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Who the cap fits?

In his recent New York Times column (April 21, 2011) – What Are Taxes For? – continues to engage with Modern Monetary Theory (MMT) but trips up because his mainstream view (dressed up as a progressive) reveals serious flaws in reasoning about the way a fiat currency system operates viz-a-viz the former monetary system based on convertibility via some commodity standard. In this blog I correct some of the analytical mistakes that appear in that article. Krugman concludes by claiming that he is really disturbed by those who don’t get mainstream logic – and is especially upset by “a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together”. My only response is to look in a mirror Paul or in the words of Bob Marley ask “who the cap fits”.

Krugman attempts to come to terms with “why we have taxes in the first place” and says:

They don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency.

So what type of monetary system are we talking about here? A gold-standard type system with convertibility or a fiat currency system?

In the former, certainly taxation was required to fund government spending whereas in the latter taxes play an entirely different role not identified here by Krugman, who conflates the two monetary systems and thereby misses the point.

Please read my blog – Gold standard and fixed exchange rates – myths that still prevail – for more discussion on this juxtaposition.

Also please read my blog – There is no solvency issue for a sovereign government – for more discussion about solvency and sovereign governments.

I will come back to the monetary system distinction in a moment. But Krugman further confuses levels of government.

He says:

Consider first the taxes raised by, say, the state of New Jersey. Chris Christie doesn’t tax me because he wants to reduce my consumption; he taxes me because NJ needs money to pay its bills. It’s true that in the short run, if we ignore the legal restrictions on state borrowing, he can spend more than the state takes in in taxes; but over the longer run the state must, one way or another, collect enough revenue to pay for its spending.

This statement is true although rather confusingly written. The points in order are – first, a state government does not issue its own currency and therefore is similar to you and me in the sense they have to fund their spending in that currency.

Second, there is no financial reason why the US states have to run balanced budgets by law. That is just a conservative constraint. The reality they face as a non-currency issuing spender is that they have to get the currency they spend from somewhere – either by imposing taxes via various tax bases or by issuing state bonds.

There are several propositions that guide the way the state should mix its debt and tax funding. First, recurrent spending should be met via recurrent funding (that is, taxes). Second, capital works spending should be funded by borrowing because it more correctly matches the benefits from the services gained from the new public infrastructure to the generations that will pay for it. Forcing the current generation to pay for bridges, for example, which will deliver benefits for many years, is unfair. So state governments should run deficits equal to their capital works program over the long-term and fund them with appropriately structured debt maturities.

So the statement that in the “longer run the state must, one way or another, collect enough revenue to pay for its spending” where revenue in context is tax revenue is not a sensible description of prudent public finance at the state government level. The reality is that the “long run” is not a very useful construction here.

A better way of thinking about it is that state governments transcend generations and must, in part, ensure the “costs” of its service provision are fairly prorated across those generations. As noted above that suggests that deficits should fund the capital budget and the “burden” of the debt servicing be shared between now and later.

Please read my blog – When governments are financially constrained – for more discussion on the intrinsic constraints facing a state government in a federal system.

Note the term – “intrinsic constraints” – by which I mean constraints that arise from the design of the current monetary system. A state government has no choice but to raise taxes and issue bonds to fund its activity. Yes, it can sell off assets but that process is ultimately finite and not worth considering.

But when we come to a fiat currency-issuing government – such as the federal government in the US, Australia, the national government in the UK etc – things are entirely different. Here the difference between “intrinsic constraints” and “voluntary constraints” becomes very important.

Krugman has a go at detailing the difference but ultimately makes a hash of it:

Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)

It is not just a case of there being less “sharp” constraints on governments that issue currency relative to “governments that can’t print money” (note I don’t use the mainstream terminology “printing money” because it is very misleading with respect to how government spending occurs).

The constraints are of a totally different dimension. Political constraints aside (and I am not suggesting these are unimportant – more later), the constraints on a state government are financial and real. Whereas a sovereign government – by which I mean one that has the monopoly rights to issue the currency in use – only faces real constraints.

What do I mean? Answer: a sovereign government can always purchase goods and services that are available for sale in the currency it issues without needing to “raise revenue” or “borrow funds”. It cannot buy what is not available for sale. A state government may not be able to buy from the available array of goods and services if it has exhausted its tax base and investors refuse to buy its debt.

The former is a real constraint the latter a financial constraint. The dynamics of each is very different and very significant in terms of defining the opportunities available each government.

Next – “too much reliance on the printing press leads to unacceptable inflation” – is a typical statement that you will find in any mainstream (neo-liberal) macroeconomics textbook. It is not the sort of statement that a progressive with a deep understanding of the monetary system would make.

The correct statement is that too much nominal spending (aggregate demand) relative to the real capacity of the economy to respond by producing real goods and services will generate inflation.

The problem is that mainstream macroeconomics, which Krugman is just repeating here, considers that the impacts of fiscal policy vary according to the way in which the government “funds” itself.

Lets state the problem up front so you can follow the explanation a bit more easily – Bond sales do not drain demand.

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. The point overlooked is that government spending is performed in the same way irrespective of the accompanying monetary operations – governments just credit bank accounts (or issue cheques which amounts to the same thing).

The textbook argument claims that money creation (borrowing from central bank) is inflationary while the latter (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.

Money creation is also called seignorage in the textbooks (and this is a term Krugman uses above).

Most mainstream macroeconomics textbooks have a section on the dangers of “printing money”.

In Macroeconomics First Edition (1997) – written by the current IMF chief economist Olivier Blanchard), we read (page 572):

Money creation – is the ultimate source of inflation – is one of the way in which the government can finance its spending. Put another way, money creation is an alternative to borrowing from the public or raising taxes.

Technically, the government does not “create” money to pay for its spending. Rather, it issues bonds and spends the proceeds. Some of the bonds are bought by the central bank, which then creates money to pay for them. But the result is the same: Other things equal, the revenues from money creation – that is, seignorage – allow the government to borrow less from the public or to lower taxes.

