Letter to Paul Krugman

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

Dear Paul

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

Examples of poor scholarship

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

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

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

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

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

As a note – ELR = Job Guarantee.

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

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

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

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

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

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

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

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

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

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

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

Your earlier post – March 24, 2011

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

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

I also agree that the austerity arguments are based on:

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

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

But, instead you wrote:

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

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

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

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

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

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

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

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

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

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

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

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

Previous faulty analysis about fiscal and monetary policy

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

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

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

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

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

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

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

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

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

You then said that monetary policy had been ineffective because:

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

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

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

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

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

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

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

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

Now to the recent articles.

March 25, 2011 and March 26, 2011 articles

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

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

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

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

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

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

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

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

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

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

In your March 25 article you say:

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

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

Where is the poor scholarship in that statement?

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

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

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

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

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

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

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

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

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

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

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

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

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

You conclude that:

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

Totally untrue as I will explain later.

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

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

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

You wrote:

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

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

You conclusion: “I disagree”.

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

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

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

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

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

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

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

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

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

True or False, Paul?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

However, the reality is that:

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

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

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

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

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

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

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

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


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

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

That is enough for today!

This Post Has 115 Comments

  1. I, not being an economist, have no standing in this particular dispute; but if this was genuinely intended as a letter then I would cut out the accusations of lying, the condescension, and the suggestion that Paul resign for a start. He won’t resign, and the way this was written will simply ensure it goes straight to the Circular Crank File. I’d also try to put all the information relevant to the letter in the letter, rather than saying “read my blog post for details” – the internet is full of people trying to tell the world about their One True Blog – or failing that, refer to published literature on the topic; Paul often refers to interesting articles people send him, and there have been plenty which you have referred to which show the absence of the money multiplier mechanism, that loans lead deposits, etcetera. 2 cents please.

  2. Well done Bill !

    It is important that misleading representations, especially high profile ones, are snuffed out as quickly as possible.
    MMT seems to have a strong base ready to do just that judging by the responses over the weekend.

    As a student of MMT I continue to be excited and uplifted about my daily, weekly discoveries and as I get more confident, hope to play some part in spreading the word. especially in the UK where our most revered financial daily, the FT contines to ignore the subject.

    Thank you again for the continuing education.

  3. I don’t think that Paul gets the idea that federal bond sales are merely a swapping of one set of debt instruments for another, and that there is no net change in balances. He thus misses the fact that the actual issuance of new debt doesn’t occur until the government actually swaps debt (as in new currency) for real goods and/or services.

    Aside from that, Bill, I hope you weren’t expecting a Christmas card from Paul this year.

  4. I think the constructive approach, one that furthers your agenda, would be to not alienate a person who has an excellent media platform for expounding MMT.

    I humbly suggest:

    “Dear Paul,

    Thank you for raising awareness of MMT. I am however alarmed at the way certain arguments are presented and would like the opportunity to talk further on these points. For example your articles [insert one or two examples with polite rebuttals].

    I would welcome the opportunity to discuss this further and to be able to defend MMT to your audience. I have barely scratched the surface and feel any question you have will either find robust answers or help to make MMT better.

    Kind Regards, Bill”

    If that does not work, then you can bring the fight. Doing the reverse wont work.

  5. As expected, a good number of folks chiming in on this. (I expect Mosler, Wray, and Auerback will add to this list, along with others.)

    Corrente: Paul Takes Another Swipe at MMT
    Corrente: Paul Doubles Down On Ignorance, Misconstrual, and Vague Scenarios

    Scott Fullwiler: Paul Krugman-The Conscience of a Neo-Liberal?

    interfluidity: The MMT solvency constraint
    (10 or so other links provided at the end of this article)

    And sadly, Paul sticks to his guns in this third post:
    Paul Krugman: The Euro Straitjacket

  6. Is there any truth in the idea that the 1990s Brazilian inflation was purely a case of (irrational) lack of trust in the Brazilian currency? If there is any truth in that then MMT perhaps genuinely has a harder job because it suggests that sweeping aside bull shit and lies has to be done in a very orderly manner that maintains trust???

  7. While the criteria for Good Scholarship should indeed remain the same, as Bill Mitchell wrote, whether the final outcome is a peer-reviewed journal article, a published book or an Op-Ed piece for the New York Times, the tone can certainly differ. We can be as caustic, or even dismissive, as we like, with presumably good cause, in any of the above but when it comes to personal letters, be they public or private letters, I believe that Civility both helps our side of the argument and helps in a constructive dialogue.

    We have every right not to be civil to people who are hopelessly lost from the realm of logic. Arguing intelligently with determined fascists, for example, is an oxymoron. But Paul Krugman is far from being ‘hopelessly lost’ and actually happens to be one of the people who are doing far more good than harm in the ongoing public debate on the economic crisis.

  8. James, Lindsay,

    Under normal circumstances I would agree with you.

    Krugman writes:

    it’s not a fight I especially want

    This specifically suggests he is looking for an economic cultural fight ala Rupert Murdoch and all his media dailies, FOX news and television included.

    Also he writes this in his NYT blog which is peripheral to his Op-Ed column, I’m doubtful many of those outside of the MMT community took note. He was adequately refuted by James K. Galbraith last year, whether or not you accept him being influenced by MMT, just as the leading academics of MMT Wray, Mitchell, Auerback, Mosler, etc more than adequately refute him in this blog post comments section.

    Krugman’s newer blog posts suggests he hasn’t read, understood or digested the refutation to his previous argument. The MMT community is quite open to legitimate critique, the best seem to come from Ramanan, Waldman and perhaps Harrison.

    Like many in the MMT community I was peeved at the misrepresentation of MMT but now I’m suspicious. I suspect Krugman understands MMT well, if not perfectly, and is just acting to get the ‘MMT brand’ out there. I also suspect this is the backwards cultural American way of promulgating new ideas in the media.


  9. Bill,

    In addition to the above PR advice, I have to remind you that you need to write to the Emperor and complement him on his choice of fabric.



  10. Dear Neil Wilson (at 2011/03/28 at 20:13)

    Yes, I was wondering whether I need a marketing department. But the “cap in hand” approach where I wax lyrical about how excellent someone who abuses a position of power is and then apologise for even raising the topic suggest he might want to contact me seems to be the favoured approach.

    I just will have to get some lessons in being obsequious first.

    best wishes

  11. That’s a funny way of getting the MMT brand out. I think Krugman just arrogantly denounced MMT based on supercilious second hand knowledge.

    Good on Bill for fighting his corner. He sees things as they are and speaks his mind truthfully as he sees it. Were he to do so differently he wouldn’t be Bill and we wouldn’t be sharing his great knowledge and insight.

    Unless Krugman is a bigger man than I credit him, he probably gave up after a few para’s. I’d like to see his defense if he has one. What would really make my day is to see/read a rational debate between the two. I’m sure Bill is up to a non-emotive dialogue. Can Krugman’s cocky ego deal with such a direct Aussie style?

  12. Well, if this letter is intended to be send I agree with @JamesH, that it needs some editing. But it isn’t, is it? Over the weekend I read many blog posts in response to PK’ two ‘MMT’ posts. A lot of hand waving and “you misrepresent us” and honest attempts to convince PK. My personal opinion: Any attempt to convince PK on something economics he’s not already convinced of is delusional. I concur with the author of this blog post: The faux left trinity PK and Mankiw differ on economics only marginal. The only major difference I see is that Mankiw is the official spokesman for the top decile of the population and PK speaks for the other 90%.

