do dislike the style — the claims that fundamental principles of logic lead to a worldview that only fools would fail to understand has a sort of eerie resemblance to John Galt’s speech in Atlas Shrugged — but that shouldn’t matter.

But I do get the premise that modern governments able to issue fiat money can’t go bankrupt, never mind whether investors are willing to buy their bonds. And it sounds right if you look at it from a certain angle. But it isn’t.

Let’s have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues. And consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds.

The second case poses no problem, say the MMTers, or at least no worse problem than the first: the US government can simply issue money, crediting it to banks, to pay its bills.

But what happens next?

We’re assuming that there are lending opportunities out there, so the banks won’t leave their newly acquired reserves sitting idle; they’ll convert them into currency, which they lend to individuals. So the government indeed ends up financing itself by printing money, getting the private sector to accept pieces of green paper in return for goods and services. And I think the MMTers agree that this would lead to inflation; I’m not clear on whether they realize that a deficit financed by money issue is more inflationary than a deficit financed by bond issue.

For it is. And in my hypothetical example, it would be quite likely that the money-financed deficit would lead to hyperinflation....
More details on Krugman's model: Debt, Deleveraging, and the Liquidity Trap (PDF, with Gauti Eggertsson). Summary. Blog post.
posted by russilwvong at 6:12 PM on December 18, 2011 [10 favorites]


And here's Cullen Roche's response to Krugman's critique of MMT.
posted by russilwvong at 6:15 PM on December 18, 2011 [1 favorite]


and now we get to see who the metafilter wonks are.
posted by justalisteningman at 6:33 PM on December 18, 2011


I'm no expert, but from what I gather it is totally wrong to suggest that MMT "holds that deficits can never lead to hyperinflation".

According to Roche's Understanding the Modern Monetary System:
We can just spend to our hearts content, right? Absolutely not. The bogey here is inflation which is constantly moving up and down with the amount of money in the system based on my tax rate, spending, borrowing, etc. Thus, government cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. It’s important to understand that government cannot just spend recklessly. This is important so I’ll say it again. This does not give the government the ability to spend and spend and spend. If they spend too much and tax too little they can create mal-investment and inflation. Likewise, if the government taxes too much and spends too little they create a government surplus and private sector deficit (by accounting identity). This can result in deflation and/or excess private sector debt levels as the private sector literally suffers a dollar shortage.
posted by moorooka at 6:36 PM on December 18, 2011 [1 favorite]


He really emphasizes this very point:
Some people claim that Modern Monetary Theorists say deficits don’t matter. That is a vast misrepresentation of MMT. No Modern Monetary Theorist would ever say such a thing. Deficits most certainly do matter. Maintaining the correct level of deficit spending is, in many ways, a balancing act performed by the government. It is best to think of the government’s maintenance of the deficit like a thermostat for the economy. When the economy is running cold the deficit can afford to be higher. When it is hot the deficit should be lower. Because there is no solvency concern in the USA (as there is in the revenue constrained European nations) the only concern is inflation or possible hyperinflation.

It’s also important to note that spending by the government must be focused on its efficiency. If spending is misdirected or misguided there is a very real possibility that this spending will simply result in higher inflation that is not offset by increased productivity. If you pay people to sit on their couches all day long there is no reason to believe why this sort of government policy will not result in long-term economic decline in the citizenry’s standard of living. Therefore, government has an incentive to promote productive output and maintain sound stewardship of its currency.
posted by moorooka at 6:37 PM on December 18, 2011


I don't care what the "experts" say... it's obvious that there are people who have a far better handle on reality, and they don't have fancy titles, just a good track record of explaining and predicting events.

If you're not worried about counterparty risk these days, you're going to be in for a very rude awakening. Thanks to Reagan and subsequent defunding and neutering of regulatory systems, the rule of law no longer applies to those at the top, and that effect is working it's way closer and closer to outright theft of the things you worked so hard for as part of a social contract.

Thanks to loopholes in English laws, it's possible for your account assets to be used as collateral by the broker for whatever market bets they care to make, an infinite number of times, if the company has a British subsidiary anywhere in its ownership chain. If enough of those bets go bad, you lose everything when the company goes under.

Don't be surprised if your 401k funds just disappear one day thanks to this.

Don't be surprised if the value of the dollar goes down by 95%, again.

Get some of your net worth out of things paper based. Invest in your friends and family and a local network of resources who you can barter with and/or trust to owe favors to/from.

Refresh your math skills, and start thinking of pricing things in terms of gallons of fuel, rolls of toilet paper, cords of wood, etc.

Soon the value of the dollar will reach it's ultimate intrinsic value, that of small pieces of used paper.

You will someday see someone crumple up a hundred dollar bill, and toss it on the ground, and then nobody will bother pick it up, except to keep a place litter free.
posted by MikeWarot at 6:51 PM on December 18, 2011 [4 favorites]


Can this debate be summarized as Krugman claims "deficit financed by money issue is more inflationary than a deficit financed by bond issue" because bond issuing expands the money supply with money that might disappear through default or growth, while MMT argues "in almost every [historical] case of .. hyperinflation the trigger is an extreme exogenous event and not merely the printing of money." Am I missing anything?

Isn't it possible that (a) bond buyers might stop believing in growth, making bonds into merely gambling against the risk of default, and (b) such "exogenous events" either invent themselves or else occur regularly and only gain importance when the money supply is expanding unchecked by default risk?

A priori, I'd favor Krugman only because investors take the bonds while everyday economic activity employs money, i.e. printing money erases the difference between the risks molded by sophisticated investors. Yet, obviously the investor class extracts a premium for that 'service' to society. And obviously we must curtail our universal belief in growth sooner or latter because we're running our of fossil fuels plus the world population will hopefully decline sooner or later.

There should always be 'growth' from efficiency improvements of course, but that need not translate into governments or stock indexes growing.
posted by jeffburdges at 6:52 PM on December 18, 2011 [1 favorite]


Refresh your math skills, and start thinking of pricing things in terms of gallons of fuel, rolls of toilet paper, cords of wood, etc.

You'll be pleased to know that things don't have to fall that far. I seem to recall that in many parts of medieval Europe people priced things in terms of the old Roman currency even though there was no actual hard currency at hand. This facilitated barter.

