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Talking Past Each Other: MMT and Mises

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August 17, 2011 – Comments (18)

In 1896, economist and marginal utility theorist Eugen von Bohm-Bawerk published what is still today considered the definitive criticism of Karl Marx's economic system. Despite the positive academic reception of his work, Karl Marx and the Close of His System, the response from Marxians can only be characterized as silence. Did they reject it as ad hominem? On the contrary, Eugen had gone out of his way to avoid direct criticism of the man, Karl Marx. Did they not understand it? Did they simply have no response to the powerful criticisms? No. In fact, as we know too well, there is always some response in heated economic debates.

It was about thirty years later, when a brilliant German socialist economist named Rudolf Hilferding burst on the scene, that we learned why the Marxians had continued to write volume after volume as if Bohm-Bawerk had never existed. Hilferding was a big picture guy, the kind that can read a passionate debate from both sides and find the root of their disagreement. And so it was that Hilferding (note 1), in his response to Bohm-Bawerk, became the first far left economist to make serious headway in debating marginal utility theorists. Hilferding identified the disconnect between the two schools of thought as one of relevance. Hilferding conceded to Bohm-Bawerk that he was correct in his formulation of value, but the key point to Hilferding was where does one begin their analysis. For a left leaning economist, value does not proceed from the individual and then out to society. Sure, Hilferding admitted, if you begin from the starting point of one man and attempt to build general theory in terms of his exchanges, the Marxian system is wrong and the marginal utility theorists are correct. However, if you start from how value exists in society and work in the opposite direction, Marx's theories, though admittedly incomplete, are more relevant (Coincidentally, Marxians ignored Hilferding as well!)

So the question left to the reader of Hilferding's work was not the correctness of each theory, but rather what is relevant to an economic analysis.

And so that is why I am temporarily pulled out of retirement. I have been drawn into a fascinating discussion with binve concerning the approach of MMT and how it differs from the framework of the Austrian School. As always, there is tension. This one, however, is different. I feel a bit of extra pressure because I am so fond of binve personally that I don't want to misrepresent his work or give him less than the full attention I can deliver.

I have been traveling a great deal recently, living up to my Fool handle, “whereaminow.” I flew from Qatar to Baltimore to Anchorage to Baltimore to Chicago to Baltimore in the past two weeks. I am really really sick of BWI airport ;) But this has provided me with a chance to blaze through the library on my iPad, which is how I came across the Marx-Bohm-Bawerk-Hilferding debate. I was immediately struck by how similar the problem was to my debate with binve. In no way should you construe that as implying that binve is a Marxian! But let me show you what I mean after I provide some brief background on the schools of thought present in this debate. I don't want to take for granted anyone's knowledge level.

Introduction to the debating schools

The Austrian School of economics is among the oldest schools in existence, but it has existed completely outside the mainstream for roughly 80 years. Its present day explosion in popularity is directly linked to their success in not only identifying the housing and dot com bubbles but their ability to explain the reasons for the booms and busts that plague our economy. The Austrian Theory of the Business Cycle (sometimes called The Austrian Theory of the Trade Cycle) is the school's most famous contribution to modern day economic debate. Austrian School economists believe that economic science is a deductive exercise that starts from the premise that all human economic activity is purposeful action and proceed from there in order to discover general laws or truths about economics. The school does not rely on empiricism or mainstream positivist approaches in order to reach its conclusions. Austrians support sound money, i.e. money that derives its value from voluntary exchange (notably, gold and silver).

Modern Monetary Theory has also seen a surge in popularity in recent years. Like the Austrian School, MMT has benefited from the total failure of orthodox mainstream economists to predict or adequately explain the volatile swings in the global economy over the past decade and a half. MMT starts from an empirical framework, taking as given that our monetary system is fiat and unbacked paper, for better or worse. They see their significant contribution in developing an understanding of how a fiat unbacked paper money system operates, for example they argue that the Treasury's bond sales are unnecessary and a relic of the gold standard. MMT tends to promote economic stability by advocating policies that smooth out the business cycle. They also advocate stable money, i.e. that the value of money in terms of the price level should remain stable.

In many arguments, MMT and the Austrian School find themselves on the same side. Both usually argue that monetary policy is useless in directing economic activity. Both argued against QE, though for slightly different reasons. (Note 2) But on very significant issues with long range implications for all economic participants, they diverge, such as on the questions of business cycles, deficit spending, and inflation.