  13. [Bill edit: CMike provided a list of typos and grammar problems with my post – thank you. Then his comment continued]

    Prof. Mitchell if you’ve all ready sent this letter, you needn’t worry about your fellow PhD noticing any of these trivial errors or, rather, not any of those that appear after the first one. Most likely Prof. Krugman will not be reading past the first couple of insults directed at him early on in this missive.

  14. In my opinion Paul Krugman sticks to the rational expectations model which he thinks is good enough to explain the reality. That’s why he clearly doesn’t understand the MMT – even if his intentions may not be sinister. There’s simply no room for analysing the financial flows in the world inhabited by rational agents. The key issue is what happens when banks create credit which is spent by consumers. In one of Paul Krugman’s papers there is an assumption that lending-borrowing occurs between 2 groups of agents. But in real life consumer credit created by the banking system adds extra flow to the aggregate demand and acts in exactly the same way as extra government spending – the usual spending multiplier logic applies. Extra money is in the end withdrawn by the savers, foreign sector and taxation. Prof Krugman’s logic is monetarist in essence – it is the quantity of money which determines the outcome outside of the liquidity trap area. However if prof Krugman acknowledges that monetary flows not stocks directly influence the economic activity, and the banking sector is at the centre of the system, he will instantly spot that during a deep recession some agents choose to deleverage. This makes the explanation of the deflationary process simple and obvious. Credit is repaid (bank money destroyed) what creates a gap in the aggregate demand. The spending multiplier works in reverse. Someone has to dis-save unless the government steps in. Firms reduce investment and people hold cash because prices and asset values are falling what makes things even worse as a positive feedback kicks in. So are we condemned to suffer a depression? (This is what the debt-deflationists think).
    The only way to push the economy out of the ruts is to fill up the gap in the aggregate demand by government spending. Not by another round of Quantitative Easing or by playing with the inflationary expectations to force agents to dis-save. By applying a fiscal stimulus – exactly as the MMT scholars advocate.
    Once the economy starts growing again it is quite easy to create a fiscal drag even if bonds are not used to offset or “finance” anything. It will be enough to start taxing banks a certain percent of the value of their assets per annum. This will not lead to any redistribution of the income towards “savers” – the deposit rate can stay low but credit rates can be as high as required to slow down the investment activity leading to overheating the economy. This could fully replace the usual monetary tools and prevent the unchecked growth of the finance industry, leading to the Minskian-type instability (saving propensity of the rich people will be realised by buying firm equities rather than money hoarding within the banking sector).

  15. I agree with Stephan – Krugman is paid not to understand this stuff, or to pretend not to. I also suspect he won’t read past the first few paragraphs.

  16. Yes Bill you can see his ‘tell’ right in the title: ‘wonkish’

    Is he embarrassed to be an economist? (so-called) He should be embarrassed alright, but not for intending to educate his readership.

    Indeed the fact that he thinks it necessary to ‘tip off’ his readers that the post contains some detailed information is quite strange if you think about it…

    Great response here and in the NYT comments Bill.

    YOU are a scholar!


  17. I agree with Bill’s characterization of my role in this debate. I was a student of Godley (and even more so, of Kaldor) many years ago and a close observer of monetary policy during my years on Capitol Hill, so this material came easily to me. But otherwise I’m peripheral, as stated.


  18. Bill,

    Steve Randy Waldman has the right tone for someone who wants to pull Krugman up on details. This post has no sense of genre. Take this comment “Then you compared the US to Ireland which is another false comparison. Greece and Ireland are comparable because they are part of the same monetary system.”

    Whenever anyone uses an analogy there are things about the analogy that are apposite and things that are not. Do you really think that Krugman is unaware of your point? You unaware of his, which is that he’s trying to communicate in a clear, shorthand way – and a way which you might interpret as being not deliberately misleading.

  19. Bill,

    This article (or version of this) would be better served if you can get it published by the Nation. I would pitch it that Krugman is using the Times as a club and someone (like you) needs to be able to respond in an equally open way.

    Sending him a letter (email) will just confirm how weak the MMT voices are.

  20. The responses on the NY comments page and on the internet were LOUD I thought.
    I’ve wondered though how MMT can be, for want of a better word ‘Instutionalised’ and by that I mean there is one umbrella organisation that speaks for the movement. Have the core developers ever considered this?

  21. First of all, a letter is private. As this has already been made public, it is what is it is. I think in the context of the blogosphere, which needs controversy and passion to get people to take notice, the tone is fine and given the curent economic conditions, more than appropriate.

    The real audience for this post are people who consider themselves progressives, read Krugman to have some level of economic understanding, find out about this controversy and start to learn what MMT really means. It is disappointing that those who have progressive credentials in the media can be so wrong, but I think that is the only way you get on an institutional soapbox in today’s world.

    Still, the deliberate misrepresentation is inexcusable for an academic and someone who holds some authority in the progressive community.

  22. Bill, I’m just trying to comprehend the world of economists. You travel across the world all the time but do MMT economists not get to chat things over with non-MMT economists? I can understand disagreements but this seems more a case of incomprehension. Is it a case that non-MMT economists “sense” that MMT has some lurking catastrophic flaw but can’t put a finger on it and so beat around the bush?

  23. I don’t know Krugman’s intentions, but the form of his behavior is quintessentially New York Times. Like the Times for American culture in general, he has established himself as the arbiter of establishment American Liberalism. He is defending the bulwarks of the American elite from attacks by the left in the same way that David Brooks or Abe Rosenthal before him defended it from the right. Should Krugman concede an inch of this territory, what with Bill, Scott Fullwiller, Randal Wray at the ramparts and the whole legacy in the US of the Galbraith clan there but a couple feet away for all the world to see, he looses his position as gate keeper of the left.

    Paul is a big boy abusing a very powerful pulpit, whether accidentally or on purpose, in support of a financial oligopoly determined to control outright the levers of American power they must now rent through the institutionalized bribery of our electoral theater. (apologies if I misspelled anyones name!)

  24. I’m a little bit surprised by the level of circle-the-wagons defensiveness and temperamental whining I have seen in some of the blogospheric response to Krugman’s two pieces. If MMT defenders want to have the impact on the public sphere debate and on actual government policy that I’m sure its adherents are hoping it can have, then these defenders need to develop a thicker skin and a more constructive style of engaging in the broader public sphere. (I think Randall Wray is one guy who does a very good job when he takes the MMT case to the public, and knows how to refrain from the dramatics).

    Krugman has a prominent public platform. His two pieces were critical, but not hostile. Really, people should see this as an opportunity, and not an attack. It’s an opening. Don’t close the door on the opening by jumping into the space with a lot of childish tantrums. Don’t go into a defensive crouch and go back to preaching to the converted.

    If Krugman has misrepresented MMT, just correct the misrepresentations, look for ways to engage him in further public debate and move forward.

    Has anyone pitched a New York Times op-ed?

  25. Dan Kervick,

    “If MMT defenders want to have the impact on the public sphere debate and on actual government policy that I’m sure its adherents are hoping it can have, then these defenders need to develop a thicker skin and a more constructive style of engaging in the broader public sphere.”

    Yeh, but he called us wonkish!

  26. I agree with Stone that it would be great to have an MMT analysis on the Brazilian hyperinflation of the 1980s to early 90s. Brazil has a huge economy that has long been on the spotlight of most analysts and it has recently emerged as a major player on the world stage so a well researched paper giving the MMT perspective on the subject could do wonders to bolster the credentials of modern monetary theory among mainstream analysts.