So when we all descend into the grim meat hook future of bartering and what not, we can just decide on some conventional pricing scheme and not have to explicitly value objects in terms of other objects. That is to day, long after a $100 bill (in this hypothetical future) loses its value as a thing, we can still use "dollars" to price out objects, even if no currency ever changes hands.
posted by selenized at 6:59 PM on December 18, 2011 [2 favorites]


So when we all descend into the grim meat hook future of bartering and what not, we can just decide on some conventional pricing scheme and not have to explicitly value objects in terms of other objects. That is to day, long after a $100 bill (in this hypothetical future) loses its value as a thing, we can still use "dollars" to price out objects, even if no currency ever changes hands.

Not me, I'm going with bottlecaps.
posted by Marisa Stole the Precious Thing at 7:10 PM on December 18, 2011 [6 favorites]


Not me, I'm going with bottlecaps.

Pogs and Pez, man. Pogs and Pez.
posted by Huck500 at 7:20 PM on December 18, 2011


We could always price things in 90% silver dollars, quarters, dimes, etc. ;-)
posted by MikeWarot at 7:20 PM on December 18, 2011


I don't care what the "experts" say... it's obvious that there are people who have a far better handle on reality, and they don't have fancy titles, just a good track record of explaining and predicting events.

This is not actually obvious.
posted by escabeche at 7:23 PM on December 18, 2011 [10 favorites]


With the caveat that all of this is a little above my head....

Banks lend to creditworthy customers. They do not lend based on the amount of reserves they carry at any time. Liquidity trap, balance sheet recession, booming economy – it doesn’t matter. This is simply a fact of modern banking. Banks are never reserve constrained.

Roche kind of loses me here, in his rebuttal to Krugman. If banks aren't stuff about reserve requirements, then a) why all the huffing and puffing about Basel II? and b) why did they stop lending to creditworthy borrowers in the wake of the mortgage crisis? Ask anyone who's tried to get a loan these days --- it's a hell of a lot harder than it used to be, even for borrowers who would have, pretty much anytime in the past 75 years or so, been considered a good credit risk --- steady job, sufficient income, history of past payment, etc. Why the freakout over having to hold some risk for most mortgages, as Dodd-Frank pushes them to do and as they are currently fighting tooth and nail against?

I mean, this is stuff I know is happening, and if Roche is right, then I'm fundamentally misunderstanding why it's happening: I had thought a lot of it had to do with banks being afraid that having to keep higher reserves would damage profits and that if they faced greater default rates than anticipated they'd be at risk of a run. Both worries have to do with reserve levels.

Has anyone else made sense of this?
posted by Diablevert at 7:32 PM on December 18, 2011


Ask anyone who's tried to get a loan these days --- it's a hell of a lot harder than it used to be

I think part of this is just that the market for mortgage-backed securities dried right up and banks could no longer simply sell their loans on to someone else
posted by moorooka at 7:36 PM on December 18, 2011 [2 favorites]


There is another factor that I'm curious about : Just how important is wasteful spending? If it's important, is recession/depression the only realistic model for cutting wasteful spending?

Richard Koo says Japan found that sustained stimulus was the solution, but presumably he's means sustained stimulus that creates high velocity money, i.e. improve infrastructure while giving poor people money. Is that possible in Americas current political climate? Not necessarily.

Aren't the deficits vastly worse if you simultaneously spend oodles on low velocity recipients like defense contractors and Wall St. bonuses too? I'll grant that reasonable deficits don't matter, but maybe defense and Wall St. sized deficits do matter.
posted by jeffburdges at 7:42 PM on December 18, 2011


Every time Malor talks about Zimbabwe I picture Krugman showing up and slapping him with a big trout.
posted by Justinian at 7:59 PM on December 18, 2011 [6 favorites]


We could always price things in 90% silver dollars, quarters, dimes, etc. ;-)

Doubloons, I'm all about the doubloons.
posted by selenized at 8:07 PM on December 18, 2011 [1 favorite]


That is to day, long after a $100 bill (in this hypothetical future) loses its value as a thing, we can still use "dollars" to price out objects, even if no currency ever changes hands.

Aw, man. Can we at least devalue them by a factor of 1000 and call them "newbucks" or "credits" or something? It doesn't look like we're going to be able to afford any silver jumpsuits and I'm sorry but the future has to be at least a little bit futurey.
posted by No-sword at 8:09 PM on December 18, 2011 [4 favorites]


Turkey did exactly that, except they used millions, not thousands. I suppose phycological factors might obstruct doing this until it gets really ridiculous. Americans won't even accept that $1 should become a coin.
posted by jeffburdges at 8:40 PM on December 18, 2011


Richard Koo says Japan found that sustained stimulus was the solution

and in the linked video, Koo says that Japan found the answer in 2005.

Which is a funny thing to say because in 2005 the Nikkei index was ~11,500 and today, six years later, its ~8,300.
posted by storybored at 8:41 PM on December 18, 2011


So when we all descend into the grim meat hook future of bartering and what not, we can just decide on some conventional pricing scheme and not have to explicitly value objects in terms of other objects.

I might be missing something, but wouldn't the ideal hedge against a grim meat hook future be to stash up on meat hooks? That way, if a grim meat hook future does happen, hey, I've got all the meat hooks!

I am not an economist. No, really, I'm not.
posted by infinitywaltz at 8:57 PM on December 18, 2011 [3 favorites]


I might be missing something, but wouldn't the ideal hedge against a grim meat hook future be to stash up on meat hooks? That way, if a grim meat hook future does happen, hey, I've got all the meat hooks!

Unfortunately the Twilight Zone twist of the grim meathook future is that there won't actually be any meat. You'll end up on your knees, a broken man, sobbing about how unfair it is, mark my words. Algae hooks, that's where it's at.
posted by No-sword at 9:08 PM on December 18, 2011 [2 favorites]


Brad DeLong comments on how the Keynesian point of view and creditworthiness point of view are two sides of the same coin.
posted by samw at 9:56 PM on December 18, 2011 [1 favorite]


... Koo says that Japan found the answer in 2005. Which is a funny thing to say because in 2005 the Nikkei index was ~11,500 and today, six years later, its ~8,300.

