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Austrians and MMTers should be on the same side



April 30, 2011 – Comments (6)

I found this to be a very interesting idea. I read a lot of economic theory (from an amateur's point of view, I am not an economist. I have just been reading and thinking about this stuff for a long time) and my own thoughts tend to be a combination of MMT and Austrian. My reason for studying is not to advocate any particular monetary or fiscal policy (I am certainly in no position either influentially or from the standpoint of economic comprehension to do so), but it is rather to understand the monetary and fiscal environment we will in.

I want to understand reality, not the way things 'should be'.

Because I believe most of the economic analysis that gets put forth all the time is not valid. It is based on concepts that were applicable when we had a convertible currency. Things like 'natural interest rates', 'crowding out', 'debt monetization', and especially the 'Government Budget Constraint' gets talked about and I think most analysts use these ideas completely out of context, if they acutally understand them at all.

I think Austrian Economics' description of the Business cycle extremely useful. The truth is that there is mal-investment and government sponsorship / support of mal-investement is one of the primary causes of booms and busts.

I think Modern Monetary Theory (MMT) has easily the most coherent and complete description of how our monetary system actually works, and the role and effects of reserves and federal government debt and taxes (i.e. that bonds "fund" nothing. When the US Government wants to spend, it simply spends. More specifically, the Treasury credits bank accounts directly. This is exogenous to the banking system and has been termed 'vertical money creation', as opposed to 'horizontal money creation' which happens completely in the banking system. For more on this, see here. This also illustrates why the US Government is not revenue constrained. It must first credit accounts so that money can disseminate through the economy, one use of which is to pay taxes. Neither Taxes nor Treasury Issuance 'funds' Government activities). MMT's discussion of sectoral balances and stock/flow consistent macroeconomic models is exceptionally useful.

The fact is that the Federal government deficit and budget policy stance cannot be evaluated independently of the rest of the macroeconomy (the private sector and the current account). They are all necessarily interrelated. A Federal government deficit is not categorically bad, nor is a surplus categorically good.


Austrians and MMTers should be on the same side
30 April 2011 10:45
By Rogue Economist

Austrians and MMTers should be on the same side. After all, both camps understand the relationship between money and credit, and both understand the full ramifications of having fiat money. They should be on the same side arguing against economists who argue that demand can be created by flooding the banking system with reserves, and both should be on the same side arguing against those who think that increasing inflation expectations is an effective way to get an already over-indebted economy to take on more debt.

As it turns out, these two groups are the most ardent critics of each other, thereby giving the mainstream enough bullets to shoot both of them both down with each other's bullets. MMTers are shot down with the branding that they don't care about inflation, while Austrians are shot down with being crazy gold bugs.

As I see it, both have a good understanding of monetary transmission, except each follows this understanding to two of its logical outcomes. Austrians believe that having fiat money in the economy will lead to continuous malinvestments, endless bubbles, and will eventually destroy the credibility of the currency. MMTers embrace fiat, and believe that it is precisely the government's ability to spend fiat that enables it to offset the private sector's need to save, to take over when the private sector is deleveraging, restructuring, or just plain fearful of investment, so that the economy does not spiral into cascading deflation.

MMTers are different from the mainstream because they distinguish between fiat being used to fuel government spending, which translates into actual income for the economy, and fiat being issued just to encourage people to spend today what they would otherwise spend at some future date. MMTers recognize that when a person is devoid of income, no amount of inflationary push will nudge him to spend money he does not have, or borrow money that no lender will ever prudently provide him.

But MMTers, just like Austrians, recognize that having fiat money could lead the private sector to extend more credit than is prudent during a boom, and this excess lending eventually leads to a ponzi scheme where the last person holding the now bust asset is unable to pay his debt, and the last person holding the bad debt loses his ability and compunction to lend some more.

Austrians, however, prescribe that the best way to handle a bust is to let it take its natural course, so that people who made bad investments lose, and those who plan to invest do so when the economy settles at a stable floor. MMTers, on the other hand, do not believe it logical for government to leave a private sector bust to itself, precisely because people who have just lost income will not be the right ones to start spending again, and investors who just lost equity are not the best ones to start investing again.

But regardless, both can look at the economy granularly, and see debtors and creditors, investors and investees. Mainstreamers only see buyers and sellers, and believe that just dropping money will solve the problem of non-existent buyers. Mainstream do not see how this money will be transmitted from fiat issuer to end consumer without aggravating consumer's already heavy debt load. There is no such thing as balance sheet recession to the mainstream, no such thing as leveraging and deleveraging.

Austrians and MMTers see this dynamic, and so should take a common stand against the mainstream who can easily shoot them both down like fleeing rabbits. For my part, though, while I see how Austrians see the dangers of fiat, and therefore want to take it away from those who can issue it - from the government, by going back to the gold standard, and from the banks, by advocating a 100% reserve lending, I don't share the same prescription.

As I've mentioned it previous posts, I don't believe the gold standard is apt to our current level of economic development and population. I don't believe 100% reserve lending addresses the needs of today's economic reality, or ever did the reality of a growing economy at any time in the past. And I also believe that recessions cannot be left alone, particularly when private businesses are no longer willing or able to do their regular job of investing, producing, hiring, and selling. I do believe though that government should support a more organic revival of the private sector by supporting the local businesses who hire the most people in aggregate. It should also respect that a recession is the best way also to reverse and break the previous boom's tendencies towards monopoly and concentrated market power. Government should not use fiat spending to perpetuate that status quo.

Fiat is now the reality. The best way to control politicians and bankers from abusing it is to strictly enforce macroprudential monitors and controls.

