Selected Posts
Mosler: A CB rate hike redefines the (fwd) value of the currency downward = "pure inflation" per se, aka, the monopolist sets the "own rate".
Mosler: 0 is the 'natural rate' of interest, inflation, and unemployment. Deviations are necessarily a consequence of government policy.
Mosler: CBs wrongly assume forward prices, a function of policy rates, are expected prices. Instead, they are current prices for future delivery.
Mosler: That is, the current term structure of prices presented to the economy, including the rate of change, is a function of CB policy rates.
Mosler: The rate of change of the term structure of prices in the economy, a function of CB rate policy, is the textbook definition of inflation.
Mosler: That is, the rate of inflation (as defined) presented to the economy at any given point in time is a direct function of CB policy rates.
Mosler: What about inflation?' The funds to pay taxes come only from gov or its agents, so gov is necessarily 'price setter', and the price level is a function of prices paid by gov when it spends. And don't confuse a relative value story with an inflation story thanks!
Comment: How is it not a logical fallacy to think the Fed needs to keep a positive slope in the yield curve to avoid a recession when that would basically imply they will always be raising interest rates?
Mosler: Higher rates support demand and inflation through interest income channels and forward pricing channels. That is, a positive policy rate provides basic income for those with money.
Comment: 12-Month Ahead Inflation Expectation is 13%, 24-Month Ahead Inflation Expectation is 10.7% in July 2018.
Mosler: Higher policy rates support inflation through two channels- interest income and forward pricing.
Comment: We demonstrate in our @curaffairs podcast and as @AVK48 & Sam show (connecting most obviously to Marx's theory of labor certificates in Critique of Gotha Programme), and 3. You know @StephanieKelton and could get her.
Mosler: And the JG provides for a superior price anchor than today's unemployment policies. That is, the JG is an anti inflation policy that at the same time supports output.
Mosler: The public debt is the $ paid by gov that haven't yet been used to pay taxes and remain outstanding as cash, balances in reserve accounts at the Fed, or balances in securities accounts (tsy secs) at the Fed until used to pay taxes.
Mosler: What about inflation?' The funds to pay taxes come only from gov or its agents, so gov is necessarily 'price setter', and the price level is a function of prices paid by gov when it spends. And don't confuse a relative value story with an inflation story thanks!.
Mosler: Thought exercise- if all prices go up and the gov doesn't pay those higher prices, gov spending goes to 0 and the price level deflates until gov spending is sufficient for tax payments due. Not that it's 'good policy' to do that, but to reveal the source of the price level!.
Comment: To clarify - I think we all agree JG politics are inseparable from the financing framework. We all want to avoid the problems Kalecki highlighted. If we make the JG dependent on taxes, aren't we...giving the rich back-door capital strike leverage over the transitional demand?
Mosler: From a pure monetary perspective, the purpose of JG is to provide a superior anti inflation price anchor when compared to unemployment, by facilitating the transition from unemployment to private sector employment. Who is against that???
Comment: No one has produced a careful analysis to work out how much of the net, new spending might need to be offset.
Mosler: Too much net spending = only a one time increase in prices that can readily be reversed, without a drop in employment or output. It does not 'trigger hyperinflation' or anything of the sort. But too little = unemployment and lost output. So what are we waiting for??? ;)
Comment: The impact of a JG in increasing efficiency/productivity and therefore push down interest rates?
Mosler: Just means funding a JG doesn't take away the ability to fight inflation with higher rates as critics fear, because in any case higher rates cause inflation, rather than fight it.
Mosler: More precisely, any increase in the general price level caused by an increase in the nominal JG wage is a one time event and not inflation which is a continuous rise in the price level.
Comment: The Turkish lira is 2.1 percent weaker against the dollar after President Tayyip Erdogan dismissed the central bank governor, laying bare differences between them over the timing of interest rate cuts to revive the recession-hit economy.
Mosler: I agree that rate cuts will lower inflation, but they will not help the economy unless state spending on interest is "replaced" with other fiscal expansion.
Comment: How is inflation measured under MMT? In the early 1980s, the measurement of inflation included energy and food. Now it doesn't. The measurement of inflation has never included house price inflation. Should it? What else should be included or excluded?
Mosler: It's a political question. The definition is meant to serve to further public purpose. Not to forget the 'price level' is a function of prices paid by gov when it spends, so inflation is the continuous increases in price paid by gov, etc.
Mosler: $s to pay taxes originate only from the state or its agents, so value is a function of what you have to do (at the margin) to get them. With JG marginal cost is your time. With UBI it's 0.
Comment: The definitions of 'inflation' are 'for further purpose'. For example, the consumer price index is about the cost of living of a representative group for the further purpose of public policy, etc
Mosler: Also the academic def of inflation is a continuous increase in the price level faced by today's agents. That is, forward prices, which are a direct function of the term structure of rates set by the CB. That is, academically the inflation rate *is* that interest rate structure.
Comment: Article shows cult nature of MMT.
Mosler: Is there another school of thought that models the currency as a public monopoly, and therefore 'the price level' as a function of prices paid by gov?.
Comment: Sure! Basically, same functionality (gov spending creates its own funding, like in the US) but constraints are different: too much money creation (via fiscal deficits or net bank lending) pushes imports up => current account deficit => pressure on the exchange rate => inflation.
Mosler: Gov spending per se doesn't alter 'the price level.' It's the gov paying higher prices 'for the same things' that redefines the currency downward. That is, the price level is a function of prices paid by the currency monopolists. Monopolists are price setters, etc. (micro 101 ;).
Comment: Yes, and whatever pricing level bank loans are financing, i.e. too much bank lending can lead to currency devaluation even if gov does not move towards paying higher prices 'for the same things'. The best example I know of this is Iceland pre-2008, but there are ofc others.
Mosler: All with the awareness that 'currency devaluation' as you put it and inflation can be two different things. For example, the yen roughly went from 80 to 120/$US and the euro from 145 to 105/$US a few years back, etc. and no one noticed an inflation problem.
Comment: What prices are government agents setting, exactly?
Mosler: With every purchase govt. defines the value of its currency whether it knows it or not. The econ needs govt spending to comply with coercive tax liabilities. It's about who's pitching and who's catching. It's a simple case of monopoly. Elementary game theory/disparity of power.
Comment: So, if the government buys a can of beans from a grocer in North Dakota, this sets the price of beans across the country?
Mosler: No. Nor when NYC priced its subway tokens at $2 did that mean that every token bought/sold privately sold for $2. But if the gov decreed it would pay 100x more for everything it would buy vs today's prices (all else equal) what does your model say would happen to the price level?
Comment: Agree that in principle it can be price setter. But this was not your claim, which was that government *is* price setter. I asked how. You answered whenever govt buys something. Evidently, this is not the case.
Mosler: As monop gov sets 2 prices. Let's start with the 'own rate' for the $- the policy interest rate. The Fed sets it (by vote) as monop supplier of reserves currently via int on reserves. With floating fx the idea of markets setting the policy rate is inapplicable. Ok so far?
Mosler: I recall a senior Bank of Mexico officer telling me they let the market set rates as they set the overnight rate based on their t bill auction rates, which I said was logically dynamically unstable/impossible. The operations people confirmed my suspicions. They set the rate.
Comment: I’m talking about the price level, Warren. Not interest rate.
Mosler: And re 2), payment of taxes is via the Fed debiting member bank reserve accounts, where those balances come only from the Fed. So tax liabilities create a need for reserve balances to avoid penalties for non payment. The Fed credits reserves on instruction from Tsy/Congress.
Mosler: That is (from inception, of course) the 'economy' is dependent on Tsy spending to avoid penalty and so the price level is necessarily a function of prices paid by gov or its agents when it spends. (Gov lending is a form of spending- the purchase of a note, a financial asset etc.)
Mosler: Integral to the monopolist is the setting of two prices. 1) How his 'item' trades vs itself, called the own rate-in this case the interest rate and 2) How his item trades vs other 'items'- in this case called the price level. We good to here?.
Comment: As a theoretical point? Yes, one could. But to what end?
Mosler: Also empirical, but it means, for openers, that inflation expectations aren't the cause of inflation, and that it's gov spending policy+institutional structure that turns relative value stories into inflation stories (not that it isn't necessarily 'good policy' to do just that).
Mosler: Assuming a market economy, it follows the gov need only set one price and let market forces work such that prices reflect relative value. That's what fixed fx policy is about. With today's floating fx policy the de facto 'price anchor' is unemployment (rather than gold), etc.
Comment: You can continue to repeat that, but it's not what I'm asking. I conceded that what you claim is possible in principle. I'm asking whether it is so in practice. Your answer seemed to be "yes," it happens whenever the government buys something. Am afraid I don't understand.
Mosler: I'm saying that the source of the price level is prices paid by gov, which is a matter of policy, and that increases in the price level are about gov paying higher prices. And all as a point of logic regarding single suppliers/imperfect competition as per mainstream Micro 101.
Comment: If Amazon decides to pay 10x, it will also have price pressure. This has nothing to do with being monopoly supplier of base money.
Mosler: Amazon at best can cause a shift in relative values, while the gov can permanently shift the general price level.
Comment: You can continue to repeat that, but it's not what I'm asking. I conceded that what you claim is possible in principle. I'm asking whether it is so in practice. Your answer seemed to be "yes," it happens whenever the government buys something. Am afraid I don't understand.
Mosler: I agree that the US government thinks the market is dictating price and acts accordingly. So the price level is determined by that policy. Monopolists/price setters have policy options in that regard.
Comment: Does @CraigGlasgow2 agree or disagree with the following statement. "Spending on the Job Guarantee is, like all spending inflationary, which means to stay within limits the JG may need to be reduced in times of high inflation?"
Mosler: Don't forget JG Gov/monopolist spending is on a price constrained basis which prevents deflation and doesn't cause inflation by definition. And a shrinking JG pool "automatically" evidences increased demand.
Comment: That is, they inflated away the purchasing power vs CPI of anyone actually holding Treasuries or bank savings deposits, as yields were forcibly kept below the prevailing inflation rate. People/institutions with substantial USD savings were hurt; those with hard assets preserved.