    Prof. Mitchell wrote some months ago an excellent post on Zimbabwe, but this country has a small economy with very specific problems (land reform, etc) so it is difficult to extract generalized conclusions for the causes of hyperinflation from its study.

    But a paper on Brazil would surely nail it. I gather Profs. Mitchell and L. Randall Wray must be quite busy writing their macroeconomics textbook (btw, is there an estimate for its publishing date already?) but surely other proponents of MMT could do it.

    And of course we Brazilians would be much grateful!

  27. This isn’t hard.

    You can create “money” by issuing:
    T Bills
    T Bonds
    Bank Credit

    They are all just different kinds of “money” that have different maturities, interest rates, and tend to affect various prices in different ways (for instance, bank credit extended for mortgages tends to increase house prices most directly).

    You can reduce “money” by taxing it out of existence or allowing it to go into default, and you can slow its growth by slowing the growth of the factors above.

    When the government or a bank issues “money” it does so in order to take control of real resources. It can do so only if people want to do so voluntarily, and their willingness to do so depends on the amount of “money” outstanding relative to goods.

    One way it can take control of a lot of real resources is to destroy a lot of money (taxes) so that it can issue a lot of money without causing inflation.

    However, taxes have various effects on society that limit how much the government wants to do that, and default of certain assets is deemed disruptive. So one way it can issue a greater quantity of money without causing inflation is to issue different kinds of money, namely interest bearing money. People are more willing to accept interest bearing money in exchange for real resources in certain cases. Whether people will accept that money and give up their real resources depends on the maturity and the interest rate. If they don’t meet a market test, people won’t give up their real resources for cash and bonds they judge to be worth less they the resources themselves. They will demand higher amounts of cash/bonds/credit in order to part with their real resources. This is most noticeable when the supply of real resources is tight (full capacity).

    Interest bearing money locks the government into certain patterns of money creation that may or may not be desirable for society. Imagine a society where everyone pays 50% of their income in taxes and 1% of the population receives very generous interest payments on debt. Suppose that is all set up in such a manner that the interest payments are slightly higher then the money being destroyed by the taxes so we get mild inflation. However, this is a pretty shitty society, all of the spending power is going to a few who control all the new money.

    Now you might say that the government doesn’t have to do this. Even if you assume it doesn’t want to cause inflation, it could just decide not to pay money on the bonds and instead lower everyone’s taxes so that the net creation rate of money was the same but distribution is different. It could, but how likely is it too? Default or missed payments on “risk free” debt has its own problems.

    In a full capacity scenario, if you drive interest rates on debt down to 0% to avoid bond payments then nobody wants to exchange their real resources for securities with negative real interest rates, and they demand more and more in exchange for their real resources (inflation).

    Similarly, non-bond political obligations with strong interest groups are bond like in that it would be very difficult to get rid of. So while you could technically cut promised Medicare and SS benefits in the future if they grow too large, that is very unlikely to happen. The more likely political outcome is that the sovereign will need to raise taxes in order to sterilize all the money being created to meet these implied demands, and those taxes may or may not be considered too onerous or have unpleasant side effects.

    And that’s what it all comes down too. The entire MMT framework seems to boil down too:
    “If we have full capacity and inflation picks up, we will just do X, Y, and Z to stop it.”

    But this ignores the fact that actions you take in the current period (issuing interest bearing debt, issuing political promises, etc.) may make actions X, Y, and Z difficult and costly in the future regardless of whether they are technically possible.

    It may be that the correct course of action is to focus on now and worry about the distant future when it gets here since forecasting the future is difficult, but that’s a political choice. Its open to debate. It has pros and cons. Its not some black and white “free money without a care in the world” system that MMT promotes, like they and only they found some pot of gold and the rest of us just don’t realize it. Yes, the government can issue its own currency, we all get that. Start thinking about the second order effects of that instead of marveling at the obvious.

  28. krugman might have been the tool to bring MMT to broad audience. Bill decided to throw out the tool.

  29. Krugman put up two posts by Bill linking back to this site.

    Unfortunately, anyone who clicks the link will certainly be put off by the mean-spirited tone of this piece.

    What a waste.

  30. Peter,
    For the polite version see Marshal at ND2.0:


    You can’t blame Bill for the elite’s resistance to challenges.

    Wolf, Krugman and Stieglitz all seem to be teetering on the brink of cottoning to MMT, but each waiting for the other to go first!

    As Samuel Jackson put it (almost) in Pulp Fiction, “That (Milton Friedman) on Green Acres must have been one charmin’ mutherfuckin’ pig!”

    Almost every economist that met him seems to have failed to notice that he stuffed Occam’s Razor through the slot in the back of his medicine cabinet, the absence of which lent the next thirty years of “economics” an exponentially increasing remoteness from reality.

    But it sure has been fun, and the pay for those happy without Occam’s shave like Barro, Manikew and Treasurer Tim, has been so much better!

  31. Dear Bill I owe so much from you.
    If possible please publish your macro-economics textbook before I finish with my graduate study.
    I’m currently using Input Output model (in energy) and some econometrics arguing for govt policy in energy and environment would be beneficial to society (as long as there are available resources). I am facing resistance (earlier) and was forced to adopt micro-foundations in the model. But thanks to you, (Scott Fuwiller, Randall Wray, Godley, Kalecki, Mosler, Marc Lovie etc) I’ve managed to resist ‘govt budget constraint’ presumption (if not, I would’ve certainly used CGE model by now).
    With your macro-economics textbook (and with your insight on Kaleckian theory) you would definitely make my research easier at the end, and hopefully I could come up with more coherent theoretical argument in my work with that.


  32. Stick to your guns Bill. I can\’t belive some of these comments.

    The real effects of Austerity outweigh the professional curtesies of academia and, as you have said many times, the doves are more dangerous than the terrorists.

    Right is Right. They are wrong. XXXX em !

  33. Aha. There seems to be a split opinion on how MMTers handle the Krugman posts. Some view it as an opportunity to go ‘mainstream’ and think any attack on Krugman is a waste of this ‘huge’ opportunity. I beg to differ. Normally I’m quite pragmatic and I’m not a big fan of Bill’s posts bashing the likes of Dean Baker, Jamie Galbraith et al for some subtle differences. But Krugman’s posts are in a complete different league: Basically he claims the US government is constrained in spending by facing solvency issues? This is 100% mainstream economic ‘reasoning’ (aka nonsense).

    Also I find it very interesting and telling that the usual suspects (Brad DeLong, Mark Thoma, …) who cheerlead any blog post by Paul Krugman are suddenly very very silent. It’s like the are screaming out of the window in their respective ivory tower: Hey Paul! What’s wrong with you? How can you do this to us? How can you lend this crazy MMT lunatics your big megaphone?

  34. Thank You Professor Krugman,

    For presenting MMT proponants with an oppertunity to correct your Neo-Liberal misconceptions! We understand that you are paid not understand MMT and you are therefore unreachable. But take heart, even tho you have scraficed your credentials as a serious academic and have shown yourself to be without scruple, you have done the MMT community a service. You have allowed us to come together. We are strenghtened and buoyed by the oppertunity.

  35. Stephan,

    You can attack Krugman’s IDEAS without bile and venom.

    Krugman could easily moderate out Bill’s links. He didn’t.

  36. stone: Bill, I’m just trying to comprehend the world of economists. You travel across the world all the time but do MMT economists not get to chat things over with non-MMT economists?