I see your 10,000 words and raise you 10,000

I want you to refer back to this post (http://caps.fool.com/Blogs/why-deficit-spending-and/621467) in which binve attempts to set the record straight on the many misconceptions surrounding Modern Monetary Theory. I get a kick out of binve's work. He is so driven to understand the economic theories he encounters that he really gets carried away with his enthusiasm. When I copied that blog into a Open Office document for further review it was 18 pages at 12 point font! When it comes to being long winded, I think I have met my match =D

But binve's work is important because he lays out, albeit in general strokes, the entire framework from which MMT views economic activity. The business cycle is taken as a given and follows the Schumpeter-ian analysis that capitalism's destructive nature (i.e. cut-throat competition) leads it to chronic booms and busts that are inevitable and necessary. From this point of view, if anything can be done to smooth out these fluctuations, particularly if you have the tools of proper macroeconomic accounting, it seems stubborn, foolish, and dangerous to propose anything else (e.g. austerity or balanced budgets).

So let's dive right into an example of how two schools can talk past each other. I cannot quote binve in length, or we'd end up at 36 pages =D, but this passage will help you get the concept of why we diverge:

1. A bank makes a loan (creates money out of thin air) to any credit worthy customer.
2. However, the bank cannot simply give the money away, it must record that transaction as a liability on its own balance sheet.
3. Which means that the bank did not increase the *net* amount of money in the financial system.
4. It created an asset (money out of thin air) but also created a liability of equal magnitude (that loan/money must be paid back).
5. The fact that this transaction did not generate any *net* financial assets is why it is called a 'horizontal' transaction.

For MMT the relevant sentences are #2-4. For the Austrian School, the relevant sentence is #1. Let's walk through it.

According to the Austrian School, the business cycle is not an inherent feature of the free market. The business cycle boom is created by the expansion of bank notes from a fractional reserve banking system (usually with a central bank acting as the engine of this expansion, though government intervention such as suspension of specie redemption can create the same effect). So what is important is that money is created out of thin air (the credit worthiness of the customer is less important in this analysis.) This new money increases the supply of available funds, thus lowering the interest rate – or the price of money – below what it would be without this injection of new money. (What that exact rate, sometimes called the natural rate, should be at any given instance is impossible to know a priori as that information is based on the subjective value scales of market participants and can only be revealed through action.)

Double entry bookkeeping has been around since the 13th century, at least. It was a major breakthrough in financial record keeping as it provided an easy way for the accountant to discover his mistakes. Just mark each asset with a corresponding liability and the two sides of the ledger should always add up. For 800 years, humans paid little attention to this novelty other than to note its convenience.

And here is where we start to talk past each other. From my perspective, I fail to see what it matters that Banker Bill marked this new money as a liability on his ledger sheet. Of course he did. He's been doing that for 800 years, under gold standards, paper standards, silver standards, etc. That's how he keeps track of his assets. But to say that this is important, well I have to differ. From an economic standpoint the important matter is how his action of creating new money distorts economic activity.

I agree that at some point the banker will be paid off. In fact, if that were the end of the story MMT would be correct in stating that there is nothing to see in sentence #1 and that it is sentences #2-4 that matter. But that's not where this story ends.

Let's take the scenario that Banker Bill at Bank A loans $10,000 to Joe Blow. Joe Blow borrowed that money for a reason, let's say to build a new garage for his small repair shop. He gives the $10,000 to the garage maker, who then deposits that check into his bank, Bank B. Bank B is now going to redeem the $10,000 from Bank A. Bank B can now pyramid off these new reserves, creating even more new money, assuming Bank A can actually cover the $10,000 it loaned out. (Note 3) And here is where the party starts for an Austrian. In a fiat unbacked paper banking system cartelized under a Federal Reserve, this continuous bank note expansion goes on for so long that it creates a boom. Interest rates are driven far too low, stimulating investment that would be seen as unprofitable in a higher rate environment (particularly for goods further away from consumption, such as housing or titles to capital goods i.e the stock market).

Now it is true that at no time during this boom has there been any new net financial assets created by the bank. But of course, there never would be anyway! Banks don't ever create new net financial assets in this way, even during the biggest bubbles in world history. So I fail to see why this matters at all in any economic discussion It is the nature of double entry bookkeeping that banks will mark a corresponding liability on the opposite side of the page. Big deal. (See us talk past each other?!)

So when MMT tells me that a reduction in government spending will cause a reduction in net financial assets, I simply shrug. Who cares? Net financial assets are the banker's bookkeeping entries. They have no relevance to a nation's true wealth or an economy's true health.

A bust is inevitable anytime that the expansion of bank notes creates a boom. But before we get to the bust, we need to talk about inflation.

Preaching Stable Inflation

Here again, MMT and the Austrian School talk past each other. Rather than quoting MMT economists at length, we can separate the two schools fairly easily. MMT believes in stable money. The Austrian School believes in sound money. As such, what they believe to be inflation is vastly different.