Most of the discussion in this section of that textbook and all other related textbooks relates to convertible currency systems and has only limited applicability to a fiat currency system.

From the perspective of analysing the relationship arising from transactions between the government and non-government sectors – the central bank and the treasury are more appropriately considered part of the consolidated government sector notwithstanding the claim by mainstream economists that the central bank is a separate entity.

Please read my blog – The consolidated government – treasury and central bank – for more discussion on this point.

The more important point is that the “money creation” in this sense does not a”allow the government – in any technical sense – to borrow less from the public or to lower taxes” if the government is truly sovereign. It might politically allow that but from the perspective of trying to understand the intrincic (technical) characteristics of the fiat monetary system this description is wrong.

A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

The mainstream depiction of the “funding” necessities of a government are a left-over from the gold-standard, convertible currency monetary system which ended in 1971.

Earlier on in his textbook, Blanchard (Chapter 21-1) says:

A government can finance its deficit in one of two ways.

It can do it in the same way that you or I would, namely by borrowing … But it can also do something that neither you nor I can do. It can, in effect, finance the deficit by creating money … with central bank co-operation, the government can in effect finance itself by money creation. It can issue bonds and ask the central bank to buy them. The central bank then pays the government with money it creates, and the government in turn uses that money to finance its deficit. This process is called debt monetization

A sovereign government only gives the impression that it is “financing” its spending. It voluntarily erects a wall of institutional complexity – accounting structures regulating the relationship between the central bank and the treasury; rules about debt limits; etc – which lead the uninformed to think that these are intrinsic financial aspects of the monetary system rather than ideological/political constructs to give succour to conservative thinking.

Ultimately, this ludicrous account of “debt monetisation” amounts to a government borrowing from itself. More importantly, the depiction is problematic.

Please read the suite of blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3 – for more discussion about why a central bank which does not pay interest on excess private bank reserves and targets a positive interest rate cannot “debt monetise”.

Once you understand that argument – you will also understand the role that debt issuance plays in a fiat currency system. Clue: it doesn’t fund anything (in an intrinsic sense). Rather it provides the central bank with the capacity to drain excess reserves to ensure the demand and supply for overnight funds is consistent with short-term interest rate it is targetting.

Blanchard cheats his students by claiming that under a system of “money creation” the budget deficit is equal the change in the money supply. In fact that is not true. The correct statement is that the monetary base expands. The central bank has no control of the money supply. While his substantive analysis is based on this lie, he does acknowledge in an obscure footnote (page 430) that the analysis is wrong but then qualifies it by saying it “does not play an important role in the arguments that follow”.

The point is that it does play a very important role because it helps him mount a case that (Section 21-3) “the need to finance a budget deficit can lead not only to high inflation, but also, as is the case during hyperinflations, to high and increasing inflation.”

This suggests to students that deficits are dangerous because they are inflationary and it has to do with printing money. All these associations are false.

Certainly deficits can be inflationary under the conditions outlined above but the impact has nothing to do with money creation or borrowing.

Private investment financed by credit-creation in the private banking system can create hyperinflation. An out of control government which pushed nominal demand beyond the real capacity of the economy – and keeps on doing that – will generate hyperinflation. So what?

The point is that is not an intrinsic outcome of budget deficits.

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.

What would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a budget deficit without issuing debt? This is Krugman’s seignorage option and he claims that “the MMT people” sidestep “the issue of limits on seignorage”.

First, as a academic developer of MMT I have never sidestepped the possibilty that excessive nominal demand expansion will be inflationary. It is front-stage in all my writing and that of my colleagues. Does Paul Krugman actually read the primary academic literature written by MMT developers?

In my earlier – Letter to Paul Krugman – I raised the issue of good scholarship which, in part, requires a person to faithfully represent the ideas they are criticising rather than falsely associate a school of thought with a set of flawed propositions.

Second, under this 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.

Please read the following blogs – Building bank reserves will not expand credit and Building bank reserves is not inflationary – for further discussion.

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.

But importantly, it is totally fallacious to think that private placement of debt reduces the inflation risk. It does not.

Thus the whole edifice of mainstream macroeconomics centred on the government budget constraint is a mispresentation of the way the fiat currency system operates. It might have been applicable to a gold-standard/convertible currency system but has no applicability to the monetary system that prevails most nearly everywhere now.

Krugman continued:

So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.

Duh? As if.

Please read my blog – Taxpayers do not fund anything – for more discussion on this point.

Taxation revenue does not finance government spending.

In a fiat monetary system the currency has no intrinsic worth. Further the government has no intrinsic financial constraint. Once we realise that government spending is not revenue-constrained then we have to analyse the functions of taxation in a different light. The starting point of this new understanding is that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.

In this way, it is clear that the imposition of taxes creates unemployment (people seeking paid work) in the non-government sector and allows a transfer of real goods and services from the non-government to the government sector, which in turn, facilitates the government’s economic and social program.

The crucial point is that the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending. Accordingly, government spending provides the paid work which eliminates the unemployment created by the taxes.

This train of logic also explains why mass unemployment arises. It is the introduction of State Money (government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment. For aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).

Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account, but doesn’t desire to spend all it earns, other things equal. As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment. In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.

The purpose of State Money is for the government to move real resources from private to public domain. It does so by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.

This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets). From the previous paragraph it is also clear that if the Government doesn’t spend enough to cover taxes and desire to save the manifestation of this deficiency will be unemployment.

Keynesians have used the term demand-deficient unemployment. In MMT, the basis of this deficiency is at all times inadequate net government spending, given the private spending decisions in force at any particular time.

Accordingly, the concept of fiscal sustainability does not entertain notions that the continuous deficits required to finance non-government net saving desires in the currency of issue will ultimately require high taxes. Taxes in the future might be higher or lower or unchanged. These movements have nothing to do with “funding” government spending.

To understand how taxes are used to attenuate demand please read this blog – Functional finance and modern monetary theory.