    I don’t know about economists, but that is the case of academics in every field, even in science. Sooner or later different schools of thought, mainstream or not, will have their own conferences, journals, etc. where they will be end up reviewing papers of each other, talking to each other, only to increase their confirmation bias. Whether in person or by electronic means they seem unable to communicate with people from other schools. MMT blogs are no exception.

    Does someone think Krugman will read the letter? It’s too long, I couldn’t even finish reading it.

    Looks like Jose joined us in being interested in an MMT explanation of the Brazilian hyperinflation. I think in the case of Brazil and Argentina Warren blames the govt for printing money to pay the external debt. Could be…

  37. @Adam
    Sure. I’ve never said that attack without bile and venom is impossible. What I did say in my first post is: it does not matter. Krugman won’t change his opinion whether you attack him with bile and venom or not. This is a phenomenon unique to economic science. The gurus in the first row will always beat their breast about being on the point whether you have a good argument or not. And to be fair: I’m not sure whether Bill does not belong in this ego maximizing league. Certainly I’ve never heard from him “I was wrong” ever. And I’m reading his blog now for some time daily. That said: in his critic on Krugman he seems to me NOT wrong and on the point.

  38. For those here in the comments who have suggested that Bill should have been more flattering. “polite”, and less blunt with Krugman, may I suggest that it is Krugman that closed that door.

    Bill, myself, and nearly 100 people all submitted comments on PK’s original post on Friday. Many, such as Bill and myself, within just a few minutes of it’s posting. Krugman moderates his comments. All comments on the original MMT post from Friday were held back and not published for 24 hours. PK had ample opportunity to read the polite comments that pointed out factual and research errors. PK chose to double-down, ignore the comments and ignore MMT. He wrote the second post and released the original comments at the same time.

    Reality is PK makes a similar error as the Chicago boys. He learned “how the world worked” over 3 decades ago. He doesn’t have and doesn’t make the time to go back and read new research or research that differs from his point of view.

    MMT is very, very threatening to PK. If MMT is widely accepted, it means PK is not the “voice of the progressive” left in the U.S.- loss of stature and ego and probably a loss of income from speaking fees. If he reads MMT, then he has to re-write his textbook and explain to many professors why he had it wrong in the first place. There’s a lot of money at stake there.

  39. Dave,

    Don’t insult our intelligence us by saying this is easy, debunking a lifetimes work in a paragrah, then showing your ignorance with a straw man comment “free money without a care in the world”. At least try to nderstand the subject you critique before throwing in your 2 cents.

    Jeez, almost as bad as Krugman.

  40. @paco

    that seeking alpha article mostly deals with the problem of democratic governance, rather than with mmt itself. remember, mmt, at its core, is descriptive, not prescriptive. the author vacillates back and forth between the two to the point of incoherence

  41. So, apart from misunderstandings, what is the big disagreement about? Deficits are ok, until there is full employment, according to both of you. The rest seems to be “wonkish”.

  42. I understand the passion for the fresh, important and correct insights into macroeconomic functionality that you (and the others you mentioned) have developed and shared. But it is sadly the case that just because someone is right (i.e. correct) it does not mean that they are going to win. Tactics matter. Reputations matter. Power accumulations matter. Alliances matter. Enemies matter. Audiences matter.

    You should have slept on this letter for a night, and freshened the draft in the more engaging light of a new day for the reasons discussed in the comments above. “You can catch more flies with honey” and all of that. Also, you are writing close on the heels of Steve Keen’s little mis-directed diatribe on Krugman’s old interstellar trade joke piece, so he might be feeling a little prickly toward Australians at the moment anyway.

    There is also the possibility (as suggested by Senexx @19:56) that he is playing Four Dimensional intellectual chess… anticipating that genuine economic insanity is about to be revealed in the context of US Congressional intransigence on the debt ceiling matter, austerian budget prevalencies, and the near universal policy surrender observed regarding the US employment debacle. I know that our other Four Dimensional chess player here in the US has been conceding early and often–even when playing checkers–but if there is even only a slim chance that Krugman was inviting you (and/or Randy, et.al.) into the VSP tent… you should find a way to engage.

    Perhaps you can exploit the international dateline, retract the first draft and issue that more engaging draft yet today. Better yet, call him and talk. Remind him of his “Mind-Changing Events” post of ten days ago. Recall that 9-dot outside-the-box puzzle. Invite him to Oz for a walkabout to develop a conversation that might shift our paradigms toward the two new schools of thought we need: Floodwater? (MMT-ers, with that tasty neo-Lerner flavor) and Drought? (Keen, with the sobering financial system foundation built by Minsky).

  43. Bill,

    Does your rock band do “My Way” by Sinatra?

    Also, if you’re actually signing off your letter to Paul with: “That is enough for today”,

    a) That is hilarious
    b) It also officially makes you the Walter Cronkite of the economics profession (most trusted man, etc.)

  44. @Lee
    Flood and drought? Lerner and Minsky? Once we’ve beamed the thinking of Lerner and Minsky into the brains of our economics overlords we can proudly proclaim: Mission accomplished. And then I won’t even complain to wear this ridiculous Navy life jacket while making my V announcement.

  45. @Stephan

    F&D…just striving for an Oz allusion, circa 2010/11. You like ‘Bottled-Water’ and ‘No-Water’ better?

    Lerner was occasionally beamed into economists heads back in the day; some (e.g. Dernburg and McDougal, McConnell) mainstream macro texts (pre-RatEx) had nice expositions of functional finance. Krugman, ironically enough given this topical thread, has written as much as anybody about the unfortunate loss/abandonment of that knowledge.

    Minsky’s balance sheet and risks of leverage emphasis seems to have been more rare. Kenneth Boulding developed a balance sheet approach quite systematically in his first post-war principles text, but nobody picked it up to carry it forward after the Samuelson era commenced.

  46. I think the only person to actually get what’s going on here in the last few days is the blogger Winterspeak, who hit the nail on the head with a post of only several lines, titled: Krugman says “MMT”.

    That’s the whole point. Empirically speaking, Krugman is quite a bit closer in economics profile terms to being “the center of the universe” than the MMT blog of the same name. I’m sure this observation will not be received warmly by Mr. Mosler, who is a grand master of MMT, with a comprehensive understanding of monetary operations, and fully credentialed and warranted to be so.

    But most of economic blogosphere, since its inception, has been obsessed with getting some sort of recognition from this man Krugman – just witness the tragic pathos of the monetarist blog “Money Illusions”, where every second post is a response to something Krugman said, in a desperate attempt to get some sort of recognition from the man himself. (What else could it be?). And there are other regular hangers on who are well known.

    To its credit, MMT doesn’t stoop within a light year toward that level of genuflection with regard to Mr. Krugman.

    But bear in mind that the man himself has finally engaged. That is important. In that context, he has written periodically on the nature of his time limits and his word limits on individual posts at NYT. For that reason, I would cut him some very small slack, at least in his use of the phrase “deficits don’t matter”, which I suspect has been partly misconstrued as to its real intention. In what way did he actually mean they don’t matter? I suspect he will elaborate further, even adjust, in due course. Adjustment is better than nothing.

    That said, what he has written does seem to indicate quite clearly that he doesn’t really understand the operational and accounting aspects of central bank monetary operations. The question now, since he has finally uttered “MMT”, is whether he is willing to learn. We shall see – because now he is invested. I think this is going to be more interesting than some may imagine, and that the main event is yet to come.