Mosler: Either way with floating fx, the public debt is just $ (tax credits) in securities accts at the Fed-it already is 'the money'-so it's never about gov 'paying it back' as it is with fixed fx. Gov/real domestic wealth doesn't gain or lose from changes in the price level.
Comment: "The idea that inflation is a result of prices moving to align supply with demand, rooted in Economics 101 textbooks, is an unhelpful one. In the real world, corporations set prices on the basis of their expected long-term production costs and don’t suddenly increase them.“
Mosler: And as the term structure of prices currently faced by markets is a direct function of the term structure of rates set by CB policy, in that sense the policy rate is the inflation rate= forward pricing channel. That is, CB's have the rate thing backwards.
Comment: Tying policy to labor force participation would give a more accurate assessment of inflation risks and distance to full employment than just focusing on the unemployment rate.
Mosler: Recognizing the currency is a public monopoly and therefore the state is 'price setter' would also be helpful, as would recognizing rate hikes impart an inflationary bias through interest income and forward pricing channels.
Comment: A good illustration of the 'Pandemic Inflation Gap' that the ECB needs to address with PEPP asset purchases. Services inflation at 0.7% and super core around 1% or below is not acceptable. Too big risk to inflation expectations.
Mosler: The price level is not a function of expectations. The currency is a simple public monopoly. The state is 'price setter'.
Comment: We see the Fed forecasting core PCE inflation at 1.9% in 2023 in tomorrow's forecast. Pretty shocking really. We don't get back to 2% even on such a long horizon. If you think inflation will rise faster, historically that's only happened with spiking oil prices. Not happening...
Mosler: A permanent 0 rate policy is a deflationary bias that promotes low inflation and low demand, thereby requiring larger fiscal deficits to support full employment. And that's just one reason why I propose it.
Comment: Is this saying that it was the 'hyper-enlarged' deficits that contributed to the hyperinflation? It also mentions failing to balance budget [revenue... failed to keep in step with its spending].I don't think this is in line with the rest of the document? Maybe further clarify.
Mosler: The point is that the higher prices paid are the redefining/devaluation of the currency. And the paying of the higher prices contributed to gov facing further price increases that gov again decided to pay. It's the paying of the higher price that redefines/devalues the currency
Comment: Then make that as the conclusion of the paper! The final sentence doesn't read this way. :-).
Mosler: It's part of the larger conclusion that it takes pro active policy to sustain inflation- a policy of continuously paying higher prices.
Comment: Agree with others (h/t @jposhaughnessy) that this is a thread worth reading. Inflation is a tax that lowers living standards. Rarely do I hear cogent arguments that “we need more tax.” Let’s ask @ericschmidt if he wants more tax.
Mosler: Inflation has distributional effects but does reduce real output or consumption.
Comment: Remember this when you hear economists opining about the “sustainability” of public debt. A sovereign, currency-issuing government can always CHOOSE the interest rate on any bonds it CHOOSES to offer. I explain here.
Mosler: The problem is they think rate hikes fight inflation, when, in fact, the opposite is true.
Comment: Interesting exchange. Ann making a point MMTer’s constantly make. The state sets the interest rate. So “we can borrow now because interest rates are low” still conforms to the household analogy, because it compares the state to a household who has to accept rates from the market.
Mosler: And raising rates contributes to inflation....
Comment: My deviation from MMT (and conventional thinking) is that inflation is irrelevant. A different discussion for another time.
Mosler: Inflation is not an economic problem, but it is a political problem due to serious distributional issues (which fortunately can be addressed while sustaining full employment and output).
Comment: Do rising interest rates in the future create a problem for the UK government?.
Mosler: And once it's understood rate hikes cause inflation, there will be no reason for rates to ever go up.
Comment: But the government can borrow cheaply, so isn't there a good argument for spending now? This is the flashing red light. The Fed has had to purchase US debt so the Treasury can issue it. The Fed now owns the equivalent of: + $33,300 per householdor + 20 percent of GDP.
Mosler: The gov sets the policy rate, and rate hikes cause inflation, so why would a gov 'in the know' ever hike rates?.
Comment: Please explain. So you somehow come up with a model which predicts inflation, then you use that to determine taxes, then you determine expenditure.. I'd that what you're saying? Do you realise how ridiculous that sounds.
Mosler: A given expenditure might result in a one time increase in prices. It does not trigger some kind of a continuous increase in prices we call inflation.
All Posts
Mosler: Valuation and inflation are two different things!.
Mosler: A CB rate hike redefines the (fwd) value of the currency downward = "pure inflation" per se, aka, the monopolist sets the "own rate".
Comment: I see. Is it fair to say right now we are in a deflationary downward spiral, albeit not a steep one?
Mosler: It's still just disinflationary but could turn deflationary if they keep pushing.
Mosler: 0 is the 'natural rate' of interest, inflation, and unemployment. Deviations are necessarily a consequence of government policy.
Comment: Your version makes perfect sense. If that was the author's,intended meaning, then fair enough. :-)
Mosler: Taxes function to regulate agg demand. The price level is ultimately a function of prices paid by gov.
Comment: @TyHealey @wbmosler@stf18 suggest rereading history. 1980 recession followed sharp interest rate hikes, reversed in summer and again in 81.
Mosler: Federal budget went into surplus in 1979 from 'bracket creep'/inflation/etc. ;)
Comment: Jared Bernstein lays out the problem of elites who hate inflation and jobs.
Mosler: Worse are progressive elites who concede there is a long term deficit problem when the Fed's long term inflation forecast is 2%.
Comment: U.S. small business borrowing rises to highest on record: PayNet.
Mosler: Still down inflation adjusted.
Mosler: New blog post! Brazil inflation.
Comment: I'll venture a guess. FX rate main driver of Brazil inflation with gvt deficits accounting for zig-zags.
Mosler: The unemployment rate tells us it's not aggregate demand!.
Mosler: So the ECB put an Italian in charge to boost inflation and even he has failed... ;)
Comment: "How long-term interest rates have remained so low so long? This is not the result of QE — a largely irrelevant bogeyman..."
Mosler: ...is because high rates cause inflation and vice versa.
Comment: Those understandably afraid to vote no should understand that a yes vote means you're back in this same spot again within a few years.
Mosler: And they worry that a return to Drachma reopens that shameless corruption channel + inflation, currency depreciation, unemployment, high rates.
Comment: Brazil inflation rate hits 12-year high of almost 10%
Mosler: Maybe their high rates support their high inflation?
Comment: Is there a link between oil prices and inflation expectations?
Mosler: As if inflation expectations are what matters when the currency is a public monopoly and gov is price setter.
Mosler: Not to forget the jg works to lower inflation!
Comment: Why did "cost-push" inflation suddenly end with Volker? Ford's WIN program was a loser.
Mosler: Carter's deregulation of natural gas in 1978 took down oil prices, ending the inflation. V's policies only prolonged the inflation.
Comment: Why no inflation? The question every banker wants an answer to.
Mosler: The price level is ultimately and necessarily a function of prices paid by the gov when it spends- simple case of monopoly.
Comment: Everyone at KeynesPizzaDinner agrees: MMT and the Fiscal Theory of the Price Level are the same thing.
Mosler: FTPL fails to recognize the currency itself is a public monopoly and the ramifications of said monopoly re the price level etc.
Mosler: Except inflation and demand are not functions of the Fed's tools- at least not in the direction presumed by the mainstream.
Comment: TIPS trader at this dinner just told Bullard in Q&A that he agrees it's not about liquidity or risk premiums, all about actual expectations.
Mosler: And Bullard still believes inflation expectations are the cause of inflation :(
Comment: The anticipated policy rate is the term structure of risk free rates presented to the economy.
Mosler: And thereby further presents the term structure of prices to the economy aka the inflation rate.
Comment: Construction spending is higher than it’s been since before the Great Recession.
Mosler: The chart is not inflation adjusted so it's still way down and growing slower than in the prior cycle, and decelerating.
Mosler: He's reading my stuff? "Low rates may be causing low inflation, St. Louis Fed President James Bullard theorized in Friday remarks.".
Comment: FB comment from Steven Hail.
Mosler: Tell Steve 'inflation' is a function of price paid by Gov.
Comment: Residential construction spending at $453.7 billion (annualized), highest since October 2007.
Mosler: Not to forget to adjust for inflation thanks! ;)
Comment: In other words, US deficits are TOO SMALL! Fiscal policymakers aren't doing their jobs.
Mosler: If there isn't a long term inflation problem there isn't a LT debt prob. Fed, cbo say 2%, TIPS even less ;)
Mosler: TIPS show the 'all knowing' 'real time' market's inflation forecast ;).
Mosler: Permanent elimination would increase sales, output, employment, and ultimately support the price level as well.
Mosler: Rate hikes per se cause inflation via interest income channels, but I'd prefer tax cuts or spending hikes.
Mosler: Government is a large net payer of interest to the economy, so rate hikes per se have an expansionary fiscal effect.
Mosler: And there are those (MMT) who understand the price level is necessarily a function of prices paid by govt... ;)
Comment: This is Patinkin's (1961?) model "Money, Interest and Prices"
Mosler: Patinkin: the need for the central bank to fix some nominal magnitude if the price level is to be determinate.
Mosler: CBs wrongly assume forward prices, a function of policy rates, are expected prices. Instead, they are current prices for future delivery.
Mosler: That is, the current term structure of prices presented to the economy, including the rate of change, is a function of CB policy rates.
Mosler: The rate of change of the term structure of prices in the economy, a function of CB rate policy, is the textbook definition of inflation.
Mosler: That is, the rate of inflation (as defined) presented to the economy at any given point in time is a direct function of CB policy rates.
Mosler: Euro area internal 'adjustment' with spending or tax cuts is via more inflation in Germany.
Mosler: 20 years on, this math model by Pavlina remains THE definitive paper on the source of the price level and inflation.
Comment: I think this might be the single most insane fiscal policy proposal I have ever heard in my life: W/negative growth, Brazil's govt wants to amend Constitution to freeze all spending for 20 years. Markets celebrate.
