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Letter to Paul Krugman

I haven’t enough time to write a blog today because I have been writing a letter to Paul Krugman following his recent articles in the New York Times. That has taken up my spare time today. So as not to disappoint I have made by letter available for all to read. I am sure Paul won’t mind. So read on …

Dear Paul

We are both academics and have been trained to PhD level in economics. We should therefore understand the difference between good scholarship and bad scholarship whether the final outcome is a peer-reviewed journal article, published book or Op-Ed piece for a popular media publication (such as the New York Times).

Examples of poor scholarship

1. Representing an argument by relying on statements by critics of the argument as a reliable construction of the argument. That is, using critical secondary sources without checking if they actually provide faithful renditions of the primary source.

This was sort of poor scholarship was demonstrated in an 2004 article by Professor Malcolm Sawyer in the Journal of Economic Issues which attacked the concept of a Job Guarantee. He chose to represent the views of Professor Randy Wray and myself by quoting secondary sources from authors who were not only critical of our work (which influenced the way they constructed their representation of that work) but also failed to understand our work (which was demonstrated by several erroneous claims about monetary economics).

We responded to that poor scholarship in a rejoinder which was published in JEI in 2005. An earlier working paper version of that article is freely available HERE – which is close to the final version.

In the final published version we noted in relation to Sawyer’s attack on us that:

… many of the arguments are related to expositions of ELR that we would not endorse. Indeed, he has relied to an alarming degree on critics of ELR … for statements of the principles of ELR – reflecting a less than satisfactory approach to what we consider to be appropriate scholarship.

As a note – ELR = Job Guarantee.

Lesson: always make sure you quote primary sources when representing a school of thought or idea. Never rely on secondary representations of that thought. In general only say a theory/school of thought purports something if you can find statements to that effect in the primary source literature.

2. Creating a stylisation of an argument that is could not be constructed from a thorough reading of the primary sources in the field. This is the, straw person tactic.

This is related to the first but does not rely on sourcing an argument from some other critique or representation. It involves creating a representation that is obviously flawed and then associating it with a literature or school of thought when such as association does not reflect the theories or arguments made by that literature. The work might contain elements of truth (that is, some things that a school of thought might have said) but will typically leave out context or qualifications that provide meaning and veracity to the ideas.

3. Presenting analytical arguments to support an attack on a school of thought which are erroneous.

That is, attacking a body of literature on technical grounds when you do not have the knowledge to mount that attack.

4. Making stuff up – this embraces the previous three examples. We caution our children against this for good reason. It is also known as plain straight out lying.

Your recent articles in the New York Times contains elements of these examples of poor scholarship and for that you should question your position as an influential Op Ed writer for the New York Times. It might be time to move on and let someone else who will present a progressive voice that is not distorted by mis-representation, innuendo and lies.

I refer to your two articles in the New York Times:

(a) Deficits and the Printing Press (Somewhat Wonkish) – March 25, 2011 and then what seems to be a qualifying article –

(b) A Further Note On Deficits and the Printing Press – March 26, 2011.

Neither are examples of good scholarship when it comes to Modern Monetary Theory (MMT).

Your earlier post – March 24, 2011

Two days earlier, on March 24, 2011 you wrote a piece in the New York Times – The Austerity Delusion – that told me you were not on top of the subtleties of monetary systems.

The article represents the causes of mass unemployment in a typical Keynesian fashion with which I am in agreement with.

I also agree that the austerity arguments are based on:

… phantom risks and delusional hopes. On one side, we’re constantly told that if we don’t slash spending immediately we’ll end up just like Greece, unable to borrow except at exorbitant interest rates. On the other, we’re told not to worry about the impact of spending cuts on jobs because fiscal austerity will actually create jobs by raising confidence.

I had expected at that point that you would have noted that the US could never end up like Greece because it is a sovereign currency-issuing government and the consolidated treasury-central bank can always fund spending in US dollars to maintain government services even if there are some voluntary legislative constraints that conservatives have erected to make that task a little more elongated.

But, instead you wrote:

But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.

You lost me at that point. “Yes, of course” – are you serious? The answer to your own question is emphatically no – never!