  47. “…just witness the tragic pathos of the monetarist blog “Money Illusions”, where every second post is a response to something Krugman said, in a desperate attempt to get some sort of recognition from the man himself.”

    heh. i think sumner is stopping blogging, at least for a while

  48. JKH,

    Absolutely correct. Though I would note that absent blogs like “the Center of the Universe,” this one, etc., and the growing list of MMT bloggers and supporters, Krugman likely would never have felt compelled to say “MMT,” and certainly wouldn’t have felt a need to do a follow up post 24 hours later. The blogs are potentially the great equalizer in a very closed, group-think-like academic field.

  49. I’m a bit stunned that Bill thinks that the only alternative to hostile insults is obsequious cap-holding. I understand that this is partly because he has a view that the real enemy is the “deficit doves”. All I can say is that this is the same POV that lead the German communist and socialist parties to spend the 1930s viciously attacking their “real enemy”, the social democrats, in the comfortable knowledge that they could surely beat the Nazis once they’d united the left. Striving for ideological purity is a fatal error for radicals and reformers as it favours an authoritarian mindset, prevents recognition of common enemies, and divides rather than unites. Krugman may well be incorrect, but does Bill seriously believe that if the US followed Krugman’s version of neo-Keynesianism that they would be worse off than they are now?

    If I had just drifted into this post by following a link from Krugman’s blog, I wouldn’t see any difference in style and tone from the personal blog of an unqualified Austrian goldbug – both Austrians and Bill accuse Krugman of lying, wilful misrepresentation in the interests of the powers that be, say he should resign, that they know the one true monetary theory, etcetera. The overall impression gained by the layman is that MMT=Crank theory. Personally, I believe that MMT is correct, because I’ve done a certain amount of research into the imposition of taxes by colonial countries as a way of gaining power and creating a dependent economy – old time Chartalist stuff. But the average PK column reader isn’t going to know any of that.

  50. Initially my take was that even though it was a quasi serious intervention by Krugman that it was somewhat hopeful because he acknowledged something to the left of him and it brought, however crudely, MMT into the mainstream light of day. And his mistakes have given me the chance to read proponents of MMT clarify their positions in a somewhat more digestible and interesting way.

  51. @JamesH,

    Unfortunately the mainstream of the profession has a habit of misrepresenting and ignoring its critics. So the chances are that Krugman never bothered to read any of the MMT literature, certainly never tried to understand it and relied instead on an impressionistic sketch he had been working up in his head which he then projected onto the page. Bill is right that is poor scholarship and displays a total disregard for the integrity of other scholars. Bill playing it polite or not does not really matter. What matters is that Bill’s rebuttal was directed at an accurate rendering of Paul’s misconceptions / projections / hatchet-job.

  52. Why did the chicken cross the road?

    Maybe PK wanted to position himself at the centre by distancing himself from the extreme money printers (MMT-ers). He has to ditch much more than just the money multiplier to understand MMT (see page 393, Macroeconomics Second Edition, Paul Krugman and Robin Wells). He has staked too much on the neoclassical reinterpretation of Keynes to change his mind after one discussion on the blogs.

    The “nuclear option” response from Bill came after an early attempt to engage in discussion.

    I believe that there might be a second and third bottom in what PK wants (or doesn’t want) to achieve. If MMT recommendations are implemented there will be no need to fill a 6% gap in the aggregate demand as saving propensity in financial assets will decrease. If we know that bonds are no longer available, there is a non-zero inflation rate and that interest rates on deposits are low (as taxes are used to mop up the excess of liquidity) – nobody who has an excess of money would “save” in deposits. Rich people will save by buying equities – thus recycling money. The great process of financialisation will be undone and we’ll be back in the 1960-ties. Banks will no longer be vehicles to redistribute 40% of the profits (that number was mentioned somewhere by Steve Keen, I haven’t verified it). But does PK really want to dismantle the Industry?

    The third bottom of the story may be related to the unique position of USD as the global reserve currency. Once MMT is implemented the saving propensity of the foreign sector will most likely decrease as well. No more M-M+ circuit as holding financial assets will no longer be the safest way to earn even more financial assets. The M-C-P-C+-M+ circuit and to some extent M-C-M+ will be the only available. This change can be quite dramatic as the structure of global commodity prices may change. Free cargo may no longer arrive from China and suddenly exchange rates will start moving in such a way that the trade balances will net to zero. At the same time there will be a much greater demand for labour in the US as more products would have to be made locally. But this may hit profits of some of the corporations and the real austerity may hit some middle-class consumers.

    This will also be the end of “Superimperialism” (as defined by Michael Hudson). But does PK really want this or does he want to muddle through without changing anything so that things will eventually get back to “normal”? I personally believe that without rebuilding productive capacities in the US and massive investment in the R&D the days of the American global supremacy are numbered anyway. So MMT is most likely the only chance for the America to stay relevant in 50 years time. But does PK understand this? Andy Grove does understand that without investment the race will be lost. But Andy Grove is an engineer and entrepreneur, not an economist… Maybe even someone has told President Obama that we have another Sputnik moment – he mentioned that term. Again – but does PK understand this? He seems to be stuck in his rational expectations models while the members of the Politburo of the Chinese Communist Party think what will happen when we run out of the cheap oil…

    If what I wrote is incorrect I would be very happy to get feedback…

  53. Off on a tangent.

    The articles in The Nation and Fortune have been great for at least beginning to get “publicity” for MMT.

    I would love to see Felix Salmon or James Surowiecki write about MMT. They do more business/consumer writing but I could see either tackling the subject and they have influence.

  54. You can’t teach an old dog new tricks, Bill.


    MMT won’t change America mate. Changing its system of government will. Unfortunately, in America, after every Depression, once you are stuck in the even horizon of an economic black hole, there is no escape. The room for civilised discussion or debate, empirical data analysis or mutual respect is non-existent. It’s a battle that is lost by design and default (but at least in the Panic of 1819 they offered debtor relief, spurring a recovery – that would be unthinkable now).

    So I’ll say it again, we are all better to focus MMT efforts in Singapore, South Korea, Switzerland, Liechenstein, Iceland and Norway (and, hopefully, the EU countries will eventually abandon the EU in due season – Finland, Austria, although several German states, thanks to citizen initiated referenda, are not ashamed to spend money for good infrastructure). Note most of these countries have excellent education systems (Singapore, Finland, South Korea) and maintained low unemployment during the 1970s (minus Germany) and thus aren’t afraid to development their citizens. America, by contrast, is a lost cause.

  55. Re: “American global supremacy”

    What does that mean and why does it matter? Seems like a diversion from real issues. The U.S. has its share of smart people so it will have its share of prestige firms. Even if the government does everything wrong.

  56. Wow. Bill, this is just… too much. Being this patronising towards a 23 year old student would be bad, but when its someone who’s contribution to the field is as significant as Paul Krugman’s it makes you look a bit delusional.

  57. Well done to Bill for giving a grub like Krugman a reality check.

    Afterall, if Keynes was a little more direct with how Hicks misrepresented the General Theory then the Paul Krugmans of this world would not have a leg to stand on.

  58. vitimothy,

    Krugman’s contribution to economics has been in trade theory.

    if you think that is significant then you are entitled to that opinion.

    With respect to macroeconomics Krugman has given us absolutely nothing.

    His discussions on the liquidity trap and Japan as an example are just plain ridiculous.

    Jan Kregal has shown us why: http://www.levyinstitute.org/pubs/wp298.pdf

    What we learned from that paper is the Krugman doesn’t understand Keynes.

    Krugman gets caught caught somewhere between a Hicksian / IS-LM interpretation and a General Theory version of a liquidity trap by failing to differentiate between the two.