The Nikkei index is a yen-denominated price-weighted average. In Dec 2005 one dollar was equivalent to 118 yen, in Dec 2011 it's about 78 yen to the dollar. So, given your numbers, the Nikkei index has actually gone up relative to the US dollar, from about 97 to 106.
posted by RichardP at 10:24 PM on December 18, 2011 [5 favorites]


MikeWarot: “I don't care what the "experts" say... it's obvious that there are people who have a far better handle on reality, and they don't have fancy titles, just a good track record of explaining and predicting events.”

Like who, perchance? This sounds suspiciously like a lead-in to a Ron Paul screed.

Your oh-so-specific attempts at being dire don't help your case, either. I guess maybe you're trying to set up a situation where you can say "I told you so" – is that it? I assure you, whatever grand and sweeping facility you may believe you have at foretelling the future, there are millions more like you who believe they are prophets, and nearly all of them are wrong. It doesn't even seem like you're making these predictions in your own name. It sounds like you're shooting for another argument from authority – replacing "experts" with "people who have a far better handle on reality."

Pardon me for not being impressed by a string of predictions that seem calculated to be scary and doomsday-dark. The kicker is that they aren't, at least not in the deepest sense. Post-apocalyptic survivalism has been an American fantasy for decades; I suspect this is because people like feeling more prepared than their neighbors, and feeling as though they're about to be proven right. Yet none of us has any reason whatsoever to believe that anything you say will actually happen. I'm left feeling as though you don't have any reason to believe it, either; you'd just rather believe it. Which, again, is understandable; the penchant for survivalism, etc.

What I'm getting at is this – do you have an actual argument? Do you have a reason to believe all this stuff? Or is it just an article of faith or something? Really, predicting the future is a much more difficult game than this. You can't just make a string of pronouncements and wait for them to come true.
posted by koeselitz at 10:56 PM on December 18, 2011 [16 favorites]


Reserves aside-- if a bank takes too many losses on its loan portfolio, it eventually causes people to flee the stock, and the stock price falls. Depositors start leaving, this triggers a bank run and then the FDIC steps in. Hence the mortgage lending slowdown-- no one wants to get caught again like WaMu. Also this is the reason that the foreclosure process has become so dragged out, and true principal reductions are so rare. Every time a bank writes down the principal on a loan, it is actually taking a balance sheet loss. Multiply that by thousands of loans, tens of thousands of loans, and you can see the losses become significant enough to threaten the stock price etc. Every time a foreclosure sale happens and the bank sells the house for less than the value of the loan, that is a loss. Same with a short sale.

You can see how this played out on WaMu:
http://en.wikipedia.org/wiki/Washington_Mutual#Subprime_losses

Regarding MMT, it is one of the few predictive models that accurately predicted the Eurozone crisis, and also has some predictive value regarding the domestic situation in the US. It also explains online game currency dynamics, which was my first clue that I could take it seriously as a model. Understanding how accounting identities work is pretty crucial, and something that most financial journalists screw up. Actually I've seen even people whose work I otherwise like, such as Chris Hedges, and Bill Kunstler, dramatically misunderstand the current financial crisis, specifically because they don't understand the sectoral balance approach to the economy. I see some of the popular (relatively speaking) Marxian economists like Richard Wolf screw this up also. I saw his RSA Animate on the crisis and he kept talking about the USG running out of money, if I'm remembering this right.

This is one of my key issues with the doomer strain of thought in American politics. There ARE solutions to the crisis and there are things we can do to get everyone a job and build a post-oil economy. But we ARE NOT doing them, because too many people fail to understand that the government is not "out of money." The right wing anarchists (the crew of disillusioned libertarians) want this to be true because they want central governments to fall and be replaced by neo-feudalism. And, actually, the neo-feudalists around the Cheney/Bush axis probably understand that MMT is functionally correct. Warren Mosler (an MMT economist) briefed Andy Card about MMT and reported that Card got it. You may remember that Cheney said "deficits don't matter" and then Bush slashed taxes. Look at the accounting identity-- cutting federal taxes actually did goose the economy because reduced taxation did keep more money in the system-- it just concentrated the money at the top. You could also get there by increasing spending, but that isn't the policy preference of the GOP. So, what we have is a situation where significant elements of the GOP are disingenuously pushing spending cuts, because they want to destroy the commons not because they think the government is "out of money."

When leftists (and most of you reading this are leftists) buy into the "we're out of money" idea, then you are actually playing right into the hands of both the right anarchists, and the neo-feudalists. The right anarchists are at best, just pleasantly deluded idealists, a lot of guys who got lucky some hard work and an internet IPO. They aren't really big players-- they don't control the security services, and more importantly, the neo-feudalists can and will trap them. They like to believe they can go it alone-- it's a romantic notion but they will not survive against neo-feudalist militias, or even the generalized low-trust society that results when government fails totally.

The neo-feudalists are keen on using the government as a guarantee of their rent extractive (toll booth) rights, i.e. mining, finance, telecommunications and intellectual property. They know they can defund government services and cut taxes, which will pump up the economy. They also know that with unchallenged positions as rent extractors they will be the ones to benefit from an improved economic situation, especially as they can hold working people hostage with high unemployment, and use the courts to enforce intellectual property rights, as well as defend insurance companies from pesky claimants, etc.

Some of the left-anarchists may initially do better, believing as they do in mutual aid and solidarity. That kind of orientation (in the Boydian sense) can take people pretty far, but I still don't think it can stand up to neo-feudalist rent seeking and private militias. Nor do I think that locally based commodity currencies (say grain based etc) can stand up to oligarchs cornering the market. There really is no substitute for the nation-state, no matter how much people would like to think otherwise. In the end, if you want safe vaccines, running water and buildings that don't collapse during earthquakes (see building codes) you are still going to need a government.
posted by wuwei at 11:29 PM on December 18, 2011 [18 favorites]


**I don't agree with Cheney that "deficits don't matter"-- the issue of course is still inflation.
posted by wuwei at 11:30 PM on December 18, 2011


Sorry if my rant above seemed harsh; I just really, really hate being lectured on how tomorrow will be the apocalypse. I'm willing to accept that possibility – I'm willing to accept most possibilities, it's a very unpredictable world – but it'd be nice to talk about it concretely, with reasons.
posted by koeselitz at 11:34 PM on December 18, 2011


wuwei, moorooka: what are the mathematical models behind MMT? (A 1996 essay by Krugman on literary vs. mathematical reasoning in economics: Economic Culture Wars.) So far I've only seen verbal arguments.
posted by russilwvong at 12:49 AM on December 19, 2011


There are maybe three classes of left-wing anarchist ideas floating around now, wuwei. (1) Low-level mutual aid and solidarity (OWS inhabitants). (2) Non-violently challenging the plutocrats (OWS protests). (3) "Code is Law" style trying to innovate out from under oppression. Yes, non-violent protestors get massacred by Blackwater-style private militias, but they fair alright against NYPD-style private militias.