Ask yourself the question: what would happen if the bond markets stopped tendering for Treasury debt issues in the US? What exactly do you think would happen? Do you think this would limit the spending capacity of the US national government? The politicians might refuse to change the rules and place artificial limits on that spending capacity but that is not an intrinsic financial constraint.

Then you compared the US to Ireland which is another false comparison. Greece and Ireland are comparable because they are part of the same monetary system. The US is not a member as yet and retain full currency sovereignty until they agree to use the Mexican peso or the Australian dollar – as their currency.

I remind you of recent comments by the Bank of Japan governor which I discussed in this blog – We’re sticking to our strict fiscal rules.

The commentators have been saying that Japan’s central bank is barred by law from directly purchasing primary issue bonds of the Japanese government. The insinuation is that the Japanese government is truly at the mercy of bond markets who will eventually foreclose on them and refuse to lend any money.

The reality is different. The Japanese government is only “at the mercy” of the bond markets if it wants to be – just like all governments which issue their own currency. The intrinsic characteristics of the fiat monetary system make it possible for the government to spend whenever it chooses without recourse to finance. That is the basis status of a sovereign government.

I have written before about how the conservatives have pressured governments tp erect an array of voluntary constraints to make it politically harder for them to run deficits. Please read my blog – On voluntary constraints that undermine public purpose – for more discussion on this point.

These constraints work to limit government net spending as we have seen over the last 40 years since the Bretton Woods system collapsed and governments were free to spend what they liked (courtesy of the fiat monetary system). In the current recession, while governments responded with fiscal stimulus packages, the responses have only just been enough to stop the world from slipping into depression.

The statement by the Bank of Japan Governor last week (March 23, 2011) told us categorically that under Japanese law, the central bank only needs the permission of the Diet to purchase Japanese government bonds directly. That is the Ministry of Finance spends and the central bank credits relevant bank accounts. Bond markets become irrelevant.

I also noted that this is probably why the bond markets are happy to buy Japanese government debt at low yields – they know that if they don’t the central bank will and then they would miss out on their corporate welfare – the risk-free (guaranteed) annuity derived from the bonds.

So lets not compare Greece and Ireland with the US any more. You should write an apology for that error which reflects poorly on your understanding of monetary economics.

Previous faulty analysis about fiscal and monetary policy

I also note that in the past you have made poor judgements about Japan. While you now advocate fiscal interventions that wasn’t always so.

As you know, during the Japanese “lost decade”, you dramatically failed to understand the nature of their problem and recommended a reliance on monetary policy. Ask Richard Koo for his opinion of your advice at that time.

At that time you were on about liquidity traps – which still resonates in your writing today and is relevant for your critique of MMT.

We know that during a liquidity trap monetary policy loses any effectiveness because no-one wants to borrow and everyone wants to hold cash. Cutting interest rates will not reverse the decline in aggregate demand (spending).

You consider the current situation to be akin to this and so think it is appropriate to advocate fiscal interventions.

However, back in 1998 when the conservatives had pressured the Japanese government into contracting net spending (via tax hike) which pushed the economy back into recession, you wrote the following article.

It told me then that you didn’t understand what was going on in Japan at the time. Your recent articles show that your arguments haven’t evolved since you made that mistaken assessment.

Yes, you recognised then (as you do now) that a spending gap (in Japan) was responsible for the economic slowdown and that low nominal interest rates were not providing a stimulus.

However, in that article, you showed your biases against fiscal policy by saying it would possibly work but that “there is a government fiscal constraint” and the Japanese Government would only be wasting its spending. You now know that there was no fiscal constraint.

You then said that monetary policy had been ineffective because:

… private actors view its … [Bank of Japan] … actions as temporary, because they believe that the central bank is committed to price stability as a long-run goal. And that is why monetary policy is ineffective! Japan has been unable to get its economy moving precisely because the market regards the central bank as being responsible, and expects it to rein in the money supply if the price level starts to rise.
The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible – to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs. This sounds funny as well as perverse … [but] … the only way to expand the economy is to reduce the real interest rate; and the only way to do that is to create expectations of inflation.

So you were completely wrong in your diagnosis at the time. The only thing that got Japan moving again in the early part of this Century was fiscal policy.