    Krugman is a pretender.

    End of story.

  59. Dear Alan Dunn,

    Last year I wrote a review on the development of BOP/currency crises lit. There is an /entire literature/ that has grown up over decades around Krugman’s seminal paper. Do you have any idea how much influence this one bit of work has had? What is your contribution to economics? What’s your RePEc ranking? How many PhDs have you supervised? How often do you see the phrase “Alan Dunn’s seminal paper”?

    “His discussions on the liquidity trap and Japan as an example are just plain ridiculous.”

    “Krugman is a pretender. End of story.”

    You’re obviously quite mad.

  60. “You’re obviously quite mad.”

    and you’re trolling. the economics mainstream does not need you to ride valiantly to its rescue. the constant appeal to authority isn’t a good look

    i like krugman’s work on economies of scale! i wrote an undergraduate paper based on that one

  61. Vimothy,

    Hook, line, and sinker.

    Begging to the authority of ideologues.

    Too easy. You disappoint me.

    Now fly away.

  62. Policy industry participants love to argue a long way from the coal face. The coal face is political and a different world to the policy industry itself. Who are the rising politicians who support MMT? Can these rising politicians explain MMT to a truck driver in 5 minutes? How can the MMT politician get the truck driver to vote for them on a MMT platform? What exactly is in it for the truck driver? Macro Smackro if the truck driver (micro) does not vote for it forget ever getting policy changed. Policy industry may read Krugman but the truck driver does not give a rats arse who he is and nor do I. Talk about over rating someones influence. Policy celebrities are a policy industry construct to support its self importance. Their influence is over rated. Your letter screams your frustration Bill, forget the Policy Industry and convince one politician the truck driver will vote for it and your snowball is underway.

  63. Adam (AK);- “Rich people will save by buying equities – thus recycling money. The great process of financialisation will be undone and we’ll be back in the 1960-ties. Banks will no longer be vehicles to redistribute 40% of the profits”

    -I don’t see how a stock market bubble could do anything to reduce financialization especially if whenever the bubbles pop the top priority of the gov is to re-inflate asset prices with a “jobless recovery”. Stock market bubbles, housing bubbles and commodity bubbles are the life blood of the hedgefunds and investment banks.
    To my mind the key danger of our monetary system is that asset price inflation becomes something that can be set to whatever level is politically expedient. Since asset price inflation has now become the source of funding for those who fund the politicians, it is hard to see a way out.

  64. Bill,

    Krugman’s critique of MMT is clearly muddle-headed and fallacious. But I have a simple question for you:

    Do you allow for the possibility that there is a world in which the private sector “stands down” at a faster rate than the public sector “stands up”?

    Or to put this differently:

    Have you considered the possibility that the marginal propensity of the private sector to save could be linked to AND larger than the government’s willingness to spend?

    For in this “special case” it is possible for a nation to find itself in a debt trap. This special case need not lead to hyper-inflation or involuntary default, but it is still troubling to some, including myself.

    In this special case debt/GDP rises inexorably as the private sector is slowly eroded. We are left with state socialism (with quasi-market prices). This may not be a bad outcome to some, but it is a value decision.

    Moreover, this special case may not be especially uncommon. I would argue that Japan provides one such real world example. Japan’s private sector has shrunk massively over the past two decades. Property prices are down over 50% and the Nikkei is down over 80% since the Bubble Economy burst in 1990. (I’ve lived in Japan throughout this period.) And debt/GDP has skyrocketed. Yet in perfect accordance with MMT thinking, there has been no default and no hyper-inflation.

    I have no doubt that Japan can keep the game going for a lot longer. But at some point Japanese policymakers, and the Japanese public, might decide voluntarily to try another method. Regime changes do occur. And if this is a possibility, then the private sector in Japan can be expected to continually react unhealthily to ever larger debt build-up. The debt trap might continue until the economic regime change occurs.

    Bill, I know you really don’t care much about bank executives, corporate CEOs, or hedge fund managers. But some people think they have a role to play in making an economy dynamic, vibrant, and more efficient. To the extent that the rentier class is euthanised we will have a very different system to live under. Do you understand that MMT could lead to a very different system?

    If Paul Krugman were post-MMT, the way I am, he might be more effective in challenging you. But he is still pre-MMT along with his right wing austerian opponents. His comments were shameful, yours are philosophically dangerous.

    respectfully yours,

    Nick R.

    Kyoto Japan

  65. Bill,

    You do not need a “PR department” or even a “PR” approach. But extremities are not the only choices.

    All that has been suggested is a more moderate tone in your Open Letter so as to better get through to your audience, which presumably is not just Krugman.


  66. stone,

    I obviously agree with you but reducing leverage will dampen the negative effects of bubbles on the real economy. Bubbles were around for at least several hundred years. What may make some difference to the stability of the system is whether I risk my own money or whether I can gamble the borrowed money or deposit my money in the bank which has lent money to gamble. I think that this is the key difference in terms of risk redistribution and “moral hazard”.

  67. “the economics mainstream does not need you to ride valiantly to its rescue.”

    The economics mainstream does not care. Nobody cares–just you guys.

    “the constant appeal to authority isn’t a good look”

    What’s wrong with treating people with a modicum of respect? No one is going to care, otherwise.

  68. Adam (ak), Is reducing leverage a core part of MMT or is it an optional add on at the mercy of political persuasion? It seems to me that many people on here want to have a system with very large stocks of bank reserves paying a negative real interest rate. My impression is that all asset classes would then inflate until the expected return from each asset class was the same as that from the reserves paying a negative real interest rate. In other words all assets/commodities would inflate into bubbles and crashes. Although overall savings would gather a negative rate of return, the elite players (ie hedge funds etc) would do extremely well, the moms and pops and pension funds etc would be scrabbling around playing into the elite’s hands. Lehmans was lent lots of money by the Japanese in the run up to the 2008 crisis so Bill repeatedly saying that Japan has not had a bubble for the last 20years seems a mute point to me. If people interpret MMT with global asset price stability as a core aim- then I’d have no worries about it. But if global asset price stability was a core aim, then wouldn’t developed nations probably need to have asset taxes that pretty well matched gov spending?

  69. Ok but I have a problem for you:

    There are this accounting identities:

    Deficits = Private Savings + Current account deficit

    Deficits = change in government debt + change in high powered money

    Let’s assume that debt=100% of GDP deficits=10% (case of US).

    Now please answer the question: what would happen if investors didnt want to hold US debt? What are the possible implications of these equations (at full employment)?


  70. “Nobody cares-just you guys.”

    Yes we know nobody who follows mainstream economics cares.

    That’s why there are millions of people without work across the globe when it is oh so simple to sort that problem out.

    It’s just us guys that care enough to think out of the box and to envisage a system that solves that real problem today.

  71. “That’s why there are millions of people without work across the globe when it is oh so simple to sort that problem out.”

    If the stakes are so high, why sabotage your chances of changing things by treating even your natural allies like idiots? Bad strategy and bad form.

  72. I’m more than willing to flick the switch on bank executives, corporate CEOs, and hedge fund managers if it means jobs for the unemployed and more hours of work or income for the underemployed.

    I’m also putting my hand up to flick the switch on Academics that sell out to big business. Especially, those writing favourable reports for the Icelandic Chamber of Commerce and then pocketing $124,000 for their efforts.

    None of these bastards can be trusted.

  73. Tom,

    “what would happen if investors didnt want to hold US debt?”

    The deficit is an *outcome* not a target. The MMT policy variables are unemployment and inflation. unemployment is kept low and inflation stable.