So to make the point clear – the taxes do not fund the spending. They free up space for the spending to occur in a non-inflationary environment.

So duh!

Conclusion

Krugman concluded with this jibe:

Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.

Exactly. Have a look in the mirror. Who the cap fits!

Which is a great Bob Marley song off Rastaman Vibration – Who the cap fits!. Listening to it takes my mind of all this economics claptrap from those with PhDs who should know better.

Anyway, it is a holiday today – so … that is enough for today!

Saturday Quiz

The Saturday Quiz will be back in force tomorrow sometime.

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    This Post Has 60 Comments
    1. “So what type of monetary system are we talking about here? A gold-standard type system with convertibility or a fiat currency system?”

      Well, gold standard was also a self-imposed constraint. While different in details, gold standard was not different from “no-overdraft” rule that we have today. While I agree that taxes do not fund anything (they are and always have been a redistributional tool) the point that anon keeps on raising, is a valid one. There is no difference between the old gold standard and today’s fiat standard. Constraints are real and in both systems they are self-imposed. What type of constraints they are is a minor, almost academic point. It is much more productive to explicitly focus on contraints and the harm they impose on economy rather then deny their existence.

    2. “Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.”

      Ah…. When losing the rationale argument, make a baseless accusation to discredit your opponent.

      The coherent picture is in plain sight. Krugman is:
      1) Too lazy or conceited to read it?
      2) Too dumb to understand it?
      3) Afraid to learn the truth?
      4) All of the above?

      Answers on a postcard please. Model answer will be presented after the Saturday quiz.

    3. Sergei,

      Correct me if I’m wrong but the point was made that the treasury can and does buy it’s own central bank bonds. The (deficit spending) reserves that would have been mopped up otherwise are left in a CB account to collect whatever overnight interest is offered.

      Are you saying reserves collecting overnight interest are classified as Government borrowing? I thought only bond issuance was considered government borrowing. Borrowing from yourself doesn’t count or am I also just playing semantics? It seems like Governments do not technically issue debt 1 for 1 to deficit spending whenever they buy their own bonds.

      I’m only an engineer and an opinionated dummy too so go easy on me.

    4. @Sergei

      The only difference is that the Fed provides overdrafts (either through daylight overdrafts or repos) to the banks willing to purchase government bonds. Since banks in aggregate do not hold excess reserves and bond sales (as well as government spending) require reserves (which can only be provided by the Fed), it is clear that banks need to go on overdraft (usually through repos on older bonds) in order to buy bonds. An overdraft which, because it is based on fiat money and is a liability on the Fed’s balance sheet, can reach up to infinity minus one cent.

      That’s a clear distinction from the gold standard (which would place a limit on the total money supply). The fact that the overdraft is on the other side of the mirror is not so important in my view. As long as congress decides on a debt limit and a deficit, bankers have the ability to create (through overdrafts with the Fed) risk-free interest-baring titles for the government to use. I see no real limit on this process.

    5. Andrew, I honestly failed to understand your point.

      My point was that today’s fiat non-convertible floating exchange rate currencies are full of self-imposed constraints. Semantically :) there is no difference between old gold standard constraint of convertibility and “no overdraft” constraint today. So it is somewhat counter-productive to go to guys like Krugman (who are respected by the masses for whatever merits) and tell him that he misses the point of constraints. It is even more wrong from the point of view of academic rigor.

      Besides this, each constraint is different. For instance, taxes function to dis-incetivize “bad” behavior and therefore also become a constraint. So shall we just blindly reject it becasue we live in a fiat monetary system or shall we focus on pros and cons? The no-overdraft rule might be stupid but it does exist and it is a clear constraint. Many people worry about removing this constraint (they really do!). So what is missing here is not the claim that they “miss the point” but a story why they should not worry. Claiming instead that no-overdraft rule is stupid and is self-imposed and we shall stop issuing bonds and will tax excessive demand will make sense to people who are already somewhat in the paradigm but to everybody else (99.(9)% of population) it will exactly “miss the point”. And there are still open questions for people who ARE already in the paradigm.

      While I am fully sympatric to Bill’s feelings (well, I got my super-tiny share trying to explain these things to people around me) this is pretty much a way to nowhere. On the other hand Bill, like everybody else, has just 24 hours every day, he has to sleep, eat and enjoy his time and given all these constraints he is already outrageously super-productive. And this is why we have comments section where those in the paradigm try to sharpen conners which are cut elsewhere.

    6. Kostas, I understand all of this. However central banks started to use discount window ages before the gold standard became history. It was never about quantity and it was always about the price. Many arguments that are claimed not to apply under the gold standard, in fact were reality and were broadly used under the gold standard. It might not be Krugman who misses the point but the MMT-crowd which misses on profitable selling opportunities. However, I think that given the available resources MMT is veeeeery successful :)

    7. Private investment financed by credit-creation in the private banking system can create hyperinflation.

      Without the government printing money at the same time? Are there any examples?

      But importantly, it is totally fallacious to think that private placement of debt reduces the inflation risk. It does not.

      Doesn’t it? Maybe, but it needs to be proven, not just claimed. Maybe we should ask the Japanese to stop issuing bonds altogether to give us some empirical evidence.

    8. Bill or others–

      I’ve never understood the argument that the imposition of state money creates unemployment (I think I’ve read everything you have posted on it). I understand why taxes (or insufficient deficits) cause unemployment. But I do not understand how “It is the introduction of State Money (government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment.” Surely involuntary unemployment can exist in a non-monetary economy. Or at least I’m not following how it necessarily doesn’t.

      Is there a conscience explanation somewhere I’ve missed?

      Thanks, love the site,

      Daniel

    9. MamMoTh,

      I don’t think the role of the State in creating hyperinflation can be denied. I do not think the private sector can cause hyperinflation on its own.