Right-wing anarchists are similarly less vulnerable than you imagine. Yes, our plutocrats could hand MafIAA plutocrats control over the internet companies through SOPA/PIPA. Yet, they cannot necessarily do so globally, imposing enormous opportunity costs by doing so nationally. And I'd presume the real security services recognize those national costs.

Amusingly, creating such control is teh original basis for copyright law (See 12m in Falkvinge's Google TechTalk).

posted by jeffburdges at 12:59 AM on December 19, 2011


russilwvong: the models in this book are apparently consistent with the theory - although I haven't gotten around to reading it myself
posted by moorooka at 1:57 AM on December 19, 2011


"I don't care what the "experts" say... it's obvious that there are people who have a far better handle on reality, and they don't have fancy titles, just a good track record of explaining and predicting events."

Except they don't. The people predicting inflation have been wrong, without fail. None of them predicted that it would be low until, say, 2012. They all predicted it would begin as soon as the increase in the money supply by the Fed worked its way through the system, i.e., in 2009 sometime. And it didn't. They then revised their predictions and jumped on the idea that a rise in commodity prices signaled the impending apocolypse—then not only didn't that happen, but the trend they were looking at didn't even itself continue. They've just been wrong, and then wrong, and then even more wrong.

The tragedy of this whole disaster—from a future policy point of view, not the actual human tragedy that's happened and still happening and will continue to happen point of view, of course—is that just like the 30s depression, this has been a great macroeconomic experiment, of sorts, with clear results. It's proven what macro theories are at least partly right and what macro theories are completely wrong. And, like what happened before, the majority of people—including politicians, voters, policy-makers, even economists—refuse to admit what has been proven and disproven. And why? Because when it comes to economics, people are deeply invested in their emotional and intuitive understanding of how things work. This is not unlike race and gender. There are deeply invested worldviews involved in this stuff, and mere factual evidence is almost entirely unimportant to most people.

With regard to economics, and especially macro, people really do see it, as Krugman puts it, "as a morality play". This is no accident, really, because what we're really talking about is the material existence of people's lives. People have always assumed that differential material outcomes are the result of some cosmic moral judgment about individual responsibility. Where there are economic winners and losers, people are certain that there are heroes and villains and if there's suffering, someone should be punished. For many, the suffering are being punished, that's justice being served. For the suffering, of course, often it's the case that someone else should be punished for unjustly inflicting the suffering.

I'm not saying that there aren't actually villains involved in this stuff and that some people arguably deserve punishment. Even classes of people. That's true, but it's a red-herring.

What I'm saying is that the analysis of the problem itself, and the complicated system it's a part of, should not be driven by one's intuitive certainty of who the innocent and the villains are and then fitting a model around that. For example, we on the left know this is true and it's wrong when the privileged wealthy do this and start with the assumption that the unemployed and poor and miserable are responsible for their suffering and then find economic explanations that validate that intuition. But it's no more the right way to think about this stuff when we do it.

I agree with the OWS movement even though I disagree with the economic analysis that many, or most, of the people involved. Because, really, what OWS is about is that interests of the wealthy are being protected while the interests of the rest of us are not. And that's absolutely true. But this doesn't form my basis for deciding which macroeconomic models are right or wrong.

Here's another example from a similarly contentious area that I am much more personally invested in than I am in macro (and I'm pretty damn interested in macro).

As many people here may have noticed, I'm an outspoken feminist. In fact, sexism and the global status of women is by a considerable margin my biggest human rights concern, my biggest concern regarding social justice. My single most important political issue. There is no "issue" more important to me. And I share the analysis of the patriarchy and most else with contemporary feminist theory.

Yet I disagree with the contemporary feminist position that gender is entirely socially constructed. I think there are significant differences between male and female brains and consequently (but not necessarily, mind) male and female cognition and behavior. Now, I'm very careful about this—I'm not comfortable asserting what those differences are and I find almost all of the supposedly scientific conclusions about these behavioral differences suspect. Specifically, and in keeping with the point I'm trying to make, I think that evolutionary psychology is, in general, probably on-target and a valid field of study, but that much of the present work in it is ideologically tainted and certainly the popular reporting of it is extremely ideologically tainted and validating hoary and offensive ideas of essentialism. Anyway, my point here is that in this context my view of the nature of objective reality is evidence-based, I think there's strong evidence for a biological basis for gender (but it's complex and ambiguous and I'm not asserting that any particular culture's gender norms are biologically determined). And the real point of this is that I absolutely don't allow that opinion to interfere with my feminist activism against sexist injustice. Indeed, my argument is that to whatever degree there are such biological differences, we need to account for them when we work to maximize social justice. The last thing I want, and I fight this strenuously, is that these differences, whatever they might be, to be used to excuse or validate existing injustice.

The same is true of economics. I think that economics is extremely young and immature as a science and that criticisms of it on this basis are valid. But I also think, as someone with some education in the history of science, that this is always true about young sciences. It's true, in fact, about some sciences that people are less inclined to criticize. Economics as a discipline has proven itself to be institutionally flawed. But that doesn't mean that there is not some good science in there somewhere, and it especially doesn't mean that it can never be a science and that, therefore, the "right" way to look at these issues is by deciding upon one's moral and political philosophies and then picking the economics that best fits. The truth is that the creation of value by human labor and trade is an essential human activity that we've always done and will always do and it's no more some top-down imposition by authority than is, say, art or religion. Or language. That is to say, it's partly an authoritarian artifice and mostly a spontaneously bottom-up self-perpetuating order. It can be studied, understood, and influenced. There are true and false things we can say about it. The better we understand it as it really is, the more effective we can be in achieving social justice.