    Unemployment would have to be low and inflation stable – otherwise MMT prescriptions would have scaled back public spending or put up taxes to control what it targets – unemployment and stable prices.

    To have a 10% deficit in that state, ‘investors’ have to want to hold US debt, otherwise the deficit simply wouldn’t have got to be that size.

    Under MMT the size of the deficit is shown to be the size of the private sector’s ‘desire’ to hold government financial assets. So if the desire fades away, so does the deficit.

  74. Neil @ 0:09

    “that care enough to think out of the box and to envisage a system that solves that real problem today.”

    You have cared enough to think out of the box and you have envisaged that system. Which puts you in a next phase. You want to be the box. How do you do that? Are strategies, tactics, skillsets the same for persuasion/implementation as for creation/innovation?

    The frustration in the letter and on this thread is understandable and valid, but I don’t think it is going to take MMT where you want it to go.

  75. Neil,

    “The deficit is an *outcome* not a target”

    I’m talking about debt not deficit. Try to understand the difference.

    “To have a 10% deficit in that state, ‘investors’ have to want to hold US debt, otherwise the deficit simply wouldn’t have got to be that size.”

    Look right now in US deficit is of the size 10% of GDP, and debt of the size 100% of GDP.

    Now what will happen if investor now longer want to keep US debt?

    Do you know and understand this equation?

    Deficits = change in government debt + change in high powered money

    If so please try to the answer the question.

  76. Andy:

    Do you know and understand this equation?

    Deficits = change in government debt + change in high powered money

    Even if you stop issuing new debt there is a problem of existing debt that can be converted to real assets. And this is highly inflationary if debt level is high.

  77. Tom,

    “I’m talking about debt not deficit. Try to understand the difference.”

    I understand the difference very well.

    However your approach is the usual one of begging a question. Since you already know the answer you seek, rather than seeking to understand the alternative viewpointsdescribed here with an open mind, why are you bothering asking the question?

    “Now what will happen if investor now longer want to keep US debt?”

    They will sell it to somebody who does – in exchange for a different kind of US debt called US dollars.

  78. Tom, a key to understanding the system is to realize that government debt and money are essentially the same thing. Money is a piece of green paper produced by the government. Government debt is a piece of green paper produced by the government with a date on it.

  79. Even if you stop issuing new debt there is a problem of existing debt that can be converted to real assets. And this is highly inflationary if debt level is high.

    If the debt is sold to someone that wants to save by someone that wants to spend, and this increases effective demand beyond the capacity to meet it when the economy is at full employment, then jack up taxes to quell demand-pull inflation.

    At full employment, income is sufficient to purchase supply unless there is leakage. Taxation, domestic private saving, and saving in the currency by the ROW, i.e, the CAD, constitute demand leakage. If there is too much leakage then offset it with deficits. If there is too much demand at full employment so that there is a continuous general price rise, then there is not enough leakage, so add some with taxation. Converting savings to spending, or private borrowing to spend at full employment can result in excessive effective demand. That can be reduced through leakage to taxation.

    What the government gives (nongovernment net financial assets), it can also take away. The power to issue currency and tax (US Constitution, art. 1, sec. 8, 10) makes government the monopolist. Government is in control of its currency and its disposition.

  80. Neil:

    “They will sell it to somebody who does – in exchange for a different kind of US debt called US dollars”

    Yes but if the only buyer will be Fed and investors than use this money to buy real stuff (at full emplyment)?


    “Tom, a key to understanding the system is to realize that government debt and money are essentially the same thing.”

    I understand it very well but the question is what will happen if invetors want change financial assets (bonds, monetary base) for real assets (properties, commodities)? And the only buyer of this financial assets is the Fed.

    Tom Hickey:

    “(…) then jack up taxes to quell demand-pull inflation.”

    Great but what will happen if investors want to change financial assets of the amount of say 50% (or 100%) of GDP for real assets. And the only buyer is the Fed and we are operating at full employment. Certainly you cant rise taxes by so much
    (50 or 100% of GDP). So a huge inflation (maybe hyperinflation) is a real danger in this situation. Do you agree?

  81. “Great but what will happen if investors want to change financial assets of the amount of say 50% (or 100%) of GDP for real assets. And the only buyer is the Fed and we are operating at full employment. Certainly you cant rise taxes by so much
    (50 or 100% of GDP). So a huge inflation (maybe hyperinflation) is a real danger in this situation. Do you agree?”

    The Japanese have been holding onto financial assets as a huge % of GDP with almost zero interest rates for many years.
    The Japanese did bid up assets prices at one point in the 90’s but after the housing bubble burst they are wary of doing it again. All the evidence points to a savings accumulation and low yields across all asset categories. There is no evidence to suggest you would see Hyperinflation.

    The worst case scenario I could picture is a long serious of bursting asset bubbles. This requires the support of an inane population and corrupt Governance. Not beyond the realms of believability.

  82. Note from Bill:

    To all those wishing to make comments – you are very welcome – including critical comments. Please read my Comments Policy for the protocols accepted.

    I delete personal attacks – like:

    1. “Bill is smarmy and indulges in undergrad hubris”. Fine, I might be and might – but you have to argue a case and address the substantive matter at hand.

    2. “Fiat currency is the road to serfdom” – Okay, you need to tease that out and argue the case.

    3. “Bill is a rude Aussie” – Okay, I might or might not be – that assessment is very cultural anyway. How many non-economists know how economists talk to each other? How many Americans know how Australians deal with things? Do you know how I deal with people personally? etc. But what has that got to do with the argument being debated – you need to engage with the substance. In general, attacks on my style will be deleted if that is all they are.

    4. “Bill’s blogs are too long” – Sorry, I write because I like to – sometimes things take a while to explain. If I just drew conclusions then the blog would be much shorter but given the controversial nature of my work, newcomers would be left thinking I was nuts. I am compelled to provide some background. And writing is also a consumption activity for me … this blog is not all about you!

    So if you are wondering why your critical comment never showed up – you might reflect on its content relative to the policy. You are welcome to reframe the criticism to be consistent with the policy. Then I won’t click the trash button.

    best wishes

  83. The fiat currency system, on which MMT is based, is the monetary road to serfdom. The former soviet union had unlimited powers to allocate resources and create full employment and those powers were unaccountable. A fiat currency has the same powers potentially to allocate resources and create full employment. In a closed economy, the power is supreme through taxes, money creation and enforcement, which is necessary to suppressed those whose wealth is being confiscated or depreciated. Many people in many countries are well on the road to serfdom.

  84. “So a huge inflation (maybe hyperinflation) is a real danger in this situation. Do you agree?”

    The hyperinflationista.

    I’m afraid your preposition is in the same category of likelihood as all the oxygen molecules spontaneously moving to the corner of the room and you suffocating. Quantum physics says that is possible, but extremely unlikely.

    Similarly with everybody in the world suddenly deciding spontaneously to spend all the dollars that they have. That’s a cascade event and will not happen when the economy is managed to low unemployment and stable prices.

    All your questions are framed in the terms “If “. That is called in psychological circles “Catastrophisation” and is the primary cause of suffering for a great many people

    The solution here is the same as it is in the medical case – use your reason to get a balanced view about the real likelihood of and how the design of MMT responds counter cyclically to the ‘savings desires’ of the private sector.