As Richard Koo said in his 2003 book – Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and its Global Implications:

The reason why quantitative easing did not work in Japan is quite simple and has been frequently pointed out by BOJ officials and local market observers: there was no demand for funds in Japan’s private sector.

In order for funds supplied by the central bank to generate inflation, they must be borrowed and spent. That is the only way that money flows around the economy to increase demand. But during Japan’s long slump, businesses left with debt-ridden balance sheets after the bubble’s collapse were focused on restoring their financial health. Companies carrying excess debt refused to borrow even at zero interest rates. That is why neither zero interest rates nor quantitative easing were able to stimulate the economy for the next 15 years.

Your failure at the time to understand these issues bears on your current attack on MMT. I thought you would like to be reminded of your past lapses in analytical judgement.

Poor scholarship also involves not learning from your errors. You have often rightly accused the main body of our profession of having their heads in the sand (see How Did Economists Get It So Wrong?) and being inflexible in responding to the crisis.

Yet, you seem to keep wheeling the same errors of reasoning out yourself.

Now to the recent articles.

March 25, 2011 and March 26, 2011 articles

At the outset, I acknowledge that you consider Modern Monetary Theory (MMT) to be a school of thought in its own right. That is an advance.

Further, given the title of your March 25 article, I checked the exact meaning of Wonkish and found that a wonk is:

: a person preoccupied with arcane details or procedures in a specialized field …
— wonk·ery noun
— wonk·ish adjective
— wonk·ish·ness noun

May I suggest that your post is not in the slightest bit wonkish – not even somewhat so! The material you are covering does not concern “arcane details” which, in turn, means “requiring secret knowledge to be understood; mysterious; esoteric” (Source).

The subject matter is at the core of the economic policy debate which . It is true that the knowledge is distorted by lies and deceptions paraded daily as scientific economic theory by mainstream economists to students, government officials and the public at large.

Your article plays its own part in perpetuating these lies and deceptions. That is poor scholarship.

There is nothing secret at all in the fact that the US government runs a fiat currency system and that the intrinsic characteristics of that system mean that it faces no revenue constraint.

There is no secret that the government is not a super household. It issues the currency whereas the household uses the currency and has to work out ways of getting it – that is it is financially constrained.

There is no secret that the US dollar floats on international exchanges and the central bank (the US Federal Reserve) thus does not have to pin monetary policy down to defending the exchange rate.

There is no secret that the one person’s spending is another person’s income.

In your March 25 article you say:

Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.

I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right.

Where is the poor scholarship in that statement?

Can you please tell your readers by way of clarification where you have read or heard a “modern monetary theory” person – by which I mean one of the key academics/writers involved in developing the school of thought – for example, Warren Mosler, Randy Wray, Scott Fullwiler, myself etc – say that “that deficits never matter, as long as you have your own currency”?

I can save you the time … that statement has never been said. That statement is setting up a “straw person” (and making stuff up!). Along the lines of “oh yeh, those MMT people, they think deficits don’t matter and the government can just spend, spend, spend and the economy will wash up fine”. To which any reasonable person would say: “If the government goes on a spending spree eventually it will be inflationary”. Statement one is wrong, statement two is correct.

But the important point which pertains to the quality of your scholarship is that you are disagreeing with a view that has never been expressed. That is poor scholarship!

So for the record … your statement – “it’s just not right”.

You might agree with Modern Monetary Theory if you actually had represented it correctly. The actual statement which is consistent with MMT is that deficits are required to fill spending gaps left by private saving decisions and/or when there are external deficits.

If there is idle productive capacity (including unemployment) then deficits never matter if they are bringing that capacity back into productive use. You might then agree with that statement.

Moreover, MMT does say that the budget outcome – an accounting artifact – is not something that is intrinsically interesting nor worth focusing on. For a start, it is not something the government can control via fiscal rules or otherwise anyway.

What matters is that a rising deficit may signal a growing private spending gap – which means there are idle productive resources and potential income generating capacities that are being wasted.

Spending is required to stimulate a demand for the idle productive resources and if private spending is deficient then public sector spending has to step up to the mark.

Once all productive resources are being utilised then expanding the deficit (that is, adding to further nominal spending growth) would be inflationary and ill-advised.