A lot of people have some deep moral intuition that debt is wrong. We can make some guesses as to why this is, but no matter. Whatever the reasons, people feel this. People similarly believe that the desire for material things is also wrong, or at least tainted. So when there are big economic disruptions, and people are suffering, there's a very strong desire to blame it on the two parts of economic activity that people intuitively morally condemn: avarice and debt. The only thing that varies is who are the villains judged to have been indulging in these things. OWS sees one set of villains and criticizes them in these terms, the privileged see another. The Greeks see one set of villains and criticizes them in these terms, the Germans see another. And everyone agrees that because of these moral failings, these bad acts, there should be suffering, it's just a disagreement about who it is who should suffer.

And that's a problem. It's a big problem. It shows that the analysis is deeply biased. It shows that people are thinking, as Krugman says, in terms of economics being a morality play, where evil is punished and the good rewarded. And if they're doing that, they're both not likely to be seeing what's really happening, and they're a lot less likely to be trying to reduce suffering in general. Because, you know, maybe there are villains. But I'm not interested in punishing them with unemployment and hunger and anxiety. Really, as a liberal and a progressive, I'm not really interested in punitive justice, anyway. I'm interested in preventing injustice and suffering in the future. And in order to do that, I need to see things as they really are; not how I want them to be or how my gut intuition tells me they must be. But how they really are.
posted by Ivan Fyodorovich at 2:25 AM on December 19, 2011 [26 favorites]


Yes, no inflation at all. Especially not around 2007.

There were some protests about commodity prices in the middle east not long ago if I remember. Oh, but those were due to Goldman Sachs optioning off futures for inflated prices - right, forgot about that. No wait, Mubarak price fixing, that's it.

Something seems to have happened with those prices in 2008 though. I wonder what that was. Nah, those couldn't be related. I saw something with rice too, but I'm not sure what that was. Definitely not related to massive rice price increases during that period.

A falling dollar is inflation you don't see.

Don't forget folks Core Inflation doesn't count food or energy because they are so volatile. Good thing, I wouldn't want to know how my two major expenditures are impacting overall costs.

Economic manipulation has gone from semi-professional in the 1900's to global out in the open, no hiding, winner sets the price for all in conjunction with the fiscal policy of multiple nations game. Good thing the CFTC is all over it.
posted by AndrewKemendo at 3:40 AM on December 19, 2011


Diablevert: " If banks aren't stuff about reserve requirements, then a) why all the huffing and puffing about Basel II? and b) why did they stop lending to creditworthy borrowers in the wake of the mortgage crisis? Ask anyone who's tried to get a loan these days --- it's a hell of a lot harder than it used to be, even for borrowers who would have, pretty much anytime in the past 75 years or so, been considered a good credit risk --- steady job, sufficient income, history of past payment, etc.

Because there has been a step change in borrower credit-worthiness. Or rather, there has been a step change in the bank's view of borrower credit-worthiness. It should have been much harder to get a loan back in the boom times, because of course those borrowers were not as credit-worthy as the bank thought they were.

Plus, general stupidity and managerial incompetence of course.

Why the freakout over having to hold some risk for most mortgages, as Dodd-Frank pushes them to do and as they are currently fighting tooth and nail against? "

This is a separate issue: if the banks have to hold capital against likely losses on their existing mortgage book, then most of them blow up *today*. Which means that the executives don't get to take home their multi-million $ pay packages for the next decade...they'd much rather that they be allowed to write off the losses over the next twenty years or so, funding the difference by increasing the margin on future lending. Obviously this is a net negative for the rest of society.

russilwvong: "wuwei, moorooka: what are the mathematical models behind MMT? (A 1996 essay by Krugman on literary vs. mathematical reasoning in economics: Economic Culture Wars.) So far I've only seen verbal arguments."

I think Steve Keen's mathematical economic models are pretty consistent with the MMT view of the economic world.
posted by pharm at 3:42 AM on December 19, 2011


(Also, as pointed out, banks can't just sell on their loan books to buyers who don't give a stuff about the underlying loan book so long as some rating agency has slapped an AAA-rating on it any more. Which means they actually have to start caring about such things again & they've probably forgotten how...)
posted by pharm at 3:43 AM on December 19, 2011


People keep saying there is no inflation. I've been un- and underemployed for the last three years. Maybe my just-scraping-by situation has colored my perception, but my grocery bills have escalated considerably. Is that not inflation?
posted by Benny Andajetz at 5:05 AM on December 19, 2011


Benny: Yes, absolutely but it's not hyperinflation.
posted by pharm at 5:10 AM on December 19, 2011


"Something seems to have happened with those prices in 2008 though. I wonder what that was. Nah, those couldn't be related. I saw something with rice too, but I'm not sure what that was. Definitely not related to massive rice price increases during that period."

Oh, so they are related? Because the two charts which you say show a causal relationship have Thailand rice peaking in March '08 and then dramatically falling and then the US monetary base dramatically rising in September. The rice increases slightly during that period but overall, while the monetary base keeps rising, rice trends downward while the monetary base trends upward.

I mean, really. Are you just randomly Googling for charts without even bothering to look at them in order to pad your arguments with supposed evidence that, in fact, is either irrelevant or disproves your claim?

And, FFS. You picked a segment (5% broken) of a segment (Thailand) of the rice market and a particular measurement of the monetary base to try to prove some point about inflation by implying a causal relationship that these already disparate things clearly don't share as demonstrated by the very charts you picked.

Wow. That's impressive in its own sad way.
posted by Ivan Fyodorovich at 6:05 AM on December 19, 2011 [1 favorite]


Banks lend to creditworthy customers.

Which is why the 2008 Housing Market collapse never occurred.

Fundamental rule. Write down your posits. A half hour later, read them. If any of them make you chuckle, wince, or swear, they are not posits, they are points to be proven.

The Nikkei index is a yen-denominated price-weighted average.

This. Anything denominated in currencies suffers change of value over time, with that currency. Comparing something valued in USDy2000 directly with USDy2010 is a fundamental error. A 3% gain, year over year, against 4% inflation is a 1% loss, against 1% deflation is a 4% gain.

Don't forget folks Core Inflation doesn't count food or energy because they are so volatile. Good thing, I wouldn't want to know how my two major expenditures are impacting overall costs.

You are assuming that those costs aren't tracked. They are. The point of removing F&E from CPI is to remove a noisy source from the information composite. Long term rises in food and energy show up in the CPI as increased costs to produce the good that are in the average, and of course, they show in the Producers Price Average (PPI.)