Stabilization theory came into popularity in the 1920s. Irving Fisher is probably the most famous stabilizer. Basically, the goal here is simple: the general price level should remain stable and it is reasoned that this will smooth out fluctuations in the economy and promote general stability. How you get from point A to point B through logical deduction is a bit less clear. (note 4) As long as the price level is considered stable, they argue, the environment is not inflationary. But there is a serious flaw in stabilization theory. Prices in a free market should generally be falling. The great thing about the market is that as prices fall, the benefits of increased production are spread out among an ever increasing amount of the population. So the poor can actually benefit and see their standard of living rise but only if you allow prices to fall. Second, if you are purposefully keeping prices stable, you must be creating new money (although, the banks are certainly going to mark the corresponding liabilities, lol). This was the case during the inflationary boom of 1921-1929. The reason Fisher and Keynes didn't see the Great Crash of 1929 coming is that they were staring at the price level, which was relatively stable and so they thought “well, nothing wrong here. We have a stable healthy economy!” Austrians such as Von Mises and Hayek saw that the total money supply was growing at unprecedented rate and thus interest rates were lower than they should have been. To an Austrian School economist, this is inflation.

We see the same disconnect today. Binve points out that the price level is relatively stable. But that means that the money supply must be continuously increased! That is inflation! Yet to binve it is not, since prices aren't rising and new net financial assets are not created thanks to an 800 year old bookkeeping practice. (Let's set aside the fact that prices are rising which means that the inflationary picture is even worse than during a stable money environment.)

That leads us to the bust, which only the Austrians see as inevitable once you have purposefully expanded the supply of bank notes. Prices do not rise in uniform through an economy. In fact, if they did, there would be no point to increasing the money supply in the first place, since no one would benefit and no one would suffer. During an inflationary boom it is the rise in prices in the complimentary factors of production that eventually undo the boom. As entrepreneurs compete for scarce resources, prices rise. At this point, just the slightest movement in interest rates upward can cause a wave of bankruptcies and a massive contraction of the supply of money (note 5). Prices fall and the economy slumps into depression.

At this point, would it help to create new money and start the cycle all over again? Of course not, yet that is exactly what MMT advocates.

The economy needs to be allowed to readjust, to find a sustainable level of growth, not to suffer the constant gyrations of funny money booms and busts.

In that sense, MMT is correct to say the business cycle is natural to capitalism under an unbacked paper money standard. General booms and busts are most definitely NOT part of a free market capitalist system, however. General booms and busts require government intervention, either suspension of specie redemption (prominent throughout Europe in the early days of loan banking) or cartelization under a central bank (usually couple with suspension of payment anyway.)

So from here I leave it to the reader to decide what is relevant. Does it matter that national accounting identities (aggregate bookkeeping entries) match up nicely or does it matter that a non-market institution (the Federal Reserve) is allowed to influence interest rates to create the booms and busts that plague the post sound money economy? Does it matter that money is stable or sound? Does it matter that we counter the business cycle or that we end it? Does it matter that the price level is stable or that new money is being created?

Although this is certainly not the last time we speak past each other, hopefully the readers can see why we do, and how it is up to them to decide what is truly important.  After all, it is their economy that we are arguing over.

David in Qatar

NOTES

 

1: Hilferding like Bohm-Bawerk's student Ludwig Von Mises, was at the top of the Nazi hit list. Sadly, Hilferding did not see the danger coming, once remarking to a friend that “Hitlers come and go”. In 1941, at last recognizing the peril, he tried to escape, was caught, and was never heard from again.

 

2: MMT argued that QE caused distortions in the market by increasing inflationary expectations but did not actually cause inflation. The Austrian School argued that QE was both inflationary and damaging to economic calculation. Again, who is right depends on what you conclude is relevant much like our discussion of net financial assets versus inflation.

 

3. Outside of an unfortunate chapter of Scottish banking history, Murray Rothbard's Mystery of Banking is an excellent overview of how banks operate both under the conditions of free banking and under the cartelization caused by government intervention and a central bank.

 

4. See Rothbard's America's Great Depression for both a complete discussion of various business cycle theories as well as a look at the different stabilization theories in vogue in mainstream economics. The book is a must read for any serious economic enthusiast.

 

5. At the end of the 1921-1929 boom, a jittery Federal Reserve took rather drastic steps to force rates up and curtail the boom leading to history's most famous stock market crash. Again, see Rothbard's AGD.

18 Comments – Post Your Own

#1) On August 17, 2011 at 12:41 PM, ChrisGraley (30.21) wrote:

awesome!

 

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#2) On August 17, 2011 at 12:46 PM, binve (< 20) wrote:

David,

This is a *fantastic* post! It really does highlight the differences between the two schools.