Should the government for political reasons desire a greater share of economic activity (at full capacity) then it might impose taxes to allow it to command more real resources at the expense of the private sector.

You then went on to say that deficits were not a problem at present (in abnormal times) because the government can borrow at a “roughly zero interest rate” and there is “lots of excess capacity in the economy”. But when we get back to normal “things will be very different”.

How so? Well then apparently, you seem to believe that an increase in the monetary base is inflationary. This is what the Austrian school nutters believe without any empirical evidence to support their case.

You conclude that:

… running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.

Totally untrue as I will explain later.

But all the central bank has to do is offer interest on excess bank reserves as is the case in many countries including the US. In that situation, bond sales are not required for liquidity management purposes and whether the bond markets tender for the debt issue or not becomes an irrelevancy.

On March 26, presumably after reading the comments from the piece you wrote the day before you published this article – A Further Note On Deficits and the Printing Press.

It was a case of saying too much – because it really gave the game away – there was no ambiguity now – you believe that expanding the money base is inflationary.

You wrote:

A followup on my printing press post: I think one way to clarify my difference with, say, Jamie Galbraith is this: imagine that at some future date, say in 2017, we’re more or less at full employment and have a federal deficit equal to 6 percent of GDP. Does it matter whether the United States can still sell bonds on international markets?

As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue.

You conclusion: “I disagree”.

For the record, Jamie Galbraith is only peripherally associated, in my opinion, with modern monetary theory. I do not consider him a core developer of the school of thought.

But now you are advancing the notion that there is a solvency threat for the US government under certain conditions. This is a classic deficit dove argument isn’t it?

The connotation is that the US government may be unable to honour its liabilities. Solvency relates to the threat of bankruptcy. Households and corporations can go broke and thus face insolvency risk. The US government can never be in a position – financially – where it can no longer honour its US dollar obligations. Read: never

Please read my blog – What the hell is a government solvency constraint? – for more discussion on this point.

The MMT position is clear: it doesn’t matter if the US government cannot sell its bonds on international markets. It doesn’t need to sell those bonds to spend.

You followed up your “hyperinflation” scenario in the March 25, 2011 post by outlining a specific case in the March 26, 2011 post – a 6 per deficit and full employment (if only!). You said:

A 6 percent deficit would, under normal conditions, be very expansionary; but it could be offset with tight monetary policy, so that it need not be inflationary. But if the U.S. government has lost access to the bond market, the Fed can’t pursue a tight-money policy — on the contrary, it has to increase the monetary base fast enough to finance the revenue hole. And so a deficit that would be manageable with capital-market access becomes disastrous without.

In my – Saturday Quiz – March 26, 2011 – which I provide for educative purposes, Question 1 asked:

Modern Monetary Theory tells us that a sovereign national government can run deficits without issuing debt. But the debt issuance allows the government to drain demand (private spending capacity) so that the public spending has more non-inflationary room to work within

True or False, Paul?

Based on your reasoning in both the March 25 and March 26 posts, you would have failed that question by answering True when the answer is clearly false.

The mainstream macroeconomic textbooks all have a chapter on fiscal policy (and it is often written in the context of the so-called IS-LM model but not always). The chapters always introduces the so-called Government Budget Constraint that alleges that governments have to “finance” all spending either through taxation; debt-issuance; or money creation.

But government spending is performed in the same way irrespective of the accompanying monetary operations – that is, by crediting bank accounts.

It is always claimed that “money creation”(borrowing from central bank) is inflationary while the private bond sales is less so. These conclusions are based on their erroneous claim that “money creation” adds more to aggregate demand than bond sales, because the latter forces up interest rates which crowd out some private spending.

All these claims are without foundation in a fiat monetary system and an understanding of the banking operations that occur when governments spend and issue debt helps to show why.

So what would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a budget deficit without issuing debt, which appears to be your “path to insolvency” scenario?

Like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank’s assets rise and its liabilities also increase because a deposit would be made.

The transactions are clear: The commercial bank’s assets rise and its liabilities also increase because a new deposit has been made. Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet). Taxation does the opposite and so a deficit (spending greater than taxation) means that reserves increase and private net worth increases.