I do have real problems with CPI -- in particular, I think the basket of prices used to calculate it. In the early 1980s, they started used just rental rates, rather than rental rates and purchase price, to determine housing costs, which had the effect of leaving the huge bubble in housing prices out of CPI, healthcare costs are measured poorly, and the basket is rebalanced too frequently.

But leaving the very noisy food and energy costs out -- as long as you track them elsewhere -- is not a bad idea. You may be thinking you're in real inflationary trouble with a quick spike in energy caused by a hurricane shutting down a large oil production area, or a drought affecting a large food producing area, and start taking measures, and then find yourself on the wrong side of the curve when the fix the refinery fast, or the rains come just in time to bring in a decent crop.

There is the issue that if you focus solely on CPI, you miss out on those issues, but that's true of any data source. Another example is those who focus solely on U3 as the sole measure of unemployment in the US. U3 is the headline rate, but the questions of "what does it mean to be unemployed" and "how do we track underemployment" are complex, which is why the US tracks not one, but six measures of unemployment, which are roughly from most conservative to least. Currently, the seasonally adjusted numbers (Nov 2001) have U1 at 5.1%, U2 at 4.9%, U3 (headline) at 8.6%, U4 at 9.3%, U5 at 10.2% and U6 at 15.6%. A current summary table, with basic definitions, is available online.
posted by eriko at 6:07 AM on December 19, 2011 [6 favorites]


Is that not inflation?

I remember inflation rates of 12 to 13 percent or more in the late 70s/early 80s. Today's inflation rates are pretty normal and unremarkable.
posted by gimonca at 7:11 AM on December 19, 2011


A falling dollar is inflation you don't see.

Except when your single largest trading partner is, for all practical purposes, fixed to your currency and won't let theirs appreciate.
posted by Talez at 7:42 AM on December 19, 2011


For those interested, here are three graphs from FRED (Federal Reserve Economic Data, provided by the St. Louis Fed):

The first shows three CPI (Consumer Price Index) measurements for the period of 12-2007 to 12-2011. In blue is the CPI for all items, including food and energy. In red is the CPI not including food and energy (which is, as discussed above, normally the more useful measure). And in green is the CPI for only food. (These are not the index numbers themselves nor percentage changes, but for the purposes of the chart indexed to 100 over the five-year period.)

The second shows M1, the not-entirely-useful measurement of money supply (but is what the inflationistas pretty much have in mind).

The third shows these all four measures but expressed as a percent change from year ago (so as to make them more easily comparable—M1 has gone up so much, if we indexed it it would make the CPI measures look flat). This is if anyone wants to find a causal relationship between the money supply and inflation.

Also, if you don't trust the US's measurement of the CPI, then you can sanity-check it against MIT's Billion Price Index, which, you'll see if you follow the link, is pretty much comparable with the CPI.

Now, what we can see from the first chart is that food (green) has, indeed, increased over the last five years. On the other hand, it reached a peak right at the peak of the financial crisis and when the Fed began frantically injecting liquidity into the system, actually fell for a year, took about a subsequent six months to regain the ground it had lost, accelerated sharply over the course of this year, but peaked around October and has been about flat (at this scale) since.

CPI-not-including-food-and-energy (red) has, in contrast, simply been steadily increasing at about the same rate over the entire time, beginning from before the financial crisis and the Fed's intervention. Well, if you look close, you can see that it's a bit below the trendline extrapolated from 12-2007 to 12-2009, though it picks up a bit during the middle of 2011. This is showing us something about demand in the context of a recession. (And how prices lag.)

Finally, CPI-all (blue), is what it must be, what you'd expect: a composite of the two previous.

The problem with complaining about excluding food and energy from the CPI if you're going to make the Austrian type of money-supply-increase-necessarily-equals-inflation argument, then this data presents two serious difficulties: First, food and energy inflation isn't even remotely enough to show what these folks want it to show. Including these things doesn't prove the point, it just makes the disproof of it just a little less harsh. Second, it doesn't even make sense, anyway, to not expect CPI-not-including-food-and-energy to show the expected high rate of inflation. If the mechanism is what these folk claim, it would show up everywhere, by necessity. In principle, because, you know: money supply. So the CPI-ex-F&E would prove the argument, anyway. And it doesn't.

And, to drive the point home, take a look at that M1 graph again. M1 truly went through the freaking roof. The Fed really and truly did fantastically increase the money supply. There's no ambiguity here.

You know how a lot of us say that it's wrong to claim that the stimulus didn't work because it didn't make everything better because, in fact, the stimulus wasn't even barely large enough to account for about half the problem? Well, it's not like anyone could make the same sort of argument here: what the Fed did was truly so huge, so monumental in scope, so unprecedented, that there's absolutely no way anyone could argue that it wasn't enough of an increase in order to have the effect of causing inflation, if it was going to cause inflation. This is why the folks who believe in this cause-and-effect relationship (in all cases, everywhere—note that the Keynesians say that this relationship is normally true, just not true right now during a liquidity trap) freaked the hell out—their model says that an increase in the money supply this huge would cause not just inflation, but "hyperinflation".

And that hasn't happened. It's not even close.

In fact, inflation has been low. (Too low, actually, but I'll leave that alone for now.) Energy and commodities have been going up in the long term, just like they have for a long time. And why? Because the former is more and more limited (thus "peak oil") and both are increasingly in demand relative to supply because of the rapid economic growth of the developing world. Food prices have been going up for a long time, and this is mostly why. There are more people to feed and, unlike in the past, they are increasingly able to pay for it and it's increasingly possible to ship it to them. Without another food revolution, food is going to continue to get more and more expensive, assuming that the developing world stays on the trend to consume the way the developed world has been.
posted by Ivan Fyodorovich at 7:46 AM on December 19, 2011 [8 favorites]


http://www.kitco.com/charts/popup/au3650nyb.html?sitetype=fullsite
posted by simms2k at 8:23 AM on December 19, 2011


In fact, inflation has been low. (Too low, actually, but I'll leave that alone for now.)
Absolutely true. But why? Because the banks (who are among the folks with big money running things in Washington) don't want their debt devalued. So we're going to suffer from a too low inflation rate because raising inflation would help fix everybody's problem but theirs.
posted by Critical_Beatdown at 8:24 AM on December 19, 2011


I would like to add a quote to the original discussion referred to in this post:

"What all the experts can agree on, however, is that we are all well and truly fucked. Our suggestion is to start burying precious metals and hoarding supplies."
posted by clvrmnky at 9:40 AM on December 19, 2011


So we're going to suffer from a too low inflation rate because raising inflation would help fix everybody's problem but theirs.