I am formulating a detailed reply right now. It will most definitely *not* be a rebuttal. There is no place to 'rebut' when there is a description of core tenets. I would be like a Christian trying to 'rebut' the core beliefs of a Muslim. It is non-sensical. Different people see the world in different ways. Is one 'right' and the other 'wrong'. No. It simply means that people believe in different core tenets and will gravitate toward schools of thought or belief that fit with their personal and world views. 

Like with any study of human interaction, economics is a study in subjectivity. Not everybody sees things the same way and not everybody thinks economics should have the same aims. What is most important: Full Employment? Maximal Resource Utilization? Stable Prices? Sound Money? Generally Decreasing Prices?

Depending on your answer will be the economic systems that make the most sense ... to you. Again, there is an inescapably subjective facet to all of economics, because people value different things in different ways.

This is why I will never see you as an 'adversary' and why I will always enjoy the discussion. Because we are two well-meaning people who have thought a lot about economics and just see things in slightly different ways. 

Thanks for a great post!

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#3) On August 17, 2011 at 1:34 PM, binve (< 20) wrote:

David,

Thanks again for such a great post.

Here are just a few replies to clarify some MMT positions.

From this point of view, if anything can be done to smooth out these fluctuations, particularly if you have the tools of proper macroeconomic accounting, it seems stubborn, foolish, and dangerous to propose anything else (e.g. austerity or balanced budgets).

This is a true statement. But let me also say that MMT does not have any problem with either balanced budgets or budget surpluses per se. MMT advocates that the Government net spending position should never be discretionary, and there is nothing inherently good about a government deficit or a surplus. It is simply a flow state to match the desires of the other two sectors. The goal of fiscal policy under and MMT framework is to arrive at an economy that: is running at full capacity, has full resource utilization (including especially employment), low (or zero) stable inflation. If this is also accompanied by a balanced current account (which I personally think is a worthwhile goal because we see time and again that trade imbalances create international political and economic friction), then a Government balanced budget is the natural outcome of this scenario.

So from and MMT perspective, pursuing a balanced budget (independent of the state of the underlying macroeconomy) is not a worthwhile goal in and of itself. It is instead the natural by-product of a full operating economy. In other words: the fully operating and utilized economy is the cause, and the Government budget balance is the effect. MMT says it is incorrect to think of the effect (budget balance) begetting the cause (fully utilized economy).

This new money increases the supply of available funds, thus lowering the interest rate – or the price of money – below what it would be without this injection of new money. (What that exact rate, sometimes called the natural rate, should be at any given instance is impossible to know a priori as that information is based on the subjective value scales of market participants and can only be revealed through action.)

I am not debating this point since it is from the Austrian perspective, I will just give MMT's alternate interpretation.

The supply of available funds (assuming you are referring to a Loanable Funds perspective) does not exist outside of previous net Government spending (the National debt). It is not exogenous to the macroeconomic sectoral balance, but exists exactly because of it. In a fiat currency system, the non-government sector has funds to buy assets precisely because the Government previously spent those funds into existence. Net Government spending creates reserves in the banking system, and without Government bond sales to soak up excess reserves, will put downward pressure on interest rates (due to overnight bank lending competition). This means that the natural/neutral rate of interest is zero.

And here is where we start to talk past each other. From my perspective, I fail to see what it matters that Banker Bill marked this new money as a liability on his ledger sheet. Of course he did. He's been doing that for 800 years, under gold standards, paper standards, silver standards, etc. That's how he keeps track of his assets. But to say that this is important, well I have to differ. From an economic standpoint the important matter is how his action of creating new money distorts economic activity.

This is why MMT goes to great lengths to distinguish horizontal money creation (loans created within the financial system where each asset has a corresponding liability) and vertical money creation (government spending which generates an asset in the financial system with no corresponding liability). The manifestation of a horizontal credit boom and bust has extremely different impacts on the economy and inflation than does vertical money creation. This was a theme discussed in the original post.

So when MMT tells me that a reduction in government spending will cause a reduction in net financial assets, I simply shrug. Who cares? Net financial assets are the banker's bookkeeping entries. They have no relevance to a nation's true wealth or an economy's true health.

Agreed! MMT says that nominal money ≠ wealth. Nor is fiat money a real resource. An economy and society creates wealth by adding value, increasing output of real goods and services, utilizing existing goods and services more efficiently (including and most especially labor). Net financial assets are not wealth, they are accumulated tax credits that the government previous spent into existence. Wealth that is not maximized (wasted and idle resources, unemployment, etc.) means that the government did not create enough financial assets for these resources to be bid for and utilized in the economy after the private domestic sector met its savings desires.