      Endogenous Moneyists stress the role of wages. I think most episodes of inflation were caused due to drastic increases in wages – the government increasing the wages of its own employees (at least in Zimbabwe), and the resulting wage-price spiral makes the whole thing go out of control.

      “Doesn’t it? Maybe, but it needs to be proven, not just claimed. Maybe we should ask the Japanese to stop issuing bonds altogether to give us some empirical evidence.”

      Agree with you to some extent. Distrust in the State lead to such arrangements being forbidden. An open line of credit to the government is typical of hyperinflationary scenarios, though no causality is intended in my argument. The causality is sudden movements in wages. But the central bank overdraft leads a careless behavior on the part of the government.

      However, it doesn’t matter, NAFA is still equal to DEF. (plus, gold standard or not).

      To me the proposal amounts to monetizing the whole debt at zero interest rate or pay interest on reserves and don’t think it will work simply because its against the principles of liability management.

    10. Plus of course, in spite of not having the overdraft, the State can easily do a fiscal expansion without worrying about issues on its borrowing because the private sector likes government bonds.

      In my opinion there is too much worry here about providing the government with an overdraft. Its a sideshow.

    11. “Private investment financed by credit-creation in the private banking system can create hyperinflation.

      Without the government printing money at the same time? Are there any examples?”

      Well, Weimar. The prices had ALREADY skyrocketed even before the money was ‘printed’ (indeed, a problem at the time was that prices had risen so much that the currency to accommodate the price increases were not yet in existence; the state had to print the money, not at the same time, but retrospectively in response to what the private sector needed i.e. the prices it had set in the market place at a time of massive supply shortages and response to pent-up demand). At the very least this suggests the money supply is endogenous, responding to large supply side shocks as people compete for very finite resources (production in 1922 was 42 percent less than it was in 1913; imports virtually frozen for a time, much like in Russia). And, of course, given there was a secular rise in prices (even under the gold standard), after the war a boom in private investment in machines took place as capitalists took advantage of the high inflation rate to pay off their debts, feeding into the demand for goods.

      But the point here is that it is not a case of government just “printing money” first, but an endogenous demand for money it.

    12. “Endogenous Moneyists stress the role of wages. I think most episodes of inflation were caused due to drastic increases in wages – the government increasing the wages of its own employees (at least in Zimbabwe), and the resulting wage-price spiral makes the whole thing go out of control”.

      Cf. with Weimar. The wages are, I think, were response to galloping prices – most universities Professors salary contracts were pegged to inflation during the German hyperinflation: so they were first paid 500 000 marks, this tripled to 1 500 000 in a short while – but it had taken into consideration the prices (caused by supply side shocks). But yes, then, there is a vicious spiral that emerges – although alot of people were not getting paid at the height of the Weimar inflation as prices were rising even though the money was not “printed” to reflect the prices on the market (so banks and local councils had to do it).

      Of course, the Weimar inflation ended once the government intervened with the establishment of a Central Bank in tadem with the withdrawl from the Ruhr, the industrial heart land of Germany.

    13. Sorry but I don’t think Weimar is an example. The question is not whether the money gets printed first or prices rise first, hyperinflation is a vicious cycle. Had the government not printed the money to accommodate the rise in prices, the inflationary process would have slowed until it stopped.

      The question is, is there any case of hyperinflation within a gold standard or pegged currency regime? I don’t think so.

    14. Spadj,

      The causality wage-price is in both directions. So if wages can be prevented from rising fast enough then one can put some cutoff on price rises.

    15. I don’t think it would as the supply side shocks – due to the state of German external accounts, weather, and the Ruhr invasion – were of such magnitude that the printing money issue is a secondary issue (as it was in Austria, Hungary, Russia all of whom experienced hyperinflation at the time due to supply-side issues – note all losers of the war). It matters whether prices rise first or money, as money is printed first because it shows that money supply is endogenous, which is what Bill’s point is.

      As I said, a) prices had risen so much that printing money was responsive to what the market place had already set (the banks themselves were requesting the currency be made and some took that extra step); b) there was a secular rise in inflation (triple digit) since the end of the war – even when the mark was attached to the gold standard (at least on the international market); and if I may add in c) there have been, by contrast, many depressions under a gold standard or pegged currency regime (let’s not forget the other side of the coin).

      What was the Nicaraguan and Puru’s hyperinflation based on?

    16. @ Ramanan, yes hence my point about a vicious spiral, although I was looking at the sort of contracts / obligations that existed in Weimar Germany at the time.

    17. Also, on the issue of hyperinflation and private credit, we should not forget there was a fixed investment boom going on as several businesses were investing in equipment, machinery, mortgages and factories as the secular inflation after the war took place (inflation easily eroded the debt, thus an interest to maintain the inflation) – thus, another reason the private sector and credit channels could contribute to the hyperinflation, adding to AD at least at the early stages of the cycle.

      I’m sure if I looked hard enough I would be able to find high inflation rates under the gold standard.

    18. It matters whether prices rise first or money, as money is printed first because it shows that money supply is endogenous, which is what Bill’s point is.

      The endogenous money supply is through credit. I don’t think you can reach hyperinflation through credit, the whole system will collapse much earlier, unless banks can print money which might have been the case in Weimar.

    19. Yes, that was the case in some instances in Weimar and you are overlooking the credit reality I just mentioned – i.e. capitalists have an incentive to drive (hyper)inflation if ithey are in debt at a time of massive supply side shortage. Richard Evans surveys a vast number of ways the credit markets can fuel inflation in Weimar.

      Btw, was France under a gold standard during the Franco Prussian War? If so, you may have a case of hyperinflation. Long list of possibilities – just look at 19th century wars http://en.wikipedia.org/wiki/List_of_wars_1800%E2%80%931899

    20. @ Sergei

      The government always spends first. When the government cuts a check or credits a bank account the money exists almost instanly. The bank now has excess reserves even though that transaction may not have cleared yet. But since the deposit and excess reserves exist the government is now able to swap that cash deposit with a bond sale. That is very different then under the gold standard where the supply of gold was fixed. Under the fiat regime the government creates the money it borrows.