DING DING DING.

Everyone talks about the "horror" of the 1970-1980s inflationary period, but you know who really made out well? Your parents, if they were paying off a mortgage they got in the late 1960s/early 1970s. Prices inflated, wages inflated, but monthly mortgage payments on fixed rate loans did not inflate, and hell, those on APRs plummeted when interest rates finally dropped after Volcker got the inflation under control, and even those on APRs were only bad for a couple of years.

Those heavy mortgage payments in 1972 were damn near a joke in 1982, and basically noise in 1992. Banks remember that, which is why they are the strongest proponent of keeping inflation in check.
posted by eriko at 10:34 AM on December 19, 2011 [2 favorites]


clvrmnky and eriko, do you think we could have induced inflation in the past 3 years? Could we in the next 3?
posted by benbenson at 11:55 AM on December 19, 2011


Significantly greater inflation, that is.
posted by benbenson at 11:56 AM on December 19, 2011


pharm: thanks. It looks like this post by Steve Keen describes the closest thing to a fully worked-out model. I'm not an economist, but it still seems somewhat preliminary (the graphs of simulation results show all sorts of behavior which hasn't been observed).
posted by russilwvong at 12:12 PM on December 19, 2011


Does MMT have anything to say about what the acceptable level of % gov't debt to GNP is?
posted by storybored at 12:18 PM on December 19, 2011


"Those heavy mortgage payments in 1972 were damn near a joke in 1982, and basically noise in 1992. Banks remember that, which is why they are the strongest proponent of keeping inflation in check."

There's truth to this about banks, specifically, of course and perhaps especially so with regard to the backgrounds of people associated with the Federal Reserve Bank. But what you're describing is really a more widespread problem—there is the group of people who are net lenders, and the group of people who are net borrowers, and their respective interests are opposed with regard to the inflation/unemployment relationship. (I know you, eriko, personally know all this; but I'm writing for everyone else from here on out.)

The net lenders are the wealthy. They are powerful, economically and politically. Their interests are damaged during an inflationary period and not so much during a deflationary period. In contrast, the borrowing class's interests are benefited during an inflationary period, and damaged quite badly during a deflationary period.

Note that everyone is hurt during a deflation. There's not a perfect symmetry here (although for high enough rates of inflation, there is) because even mild deflation ends up having big systemic effects that depress economic activity in general and everyone is hurt. But even when moderate deflation hurts the lending class, their wealth mostly shields them from it and they are willing to see it as a necessary correction—not the least reason is that they are also the capitalists, obviously, and they really really hope that deflation will lower the wages they have to pay workers. This generally doesn't happen, however, because wages are extremely "sticky"; but the capitalists generally are resistant to believing this, even when history demonstrates it, because it's such a lovely idea for them. And, in any case, it does mean a decrease or end of wage increases, so it's all good.

For them.

Now, what mechanism might there be that could cause wages to fall (or at least stop rising)? Why, don't you know, that'd be unemployment.

So inflation and unemployment are opposite sides of an economic coin. Turn the knob one way, you get inflation. Turn it the other, you get unemployment. Or, alternatively, let's say that some other factor has increased either inflation or unemployment. Then, similarly, you turn the knob in the other direction to counteract that other factor.

Now, what "knob" is it that can be "turned"? Well, basically, with a central bank, it's the interest rate it charges other banks to borrow funds. (This isn't actually how it works for realz; there's an intermediating process involved but the result is the same.) A lower rate spurs economic activity and, if there's inflationary pressures anyway, will exacerbate it. If the economy is at or near full-capacity, it will encourage inflation. If the economy has some slack in it, such as, say, a lot of unemployed workers, it will encourage that slack to be taken up, which won't be that inflationary because the pressure will be pushed toward employing workers who weren't working rather than paying the ones who are, more.

And the reverse stuff is true. If you've got inflation, because the economy is "overheated" and is at full-capacity, then raising interest rates some will keep the inflationary pressures in check. You might ask why that's important, because didn't we say that it helps the borrowers? Yeah, but it does hurt the lenders and, anyway, no one really likes stuff getting more expensive. There's a psychological thing happening here where a small amount of inflation people don't much notice or mind, but when it goes higher than a certain amount, then people notice and they don't like it. It makes them nervous, even if all other things are equal. And that nervousness itself causes problems. So, anyway, it's a good idea to keep inflation from getting too high.

Inflation can also happen because of exogenous factors. Like, say, energy costs suddenly going through the roof because an organization of all the oil producing and exporting countries have finally, after years of attempting this, actually manage to stop bickering with each other, stop competing with each other, and agree on a fixed price for oil—that is higher than it was before, now that they aren't undercutting each other. Energy costs feed into everything, economically, a jump there will create inflation all by itself because energy costs are factored into all production and transportation and, well, everything. This is what happened in the late 70s. Everything that was going wrong economically at that time comes down to OPEC...though, of course, conservatives like to somehow blame Carter.

The sad thing about this kind of scenario, with an exogenous factor, is that it can be more complex than I explained above. Specifically, in this example, you can have both inflation and unemployment. Which is what happened back then. If you think about it, you can see how this might work, systemically.

In the past, other ways to deal with this sort of problem were attempted. Like, for example, price controls. Most recent to this example, it was done only a few years before, in the early 70s. Price controls. By who? Oh, yeah, by that famous socialist, Dick Nixon.

Anyways, price controls are almost always more trouble than they're worth. They often backfire in bad ways and end up not even doing what they're supposed to do.

So, in 1979, that famous conservative and inflation hawk, er, Jimmy Carter, appointed Paul Volcker as the Chairman of the Federal Reserve. Volcker raised the rates very, very high. The prime rate went above 20% in 1981. Volcker's Fed knocked down that inflation demon, then walked over and kicked it in the head, repeatedly. Reagan reappointed him: so, hey, maybe Volcker was very, very politically unpopular due to the effects these interest rates caused, but what's not for the wealthy to like? They loved him. Conservatives loved him.