We see the same disconnect today. Binve points out that the price level is relatively stable. But that means that the money supply must be continuously increased! That is inflation! Yet to binve it is not, since prices aren't rising and new net financial assets are not created thanks to an 800 year old bookkeeping practice

This is an inaccurate statement. You are confusing horizontal money creation and vertical money creation, as explained above. As was elaborately detailed in this post it is unambiguously stated that the long term trend in inflation is in direct response to the long term deficit spending position of the United States.

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#4) On August 17, 2011 at 4:00 PM, wolfman225 (69.75) wrote:

Great discussion!  I must say that I lean intuitively towards the Austrian Theory.  I must also say, however, thay my opinion is worth less than you paid for it.  In the school of economic theory, I'm still in Kindergarten.  I downloaded a .pdf of Mises work a few months ago and found it heavy going (especially having to remind myself that his use of the term "liberal" is in the classical sense, rather than it's modern interpretation.)

I'm going to dive back into it whan I have more free time to go slowly and digest the meanings better.  I will definitely continue to enjoy and learn from your discussions.  You both, while holding to differing views, are providing a valuable source of education to us Fools.  Thank you both.

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#5) On August 17, 2011 at 7:34 PM, rhallbick (99.71) wrote:

Excellent discussion!  Thanks for putting forth the effort.

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#6) On August 17, 2011 at 9:20 PM, rfaramir (29.51) wrote:

binve wrote:

“The supply of available funds (assuming you are referring to a Loanable Funds perspective)”

No. This is a common misperception of bankers, whose natural focus is what rate they can get when loaning out money. For an Austrian and anyone looking at the quantity of money in the system and the effects of that quantity on prices in general, ‘available funds’ pretty much means all money in existence. All money is owned by someone at all times. (Even money going between banks, in armored cars or electronically, is owned by someone, and when a bank ‘holds’ a check they still know who owns the money before and after clearing it.) Whether “available funds” are “Loanable Funds” depends on the market price of renting money (the interest rate) and the owner’s preference for holding it as a cash balance (available for any use he may want) versus giving up the use of it for a certain time in exchange for getting back more at a later date. A higher rate of interest will cause the owners of money to make more of their money “loanable” but (except for money being created) doesn’t change the amount “available”. The total money supply is “available” for spending or holding or loaning out however the owners wish. “Loanable funds” are the subset that the owners are willing to do without for a time.


“does not exist outside of previous net Government spending (the National debt).”

Yes, it does. Originally, when gold and silver were money, both specie and paper (strictly speaking "money substitutes" which are rights to specie) circulated, independent of government. (The 'dollar' was in fact named via Spanish ‘dolar’ after the privately minted Thaler.) Anyone who wished to enter the warehousing business could issue a paper receipt for the amount of specie warehoused, and any holder of paper or specie could alter his preferred ratio of hard and paper holdings by visiting such a warehouser (goldsmiths, bankers, and later and exclusively government offices) and trading paper for specie or vice versa. Even specie could change shape according to how useful the holders found dust, nuggets, bars, and coins, as a minter could exchange one shape for another, melting or minting as the free market participants changed their preferences. (Of course these services were provided at a cost, so to avoid high transaction costs you would want to predict your own desires for each form ahead of time fairly accurately, but the point is, you could change your preference.) When US gold was confiscated in 1933, the exchange resulted in paper alone in our hands. These funds were only ‘spent into existence’ in the same sense that any warehouser spends paper receipts into existence, by taking in the gold and giving out a receipt in return, except that the exchange was done by force and 38 years later the promise to redeem for specie was broken. (And less than one year later, the promised ratio was unilaterally altered from $20.67/oz to $35.00/oz, but that massive-at-the-time fraud has been dwarfed by the fraud of printing unbacked notes since then.) So, of all the dollars constituting the “supply of available funds” only the *new* ones exist because of government “spending them into existence”. Money does not exist because of government spending; “fiduciary media,” the excess, fraudulent, money-like slips of paper do so exist. The fraudulent ones are identical in appearance and use to the original ones (otherwise they’d be worthless, as people would only want the “real ones”), but not identical in origin or effect. Money is a creation of the free market because people found it much more useful to trade indirectly than directly (avoiding double coincidence of wants). Just because government has arrogated to itself control of its quantity doesn’t mean that’s how it was, or how it has to be, or will be, or should be. That’s only how it *is*, currently, in a devastating, precarious, naturally unstable state.


When MMT analyzes and explicates this current condition, it is of interest. When MMT makes value judgements implying that the current state is good, it is of no interest except as an opponent to defeat. The violations of Life, Liberty, and Property that were necessary to bring us to this state are staggering. The violations continue to be perpetrated every time new fiduciary media are created.


“This means that the natural/neutral rate of interest is zero.”