Mosler: If unemployment is elevated the reported inflation is likely not an excess demand story.
Comment: Profiting from covered interest parity deviations ("cannot prevail in the marketplace for long"): 1977 textbook example.
Mosler: That's what the 'term structure of prices' is about. It's a function of the Fed's policy rate and it's also the rate of inflation.
Mosler: So maybe Trump thinks that he needs 'inflation' to bail out his real estate holdings? ;)
Mosler: Or, inflation drove the budget into surplus in 1979 which caused the subsequent recession. ;)
Comment: Our latest estimate of 10-year expected inflation is 1.93 percent.
Mosler: And if there's not a long term inflation problem, then there's not a long term federal deficit problem either.
Comment: Construction spending rose in November to an annual rate of $1.18 trillion, the highest in more than 10 years.
Mosler: These numbers are not inflation adjusted. Adjusted for inflation construction spending remains well below that of 10 years ago.
Comment: 1979? U.S. Federal Budget | InsideGov.
Mosler: Sorry, just noticed that surplus was on an inflation adjusted basis.
Comment: "The public" includes Fed, which owns abt 10-15%, so you're wrong. Also you say it like it's a bad thing but it adds that much to pvt saving: Federal debt held by the public is now 77%, the highest level since shortly after World War II.
Mosler: And 'inflation' is a 'soft', political limit, not an operational barrier.
Comment: Fed's new normal balance sheet could be huge.
Mosler: Inflation isn't a function of the size of the Fed's balance sheet as feared in this publication.
Comment: Why Abba Lerner believed that raising rates could help combat deflationary pressures: THE ECONOMICS OF CONTROL output by sacrificing some of this year's output. Consequently the greater marginal product of a factor when used this year to add to next year's output will be exactly offset by the lower price of next year's output. The vmp will be the same whether a factor is used directly to increase this year's product or whether it is used to increase equipment to make possible a greater increase in output in the future. The inconveniences of falling prices can be avoided by a positive rate of interest on money. Such a state of affairs, with the prices of all products and of all factors falling, would not only be very inconvenient for book keeping purposes, but would require a perfect flexibility of all prices including rents and wages. Any inflexibility would prevent the optimum use of resources, and the increasing value of money as prices fall would provide a great incentive for individuals to hoard money. Where the supply of money is produced at practically no cost and controlled by the government in the general interest, this is not serious, for enough money could be printed to satisfy this desire without permitting the hoarding to interfere with the flow of money expenditure necessary for the health of the economy, but even then it may occasionally be trouble some. All these inconveniences and possible inefficiencies can be overcome by a very simple device. A rate of interest on money is established equal to the marginal yield from the postponement of output (which is the rate at which prices would fall in the absence of the device). If a ton of steel sacrificed this year permits 1.1 tons of steel to be added to next year's steel output, the marginal yield from postponing the consumption of steel is or 10 per cent per annum. If the marginal yield from postponing output (or the marginal yield from anticipating input by applying a factor a year earlier) is 10 per cent per annum, all prices would fall in this proportion. An interest policy can minimize necessary price changes, thereby avoiding resistances to price changes which would interfere with the optimum use of resources, Interest at this same rate of 10 per cent per annum charged to all producers on money borrowed to pay for factors in anticipation of the sale of their product, would prevent the prices from falling. It will still be true that 11 tons of steel next year can be produced by the same resources that would yield only 10 tons this year, but when the 10 per cent additional interest has been added to the cost of producing steel for next year with this year's resources, the cost per ton will have been raised to the same level as steel this year!.This is the way the matter is expressed in terms of production: In terms of the transformation of one product into another we can express the substance of the matter by saying that 10 tons of steel today are technically transformable into 11 tons of steel next year, but the 10 per cent interest that is payable when output is postponed for a year makes the cost of the 11 tons next year 10 per cent more than the cost of the 10 tons this year, so the cost per ton (and also the price per ton) is the same this year as next. Similarly with the factors. To produce the same product next year requires eleven units of factor available next year as against only ten available this year. The greater productivity of this year's factor over next year's (the marginal yield from anticipating input or applying factors earlier) is exactly offset by the 10 per cent interest that has to be paid for acquiring the factor a year earlier. The value of the marginal product after the interest has been deducted (the discounted value of the marginal product) is the same for the factor in both years and so the price of the factor will be the same in both years. What the rate of interest does, in effect, is to make the value of money fall at the same rate as the value of goods so that the value of goods stays constant in terms of money. The in the value of goods as well as of the money must be measured in terms of the goods or money at some base period. Ten tons of steel are still exchangeable for 11 tons next year. Instead of steel having a lower price per ton next year (H of this year's price) it has the same price as this year, but if 10 tons of steel are to be sold this.
Mosler: HT Stuart Medina MMT Spain. Supports my position: the term structure of prices is a function of the policy rate= academic def of inflation.
Comment: The US nat'l debt is near $20T, caused by continued budget deficits. Yes, but also by responsible savers desiring to hold net financial assets.
Mosler: The 'inflation adjusted' public debt is necessarily enabled by non government 'savings desires' as a simple point of logic.
Comment: I mean seriously. Ditching this assumption is a no-brainer.
Mosler: Not to mention the paper you did about how rate hikes promote inflation. ;)
Comment: Former FOMC member Tarullo: We have no idea how inflation actually works.
Mosler: MMT has THE theory of the source of the price level: As single supplier of the thing required to pay taxes, gov is necessarily price setter.
Comment: I'm not an economist, but I believe #MMT economists agree budget surplus can help fight inflation. But I believe at least one MMTer, @wbmosler, questions whether Volcker's big rate hikes really tamed late-70s inflation.
Mosler: If the cause of inflation is excessive aggregate demand, a tax hike or spending cut can cool it down, but not so for a cost push inflation.
Mosler: What about inflation?' The funds to pay taxes come only from gov or its agents, so gov is necessarily 'price setter', and the price level is a function of prices paid by gov when it spends. And don't confuse a relative value story with an inflation story thanks!
Comment: I'm all in with MMTers (and Keynes) on deficit spending to get to full employment. But there's a bunch of other stuff I don't get. Here's my good faith effort to better understand where their arguments are coming from. http://jaredbernsteinblog.com/questions-for-
Mosler: Not to forget the price level is a function of prices paid by gov. And feel free to contact me any time to discuss MMT.
Comment: And yes, mainstream recognizes the CB as monopoly supplier of reserves and therefore price setter of the interest rate.
Mosler: But reserves are also required to pay taxes, making the price level necessarily a function of prices paid by the state when it spends.
Comment: No. TIPS are just a better protection here vs a loss of purchasing power. But they still pay strictly in the issuer currency ($) and are not convertible to any other asset (real/financial). 1/
Mosler: Note that indexation, such as with TIPS can introduce a risk of accelerating inflation. (Nor do I see any pubic purpose served with TIPS.)
Mosler: Jimmy Carter broke the inflation by deregulating natural gas in 1978.
Comment: So from the charts it looks like the recession cut total oil consumption for electricity with subsequent growth from gas and other sources?.
Mosler: Inflation caused debt/gdp to fall followed by recession. Nat gas dereg helped shift consumption away from oil by securing long term supply.
Comment: All right, since most of you said inflation is sometimes a monetary phenomenon, what are your favorite examples?
Mosler: The price level is necessarily a function of prices paid by the state (or collateral demanded when it lends).
Comment: How is it not a logical fallacy to think the Fed needs to keep a positive slope in the yield curve to avoid a recession when that would basically imply they will always be raising interest rates?
Mosler: Higher rates support demand and inflation through interest income channels and forward pricing channels. That is, a positive policy rate provides basic income for those with money.
Comment: 12-Month Ahead Inflation Expectation is 13%, 24-Month Ahead Inflation Expectation is 10.7% in July 2018.
Mosler: Higher policy rates support inflation through two channels- interest income and forward pricing.
Comment: "I don't think anyone has a good model of inflation that shows how policy levers link to a price index." Exactly! You will hear me say this in my @planetmoney interview going up (probably) tonight.
Mosler: The 'policy rate' *is* the rate of inflation as academically defined. ;)
Comment: I'd be curious to hear any thoughts on this point, including research that specifically talks about this likely tradeoff (including why there may not be such a tradeoff).
Mosler: Tightening fiscal as suggested works to reduce aggregate demand.
Comment: Tightening fiscal as suggested works to reduce aggregate demand.
Mosler: Inflation as generally defined is only rarely, if ever, an excess aggregate demand story.
Comment: Also, how does this then equate to “not having a theory of inflation” Having a theory of inflation is one thing, and MMT does. being able to measure your key determinant is another.
Mosler: MMT has the only understanding of the price level- monopolists are price setters.
Comment: Do you have a take through this lens that explains US disinflation after Volcker raised rates?.
Mosler: Those rates supported and prolonged the inflation.
Comment: Italy was paying 10% of GDP in interest on public debt, with real interest rates of 4% (nominal rates of 9-10%) and was having inflation above 5%.
Mosler: Yes, I met with CB officials back then, suggesting that as rates came down, the annual deficit would fall, inflation would come down, the currency stabilizes, the economy decelerates and unemployment goes up and they would converge with the rest of the EU.
Mosler: Are they using fiscal to sustain domestic output at full employment levels? Their high policy rate is basic income for those who already have "money" so created distributional issues. Are govt payments indexed to "inflation"? How's banking regulation and supervision?
Mosler: I've shown how their high policy rate is supporting their inflation rate and depreciating the currency continuously over time. They need to drop it to 0 imho.
Mosler: None of that is coming from high demand.
Mosler: I do look at it unfavorably. Just saying it's no worse if you have your own currency. And with Turkey it doesn't read like the problem is the state increasing demand.
Mosler: Looks more like the high policy rate is causing lenders to sell their interest payments for fx and drive down the lira. The inflation looks at lot more like cost push than demand pull?
Mosler: The inflation as measured is coming from something other than high aggregate demand. What does bank lending growth look like? Are there state banks with politicized lending? And are state related wages indexed?
Mosler: The reported GDP growth rate is adjusted for inflation.