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

    Let’s consider situation where we have high unemplyment and the Fed and the Government decide to do something to reduce it. Government decides to hire every citizen for nothing. They will only receive compensation every month. In this case the Fed issues new money (bank notes) for every citizen and they receive it every month. Each citizen receives 5000$ a month. People decide to spend 10% of what they receive and keep the rst of it (i.e. 90%) in their pockets (we are in liquidity trap). This process lasts one year (5000$ every month for each citizen). After one year due to the additional spending we leave recession. At the beginning of the second year people have 16 trillons of unspent USD in their pockets (90%*5000USD*12months*300milions citizens). This is more than US GDP. Now people decide to spend it in the second year. How would you be able to offset it with fiscal means? You cant reduce decicits by 16 trillions (more than 100% of US GDP).

  86. I can confirm how important your point 4 is Bill. One day one of the freaks of nature (those that move nations) will take up your cause because it is written in understandable language. The effort you put in keeping it simple is worth the effort.
    As for hyperinflation it wont happen precisely because so many people in power worry about it. lets hope they don’t cause deflation while they fight the good fight against imagined inflations. Cheers and what a hoot not sending the letters….. Good one, Punchy

  87. “monetary road to serfdom”

    I would have thought a “monetary road to serfdom” is a contradiction in terms because MMT (at least in my mid) shows most taxes are pointless and mere surplusage i.e. governments tax not to “fund” government expenditure, but merely to absord excess demand and/or equity reasons – which may suggest it is better to tax economic rents (land values) over incomes (wages, profits). Thus, providing a case for low taxes or at least user charges so the expenditure has some relation to what is being created. I also would have thought that by taking out the government sector – which provides us cashflows to meet private debt obligations – you are creating serfdom: debt peonage and widespread insolvency. Enter the 1890s and 1930s Depression. That seems more close to a “monetary” road to serfdom.

    In “open” economies, fiat currencies (with flexible exchange rates etc) seem fine and far from “serfdom” – Switzerland, Norway, Singapore, Iceland, Denmark, the Czech Republic. This suggests serfdom has more to do with culture and access to resources, rather than your currency system. But let me think about it more.

  88. To all those who worry about how ‘polite’ the letter is I’d say: get over it.

    The real question is: how does truth spread vis-a-vis dogma? The great philosopher of science Paul Feyerabend dealt with this at length in his famous ‘Against Method’. His conclusions were clear: truth and science dissolved dogma by taking a hostile stance, standing firm and even – you might be shocked to hear it – engaging in cruel polemics.

    Even anecdotally we can see this is also the case for economics. Was Keynes’ ‘The Economic Consequences of Peace’ polite? I should think not. It attacked some of the most important figures of the day quite viciously. It established Keynes as an enemy of the establishment… but ultimately it precipitated his rise to fame.

    Krugman – despite what some people on here would like to think – will never accept MMT. He has too much invested in his own way of thinking. After all, he is – rightly or wrongly – one of the most recognised economists on the planet; if he were to concede that basically his entire approach was wrong, he’d have to step down – and possibly give his post to Galbraith or someone.

    Economists are some of the most stubborn academics on the planet. It’s because a lot of economic theory rests on the boundary between the openness of the hard sciences and the closed, somewhat dogmatic nature of the social sciences. Someday this might change – I truly hope it does – but for now, economics doesn’t appear to be a discipline that bends to real criticism. Until that day – which might well be on the horizon – criticism may as well be sharp. It might, as Feyerabend pointed out, rile up both parties and cause a debate that will get attention. From there you need only rely on the inquisitiveness and integrity of the young to discern who is arguing honestly and who is relying on their position of social authority to lend weight to their statements.

  89. Soadj,

    Exactly, in your own words, you have described some aspects of “serfdom: debt peonage and widespread insolvency”. You are right to want to “think about it more”.

    Avoid being stuck on petty details: “if this then that…”, which are empty rhetoric based on flawed logic, unsupported by empirical evidence. Both Paul Krugman and MMT have been trapped in theoretical nonsense of this kind in discussing each others assertions.

    You should focus on the big picture: the obvious and glaring facts. None of these academic economists knew the global financial crisis was crashing on them, let alone saw it coming. Neither Paul Krugman nor MMT ever mentions credit defaults or economic wastes and how they can accommodate these inconveniences in their theories.

    I deliberately avoided open economies in my remarks, because it complicates my main message: “Unlimited and accountable powers of governments, whether fiscal or monetary, leads to economic wastes, disasters and enslavement of the people”. In a closed economy, the fiat currency system provides unlimited monetary power. Tax is overt power, while money printing is covert.

    Open economies are more complicated because of exchange rates, which muddies, but not invalidates, the fundamental argument. Which countries really have flexible exchange rates? Nearly all countries will intervene in their currencies when it suits them. Japan after the earthquake, China all the time and Brazil during the GFC, just to name a few obvious examples.

  90. “None of these academic economists knew the global financial crisis was crashing on them, let alone saw it coming. Neither Paul Krugman nor MMT ever mentions credit defaults or economic wastes and how they can accommodate these inconveniences in their theories.”

    Wow! You really have no idea what you’re talking about, do you?

    You know that Randy Wray is a student of Hyman Minsky, right? You know that Minsky warned about the crash more than 50 years ago, right? MMT partially grew out of Minsky’s work on unstable debt structures that lead to major private-sector over-leverage.

    Methinks its time to do a little bit of homework…

  91. Lyonwiss “Unlimited and accountable powers of governments, whether fiscal or monetary, leads to economic wastes, disasters and enslavement of the people”.

    -Would you still have those fears if gov, rather than trying to micro-manage what goes on (as in the Soviet Union,) instead just blindly enforced redistribution via a universal asset tax and citizens’ dividend. Doing that would prevent the debt peonage scenario Spadj talked about without the perils of a Soviet scenario.

  92. Methinks Stephan is right to think Phillip Pilkington is right!

    “it complicates my main message” – well, it does more than that, as the analysis and message is one dimensional: I think it has more to do with culture (and other variables) than currency regime per se (e.g. compare the Norwegians and Swiss [more production orientated] with the Americans). America’s problems happen every 18 or so years. It’s cyclical and just show you how sad people are not to learn anything from history.

    I’m not sure where I made assertions, but we shall recall from National Accounting identies and economic history that small government has led to the debt-deflations we have witnessed in the past – Minsky in ‘Stabilising an Unstable Economy’ provides three effects with evidence: income effects, cashflow and balance-sheet effects – resulting from Big Government and why our last debt-deflation was in the 1930s. I’m not sure whether you are advocating smaller government or what not, but I do prefer the approach the US Congress took in the 1820s: abolish the private debts and offer debt relief where possible.

  93. “Doing that would prevent the debt peonage scenario Spadj talked about without the perils of a Soviet scenario”.

    Exactly stone. Alas, LVT etc has really only been employed in a very watered-down sense in Singapore, some US states, Hong Kong and former German colonies throughout Asia. The only country I can see adopting a citizens’ dividend is Switzerland, and possibly some Nordic countries and Singapore.

    MMT, from my point of view and the way I choose to interpret it, has quite a libertarian streak to it, but I’m sure most MMTs would be first to advocate taxing rents, over profits or wages. After all, analogous ideas were used to advocate eliminating the corporations tax: http://hiwaay.net/~becraft/RUMLTAXES.html

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

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

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


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

    My bad.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  103. Tom:

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

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

  104. Tom:

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

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

    Why do you think that that is consistent with MMT?

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

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

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

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

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

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

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

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

    Here are a couple of relevant links from billyblog: removethis_https://billmitchell.org/blog/?p=12671 & removethis_https://billmitchell.org/blog/?p=5402

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