No. Since the rate of interest is the price of renting money, a zero price would mean renting money is valueless, which would mean money is valueless. As much as printing more money units makes the existing money units less and less valuable, it’s still not precisely true that they are totally valueless, yet. If (Keynesian and) MMT policy proponents get their way for an extended period of time, this false postulate will eventually *become* true.


Wow. Sorry. All that from *one* paragraph of binve’s. That’s why I have a hard time reading or corresponding with MMT-ers. All the misconceptions make it hard going. And I do mean misconceptions. While many differences are just differences, some areas are flat out incorrect. I hope I have focussed on the latter. Mere differences are the fog that make it hard to communicate and navigate, while the misconceptions are the rocks you hit in the fog that derail a theory and produce errors of action.

If I’ve got errors of my own, please point them out to me. While I am confident in this area, I highly doubt I’m perfect!


@wolfman225,

Kudos for trying Mises. He can be a little hard to read. Human Action (read aloud by Jeff Riggenbach) is available as a free download at mises.org. Murray Rothbard’s Man, Economy, and State with Power and Market (also read by Jeff Riggenbach) is in production. Both are also available in PDF and ePub formats (I believe). Rothbard is a bit more readable than Mises and added some good bits to the theory (he meant to just restate it). For this particular conversation, I’d recommend Mises’ 1912 “Theory of Money and Credit” (actually in 1912 it was in German, the English is from the ‘20s).

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#7) On August 17, 2011 at 10:29 PM, mtf00l (44.16) wrote:

Welcome back David!

I learn the most from the exchanges you are involved in.  I enjoy reading blogs at the Motley Fool and many are entertaining.  Yours are mostly educational and evoke teaching from others even when you sometimes go "nuts".

I hope your travels end well and you find the success you seek.  Please continue to find time to educate and enrich.

I agree with you entirely regarding rfaramir.  He puts the exclamation point on information.

@rfaramir

Thanks for the additional information and references.  You don't need this from me however; you rock.

@binve

Thank you for continuing to teach Modern Monetary Theory.  You're the Yin to David's Yang.  I appreciate the quality you bring to the debate.

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#8) On August 18, 2011 at 10:44 AM, FreeMarkets (97.22) wrote:

Great to have you back Dave!  Awesome post.

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#9) On August 18, 2011 at 4:54 PM, whereaminow (42.34) wrote:

ChrisGraley FreeMarkets, rhallbick,

Thanks! Glad you enjoyed the post.

wolfman225,

I remember that when I first started reading Mises (I started with him too), I could not get over the depth of his scholarship.  I kept thinking "did everybody read that many books back in the day?!!"

mtf00l,

Glad you liked it and yes, I am "nuts" from time to time lol.  Don't know why :)

binve,

I saw that you helped get this post more readers, and I really appreciate that.  I liked your response, but I really do believe that we just place emphasis on different factors and that leads us to different conclusions.  

If I truly wanted an unbacked paper money standard, I would look to MMT and say, ok let's see how to make this work.  However, if I believe there are irrefutable economic laws that are always at work, I must reject our operational reality and advocate a different system.  So yes, we will find ourselves in opposition often, even at times when we are both absolutely correct depending on what we think is relevant.

I greatly appreciate that you took the time to learn our point of view.  I look forward to many years of learning from you.

rfaramir,

You are absolutely correct from our perspective, of course :)  I do think that you are talking past binve as well, and vice versa.  I know that I feel exactly the same way but that he would view that analysis as irrelevant.  I'm just glad to know that we aren't the first to suffer these problems in discourse.

I really appreciate your comments and I would love for you to email me sometime so we can keep in touch.  (That goes for many other Fools here that I can't talk to as often anymore!)

dvdburns@gmail.com

David in Qatar

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#10) On August 19, 2011 at 12:55 PM, kirkydu (94.07) wrote:

I like saying "Bohm-Bawerk" so I'll finish this post later, very interesting, but yes, long.

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#11) On August 29, 2011 at 2:54 PM, MikeMark (29.86) wrote:

Excellent post and discussion. I think I have some new wrinkles in my brain.

To me a key difference is here:

MMT says that nominal money ≠ wealth.

The Austrian definition of money includes the idea that it is a commodity with value perceived by the owner, in other words, wealth.

In looking at an acting person, his willingness to work or exchange is for something he perceives as valuable, especially if he is poor. Because money is often the first savings of any kind that he can make, it becomes his wealth. He has traded his effort for that wealth.

When saving for an entrepreneurial venture, money is often also the first savings of wealth by the entrepreneur. Unless she has already been successful, loans are unattainable by her. She resorts to saving money to prepare for the initial expense of the venture, to prove its value.