This means that there are likely to be excess reserves in the “cash system” which then raises issues for the central bank about its liquidity management. The aim of the central bank is to “hit” a target interest rate and so it has to ensure that competitive forces in the interbank market do not compromise that target.

When there are excess reserves there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities), the central bank then has to sell government bonds to the banks to soak the excess up and maintain liquidity at a level consistent with the target. Some central banks offer a return on overnight reserves which reduces the need to sell debt as a liquidity management operation.

There is no sense that these debt sales have anything to do with “financing” government net spending. The sales are a monetary operation aimed at interest-rate maintenance. So M1 (deposits in the non-government sector) rise as a result of the deficit without a corresponding increase in liabilities. It is this result that leads to the conclusion that that deficits increase net financial assets in the non-government sector.

What would happen if there were bond sales? All that happens is that the banks reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.

The only difference between the Treasury “borrowing from the central bank” and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If it debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the Japan solution).

There is no difference to the impact of the deficits on net worth in the non-government sector.

Mainstream economists would say that by draining the reserves, the central bank has reduced the ability of banks to lend which then, via the money multiplier, expands the money supply.

However, the reality is that:

  • Building bank reserves does not increase the ability of the banks to lend.
  • The money multiplier process so loved by the mainstream does not describe the way in which banks make loans.
  • Inflation is caused by aggregate demand growing faster than real output capacity. The reserve position of the banks is not functionally related with that process.

So the banks are able to create as much credit as they can find credit-worthy customers to hold irrespective of the operations that accompany government net spending.

This doesn’t lead to the conclusion that deficits do not carry an inflation risk. All components of aggregate demand carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and productive capacity. It might be that in your example a 6 per cent deficit with full employment might be too expansionary.

There is nothing a priori that would suggest that. There is nothing intrinsically interesting about a 6 per cent deficit or a 2 per cent deficit. It all depends on the spending contributions from the three sectors (government, external and private domestic).

If a 6 per cent deficit – which is a flow of spending – was adding too much to aggregate demand (spending) at full employment and wasn’t just offsetting the demand drains coming from the external sector (trade deficit) and the private domestic sector (saving overall) – then MMT provides clear guidelines for policy.

As long as the government is happy with the political private-public mix of activity then it would cut back its deficit to avoid pushing demand into the inflation barrier. If it wanted more public activity and less private, it could do that by increasing taxes and deprive the private sector of disposable income.

But your assertion that the private placement of debt reduces the inflation risk is totally fallacious. It does not.

To help with your education may I suggest the following blogs:


I am disappointed Paul that you would represent the progressive view with such poor scholarship.

If you want to represent MMT correctly you can always send me an E-mail and I will help you get the words right!

That is enough for today!

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    This Post Has 115 Comments
    1. Spadj- Alaska!?! has a (small) citizens dividend. I think the core issue with asset taxes might be that asset price inflation provides a “free lunch” method to fund trade deficits. The UK seems totally addicted to that. Sadly an economy based on asset price inflation hollows out manufacturing and makes the gov entirely beholden to pampering the most wealthy.

    2. Haha, the UK – what a hole (no offence). I do agree that asset speculation ‘crowd outs’ manufacturing – as I said, Singapore, Hong Kong and Switzerland – countries that actually manufacture various items – are not too keen on real estate speculation as their other brethern in their region (e.g. UK, Spain, China). I think China is doomed to become America II, given it too has 64 million vacant homes and a large % of GDP is fixed investment.

      Alaska!?! Sorry, never thought of it to be as progressive given Sarah Palin was President. Although the key word here is , and the LVT was really only ever applied in full form by the German empire in China: Silagi, Michael. 1984. “Land Reform in Kiaochow, China: From 1898 to 1914 the Menace of Disastrous Land Speculation was Averted by Taxation.” Trans. Susan N. Faulkner. American Journal of Economics and Sociology 43 (2) (April): 167-77.

    3. Errata: Although the key word here is *small*, the LVT was really only ever applied in full form by the German empire in China…

      My bad.

    4. Wray was making hindsight rationalization of GFC, not making predictions. The only Minskian who called the GFC was Steve Keen, according Bezemer’s list. If I said sooner or later Japan will have a greater earthquake, that is not a prediction. But if I said Japan will have a greater earthquake within the next three years, then that is more of a prediction. Better still, if I said Japan will have a greater earthquake within the next month, then that is a real prediction.