Mosler: And Scotland's 90% sterling debt under current institutional arrangements is a drag on its economy and will continue to be a drag with it's own currency, though it would both be a lesser drag and diminish over time.
Mosler: And Scotland would be able to keep the population fully employed and sustain a 0 policy rate all of which would promote low inflation, a stable currency, and real gdp growth that would cause the fx debt to gdp to diminish over time all with a higher standard of living.
Comment: The ‘fiscal contraction expansion’ lie lives on.
Mosler: Laced with fundamental errors from a failure to recognize state currencies as public monopolies. Particularly weak on neutrality and inflation.
Comment: To make room for the massive spending required to fight WWII, Keynes proposed taxing those at the top and "borrowing" from the working class. That way, workers got jobs and interest-bearing assets (bonds) in exchange for deferred consumption during war effort.
Mosler: Today QE has made it clear that consumption is not a function of the 'bonds vs no bonds' thing, and WWII inflation control was about fixed prices and rationing, led by John Kenneth Galbraith.
Comment: "So the price level is necessarily a function of prices paid by government and NOT about excess demand, as evidenced continuously in states with both high unemployment and high inflation" Any material on this Warren for further reading?
Mosler: Quite a bit on the price level in my book thanks.
Comment: The Greatest Public Good? Here you'll find more economic wisdom & reality than in the past four decades of research by the economic profession. Pls notice that West. national banks confirm their analysis. They are @wbmosler @billy_blog. When two original MMT developers get together to discuss their work.
Mosler: Note also that MMT alone recognizes the state's currency is a public monopoly, and so the price level is necessarily a function of prices paid by government and NOT about excess demand, as evidenced continuously in states with both high unemployment and high inflation.
Comment: We demonstrate in our @curaffairs podcast and as @AVK48 & Sam show (connecting most obviously to Marx's theory of labor certificates in Critique of Gotha Programme), and 3. You know @StephanieKelton and could get her.
Mosler: And the JG provides for a superior price anchor than today's unemployment policies. That is, the JG is an anti inflation policy that at the same time supports output.
Comment: I have patiently responded to every question. Functional Finance says: yellow—use fiscal policy to *maintain a full employment economy* (Not to *cause* unemployment). Green—If you permit excessive spending, you will have to dial it back TO FULL EMPLOYMENT in response to inflation..
Mosler: Yes, but only if the inflation is from excess demand (which it rarely is).
Mosler: Yes, you know the inflation and currency depreciation isn't about excess demand.
Comment: Where does inflation come from? thanks!
Mosler: The price level is necessarily a function of prices paid by gov when it spends or collateral demanded when it lends, because the gov (and its agents) is the sole supplier of what it demands for payment of taxes. Simple case of monopoly....
Mosler: The public debt is the $ paid by gov that haven't yet been used to pay taxes and remain outstanding as cash, balances in reserve accounts at the Fed, or balances in securities accounts (tsy secs) at the Fed until used to pay taxes.
Mosler: What about inflation?' The funds to pay taxes come only from gov or its agents, so gov is necessarily 'price setter', and the price level is a function of prices paid by gov when it spends. And don't confuse a relative value story with an inflation story thanks!.
Mosler: Thought exercise- if all prices go up and the gov doesn't pay those higher prices, gov spending goes to 0 and the price level deflates until gov spending is sufficient for tax payments due. Not that it's 'good policy' to do that, but to reveal the source of the price level!.
Mosler: What is called 'inflation' exists even with unemployment and excess capacity, as evidenced in most of the world. And MMT alone recognizes the price level is a function of prices paid by government when it spends, and not the quantity of government spending.
Comment: If fiscal policy is used to target NGDP (or inflation), given a rate of interest set by the central bank, you will (generally) end up with a suboptimal fiscal policy from an OLG perspective. You've got one instrument trying to do 2 jobs, while the other instrument is idle.
Mosler: Nor has excess demand generally been the cause of what is popularity called inflation.
Comment: If you think govt deficit spending at full employment leads to hyperinflation, you need a better theory of hyperinflation. Hint, every historical case of hyperinfl has had mass unemployment, and no full employment case has had one. There is zero #MMT here: https://bloomberg.com/opinion/articl....
Mosler: Pavlina's definitive math model on the source of the price level first published over 20 years ago: ….
Comment: For some of these, I can see why MMT proponent @StephanieKelton thinks MMT is being caricatured, but on the taxes one... that's straight outta @wbmosler Warren Mosler's book.
Mosler: Yes, tighter fiscal cools demand, and excess demand can be one of many possible contributors to what we call inflation. And Bob, you did state during our debate that everything in my book is technically correct.
Comment: Here’s @StephanieKeltonexplaining Modern Monetary Theory to @zbyronwolf Debt? What debt? At $22 trillion, here's the argument the national debt doesn't matter.
Mosler: How about "Yes, and MMT is the only analysis that understands the source of the price level and recognizes the JG as a superior price anchor to unemployment."
Comment: Your answers are all in the book. Maybe a quick re-read of the first half?
Mosler: You agree 1. the state and its agents are the only legal source of that which it demands for tax payment? 2. Therefore the price level is a function of prices paid by the state? That is, monopolists are price setters?
Comment: Or we will be discussing how relaxing the fiscal constraint and being willing to run the economy hot created space for the decarbonization investment that allowed the planet to remain habitable.
Mosler: Heard anyone say, 'yes we won WWII but the inflation rate was above target' ;)
Comment: Aye, falls in supply push up prices.
Mosler: Generally what the Fed calls a 'relative value story' vs an inflation story.
Mosler: : Negative rates; QE; maybe central banks can't create inflation? Even with an Italian in charge? ;) Try someone from Zimbabwe or Venezuela? ;)
Comment: Exactly! I wrote about this regarding IP from Job Guarantee labor, but logic also applies more broadly. If research in science and useful arts is financed by public money, the fruits of that research should be made available to the public.
Mosler: The JG serves public purpose as a superior ("anti inflation") price anchor vs unemployment while removing most of the negative externalities of unemployment.
Comment: I still think that's a much clearer way to model it, as you do in your papers. But I now think the FTPL captures that in its (much less clear) way - that's the point of the 'seniorage' term. So you could 'teach' MMT to the mainstream using the FTPL, if you wanted...
Mosler: Including the fact that the price level is therefore necessarily a function of prices paid by the state?
Comment: To clarify - I think we all agree JG politics are inseparable from the financing framework. We all want to avoid the problems Kalecki highlighted. If we make the JG dependent on taxes, aren't we...giving the rich back-door capital strike leverage over the transitional demand?
Mosler: From a pure monetary perspective, the purpose of JG is to provide a superior anti inflation price anchor when compared to unemployment, by facilitating the transition from unemployment to private sector employment. Who is against that???
Comment: Yes! More on the different sources of inflation please !!!!
Mosler: Insiders getting local currency via the banking system and state owned enterprises and selling it for foreign currency for personal use, driving down the currency causing import prices to rise, for example.
Mosler: Corruption as a source of inflation: New York Post : Luxury NYC apartments tied to $2.4B Venezuelan 'boligarchs' currency scam.
Comment: Yes. And would just emphasize Nathan's point: there is more to MMT's inflation-fighting toolkit than solely raising taxes. The emerging consensus, following Mason/Jayadev and then Barro, to reduce MMT to Lernerism is pernicious and false. MMT was talking Minsky before most.
Mosler: And the MMT 'inflation-fighting tool kit' begins with the Job Guarantee which immediately provides the monetary system with a superior price anchor than today's unemployment, as it facilitates the transition from unemployment to private sector employment.
Comment: No one has produced a careful analysis to work out how much of the net, new spending might need to be offset.
Mosler: Too much net spending = only a one time increase in prices that can readily be reversed, without a drop in employment or output. It does not 'trigger hyperinflation' or anything of the sort. But too little = unemployment and lost output. So what are we waiting for??? ;)
Comment: Yes that's one merit of JG. But I think JG has a hundred other pros and cons.
Mosler: Aka, positive externalities... ;) The anti inflation aspect is common ground for most all voters. And when you lead with anti inflation you derail the critics who might otherwise scream inflation. Give it a try thanks! ;)
Mosler: CB's believe rate hikes fight inflation but say with high pub debt rate hikes= higher interest pymts= inflation, so using fiscal to fund a JG=no option to hike rates to fight inflation. I say THEREFORE they have it backwards and lowering rates fights inflation=no problem with JG.
Comment: The impact of a JG in increasing efficiency/productivity and therefore push down interest rates?
Mosler: Just means funding a JG doesn't take away the ability to fight inflation with higher rates as critics fear, because in any case higher rates cause inflation, rather than fight it.
Comment: To clarify, you’re saying “using their logic the reverse of the equation would have to be true,” yes?
Mosler: Using their logic about rates and deficits they are wrong/backwards about rate hikes fighting inflation.
Comment: Fed reviewing its inflation tgeting policy even though it has better growth dan SA & only 4% unemployment. Meanwhile in SA, w hve 28% unemployment & growth near 0%, yet SARB trying to limit mostly cost push inflation 2arbitrary % with rpo rate makes sense.
Mosler: Makes the point about inflation from sources other than demand thanks!
Comment: This is now my go-to example when people ask, "Why do the critics of MMT say it's difficult to pin down what their actual position is?". I know you've got this question on your mind right now. I answer it a bit later in this book, but let me state the question and give you a quick answer to tide you over: Question: If the government doesn't tax because it needs the money to spend, why tax at all? Answer: The federal government taxes to regulate what economists call "aggregate demand" which is a fancy word for "spending power." In short, that means that if the economy is "too hot," then raising taxes will cool it down, and if it's "too cold," likewise, cutting taxes will warm it up. Taxes aren't about getting money to spend, they are about regulating our spending power to make sure we don't have too much and cause inflation, or too little which causes unemployment and recessions."
Mosler: Yes, tax increases cool demand. However, inflation is more often caused by things other than excess demand, in which case taking measures to cool demand wouldn't be my first choice for addressing it
Comment: If someone can write down the Fed’s model of inflation for me, that’d be super.