What this means to me is a couple of things. Under MMT, because money is not wealth, the treatment of the wealth of the poor and the startup (or small, "main street", business) is not protected. This means two things, it will be difficult to rise up out of poverty, and entrepreneurial ventures will tend to be only begun by the already wealthy.

Because the middle class is essentially made up of those rising out of poverty, the middle class will decline or will never get started.

Because the wealthy on an individual basis are as a general rule, "satisfied with the way things are" this will mean a potential for fewer great business ventures that raise people's standard of living. The average standard of living will probably decline due to the fact that there are generally far more poor than wealthy.

For me this means that MMT is not a viable way to define a good economic policy. Not because I care whether we define money as wealth or not, but instead because of the effects that I see would filter through a system like that.

I think that the average man, upon discovering that in the money he is using wealth does not exist, would move and keep his wealth outside that money as much as possible. I think he would also tend to borrow in that money and immediately spend that money to the limit of what he is allowed, thinking that he is receiving true wealth for nothing.

I think we have seen some of that in action in the past decades.

-MikeMark

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#12) On September 11, 2011 at 12:53 PM, cubanstockpicker (20.32) wrote:

For such a long winded response, you are actually crediting the Austrian school of economics for exposing the housing bubble?

http://en.wikipedia.org/wiki/Copula_(statistics)

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

Your eloquently wrong, which doesn't say much for your selling of the debate with Marxist (not Marxian) mixed in with having stated that Keynes didnt know of the impending bust, when at the the time more than enough financial alarms were sounded but were sweeped under the proverbial rug due to the pressure placed by politicians.

As in any financial model, especially with those that deal with more advanced formulas, when a disruption to the formula is added or released then we tend to have a crisis.

The cause of the Great Depression, as you so elloquently missed was caused by the failure itself of Government regulation. Just as the root cause of the housing bubble was caused by not only the repeal of the Glass Steagal Act, but the application of the Gaussian copula function, dressed up into a nice package and presented by the same lobbying firm that provided us with Enron. 

Furthermore, the act was also nicely called the Gramm, Leach Bailey act signed by then President Clinton. (Gramms wife was the lobbyist heading up the campaign) This opened the floodgates for new money to pour into the housing market. Not only new money, but new money invested into new money on the expectations that the first layer, the actual loans would make enough, that the second layer, the CDOs would profit from the interest earned. 

The fact is, no school of economics can correct or deter what are unsound financial practices and the intervention of greedy lawyers with complex language similar to yours and a fancy powerpoint presentation plus the promise of a few million spread out amongst congressional leaders can do. It may sound good, but it doesnt add up. Now, will we look up at history and blame the scarcity of resources on this? Or do we also factor in the printing of money and going to a paperbacked standard, gold standard or silver standard? The fact is, although all of these things may have an influence to a small degree, but if the fundamental issue, of which I have provided you their cause in this comment is out of place, then the equations concavity will fluctuate in other ways that no gold, paper, silver or other standard would correct. In addition to any application of any of the schools of economics that you wrongly attribute to having seen the magic bubble before bursting.

"Just like a remote conrol that needs new batteries may work every once in a while to change the channel a little or raise the volume. The problem being forgotten, is the lack of batteries" 

The issue here was bad policy allowed by the ineptitude of and unknowledgeable congress, and a bunch of impressive economists touting the sound benefits of its practice. 

If you look at the formula especially at the higher levels of its parabolic progression, there will be a financial breakdown. (Just as in a polynomial equation that is now fitted with an additional exponent attached to the same variable).

As in numbers, and even in the most complex math, it must be stated simply and harmoniously.

Eloquence is not the fiber of intelligence. How do you tell a donkey it has big ears?

Your good at putting words together, but you push your point between badly placed chronological facts laced with your opinions that unfortunately almost all of us would have neither the will nor the research resources you fail to provide. Cite sources.

A good research paper will CITE SOURCES, give me something to reference the paragraph long explanations of supposed arguments that the economists had at the time. You cite many key people in here, but not a single source cited. 

Ony citing "mystery of banking" and "Americas great depression" as the only verifiable sources, not offering the key fundamental arugments you are making. 

I know religions that do that to the Bible all the time, most of these causing a mailaise to our very fiber as a country:

Examples: 

"Does it matter that national accounting identities (aggregate bookkeeping entries) match up nicely or does it matter that a non-market institution (the Federal Reserve) is allowed to influence interest rates to create the booms and busts that plague the post sound money economy?"

Your argument here is that the Federal Reserve is the root of causing booms and busts, of which there is no credibility to that point. Unfortunately the Federal Reserve is the one that ends up looking bad because it is the one looked at to fix the problem, as in its effort to salvage a system introduced to Congress by the same people that brought us Enron are to blame. Not the fed itself.