      Neither Minsky nor Wray could have been said to have predicted the GFC, in this sense. In any case, Minsky is not central to the academic economists associated with neo-Keyenesian or MMT. These schools simply do not have the intellectual framework to make precise predictions. I find such discussions on “who said what” rather unimportant and unproductive, because economic understanding is not advanced them.

    5. Australia’s tallest peak is hardly a mountain Tommy boy. Bit of a molehill maybe. Me thinks Keen never did see his Minsky moment… and you need your minsky moment for a property crash. But don’t bother trying to predict if or when. Keen and his guessing games demonstrate that.

    6. Minsky in’ Stabilising an Unstable Economy’ sounds pretty MMT to me, and his analysis can well describe, indeed, explain the GFC. In any event, I’m a Georgist who shares the monetary analysis of post-Keynesians/MMT, but as far as I am concerned offers band aid solutions to deep problems. I note on Bezemer’s list the first person to predict the GFC was a Georgist, the same bloke who predicted the 1975 and 1990 recessions (Fred Harrison).

    7. I don’t think that the MMTers were that focused on predicting the date of the financial crisis. They were more concerned with building a positive theory of how the monetary system works. But given that they recognised Minsky’s work as central, I think it is safe to say that they assumed a large financial crisis was inevitable unless the system was changed. Personally, I think that their approach was more constructive than Keen’s – but if you prefer crystal-ball gazing to constructive theorising, I suppose that’s your prerogative…

      “In any case, Minsky is not central to the academic economists associated with neo-Keyenesian or MMT.”

      I don’t think that’s even remotely true…

      “I find such discussions on “who said what” rather unimportant and unproductive, because economic understanding is not advanced them.”

      Funny, you’ve been banging on about ‘who said what’ for a few posts now… I guess the irony is lost on you…

    8. Nice essay, and I hope you do send it as a paper letter to Professor Krugman, but I would suggest a few revisions.

      First of all, the postings at issue are on the New York Times website, not in the Op-Ed column of the printed paper, and it is worth making that very clear to avoid any pointless offense.

      Secondly, the standard MMT “loans create deposits, banks are not limited by reserves” argument inevitably raises a list of quesitons, and you should answer them in advance:
      (1) What limits the banking sector (as a whole)’s ability to create loans? Why can’t they create them willy-nilly? (Proposed answer: when the banks are not choosing to be pessimistic about who is “creditworthy” and limiting themselves — they do create them willy-nilly! Capital requirements, reserve requirements, FDIC auditing, accounting requirements, and other regulatory requirements are the primary limits during a bubble. )
      (2) Why does this appear to not fit with historical evidence from periods like the 19th century US? (Proposed answer: banks weren’t backed by a central bank, causing them to be limited by ability to attract deposits, ability to withstand bank runs, and ability to convince people to accept their banknotes. They did issue their own currency, though not with full control over it, and can be analyzed in the way governments are analyzed today by MMT. )

      (3) Correct me if this is not what you think as an MMT theorist, but this sounds right to me: If an individual bank is interested in lending but reserves-limited due to regulation, increasing *that* bank’s reserves would be stimulative, but this appears to be a rare phenomenon in the modern world — though some “shadow bank” operations like money market funds *may* be reserves-limited. Transferring reserves from “hoarder” banks into banks with different lending standards might well have some effect, if you could identify which was which.

      I believe those points might help reconcile neo-Keynesians with MMT.

    9. Oh, here’s the third correction you should make:
      “(Krugman): if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.

      (You):Totally untrue as I will explain later.”

      No, it’s true, the thing is there’s no problem in “persuading” people to hold it. They just take it when you give it to them. Given the powers of the government, unless general distrust of the government leads to general abandonment of the currency, people *will* take it when you credit their accounts with it. And that’s what you should say. People don’t *refuse* to take added money. And the added money doesn’t drive inflation unless the economy is at full capacity, because as the core macroeconomic insight of MMT says, *most businesses are capacity-adjusting first*, and price-adjusting only if they hit capacity.