Mosler: It's entirely about inflation expectations by default as they don't model the currency as a public monopoly. Their models are relative models with the currency as numeraire and so there's no other reason why prices are at any given level except history and changing expectations.
Comment: What was Paul Volcker doing, then?
Mosler: Prolonging the inflation that otherwise would have abated much more quickly as oil prices collapsed.
Comment: Well then. MMT thinks interest rate hikes might be expansionary during a boom.
Mosler: And Professor Krugman agrees when he (contradicting himself) uses the same argument to explain why high deficits and debt remove the option to use monetary policy (rate hikes) to fight inflation with his 'interest rate higher than growth rate= unsustainability' story.
Comment: How could a smart guy like Krugman not understand that deficit spending increases the money supply & that gov't cannot unintentionally "run out of money"???
Mosler: By using a narrow definition of money supply and by assuming inflation adjusted money? ;)
Comment: So what are Central banks doing playing with short term rates and why does hiking rates correlate so strongly with lower demand and recession?
Mosler: Central banks have it backwards, and other things correlate a lot better than rates which can be working pro cyclically. Read the CB literature on how little evidence there is of causation running from higher rates to higher output, employment, and inflation.
Mosler: More precisely, any increase in the general price level caused by an increase in the nominal JG wage is a one time event and not inflation which is a continuous rise in the price level.
Comment: In which I examine an MMT model in detail, and am disturbed by what I find.
Mosler: Pavlina reveals and models the definitive source of the price level still unknown to the mainstream and it means nothing to you?
Comment: Unemployment is really hard to implement without wasting a ton of money, output, and lives, but we're doing it anyway. The JG is always cheaper than the alternative, which is what we have now.
Mosler: And it's a better inflation fighter.
Comment: Warren, I get that higher rates add $ to the economy in the form of govt spending (assuming no fiscal budget cuts in response), but...Didn’t Volker hiking rates increase the dollar, which lowered oil prices, decreasing inflation in the early 80s.
Mosler: The progressive tax structure via inflation= fiscal contraction that shrank the 'real' public debt causing the recession that cut oil demand (helped some by the dereg of nat gas) too large for Saudi output cuts to counter caused oil to collapse from approx $40 to $15.
Comment: I think @wbmosler argues that it was mainly the deregulation of the gas industry that did it.
Mosler: On a look back, that and the recession from tight 'real' fiscal due to inflation cut global oil demand to where the Saudis couldn't sufficiently cut production to keep the price from collapsing.
Mosler: Add oil prices to the chart. A drop that large would have brought inflation down a lot more if it wasn't for lingering high rates/govt. interest payments (basic income for people with money) supporting spot and forward prices.
Comment: Which part of the model equations is flawed in your view?.
Mosler: The assumption that inflation and aggregate demand are functions of rates, or are a function of securities sales to the non govt sector.
Comment: This thread desperately needs an MMT correction (and the WSJ Article it’s responding to even more): And one thing’s for sure: We cannot grow our way out of this problem. We are going to have to fix it—that means either higher taxes or lower benefits or both.
Mosler: With 30 year Fed, cbo, and tips inflation forecasts about 2%, I don't see the problem?
Comment: Can gov push prices down through taxation? Are you saying that no matter how high gov pushes taxes, banks will always create enough money to keep prices at or above current levels? Even if reserves go low enough that banks have to go to the discount window? Am I misunderstanding?
Mosler: Only if the inflation is from excess demand.
Comment: Both reserves and tsy secs are deposits at the Fed defined as "money" under broader definitions of money, and the same goes for checking and savings accounts at other bank's.
Mosler: QE in Japan, the US and the euro zone has demonstrated to me that it's just a placebo that doesn't per se increase aggregate demand or inflation.
Comment: Stanford conference on Friday featuring almost half of the FOMC was basically a dress rehearsal for the upcoming conference in June at the center of Fed's year-long inflation strategy rethink. @RichMiller28 was there and it's not getting good early reviews.
Mosler: They need to know two things- 1. they got the interest rate thing backwards, and 2. the price level is necessarily a function of prices paid by gov (and not inflation expectations).
Comment: The national debt is $22,030,000,000,000. Entitlements are driving that number higher. It's a predictable crisis - and nobody in Washington seems to care.
Mosler: Not a problem when the Fed, CBO, and tips tsy markets forecast long term inflation at 2%... ;)
Comment: Very nice summary. I’d add that insights lead to imp truths on both sides. The US has run an excessively tight monetary policy and has made poor fiscal policy choices based on a misunderstanding of budget constraints. However, removing constraints has likely costs, eg inflation.
Mosler: Either you believe in an informed electorate or you don't... ;) (and 'inflation' per se is not an 'economic' cost...;) )
Comment: Inflation expectations now anchored at levels below 2%
Mosler: Except the currency is a state monopoly, so the price level is necessarily a function of prices paid by gov when spending, and not inflation expectations.
Comment: I support free higher education and student debt relief. But making the ultimately false analogy of 'trillions for bank bailouts' undermines implementation, just like (inapplicable) proposed tax hikes for Medicare for All have kept it from being implemented.
Mosler: Students have too often been grossly overcharged. Immediate refinancing at Treasury rates and extending maturities can dramatically reduce inflation adjusted debt burdens and eliminate any moral hazard concerns.
Comment: Hey, two of those sentences were Stephanie's but the third one is mine! That and $2.87 gets you a cup of tea at Starbucks.
Mosler: What would be bold would be to have the CBO score it based on how much it would add to inflation to determine if there is a need for a fiscal offset... ;)
Comment: How would you respond to a large group of citizens who want sound money? It seems somewhat obnoxious to simply dismiss them all, responding that “actually, no you don’t need it, and won’t have it”. I’m much more attracted to delivering what they want somehow.
Mosler: Response: oh, so you think inflation is too high?
Comment: The Turkish lira is 2.1 percent weaker against the dollar after President Tayyip Erdogan dismissed the central bank governor, laying bare differences between them over the timing of interest rate cuts to revive the recession-hit economy.
Mosler: I agree that rate cuts will lower inflation, but they will not help the economy unless state spending on interest is "replaced" with other fiscal expansion.
Mosler: Jimmy Carter broke the inflation by deregulating natural gas in 1978.
Comment: スレッド
Mosler: That was a contributing factor, and the recession triggered by letting fiscal get way too tight in real terms (inflation adjusted) caused a large and immediate drop in oil demand.
Comment: Turkish lira returns to relatively unchanged for the session in the wake of central bank's largest ever rate cut of 425 basis points.
Mosler: Let me suggest the currency will continue to strengthen and inflation will fall as they continue to lower rates.
Comment: No. I just don’t want to continue the greater of two evils. There could be a better plan by far.
Mosler: Yes, now when you turn 65 you can sign up for Medicare if you want to. Just lower that age to 0 and leave the rest alone. And let the CBO score it for inflation. If it doesn't increase inflation (I suspect it will be scored as deflationary) there's no point in a tax increase.
Comment: Unemployment is really hard to implement without wasting a ton of money, output, and lives, but we're doing it anyway. The JG is always cheaper than the alternative, which is what we have now.
Mosler: And it's a better inflation fighter.
Comment: Do you think the Volcker shock supported employment?.
Mosler: Yes, and supported the inflation as well, which continued long after oil prices collapsed due to the higher rates. It was fiscal tightening (public debt shrunk in real terms) that caused the initial recession.
Comment: Interpreting #MMT saying "money is a unit of measurement for resources" as if it also means that "production and actual resources are meaningless" is like Interpreting a parent saying, "I love my older son" as if they also mean, "I don't love my younger son. Compartmentalize! Scott Freeman on monetary surprises and nominal government debt.
Mosler: The dollar is simply a tax credit, and the gov (and its agents) are single supplier= the 'price level' is a function of prices paid by gov when it spends and collateral demanded when it lends. And only MMT seems to understand that?.
Comment: Scott Freeman on monetary surprises and nominal government debt.
Mosler: The currency is a public monopoly. With floating exchange rate policy, the Fed is 'price setter' for interest rates, not 'price taker.' Inflation expectations per se don't alter interest rates. Only with fixed exchange rate policy, interest rates are 'market determined.'.
Comment: 'The idea that inflation is a result of prices moving to align supply with demand, rooted in Economics 101 textbooks, is an unhelpful one. In the real world, corporations set prices on the basis of their expected long-term production costs and don’t suddenly increase them.“
Mosler: And as the term structure of prices currently faced by markets is a direct function of the term structure of rates set by CB policy, in that sense the policy rate is the inflation rate= forward pricing channel. That is, CB's have the rate thing backwards.
Mosler: Maybe high rates are contributing to the inflation?
Comment: Part two of what actually causes inflation! Up next--is that Bernie Sanders guy one of them damn socialists??? Tune in to find out.
Mosler: The currency is a public monopoly. As a point of logic, monopolists are 'price setters' and therefore the 'price level' is necessarily a function of prices paid by the state when it spends or collateral demanded when it lends.
Mosler: On John Kenneth Galbraith's "Economics of Innocent Fraud" (2004): #8- The illusion that the Federal Reserve, by raising or lowering interest rates, has any effect whatsoever on spurring growth or preventing inflation. (Wikipedia)
Comment: Venezuela to add Bitcoin and Ethereum in central bank's reserves.
Mosler: Expenses like this add to their inflation problem....
Comment: For #InternationalPodcastDay here's our most listened to episode of #PitchforkEconomics with @NickHanauer. We interview @StephanieKelton to discuss #MMT
Mosler: After Stephanie left the show the risks of inflation were discussed without the benefit of a critical MMT understanding, as expressed in the White Paper.
Comment: How is inflation measured under MMT? In the early 1980s, the measurement of inflation included energy and food. Now it doesn't. The measurement of inflation has never included house price inflation. Should it? What else should be included or excluded?
Mosler: It's a political question. The definition is meant to serve to further public purpose. Not to forget the 'price level' is a function of prices paid by gov when it spends, so inflation is the continuous increases in price paid by gov, etc.
Comment: But you suggested it:"Suggest govt order up plush new houses for all the less well off at $1 each, "I said the government could - it has the economic leavers to do it. It would involve deflation.