6 Comments – Post Your Own

#1) On April 30, 2011 at 1:42 PM, whereaminow (< 20) wrote:

While I agree that they have certain things in common, those differences are pretty strong obstacles to overcome.  This is not a petty slap fight.  The theory of economic calcution based on subjective value scales rules out coercive money as an option for a stable economy.  The Austrians could be wrong, but I haven't seen any empirical or theoretical evidence that they are.

I don't know about "sides" either.  I am only on the side of liberty, and I don't find MMT compatible with that side.  That doesn't mean I reject their analysis entirely, but I do find myself strongly opposed to their solutions. A truth is a truth, no matter how unappealing.  Yes, it's true that demand for paper money comes from the power to tax.  I don't like it, but it's true.  Yes, if the entire system is dependent on central bank credit creation, lowering their dollar output will lower net assets.  It's true, though not economically relevant if people are given their choice of currency. 

I definitely have no interest in silencing them and I am glad they are there to highlight weaknesses of mainstream theory that Austrians have missed. If they are doing good work, I hope they keep it up.

But in the meantime, I can't advocate coercion in economic affairs and be a principled proponent of liberty. 

David in Qatar

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#2) On April 30, 2011 at 2:12 PM, binve (< 20) wrote:

whereaminow ,

Hey David, I hear you man.

There are some policy advocations from MMT that I find that I don't agree with / don't sit right with me.

What I do find interesting is that most MMTers and most Austrians agree that the financialization of the economy is the biggest threat to a stable economy, which is something I completely agree with. And anything that is too big to fail, which means that supporting that industry at the expense of others is directly in opposition to the ideals of liberty. So that is another point of common ground.

But yes, I agree there are some huge differences as well.

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#3) On April 30, 2011 at 2:22 PM, whereaminow (< 20) wrote:


If it were possible to pull together on specific issues to take down the greatest scam of our lifetime (rewarding irresponsible bankers), then I'm all for it. It is the same strategy that brings libertarians and liberals together on the war (well, at least Nader and McKinney and all them).  How to do that in an economic rather than political setting, however, is beyond my limited intelligence.

David in Qatar

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#4) On May 01, 2011 at 3:57 AM, mhy729 (30.30) wrote:

What I do find interesting is that most MMTers and most Austrians agree that the financialization of the economy is the biggest threat to a stable economy, which is something I completely agree with.

Amen.  As the financial wizards devised increasingly ingenious ways to make yet even more money, engaging in activities that have become far removed from the "proper" function of efficient allocation of capital generated by the production economy towards further economic development/productivity, they created a gargantuan unstable anomaly that was/is/will once again be bound to explode in time.  (JMHO from my admittedly amateur understanding of these issues.)

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#5) On May 02, 2011 at 2:56 AM, checklist34 (98.39) wrote:

hey, thank you very much for the reply to my comment a month or a couple weeks ago in your other blog.

I have concluded that MMT is close enough to what I was thinking to make me willing to follow it if I had to follow a group.  

no chance of china not buying our bonds causing us problems, much less severe ones

the whole of the monetary base and common money supply thoughts are outright silly, the "debt" about roughly probably represents the money supply or osmething like that

I appreciate it.  I don't care much for the details of MMTers views on what the gov't should do, but I'll offer this:

if ever you find many intelligent people who are pondering the same thing with the intention of learning and understanding (thats a key, as frequently people ponder with the intention of justifying their current views and biases) ...

you'll find many different answers.

and if you were granded omniscience, so that you could know the complete truth of everything...

you'd probably find that those many different answers weren't wrong, but all were right, in part.  when taken from our own point of views, filtered with our own biases and prejudices, what we come up with when pondering something honestly tends to be different than what others come up with when viewing the same data through the lense of themselves -vs- ourselves.

in this case probably all of the major schools bring some good points to the table, and ... 

the goal, if pondering all of this, should probalby be to unite and not refute, various schools of thought.  

in all honesty I think this is possible and I'd post a stab at it, but I'm leary of what would no doubt be a contentious thread full of no small number of hyperbolic posts and no small number of posts written from the god perspective (a sin, in no small part, of mine when posting, I would add).  

suffice it to say fears of "china not buying our bonds" are flat out silly.  And that alone leads me to wonder if some significant opportunity lies in the markets, because so many people assume (for that and other reasons) that our bond rates are destined to soar.  

gun to my head, they aren't.  

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#6) On May 02, 2011 at 1:52 PM, binve (< 20) wrote:

mhy729 ,

Completely agreed.


absolutely man, no problem.

Agreed. I like reading MMTers thoughts because I think they are analyzing the current problem the most accurately. I also don't agree with many of the prescriptions being offered by them. We currently have a huge output gap, but if we try to close that gap we have to realize how much of the economic activity was completely unhealthy at both the 2000 and 2007 peaks. David and I discussed this at one point, and my thoughts boiled down to these (comments #8-#17, but especially #17):

I also agree with your thoughts about reading to learn vs. reading to justify. I have broaded my economic reading the past two years for that very reason. I don't dismiss any commentary out of hand anymore and will read it to see if any logical conclusion are put forth with a rationale (more often than not the rationale part is missing). And if it makes sense, I incorporate it into my future economic thinking.

>> suffice it to say fears of "china not buying our bonds" are flat out silly.  And that alone leads me to wonder if some significant opportunity lies in the markets, because so many people assume (for that and other reasons) that our bond rates are destined to soar.  gun to my head, they aren't.  

100% agreed. Today, the debate is not 'if' rates will rise, it is 'when'. Nearly everybody (at least the vast majority) is convinced that there is a 'bond bubble' (and I was on that side of the thinking at one point), and that a government default / funding crisis is likely if not inevitable. And when I say everybody coming to that conclusion in the economic media, I really began to question it hard. I started reading MMT in earnest around that time and a few months later I wrote this post which was my first serious consideration of those ideas:

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