      I don’t think MMTers and Krugman disagree that much. Here’s a neo-Keynsian explanation. If you run a large fiscal deficit, you are pump money into the hands of people. As long as there is unemployment and unproductive assets, people spend it on those. If you pump the money in the *right place*, anyway – – if you put the money into the hands of savers who have no debt, who hoard it, you end up doing absolutely nothing. Now, that increased money and spending, creating more aggregate demand, is inflationary — but as long as there is unemployment and unproductive assets, it’s just fighting a deflationary effect and breaking even. Only once you’ve eliminated those does it have a net inflationary effect. MMTers and Neo-Keynesians *agree* on when added injection of “deficit spending” or “printed money” starts being counterproductive.

      I would actually start your letter with the core fact that most businesses, and certainly most industries are capacity-adjusting first and price-adjusting second. Because this is the macroeconomic driver of the entire principle that adding money to the economy is not inflationary until full economic capacity is achieved. (And in fact to the extent that there are monopolistic cartel industries which adjust price first and only adjust capacity grudgingly — with the phone company being the old classic example — this sort of MMT macroeconomic analysis seems to fall apart for those industries, which will happily cut jobs and service while raising prices.)

      (Likewise in industries where capacity expansion does not require any employment expansion, additional money in the economy does not reduce unemployment, so if the whole economy consisted of such “one man, arbitrarily large factory” industries, no amount of fiscal OR monetary expansion would serve to reduce unemployment, and it would be time to provide a guaranteed minimum income for everyone and live a life of leisure and luxury tended by robots.)

    10. Tom:

      “Now please answer the question: what would happen if investors didnt want to hold US debt? ”

      I see that I am a bit late on this. But if investors did not want to hold US debt, that would mean that they would not want to hold US dollars, right? Wouldn’t that mean that the US economy, for some reason, had already collapsed?

    11. Tom:

      “Ok guys now I will give you numerical example that MMT is wrong.

      “Let’s consider situation where we have high unemplyment and the Fed and the Government decide to do something to reduce it. Government decides to hire every citizen for nothing. They will only receive compensation every month. In this case the Fed issues new money (bank notes) for every citizen and they receive it every month. Each citizen receives 5000$ a month.”

      Why do you think that that is consistent with MMT?

    12. Min: I see that I am a bit late on this. But if investors did not want to hold US debt, that would mean that they would not want to hold US dollars, right? Wouldn’t that mean that the US economy, for some reason, had already collapsed?

      No, it means they don’t want to hold US bonds.
      They are stuck with their dollars, someone has to be.

    13. I just discovered you in the April 4th Nation magazine article you wrote. I haven’t time right now to search your blog stuff for the answer to my question, which is: Why are we told that we owe a huge debt to China and that that is a big problem? Can you just please point me to where I can find your answer to that?

      I majored in economics at Ohio State back in 1944-46. My major professor, H. Gordon Hayes, often said about the national debt, “We just owe it to ourselves.” Of course I learned Keynsian economic theory, bit That was a long time ago, but even at 86, I was fascinated by your article. It rang bells.

    14. While you wait for bill’s answer, here’s mine:
      I majored in economics at Ohio State back in 1944-46 Then you know much more about economics than if you had learned it in the last 30-40 years. Those years were devoted to creating a ridiculous body of unknowledge to bury the hard-won insights you learned back then.

      Why are we told that we owe a huge debt to China and that that is a big problem? The US (government or country) does owe a debt to China, just like it owes a debt to anybody who holds dollar bills ( or US bonds). The US government can always credit the Chinese accounts by just punching numbers into a computer, so interest is never a problem.

      When the US is not at full employment, like now, this debt can never be a problem. The most the Chinese could do to call in their debt is to use it to buy stuff from the USA. The production of, the Chinese demand for, these exports would stimulate our economy, and thereby increase our wealth, while the Chinese would win by getting real imports from the US in return for their US bonds. A win-win.

      If the US were at full employment, then the Chinese buying US stuff with their US dollars does decrease US real wealth. But this is just the mirror image of when the US got real stuff from China in return for paper – dollar bills. This full employment economy sending stuff to China is the kind of problem one wants to have – the gains from full employment outweigh the losses from exporting.

      Here are a couple of relevant links from billyblog: removethis_ & removethis_

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