Well, you know, a funny thing happened because of all this. Prior to this, it wasn't exactly widely thought that a central bank could truly have this sort of macroeconomic effect using monetary policy. Friedman's practically a saint today, but things were different then. So what was definitively proven was that, yes, Virginia, there is a Federal Reserve Santa Claus, and he will bring you low inflation for Christmas, every Christmas. And another funny thing happened: if 12% is better than 16%, then maybe 9% is better than 12%. And, once we're used to that new normal, maybe 6% is better than 9%. Maybe, just maybe, we can always have it be like, say, 3%. What the hell? Doesn't that make your financier heart just swell up two sizes simply thinking about it? Oh, that's not your heart, is it?

Anyway, in the meantime, somehow everyone forgot about the fact that when the Federal Reserve bank was established, its mission was to do two things, not just one: to control inflation and control unemployment. But when your focus is on essentially eliminating even the merest hint of inflation, then it's kind of hard to use, er, inflationary pressures to reduce unemployment.

And, hey, those unemployed are disproportionately the poor and under-educated and blue-collar and non-white folk, anyway. They don't really count. So at the same time that the new normal kept being lower and lower inflation, the new normal also began to accept higher and higher unemployment. Now, sure, everyone agrees, due to hard lessons learned repeatedly, that if you try to get unemployment to go completely away, or nearly so, then Bad Things Happen. Because, there's a lower limit for it, and basically there's a natural rate of unemployment. This is true, most agree that this is true. But it's also sort of neat for the lenders and capitalist class because, well, it's great cover to use to argue that you can't do anything to reduce unemployment.

So here we are.

And here's the thing: if the neo-Keynesian idea of liquidity trap is correct, and evidence indicates that it is, then it's entirely possible to use that gas pedal, to do stuff that otherwise would be inflationary, to reduce unemployment without actually causing inflation. This would be true to some degree, anyway, when there's relatively high unemployment. But it's even more true, deeply true, in a liquidity trap. So there's no good reason, right now, to not use whatever tools are available to reduce that economic slack, to reduce unemployment.

So why aren't they? Well, some of the lenders and capitalists really are afraid of inflation. I don't doubt this. But, you know, it's also the case that they expect (near) deflation to help them—they expect that unemployment means they will not pay higher wages and might actually pay lower wages. As long as they're not feeling much pain, if any, then "correcting" any problems via lower wages is their preferred solution.

Which, oddly enough, brings us to Europe. Didn't expect we were about to go there, did you? But that's exactly what's happening. Just think of the "lenders" as "Germans and French" and "borrowers" as "Greece, Italy, Ireland, Portugal, and Spain". As it happens, regular old Germans don't like to borrow money, anyway. Even middle-class Germans are net lenders, not borrowers, because they're savers. Any inflation at all won't help them, but will hurt them. All that savings had to go somewhere, it went to the European periphery. They got all that money in the first place because they were selling more products than they were buying, so they had to essentially loan the money to the people they were exporting their products to. And they did so, indiscriminately, at low rates. Because, hey, it was all good, right? Now, when the problems with that whole situation have become more apparent, there's basically the same kinds of solutions here as I explained above. Deflation and unemployment, or inflation. Well, the Germans and the French have the political power, and so it's going to be deflation and unemployment for the periphery rather than a mild inflation for them, just like here in the US it's unemployment for the less-privileged, borrowing class rather than mild inflation for everyone.
posted by Ivan Fyodorovich at 12:28 PM on December 19, 2011 [10 favorites]


"Does MMT have anything to say about what the acceptable level of % gov't debt to GNP is?"

I've read that MMT says that as long as the government's debt is in its own currency, then it literally does not and cannot matter how high that number goes.

Which is problematic.

Note that I've heard-tell of a supposed rebuttal of this claim (what I repeat above) by a MMT person.

Sovereign debt is a red-herring. It really is. I know that this is hard to believe when every talking head and politician around the world seems to be saying it's the root of all evils. Stop and consider the possibility that they're using it as a diversionary tactic because it's something the voters can easily understand, it appeals to people's notions of virtue and punishment, and it distracts voters from all these folks' complicity in a) the finance bubble that is the root cause of the problem which these talking heads and politicians are all either responsible for, cheered on, or profited from and b) that there is something that can actually be done to alleviate the suffering caused by the bursting of the finance bubble that isn't in the personal interests of these very wealthy people, taken as a class.
posted by Ivan Fyodorovich at 12:42 PM on December 19, 2011


Ivan Fyodorovich:
Yes of course, there's something that can be done under the MMT framework , which is a jobs guarantee, as pushed by Bill Mitchell. As Randall Wray wrote recently:
I had never thought of it that way, but Bill’s analogy to commodities price stabilization schemes added an important component that was missing from Minsky: use full employment to stabilize prices. With that we turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand.
link
posted by wuwei at 1:38 PM on December 19, 2011


MikeWarot wrote: You will someday see someone crumple up a hundred dollar bill, and toss it on the ground, and then nobody will bother pick it up, except to keep a place litter free.

Uh, 401(k)s being wiped out would be deflationary, not inflationary. Your mythical hundred dollar bill being thrown on the ground would be more akin to a million dollar bill.
posted by wierdo at 4:06 PM on December 19, 2011


Uh, 401(k)s being wiped out would be deflationary, not inflationary. Your mythical hundred dollar bill being thrown on the ground would be more akin to a million dollar bill.

When have facts ever gotten in the way of conspiracy and speculation?
posted by Talez at 8:30 PM on December 19, 2011


Isn't reality considerably more subtle than all this monetary policy machinery? Prices have inflated like forever, except when a smidgen of our ever more efficient production trickles down through cut-thought competition. Wages have inflated for some jobs fairly high up the food chain, like technical jobs. Wages are currently deflating for most jobs.
posted by jeffburdges at 9:38 PM on December 19, 2011


russilvwong: I think that model doesn't have a government sector, which probably explains why the oscillations are so much stronger.

In that sense, Keen's model's are separate from MMT in that they don't include the actions of the issuer of fiat currency. However, they do include a separate banking sector & make an honest attempt to handle the consequences of credit creation in a credit-money economy (like ours), and recognise that the economy is a dynamic system which is never "in equilibrium" as neo-classical models usually assume (they also tend to assume that debt doesn't matter as every debt is someone else's credit). The interesting thing about Keen's models is that natural changes to the assumptions lead inevitably to the kind of "great moderation, followed by credit crunch & turmoil" that we experienced both in the 20s/30s and in the last 30 years.
posted by pharm at 5:18 AM on December 20, 2011


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