 :) Maybe the solution would be to have the fed be the one that reviews every bill that has a financial founding to it to make sure it is sound, like a bank does before approving a loan.

You state:

"Prices do not rise in uniform through an economy. In fact, if they did, there would be no point to increasing the money supply in the first place, since no one would benefit and no one would suffer. During an inflationary boom it is the rise in prices in the complimentary factors of production that eventually undo the boom. As entrepreneurs compete for scarce resources, prices rise." You are speaking as if there is a direct influence in every single aspect of the economic cycle in every product.

You state what is a fact, what every book about economics would counter. Some prices rise out of a consequence not only of true scarcity, but of perceived scarcity, a simple marketing class will teach you that one. 

 

"Does it matter that money is stable or sound? Does it matter that we counter the business cycle or that we end it? Does it matter that the price level is stable or that new money is being created?" I am guessing we should start trading in watermelons or bags of rice?

The true issue is, in your beautifully detailed but flawed argument, you are pointing your finger at the red herring, and you offer no argument of how and why the housing bubble occured only that it occured as an abhoration of scarcity, the fed printing to much money and the lack of Austrian economics, when in fact, as I have delineated in my own rebuttal, you have missed the point trying to explain it without introducing the emotional factors of Human Greed, or emotions of following an intelligently presented, but ill-fated argument as in this posting.

I will refrain from calling it retarded because I have countered it enough without needing to.

Gabriel in Miami, FL "yeah I can troll too, but im much better at it."

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#13) On September 11, 2011 at 1:05 PM, whereaminow (42.34) wrote:

Cuban Troll,

Marxian vs. Marxist

http://www.google.com/search?hl=en&source=hp&q=difference+between+marxian+and+marxist&aq=f&aqi=g1&aql=&oq=

Master this simple concept and then perhaps we'll talk.

David in Qatar

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#14) On September 11, 2011 at 8:01 PM, cubanstockpicker (20.32) wrote:

Philosophy 101, ad hominem.

http://www.iep.utm.edu/fallacy/

Master this simple concept then you can offer a better rebuttal than your less than fallacious argumen. 

Now I can be just as childish as you. Your complete argument at the beginning of this blog, doesnt explain a hing about the fundamental problem that occured in the "housing bubble". It just offers people a way to address the problems neatly withouthaving to have addressed the real issue that occured.

How do you tell a donkey its ears are big?

 

 

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#15) On September 11, 2011 at 8:02 PM, cubanstockpicker (20.32) wrote:

Oh and I will autocorrect before you use another ad hominem. take away the words less than before fallacious. LOL, your a joke.

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#16) On September 11, 2011 at 8:10 PM, cubanstockpicker (20.32) wrote:

Oh, dont bother arguing, your obviously outmatched by things like facts.

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#17) On September 11, 2011 at 11:52 PM, whereaminow (42.34) wrote:

Cuban Troll,

You're not even in the top 20 of my trolls. Scroll through my blogs to find out the competition level.  It's pretty steep.

In fact, I've already won. You have now spent three comments responding to an issue that has nothing to do with your original commnet.  

So let's break this down.  Here's a fact. You made a mistake in your comment.  Second fact. No ad hominem was involved in my reply.  Third fact.  I successfully sidetracked you to the point that you were more concerned about my response than you were about the substance of the post or your original reply.

Check mate.

Have a wonderful day.

David in Qatar

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#18) On September 12, 2011 at 9:04 AM, cubanstockpicker (20.32) wrote:

Where in the world is David whereaminow?

Do you wear a big red hat?

Like I stated, you are very good at not saying anything.

I would rather make a mistake in a comment, than make a mistake in poisting a blog blaming the fed for the current crisis, when you dont even understand the crisis that went underway.

To that you cant even respond to how the problem got started, which has nothing to do to which school of economics you belong to. Sounds to me like if its pretty aryan nation stuff.

But anyways, you dont even know what an ad hominem is then.

Here I will help you. Ad hominem: where you name call someone as you did. eg: "Why would you believe my opponent if he is a retard"

Fact, you are going in circles taking tiny jabs acting as if you are above my intellect level.

1: Never underestimate your enemy.

2: You couldnt even reply to my rebuttal with more than a putdown.

3: Arrogance is a true sign of weakness

4: Tell me of what you presume to know,  and I will tell you of what you are lacking.

But yeah, you win, hands down. You are far more superior to me.

To quote Harold in "the fly", "If we were playing a game of crazy chess, I would be ten moves ahead. Your knig is trapped, my queen is breathing down his neck, my knight is chasing him down like a pig and my bishop is bashing his f%$king head on the chessboard."

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