Mosler: Think relative value story vs inflation story, to use Fed speak.
Mosler: Turkey- Massive interest rate cuts and at least so far lower inflation and a firming currency. Not that this proves anything, of course. Just that the reverse didn't happen. And just in time for Thanksgiving! ;)
Comment: A thread on what #MMT has to say re: small, non-hegemonic or so-called "developing" countries, a vital topic for any truly global & decolonial political economy. @FadhelKaboub has been working on this for decades. But recently many MMTers & fellow-travelers r now taking it on 1/x.
Mosler: In 25 years we've started 3 currencies that have continuously provisioned their universities with student labor- the UMKC Buckaroo, the Denison Dollar and the Franklin Franc with 0 rate policies, 0 inflation, 0 unemployment and in economies that couldn't be smaller or more open.
Comment: MMT Heaven and MMT Hell for Chinese Investment and U.S. Fiscal Spending - Carnegie Endowment for International Peace.
Mosler: The fact that the price level is a function of prices paid by govt, the currency monopolist and price setter, has again been omitted by an mmt proponent. :(.
Comment: They're starting to get what MMT has said for 20+ yrs. Next step is to grasp that the interest rate on the national debt = policy variable for monetary sovereign, w/ still plenty of options for monetary policy to manage credit conditions.
Mosler: And with lower rates promoting lower inflation.
Comment: I think the key breaking point in #MMT is whether one trusts its inflation management or not. Shikenan. You know which side I'm on. I don't and can't trust any human being with managing inflation.
Mosler: It's that MMT is the only school of thought that recognizes the source of the price level.
Comment: Inflation may or may not be a concern going forward, but we can afford not to worry it right now (market-based measures of inflation expectations have tumbled). This is not to say we won't have to worry about inflation ever again, of course. Stay safe out there!
Mosler: Another bridge for you to cross: The $ is a public monopoly, so first order the price level is necessarily a function of prices paid by gov, and not inflation expectations.
Comment: Great piece !! Question, if treasury paid job guarantee wages, that would add net financial assets, right? Couldn't that produce inflation?: When Congress spends, however, it usually buys real goods and services, and not securities and other financial assets. So when the exchange takes place, Congress gets the real goods and services, which are not financial assets, and the economy gets dollar balances at the Fed, which are financial assets. So spending by Congress adds financial assets to the economy, to the penny, making it very different from what the Fed does.
Mosler: Only if indexed. Otherwise it could at most trigger a one time adjustment in prices.
Mosler: $s to pay taxes originate only from the state or its agents, so value is a function of what you have to do (at the margin) to get them. With JG marginal cost is your time. With UBI it's 0.
Comment: There are consequences.MMT never says there are no consequences. The consequences are inflation. The constraints are real resources and inflation. The constraints are never financial.
Mosler: And the price level is a function of prices paid by government
Comment: Japanese Gov talks constantly about the need to bring debt down. People believe this talk. And, indeed, Gov is backing it up by raising sales taxes at most inopportune time. The projection of higher taxes reduces net wealth. This is one source of deflationary pressure.
Comment: Situation similar to U.S. in 1980s. Apart from initial tax cut, Reagan administration raised taxes 8-10 times after that, largest in 1986. There was broad bipartisan support to "bring fiscal house in order"-- which provided the nominal anchor. It was this, not Volcker, that....
Comment: … permitted inflation to decline permanently (of course, Volcker brought inflation down temporarily by creating a temporary recession).
Mosler: You don't attribute that recession to the fiscal tightening? The real public debt contraction due to the inflation, bracket creep, etc?
Comment: Good point on bracket creep, though I don't recall people talking about it at the time. Oil price shock (Iran-Iraq war) probably main driver, together with Volcker's tight money policy.
Mosler: Cost push from Saudi price setting, and my narrative is the high rates supported and prolonged the inflation even as oil prices fell.
Comment: See: https://fred.stlouisfed.org/graph/fredgraph.png?g=r5kX…And in case anyone's interested, I talked about "failure to inflation Japan".
Mosler: 1st, agreed with your operations analysis. 2nd (semantics) with JGB prices market determined/indifference levels are they 'perfect substitutes' for cash? 3rd, have you thought about what happens to the price level should gov, for example, simply pay double for all purchases?
Comment: The recession plus substitution assisted longer term by the 1978 dereg of nat gas, etc. reduced the demand for oil as OPEC cut production by some 15 million bpd which wasn't enough. Prices fell, alleviating what had been a cost push inflation.
Mosler: Also, as a point of logic, with the Fed sole supplier of reserves ultimately required for tax payment, the gov is 'price setter.' That is, the source of the price level is prices paid by gov when it spends. And note the Fed as single supplier votes on rates (the own rate)
Comment: Did you leave out the role of inflation in MMT?
Mosler: MMT has the only understanding of the source of the price level/'inflation'- it's necessarily about prices paid by gov. The currency itself is a case of monopoly, and monopolists are necessarily price setters, whether they know it or not
Comment: The definitions of 'inflation' are 'for further purpose'. For example, the consumer price index is about the cost of living of a representative group for the further purpose of public policy, etc
Mosler: Also the academic def of inflation is a continuous increase in the price level faced by today's agents. That is, forward prices, which are a direct function of the term structure of rates set by the CB. That is, academically the inflation rate *is* that interest rate structure.
Comment: That assumption is in my models. Not sure what you think falls in place though. It's just standard monetary theory.
Mosler: Monops set 2 prices 1. own rate= policy interest rate set by Fed as single supplier of net reserves 2. terms of exchange for other goods and services= price level is necessarily a function of prices paid by gov. spends=source of price level.
Comment: That assumption is in my models. Not sure what you think falls in place though. It's just standard monetary theory.
Mosler: Monops set 2 prices 1. own rate= policy interest rate set by Fed as single supplier of net reserves 2. terms of exchange for other goods and services= price level is necessarily a function of prices paid by gov. spends=source of price level.
Comment: Interesting. I like the analogy to the LTV. Money = labor and a minimum $ is generated proportional to labor power.
Mosler: The economy needs the gov's $ to pay its taxes (and to net save $), so the gov tells the economy what it has to do to get those needed $. That's called a monopolist setting price. And the prices paid define the 'value' of the $- aka 'the price level' etc.
Comment: Article shows cult nature of MMT.
Mosler: Is there another school of thought that models the currency as a public monopoly, and therefore 'the price level' as a function of prices paid by gov?.
Comment: You’re not really claiming that “when AD > AS, inflation results” is an MMT insight, surely.
Mosler: The MMT insight is that the 'price level' is a function of prices paid by gov when it spends.
Comment: Sure! Basically, same functionality (gov spending creates its own funding, like in the US) but constraints are different: too much money creation (via fiscal deficits or net bank lending) pushes imports up => current account deficit => pressure on the exchange rate => inflation.
Mosler: Gov spending per se doesn't alter 'the price level.' It's the gov paying higher prices 'for the same things' that redefines the currency downward. That is, the price level is a function of prices paid by the currency monopolists. Monopolists are price setters, etc. (micro 101 ;).
Comment: Yes, and whatever pricing level bank loans are financing, i.e. too much bank lending can lead to currency devaluation even if gov does not move towards paying higher prices 'for the same things'. The best example I know of this is Iceland pre-2008, but there are ofc others.
Mosler: All with the awareness that 'currency devaluation' as you put it and inflation can be two different things. For example, the yen roughly went from 80 to 120/$US and the euro from 145 to 105/$US a few years back, etc. and no one noticed an inflation problem.
Comment: New article: “What Is MMT? (Short Version)”This is a draft version of a section that will appear at the front of my text. It is aimed at readers who are somewhat familiar with economics, but new to MMT.
Mosler: Don't forget the source of the price level. ;)
Comment: What prices are government agents setting, exactly?
Mosler: With every purchase govt. defines the value of its currency whether it knows it or not. The econ needs govt spending to comply with coercive tax liabilities. It's about who's pitching and who's catching. It's a simple case of monopoly. Elementary game theory/disparity of power.
Comment: So, if the government buys a can of beans from a grocer in North Dakota, this sets the price of beans across the country?
Mosler: No. Nor when NYC priced its subway tokens at $2 did that mean that every token bought/sold privately sold for $2. But if the gov decreed it would pay 100x more for everything it would buy vs today's prices (all else equal) what does your model say would happen to the price level?
Comment: Agree that in principle it can be price setter. But this was not your claim, which was that government *is* price setter. I asked how. You answered whenever govt buys something. Evidently, this is not the case.
Mosler: As monop gov sets 2 prices. Let's start with the 'own rate' for the $- the policy interest rate. The Fed sets it (by vote) as monop supplier of reserves currently via int on reserves. With floating fx the idea of markets setting the policy rate is inapplicable. Ok so far?
Mosler: I recall a senior Bank of Mexico officer telling me they let the market set rates as they set the overnight rate based on their t bill auction rates, which I said was logically dynamically unstable/impossible. The operations people confirmed my suspicions. They set the rate.
Comment: I’m talking about the price level, Warren. Not interest rate.
Mosler: And re 2), payment of taxes is via the Fed debiting member bank reserve accounts, where those balances come only from the Fed. So tax liabilities create a need for reserve balances to avoid penalties for non payment. The Fed credits reserves on instruction from Tsy/Congress.
Mosler: That is (from inception, of course) the 'economy' is dependent on Tsy spending to avoid penalty and so the price level is necessarily a function of prices paid by gov or its agents when it spends. (Gov lending is a form of spending- the purchase of a note, a financial asset etc.)
Mosler: Integral to the monopolist is the setting of two prices. 1) How his 'item' trades vs itself, called the own rate-in this case the interest rate and 2) How his item trades vs other 'items'- in this case called the price level. We good to here?.
Comment: As a theoretical point? Yes, one could. But to what end?
Mosler: Also empirical, but it means, for openers, that inflation expectations aren't the cause of inflation, and that it's gov spending policy+institutional structure that turns relative value stories into inflation stories (not that it isn't necessarily 'good policy' to do just that).
Mosler: Assuming a market economy, it follows the gov need only set one price and let market forces work such that prices reflect relative value. That's what fixed fx policy is about. With today's floating fx policy the de facto 'price anchor' is unemployment (rather than gold), etc.