    21. “Cue the MMT people — but after repeated discussions\”

      I would like to know who are the MMT people which he has had repeated discussions.

      I think there is a chance Krugman understands MMT. Why else would he continue to bring it up? Notice he doesn’t reject MMT, just questions it. This might be his way of transitioning to the new paradigm without losing his followers. If he came clean all at once and said he was wrong about the way the monetary system works, his opponents would say “and what else are you wrong about?”.

    22. I dunno Sergei, it’s so easy to get knotted up with these abstractions.

      I’m just going to run with this thought. A Government somewhere will stop issuing debt against deficit spending in a relatively stable and controlled environment (not a war zone or something like that). It will either produce dire inflationary effects or it won’t. We will analyze the circumstances and the impacts on inflation. We’ll see whose talking a crock of shit and who is not. Seems like the entire economic profession is just speculatiing and gassing without any empirical data.

    23. “unemployment occurs when net government spending is too low to accommodate the need to pay taxes and unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.”

      This is the bit of MMT I struggle with most. I can not grasp how “the desire to net save” can be viewed as something that can ever be accommodated especially in a system that empowers people pretty much in proportion to their savings. What it boils down to is asking Goldman Sachs what proportion of the world economy they wish to control, giving them that and then hoping that they will not try and gain anything from that control. To my mind the “desire to net save” is a bottomless pit. That desire can never be accomodated. Realistically, as some people save, others have to disave -sometimes despite their desire not to. The role of tax to my mind is to nip in the bud net saving. To my mind the key thing is to maintain a zero net save economy by targeting the tax on savings (in the broadest sense) and so avoiding unemployment. An asset tax is the way to do that. I’m not saying that saving is unemportant or that the desire to save is bad; I’m just saying that long term net saving is not something that happens ever without disasterous consequences (war, crisis leading to famines etc).

    24. Stone;

      I think ‘the desire to net-save’ is meant to imply an effective desire – that is, both a desire and a practical ability to forego some consumption and thus net-save a portion of income. A merely subjective desire to accumulate financial assets (on the part, say, of an unemployed person whose benefits have run out) doesn’t count. Unemployment results any time a significant portion of a nation’s real output goes unsold because companies with excess unsold inventories tend to cut back hours and lay off workers. One of the big reasons this happens is the “leakage” of demand into private savings. Money saved is money removed from the cycle of payments.

      Regarding ‘as some people net save others have to dis-save’… There is a difference between something that always happens and something that necessarily must happen. It’s always true that some people in a society will increase their debt level and some will increase their saving. But the two things aren’t causally related and there is no reason why this must be true. If a government were to run a large enough nominal deficit, even to the point of causing high inflation, everyone in that country could, theoretically, net-save at the same time. Also true if there is a large enough trade surplus.

    25. Sergei: “While different in details, gold standard was not different from “no-overdraft” rule that we have today.”

      During the Great Depression, for major economies, going off the Gold Standard coincided with the beginning of recovery, with a sharp upturn (Great Britain and Japan in 1931, the USA and Germany in 1933, France in 1937). How come?

      Thanks. :)

    26. Ramanan: “To me the proposal amounts to monetizing the whole debt at zero interest rate or pay interest on reserves and don’t think it will work simply because its against the principles of liability management.”

      Is there not a golden mean between monetizing the whole debt and having no money except that based on treasuries (plus a relatively small amount of circulating currency)?

    27. dehbach: “I’ve never understood the argument that the imposition of state money creates unemployment”

      Me, either. For instance, in a barter economy suppose that tenant farmers pay a portion of their crops to the landowners. Couldn’t a drought cause unemployment?

    28. stone: “To my mind the “desire to net save” is a bottomless pit.”

      I think that this underscores the importance of operational definitions. :)

    29. Sergei: What type of constraints they are is a minor, almost academic point. It is much more productive to explicitly focus on contraints and the harm they impose on economy rather then deny their existence.

      While the difference between gold and political restraints may be academic, there is a real difference. Gold. FDR removed this restraint nationally, as did Nixon internationally. Technically, these were defaults on obligations. A big deal. Moreover, in the US people were not allowed to hold gold for some time.

      Removing the current political restraints is trivial in comparison.

    30. dehbach:
      I’ve never understood the argument that the imposition of state money creates unemployment

      Taxes, saving and net imports constitute demand leakage. In a primitive economy, production and consumption are equal. When there is demand leakage introduced by state money, which is based on taxation, production and consumption are no longer equal and the resulting glut results in contraction and unemployment unless the government offsets the demand leakage with expenditure. Add demand leakage to saving and net imports and the government offset (fiscal deficit) has to be larger to accomodate them or contraction will result unless exports increase or the private sector net dissaves. This is sectoral balances in a nutshell.

    31. “I’ve never understood the argument that the imposition of state money creates unemployment”

      Well, “in the beginning,” the state imposes obligations (taxes and fees) which must be satisfied by presenting a certain number of tokens that the state issues (money). This creates demand for the tokens (thus conferring value upon them) and ultimately a money based economy arises. If you are unable to find a socially acceptable way to get the money to meet your obligations in such an economy you are considered “unemployed.”

      Unemployment didn’t exist under the feudal system for example. If you were contractually attached to a piece of land your obligations were denominated in commodities and you were considered “a peasant.” If you were unfit for farm work and otherwise outside the given system of mutual obligations you were called a pauper.

    32. “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.”

      Let’s say Apple has 2 billion in its checking account as a demand deposit (velocity equals 0 and as savings). There is a bond sale with Apple buying the bond. Doesn’t Apple’s 2 billion demand deposit go away reducing demand deposits?

      Isn’t it 2 billion in demand deposits is created (by the net spending), and then 2 billion in demand deposits is destroyed (from the net saving)?

    33. Dehbach and Min, I’ve never heard of anyone suggesting that introducing STATE money to a barter economy causes unemployment. But what is widely accepted is that introducing money – any form of money – increases the chances of unemployment. The reason is “paradox of thrift”. As Keynes rightly pointed out, if people try to save an excessive amount of money in a money economy they are ipso facto not spending, and that causes unemployment.

      But that is not to say unemployment is impossible in barter economies. Strangely enough, Min, I wrote an article on my blog in Jan 2010 and (like you) cited the example of drought as a possible cause of unemployment in a barter economy.

      My illuminating (or perhaps not) article is here:

      http://ralphanomics.blogspot.com/2010/01/there-is-widespread-view-that.html

      BTW some would argue that my above distinction between state money and other forms of money is irrelevant because the only form of money that has ever existed in all history is state money. Personally I think that “state money enthusiasts” are near being right, but not quite. E.g. bronze axe heads were used as money in what is now Europe in the Bronze age, and no “government” ordained that axe heads should be a form of money. Plus it looks as thought there was a “credit crunch” in Europe when iron replaced bronze: a bizarre example of how money can cause unemployment!

    34. A short quote out of “The Lessons of History” by Will & Ariel Durant
      “We conclude that the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution. In this view all economic history is the slow heartbeat of the social organism, a vast systole and diastole of concentrating wealth and compulsive recirculation.”

      If the Durants are correct, it seems to me government policy regarding spending and taxing should take the above historical fact into consideration. Seems to me one of the important functions of taxes is to level the playing field.

    35. Hi Bill,

      Your work and posts always stimulate thinking, but your offerings on music-inspired days always reach a higher plateau, IMO. Thanks.

      In the above posting you say: “The starting point of this new understanding is that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.”

      Is a corollary of this understanding the proposition that declining levels of taxation (across periods, and hypothetically across an array of cultures/national economies) have a fundamental influence in reducing the demand for social goods (as considered in JKG’s social balance narrative) relative to private goods? And vice-versa?

      It just feels like there might be something structurally and theoretically (really) important to be found along this path. E.g. There is frequent commentary about the coincidence of high marginal tax rates and social goods provision (Interstate highway system, higher education access, etc) during the Eisenhower era in the US. I can’t recall where, but I have seen this conversation extended into a rationale of lower opportunity costs for real private sector investment (implying a more robust accelerator) because of those higher marginal rates. Similarly, the contrasts between social goods’ provision in cultures like Scandinavia’s (high tax) and the US (low tax) are pretty evident.

      A couple of other thoughts more related to MMT construction and translation to/from other paradigms. I assume that you are declaring that this process of “offer(ing)… in return for the necessary funds to extinguish” is a (foundational) component of an economy’s demand for money, but that it does not totally displace the conventionally listed factors that foster that demand (i.e. transaction volumes, store of value, etc.). In that sense, is it fair to categorize this functional MMT insight as describing the transaction demand for money arising from the private sector/government interface? If so, maybe you should define it along the lines of “government’s macroeconomic inducement of the transaction demand for money” for translation purposes. The implication is that the other aspects of money demand (that conventionally arise from the period’s (C+I) and its private sector banking interactions–between reserves and propensities to lend and borrow) still hold and together with your ‘new understanding’ cause us to arrive at EOP observations of money quantity and velocity.

    36. Min and Dale, when I said that the “desire to net save” is a bottomless pit I meant that I think it is futile and dangerous to try and fulfill leakage to savings by deficit spending. The more that leakage to savings is offset by deficit spending, the more that the “desire to net save” expands. Think about where the bulk of the net saving is- it is by the tiny number of elite financiers. They use their savings to induce and enforce more indebtedness of the little people. The median level of indebtedness actually gets increased by feeding the “desire to net save” of the aggregate economy. Rather than feeding the “desire to net save” I think a saner response would be to use an asset tax to ensure that no net saving occurs.

    37. Min @ Saturday, April 23, 2011 at 4:33,

      That is an interesting question. James Tobin once wrote a paper (long back) called “An Essay On The Principles Of Debt Management ” (1963)… though I couldn’t figure out in detail what he was attempting to say … one of those things .. which makes sense after a long time … hopefully some day I will figure out what he was saying …

    38. Bill,

      You also wrote above: “The crucial point is that the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending. Accordingly, government spending provides the paid work which eliminates the unemployment created by the taxes.”

      I understand the focus on eliminating unemployment, and think that that generally puts you in the Camp of the Angels. But, did you mean the second sentence to apply only in a JG context? If it was stated for a more general context, aren’t taxes’ intra-period drain on the circular flow just sucking us inward from some point nearer to (or optimally, on) the economy’s production possibilities surface? That surface which is relationally contoured to the array of resources available — labor time, natural resource endowments and sustainable sink capacities, knowledge and technology, physical capital, etc.– and technical substitution/complementation rates within that array. I guess I am asking, “Isn’t functional finance about more than quantity clearing in the labor market? This is more wordy, but covers the waterfront a little better, IMO:

      ‘Accordingly, government spending provides the funding for consumption of goods, and/or the acquisition and/or hiring of resources (production capacity and labor force) otherwise idled within the non-government sector during the period because effective demand is concurrently depleted by the tax amount drained from the economy’s circular flow.’

    39. Ralph/Tom:

      Thanks. I guess I was reading too much into it. I understand how the imposition of money and taxation increases the possibility of unemployment.

      Tom, you write that “In a primitive economy, production and consumption are equal” which makes sense. From that I should just take the point that the imposition of state money increases the chances of unemployment because it introduces demand leakage that is otherwise not present, but not that for whatever reason primitive economies do not have unemployment (in for example, a drought scenario). Correct?

      Daniel

    40. Ralph Musgrave: “Strangely enough, Min, I wrote an article on my blog in Jan 2010 and (like you) cited the example of drought as a possible cause of unemployment in a barter economy.”

      Great minds think alike. :)

      Thanks for the link.