Comment: You can continue to repeat that, but it's not what I'm asking. I conceded that what you claim is possible in principle. I'm asking whether it is so in practice. Your answer seemed to be "yes," it happens whenever the government buys something. Am afraid I don't understand.
Mosler: I'm saying that the source of the price level is prices paid by gov, which is a matter of policy, and that increases in the price level are about gov paying higher prices. And all as a point of logic regarding single suppliers/imperfect competition as per mainstream Micro 101.
Comment: If Amazon decides to pay 10x, it will also have price pressure. This has nothing to do with being monopoly supplier of base money.
Mosler: Amazon at best can cause a shift in relative values, while the gov can permanently shift the general price level.
Comment: You can continue to repeat that, but it's not what I'm asking. I conceded that what you claim is possible in principle. I'm asking whether it is so in practice. Your answer seemed to be "yes," it happens whenever the government buys something. Am afraid I don't understand.
Mosler: I agree that the US government thinks the market is dictating price and acts accordingly. So the price level is determined by that policy. Monopolists/price setters have policy options in that regard.
Mosler: The dynamics of a monopoly are a clear point of logic as per all mainstream texts. Monopolists are price setters as by definition there is no competition, etc. How they do it is a matter of policy.
Comment: Many great points here, though personally am not ready to abandon "monetarism" as my provisional theory of (trend) inflation.
Mosler: It's never too late... ;) Models say competitive mkts clear and imperfect competition causes unemployment. NK's say its sticky wages, etc. Keynes and I agree it's the gov/monop restricting supply/deficit spending to offset unspent income. Therefore price level= f(prices paid by monopolist)
Comment: Am I the only MMT aficionado who refuses to concede this?.
Mosler: For another thing inflation can be 'on target' with elevated unemployment and excess capacity utilization with that inflation being caused by something other than excess demand, etc. etc. etc.
Comment: Do you have insight? The Weimar government caused the inflation. If they'd acted to maintain the purchasing power of the paper it would have bought gold, coal, or jam. But if they'd refused to pay market prices (CONCEIVED OF AS COAL AND JAM) there's no gold, without violence.
Mosler: Though I'd say inflation was the better policy choice given the circumstances?.
Comment: Does liquidity need to be in deficit if repo is the single policy rate. Else, if liquidity is surplus, does reverse repo need to be added to MPC mandate.
Mosler: RBI can't just pay interest on reserves to establish a floor? Political restriction? Not to mention I don't agree that rate hikes fight inflation... ;)
Comment: Does @CraigGlasgow2 agree or disagree with the following statement. "Spending on the Job Guarantee is, like all spending inflationary, which means to stay within limits the JG may need to be reduced in times of high inflation?"
Mosler: Don't forget JG Gov/monopolist spending is on a price constrained basis which prevents deflation and doesn't cause inflation by definition. And a shrinking JG pool "automatically" evidences increased demand.
Mosler: First, said CB gold buying is "off balance sheet"- it doesn't count as Gov (deficit) spending. The only 'cost' is a bit of inflation/lost fiscal space that's way under the radar.
Comment: That is, they inflated away the purchasing power vs CPI of anyone actually holding Treasuries or bank savings deposits, as yields were forcibly kept below the prevailing inflation rate. People/institutions with substantial USD savings were hurt; those with hard assets preserved.
Mosler: Either way with floating fx, the public debt is just $ (tax credits) in securities accts at the Fed-it already is 'the money'-so it's never about gov 'paying it back' as it is with fixed fx. Gov/real domestic wealth doesn't gain or lose from changes in the price level.
Comment: Olé, olé eta olé!!! EN LAS GRANDES CRISIS, EL ORO ES UN VALOR REFUGIO... ¿Y EL DÓLAR NO?.
Mosler: Just saying it seems odd the gold bugs are complaining about $US inflation when they are free to own all the gold they want.
Comment: Until they recognize they have the interest rate thing backwards, they will have what they think is good reason to avoid public debt.
Mosler: Mainstream economists say if gov debt gets too high while sustaining full employment, hiking rates to fight inflation makes it worse due to higher gov interest payments, and I agree, only adding that we are already at that point where rate hikes cause inflation and cuts slow it.
Comment: Nobody seriously questions the validity of modern monetary theory as a description of our monetary system. This is genuinely new, and it has happened since the publication of S. Kelton's "Deficit Myth". That in itself is hugely significant. Next step - abandon the old narrative.
Mosler: And then move on to them getting the interest rate thing right way around, before they start looking to hike due to inflation fears.
Comment: This is a particularly stupid comment: We’ve created more jobs in the last 3 months than Joe Biden and Barack Obama created in their 8 years in office.
Mosler: Voters hate inflation a lot more than they hate unemployment.
Comment: I'm done listening. Now I want evidence that tax rates control inflation. Ready? Go.
Mosler: Taxes regulate aggregate demand. The price level is a function of prices paid by gov. Take it from there?.
Comment: Framework review complete, Fed's Powell starts hard sell for higher inflation.
Mosler: From 2011: It must be impossible for the Fed to create inflation.
Comment: Important key victory. Also transitory. The argument that "at *some* point wages will rise and cause inflation" isn't dead. At that point, jobs will again be on the chopping block. We need tools for inflation control other than unemployment & stagnant pay: With new monetary policy approach, Fed lays Phillips curve to rest.
Mosler: And they all still think rate hikes fight inflation-it's in fact the presumption behind this latest move- when in fact rate hikes work to support inflation. :(
Comment: Important key victory. Also transitory. The argument that "at *some* point wages will rise and cause inflation" isn't dead. At that point, jobs will again be on the chopping block. We need tools for inflation control other than unemployment & stagnant pay?
Mosler: This remains definitive on the source of the price level, which hopefully MMT proponents next push to 'front and center.' Now that we all know the gov can't go broke it's time to move on to this..
Comment: "The idea that inflation is a result of prices moving to align supply with demand, rooted in Economics 101 textbooks, is an unhelpful one. In the real world, corporations set prices on the basis of their expected long-term production costs and don’t suddenly increase them.“
Mosler: And as the term structure of prices currently faced by markets is a direct function of the term structure of rates set by CB policy, in that sense the policy rate is the inflation rate= forward pricing channel. That is, CB's have the rate thing backwards.
Comment: ICYMI: Some thoughts on yield curve control.
Mosler: It's not going to add to aggregate demand or inflation. Monetary policy works mainly through interest income channels and if anything this is more likely to (modestly) reduce interest paid by gov to the economy.
Comment: Tying policy to labor force participation would give a more accurate assessment of inflation risks and distance to full employment than just focusing on the unemployment rate.
Mosler: Recognizing the currency is a public monopoly and therefore the state is 'price setter' would also be helpful, as would recognizing rate hikes impart an inflationary bias through interest income and forward pricing channels.
Comment: A good illustration of the 'Pandemic Inflation Gap' that the ECB needs to address with PEPP asset purchases. Services inflation at 0.7% and super core around 1% or below is not acceptable. Too big risk to inflation expectations.
Mosler: The price level is not a function of expectations. The currency is a simple public monopoly. The state is 'price setter'.
Comment: We see the Fed forecasting core PCE inflation at 1.9% in 2023 in tomorrow's forecast. Pretty shocking really. We don't get back to 2% even on such a long horizon. If you think inflation will rise faster, historically that's only happened with spiking oil prices. Not happening...
Mosler: A permanent 0 rate policy is a deflationary bias that promotes low inflation and low demand, thereby requiring larger fiscal deficits to support full employment. And that's just one reason why I propose it.
Mosler: Thanks, John, and hoping that they further understand that hiking rates would be inflationary. That is, rate hikes don't fight inflation, they support it and make it worse.
Comment: US fiscal policy became looser between 1973 and 1985, at least on the data i have.
Mosler: Look at it in real terms. Inflation lowered the real size of the public debt in the late 1970's to the point that in real terms the gov reported a real fiscal surplus with a nominal deficit.
Mosler: It was called 'bracket creep' as inflation caused rising nominal incomes to shift to higher tax brackets.
Comment: What’s your view on the Volcker shock and inflation thereafter?
Mosler: The high rates supported and prolonged the inflation.
Mosler: Fiscal tightened/public debt falling in real terms triggered recession, oil demand collapsed/oil price collapsed bringing down inflation and Carter's dereg of nat gas made it safe for utilities to convert keeping oil demand down.
Comment: MMTers say rates go to zero but CB's actively prevent this because they like to use interest rates as a policy tool. So implies we cant use interest rates in this way anymore, no? Which is also what they recommend... "anything but interest rates" seems to be the approach.
Mosler: It's about the consequences of rate hikes being inflationary via increasing deficit spending to pay interest to people who already have money, and at the same time imbedding a continuous increase in the term structure of forward prices, aka, inflation as academically defined.
Comment: There was a time when the ECB & BoJ aggressively pursued reflation, but that's over. We're left with inflation forecasts that fall short of target out to 2023. If deflation is to be avoided, both central banks must revert to the 2014 playbook for asset purchases.
Mosler: CB's still have the rate thing backwards, mate.
Comment: This is important, dovish, and relatively new from @Lagarde.
Mosler: As if inflation expectations matter as the mainstream believes they do....
Comment: Interest Rates Limited by Private Sector Fragility: With debt-to-disposable income ratio bouncing around 175%, there is a v. large Canadian household sector sensitivity to interest rates. Bank of Canada is boxed in b/c of household debt
Mosler: And rate hikes promote inflation. So why do it?.
Comment: I don’t think anyone would argue that increased government purchases or transfers, paid for by printing money, would not expand employment. The argument is whether the policy would be inflationary and possibly lead to an uncontrollable increase in inflationary expectations.
Mosler: I say it this way: net spending of gov (and its agents) leaves residual liabilities ($US deposits, cash, etc.) and the residual price level is a function of prices paid by gov/agents.
Comment: Spot on. Also a perfect illustration of how silly the MMT critique "that the Fed might lose its independence" is. The Fed is begging (rightfully) for more fiscal support, the GOP wants to be "independent" to do nothing and let the economy drown.