    41. MamMoTh @0:35:

      “I don’t think you can reach hyperinflation through credit”

      I think you are probably right although, because we have mixed economies in the real world, I can see possibilities for ‘big’ price changes in ‘favored’ sectors in situations with directed governmental credit enhancement and/or systematic effective demand channeling via institutional rules or public policy. Think about how borrowing capacity tends to get bid — in this context via government relieved funding constraints or funding “innovations” — and therefore capitalized into asset prices in “eligible classes” (e.g. housing stock prices with Fannie, Freddie and securitization conduits standing ready to fund). Or, where policy routines channel effective demand toward targeted goods (e.g. the apocryphal cost-plus $400 Pentagonal toilet seat).

      Whether such sectoral price changes could be ‘big’ enough to dominate a valid macro price index calculation to the degree that we arrive at hyperinflation becomes, I suppose, an empirical question subject to the normal stipulations. (I.e. aggregate demand > productive capacity, I suppose with the hypothetical example found in surprises from adverse factor shocks, production disruptions, wars, political instability, etc.). Hard to envision getting to hyperinflation in a reasonably large economy though, unless the composition of aggregate demand is ridiculously badly balanced.

      This (macro price index behaviour + credit system effects on sectoral prices and real allocations) is clearly a tangency point in the synthesis between MMT and Minsky, IMO, and is really interesting because it has institutional/process facets that are missed in the CW approaches.

    42. Ramanan: “James Tobin once wrote a paper (long back) called “An Essay On The Principles Of Debt Management ” (1963)”

      Thanks for the reference. :)

      My idea, such as it is, is that it would be helpful to have a relatively permanent buffer of money as a stabilizer.

    43. @ Lee Rosin – “Hard to envision getting to hyperinflation in a reasonably large economy though, unless the composition of aggregate demand is ridiculously badly balanced”.

      In normal circumstances I would agree with you and MamMoTh: I don’t think you can reach hyperinflation through credit (or if I may add for that matter government spending!) and that certain sectors would have individual price escalations. But post-war periods are never normal. They are extraordinary. That is the point. One example is this: if you have alot of debtors – particularly in capital intensive goods which require metals to build these goods (and after having the French take over your industrial base for these necessary metals and your production base is thrashed!) you will also invest alot more as any resulting inflation erodes way your debts, adding to AD / inflationary spiral that has already begun due to supply-side issues. With Weimar there is a whole school of thought that argues excessive credit borrowing spurred the hyperinflation.

      On the consumption side, curiously, like with Zimbabwee, in Weimar grain production was half of what it was before the war per capita ( & 90% of family incomes during the height of hyperinflation went toward buying food). People often borrowed from banks, others or liquidated existing assets to buy these scarce resources, even at ridiclous interest rates. If the initial rise in inflation is supply-side (which is it: prices lead increases in money supply + printed tender), then people (often debtors) will respond by taking advantage of the situation (mind you, the Weimar hyperinflation was not that prolonged in the sense most of the major inflation took place over a few months so perhaps why the flow of credit was not stopped – although their were many lawsuits after the end of the hyperinflation over contractual obligations!).

      Looking at military history, supply-side constraints and how agents react to these secular rise in prices seem like a far better away of examining hyperinflation than just “printing money”.

    44. Min “Is there not a golden mean between monetizing the whole debt and having no money except that based on treasuries (plus a relatively small amount of circulating currency)?”

      On the “thought offerings” blog hbl has written about that and says that the private sector adjusts so as to maintain such a level. So, creating more monetary base does not increase the money supply (I think that was what it says).

    45. stone: “On the “thought offerings” blog hbl has written about that and says that the private sector adjusts so as to maintain such a level. So, creating more monetary base does not increase the money supply (I think that was what it says).”

      If the private sector adjusted to maintain a golden mean of the supply of money, then we would not have depressions. Having money that the private sector cannot reduce might decrease the volatility of the system.

    46. The neo-liberals have one set of rules for themselves and another set for everyone one else.

      This useless banter about barter exchange and hyperinflations is nothing more than a smoke screen to hide one simple fact.

      None of the neo-liberals have yet been able to provide any proof that the National accounting identities are wrong.

      That is the issue.

      Prove that the government surplus does not equal the non-government deficit!

    47. “In regard to the inflation in Weimar Germany, it is worth pointing out that how the Reichsbank – a private bank – ruined the German economy has nothing to do with how we could use the publicly-owned Bank of England to properly manage the British economy.
      Stephen Zarlenga dealt with this in his massive work of monetary history, The Lost Science of Money (pp579-580). He said:
      “The great German hyper-inflation of 1922-23 is one of the most widely cited examples by those who insist that private bankers, not governments, should control the money system. What is practically unknown about that sordid affair is that it occurred under the auspices of a privately owned and controlled central bank.
      Up to then the Reichsbank had a form of private ownership but with substantial public control; the President and Directors were officials of the German government, appointed by the Emperor for life. There was a sharing of the revenue of the central bank between the private shareholders and the government. But shareholders had no power to determine policy.
      The Allies’ plan for the reconstruction of Germany after WW1 came to be known as the Dawes Plan, named after General Charles Gates Dawes, a Chicago banker. The foreign experts delegated by the League of Nations to guide the economic recovery of Germany wanted a more free market orientation for the German central bank.
      Schacht relates how the Allies had insisted that the Reichsbank be made more independent from the government:
      ‘On May 26, 1922, the law establishing the independence of the Reichsbank and withdrawing from the Chancellor of the Reich any influence on the conduct of the Bank’s business was promulgated.’
      This granting of total private control over the German currency became a key factor in the worst inflation of modern times.”
      Therefore, as Zarlenga goes on to elaborate, German hyper-inflation did not occur as a result of the German government creating money, but rather it was a result of the complete privatisation of the German central bank, the Reichsbank, as part of the Allies’ post-WWI free-market plans for the German economy.
      The worst inflation of modern times occurred as a result of the privately-controlled central bank manipulating the German economy for its own private profit.”
      http://www.positivemoney.org.uk/solutions/

    48. John, excellent summary. I think Evans cites the sources you cited in his footnotes, but it does prove the point I was making about the fact Weimar etc., had more to do with its unique historical context rather than anything else – and it was not a simple case of “just blame the government”, “let’s adopt a gold standard” mantra.

      I also observe that during the 1880s and 1890s, during the free banking era, inflation ranged from 5-11 percent (these were normal times full of abundance) in addition to our biggest depression – post-war Australia and since the 1990s (i.e. long before and after the oil shocks of the 1970s), inflation in Oz (another time of stability and abundance) inflation has been around 2-4 percent (minus 2001 where the GST was introduced). Historical context matters.

    49. Bill
      I haven’t finished reading the article yet and just skimmed thru the comments, but did”t you mis-speak when you wrote

      “Whereas a sovereign government – by which I mean one that has the monopoly rights to issue the currency in use – only faces real constraints.”
      ….meaning to say, “only voluntary constraints”

      ???

    50. Bill,
      I know it must be me, but….

      “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.”

      It would seem that their idea would tends that draining reserves ‘contracts’ the multiplying base and thus reduces the money supply, as in, fractional-reserve banking doesn’t work in reverse.
      Or am I jst incapable of following the modifier here?
      Thanks.

    51. hi bill,
      I think that

      […]In the world we live in, bank loans create deposits and are made without reference to the reserve positions of the banks. The bank then ensures its reserve positions are legally compliant as a separate process knowing that it can always get the reserves from the central bank. The only way that the central bank can influence credit creation in this setting is via the price of the reserves it provides on demand to the commercial banks.[…]

      it’s true. but where can i read this concept like an official regulation?

    52. Some thoughts on the nature of the persistent confusion of gold standard & fiat currency.

      A long time ago, I took courses that were on the psychology of motor learning theory. It’s the study of how we learn to do physical activities. There was this concept of proactive interference. It basically stated that what we already know how to do interferes with learning a new and different task. The effect of proactive interference was greater the more similar it was to the new task.

      A short story. I was living in Canada at the time, and my psychology professor was a Brit. He liked to tell this story about having learned to drive in a car with steering on right side and how that effected his automatic responses to a defensive driving response, under stress, in car with left hand drive. He said he’d torn a lot of turn indicators from car steering columns in Canada.

      So, economists driving the economy with a gold standard conceptual economic model will never get it right in a fiscal currency economy. Kind of a variation of the Abba Lerner metaphor of the car without a steering wheel.

      Next. I have read Paul Krugman for awhile. Since just before all this recent economic trouble started. I think he is well meaning and doesn’t want to see people get needlessly hurt. However, I’m in no position to evaluate his economic thinking. If MMT is a better conceptual model of the economy, than I believe it is possible for his good intentions to overcome the proactive interference of previous learning. I not so sure about Pete Peterson.

      I’m a biologist who works in research. I’m aware of the importance of correct conceptual models. I know how hard it is to discover causality amongst all the correlations and to distinguish primary from secondary effects. To further science or more importantly redirect it, you have to have logic and evidence that is acceptable to your peers. Unsupported assertions or are not enough.

      Finally, I want to thank the author for his efforts at providing an opportunity to improve my understanding of what has been, for me, an opaque subject.

      Cheers – happy holiday

    53. Spadj @ 11:48

      “Looking at military history, supply-side constraints and how agents react to these secular rise in prices seem like a far better away of examining hyperinflation than just “printing money”.

      Did you mean to say something like ‘than just (focus on) “printing money’? If so, I think it is pretty easy for all of us to agree that understanding historical contexts, institutional rules and behavior, resource stocks and all such production side constraints are important in looking at aggregate supply characteristics, regardless of how the price level index happens to be behaving. And that it takes both aggregate demand and aggregate supply to tango. I think Bill/MMTers are very consistent in pointing out the real constraints that bind once you succeed in getting the economy out of liquidity trap and uncleared labor quantities territories…and that MMT prescriptions are actually pretty neutral (excepting the employment priority) regarding the output composition, production structure, distribution pattern, etc. prevailing in a real economy.

    54. Yes – i.e. “why” print the money (which in my view demand for money – printed or credit – is endogenous even under hyperinflation). It’s not like one who is Head of the Government just suddenly wakes up one day and says ‘hey, you know what, I feel like printing lots of lots of money just for fun!’. No, they print the money because in the market place prices have risen so much, often due to major supply-side constraints which take over, internally (war, invasion, revolution) and externally (collapse in imports or imports that are imported rise dramatically in price). Austrians and other libertarians have a one dimensional view of the causes of hyperinflation.

    55. One way of looking at the money supply is as follows:
      Money is created as needed, where needed, within the constraints of the day.
      Those constraints wary with time and place, causing constant fluctuations in the money supply.
      In past civilizations cowrie shells (Cypraea moneta) were used throughout the world as currency.
      They are beautiful natural creations.
      I’m sure credit has always been used as a way of facilitate financial transactions.
      However, basing a monetary system entirely on credit is a recipe for financial panics.
      It invariably leads to a concentration of power in a few hands.

    56. giulio \”it’s true. but where can i read this concept like an official regulation?\”

      I think the official rules that create the system Bill describes are:

      (delete)http://www.bis.org/bcbs/basel3.htm

    57. Spadj “they print the money because in the market place prices have risen so much”

      I think the crucial thing to learn is that sometimes rationing (such as was done in the UK in the 1940s) is the only way. If the UK had not resorted to rationing, then I’m sure any attempt to say index police salaries with the cost of food would have caused hyperinflation in the UK in the 1940s. Perhaps if a gov ever thinks that the supply situation has got so bad that salaries need to be inflation linked, then they should take that as an indication that rationing needs to be implemented instead.

    58. Mmmaybe Krugman didn’t read your “letter to Paul Krugman” because it started out by accusing him of “misrepresentation, innuendo and lies” and he gets hundreds of emails like that from Republicans every day?

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