Mosler: The Fed's 0 rate policy is helping to keep inflation and aggregate demand down, opening the door to a fiscal adjustment- increased gov spending/lower taxes.
Comment: Bonds aren’t that dissimilar to the tax demand in that they’re another way of encouraging those who are good at not paying taxes to still want to get hold of the currencyCollect 10 invisible dogs and we’ll give you an eleventh(creature of the state).
Mosler: QE evidences otherwise as it has not increased the rate of inflation.
Comment: Besides that Brazil has huge dollar reserves and minimal external sovereign debt. CB refuses to intervene both, on fx level and long term interest rates. High treason crime?.
Mosler: Brazil's interest rate cuts have helped bring inflation down maybe?.
Comment: Why do you think recognising real resource constraints is some sort of magic insight by MMT? It’s really, really not.
Mosler: The mmt insight is that the price level is a function of prices paid by gov.
Comment: An MMT response on what causes inflation.
Mosler: Missed the point about the price level being about prices paid by gov. Monopolists are price setters.
Comment: Has the Phillips curve flattened? Our new paper concludes: Not really. It has always been flat.
Mosler: The $US is a monopoly, Gov is price setter, price level necessarily=f(prices paid by Gov), game theory says P curve not applicable.
Comment: Ms. Kelton’s response also misses the crux of Erik’s question. Economics 101 tells us that when you increase the supply of something, the value of each individual unit of that thing falls. Why would this basic economic concept not hold true for money?
Mosler: The currency is a monopoly so gov is "price setter."
Comment: More generally, Ms. Kelton assumes that inflation is tractable and ignores the psychological element of inflation (which I explain in tweets 4 & 4A in linked thread below). The fact is, inflation can be intractable and run away from us (hence the term “runaway” inflation).
Mosler: No, the price level is necessarily a function of prices paid by gov.
Mosler: I've been working with Phil on the Weimar inflation. This is the latest draft- comments welcome! Nov 7, 2020 draft: Weimar Republic Hyperinflation through a Modern Monetary Theory Lens.
Comment: Is this saying that it was the 'hyper-enlarged' deficits that contributed to the hyperinflation? It also mentions failing to balance budget [revenue... failed to keep in step with its spending].I don't think this is in line with the rest of the document? Maybe further clarify.
Mosler: The point is that the higher prices paid are the redefining/devaluation of the currency. And the paying of the higher prices contributed to gov facing further price increases that gov again decided to pay. It's the paying of the higher price that redefines/devalues the currency
Comment: Then make that as the conclusion of the paper! The final sentence doesn't read this way. :-).
Mosler: It's part of the larger conclusion that it takes pro active policy to sustain inflation- a policy of continuously paying higher prices.
Comment: I agree. This is also demonstrated in the current hyperinflation of venezuela, where Minimum wage is being doubled by Maduro every few months, trying to keep up with prices. But this min wage doubling is fuelling the hyperinflation. Biden's platform calls for big changes to Social Security. Here's what could be on the table.
Mosler: Last I checked that inflation wasn't about excess consumer demand?.
Mosler: Please read my short, free online, non technical 7DIF book- get up to speed on MMT, deficit spending, Social Security, and inflation. You'll be glad you did! ;)
Comment: The value of bitcoin is also rising because nation-states are developing mining facilities "as a strategic sovereign reserve asset".
Mosler: Central Bank of Venezuela apparently buying as well, which adds to their Bolivar inflation. Same with gold buying. Price is as high as it is due to central bank buying, which they do 'off balance sheet' as it doesn't count as Gov spending, but as a CB asset purchase.
Comment: This is why hyperinflation usually emerges. Non-sovereign debt can be a factor but doesn’t have to be. If a sovereign prints more money but the private sector produces nothing of value from it all you have is more money chasing the same level of goods and services.
Mosler: The answer to the source of the price level is here.
Comment: Agree with others (h/t @jposhaughnessy) that this is a thread worth reading. Inflation is a tax that lowers living standards. Rarely do I hear cogent arguments that “we need more tax.” Let’s ask @ericschmidt if he wants more tax.
Mosler: Inflation has distributional effects but does reduce real output or consumption.
Comment: So, in your opinion Volcker was not the hero, Carter was?.
Mosler: Certainly not Volcker. His lack of understanding of Fed monetary operations and inflation prolonged the problem.
Comment: Remember this when you hear economists opining about the “sustainability” of public debt. A sovereign, currency-issuing government can always CHOOSE the interest rate on any bonds it CHOOSES to offer. I explain here.
Mosler: The problem is they think rate hikes fight inflation, when, in fact, the opposite is true.
Comment: Interesting exchange. Ann making a point MMTer’s constantly make. The state sets the interest rate. So “we can borrow now because interest rates are low” still conforms to the household analogy, because it compares the state to a household who has to accept rates from the market.
Mosler: And raising rates contributes to inflation....
Comment: My deviation from MMT (and conventional thinking) is that inflation is irrelevant. A different discussion for another time.
Mosler: Inflation is not an economic problem, but it is a political problem due to serious distributional issues (which fortunately can be addressed while sustaining full employment and output).
Mosler: More simply when it's realized gov necessarily spends first and only then can taxes be paid or gov bonds purchased, and that rate hikes cause inflation, notions of gov solvency, debt burdens, etc, become entirely inapplicable.
Comment: About inflation only one thing is MMT sure: that it cannot be created by the Central bank without the help of the government.
Mosler: Inflation is about gov continuously paying higher prices.
Comment: Do rising interest rates in the future create a problem for the UK government?.
Mosler: And once it's understood rate hikes cause inflation, there will be no reason for rates to ever go up.
Comment: But the government can borrow cheaply, so isn't there a good argument for spending now? This is the flashing red light. The Fed has had to purchase US debt so the Treasury can issue it. The Fed now owns the equivalent of: + $33,300 per householdor + 20 percent of GDP.
Mosler: The gov sets the policy rate, and rate hikes cause inflation, so why would a gov 'in the know' ever hike rates?.
Comment: Spending = Income = Sales = GDP. Only way the price level can go up is if Spending goes up first….
Mosler: The price level is a function of prices paid by gov when it spends.
Comment: Sunak stated that ‚there are record peacetime highs in borrowing and debt, .. forecasts .. show us on a path where that continues to be at a very elevated level’. The elephant in the room is this: How is a sustainable position in public debt defined?“.
Mosler: When they understand rate hikes cause inflation there is no longer any reason rates would go up.
Comment: Which part? Chicken and egg? Output gap?
Mosler:
Comment: For MMT, a relevant constraint is the inflation (not budget) constraint AT full employment. There are 'inflationary' fiscal policies below full empl and could be used as justification for layoffs/low wages to tame inflation. We reject the NAIRU as a Monetary or Fiscal policy rule.
Mosler: If there are what is deemed to be an excess of workers in the JG pool and also inflation, it means the inflation is coming from something other than an excess of aggregate demand.
Comment: Just to add appropriate qualifiers, does your interest rate - inflation link only apply to "advanced countries"? Higher interest rates definitely appear to be brining inflation down for turkey right now correct? mainly because its stabilized their currency..wanted to clarify!.
Mosler: Turkey's (still high) interest rates are lending support to inflation, not fighting it. IMHO Erdogan has been right all along on that score.
Comment: This IOU has a picture of the queen on it and gets exchanged in shops. Not the same as a govt bond, but is not so different either. At some point, we do have to worry about making sure that the money printing gets 'undone', as and when not undoing it threatens high inflation.
Mosler: If that inflation is coming from excess demand.
Comment: An MMT critique from the man who bailed out the banks. Others have already shares strong words about this. Some comments from me: The ideological bankruptcy of modern monetary theory | The Spectator.
Mosler: MMT teaches sequence- tax liabilities, spending, tax payment/bond purchase- thereby eliminating solvency consideration, and the source of the price level is prices paid by gov. And they have the rate thing backwards. No new tools, just a new (for them) understanding of the tools.
Comment: Please explain. So you somehow come up with a model which predicts inflation, then you use that to determine taxes, then you determine expenditure.. I'd that what you're saying? Do you realise how ridiculous that sounds.
Mosler: A given expenditure might result in a one time increase in prices. It does not trigger some kind of a continuous increase in prices we call inflation.
Mosler: Prof Perelman on high rates causing inflation, 1996:Fri, 12 Jan 1996 18:34:26 -0800 (PST) Michael Perelman. Here are my notes from one article on the subject showing how HIGH interest rates can add to inflation. Journal of Economics 100: 1 (February): 149-64. Rep. Wright Patman charged that high interest rates cause inflation. // Hotson articles. Traditional view: high interest => declines in inflation and interest rates in long run. Steven Seelig. 1974. "Rising Interest Rates and Cost Push Inflation. J. of Finance, 29, p. 1049-61 found that interest rates would have had to double during 1959-69 in order for interest rates to be an important determinant of prices. Today interest rates have achieved that level. I have fond memories of Wright Patman, who pushed this idea in the 1960s and before. Driskill, Robert A. and Steven M. Sheffrin. 1985. "The "Patman Effect" and Stabilization Policy." Quarterly They assume that wages and interest are prime determinants of cost and output is demand determined. With a fairly high interest cost share and a relatively interest-inelastic money demand relationship the model becomes unstable, lending some credibility to Patman. Also economies with high interest cost shares in production have worse macroeconomic tradeoffs.Michael Perelman.
Comment: Credit to Jim Bullard for reviving this view under the Neo-Fisherian argument. Also credit to Jim Bullard for failing to advance anything controversial.
Mosler: So, not that it actually matters, a prime mainstream argument about increasing net (deficit) spending to sustain full employment, for example, is 'we're ok as long as the Fed keeps rates low' which becomes moot when it's understood that raising rates in fact promotes inflation.
Comment: Wow -- I agree with you. Esp in a massively indebted economy, interest service can become huge cost-push driver in rising rate environment. But real takeaway is that inflation's a mysterious thing and its causes are unpredictable. Which is why your theories are so dangerous.
Mosler: Read what inflation is here: MMT White Paper.