In the Trenches: Command and Control
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“From what I’ve tasted of desire
I hold with those who favor fire.”
This matches up pretty closely, obviously, with Ben’s “fourth horseman”. Is there any path forward you see for this confluence of MMT, global QE, populism, etc., that doesn’t involve globally synchronized hyperinflation? It seems like all the trends are pushing inflation, and it’s notoriously hard to stamp brakes once inflation has begun.
I have the honor of never having read any economics until recently. I was also a (bad) math major at Princeton. Just as the Disruptor-in-chief has propagated much new learning about our government and media, Disruptor MMT seems to be doing the same for economics, at least for me. Judging from my initial readings of Wray, Mosler, and ‘comrades’, I am sure of just a few things so far. The narrative machine is working overtime against MMT. Meanwhile, some ‘socialists’ have latched on (Mother’s Milk Theory) for political gains. My take is that terms like ‘keystroke’, ‘helicopter’, and ‘print’ money are clues to against MMT, and ‘sectors’, ‘stock-flow’, and ‘private vs government (net financial) surplus’ are the contrary. Rather than take either the Pessimistic Weimar or Optimistic Socialist point of view, please consider reading some primary source material if not already done.
What keeps banging around in my head as the answer to the lack of inflation conundrum…debt is deflationary. Debt, especially excess indebtedness, has two pernicious effects. Firstly, debt brings forward into the present future consumption that needs to be paid with future earnings, dampening future consumption. Secondly, debt demands repayment…at the expense of current consumption. When mal-investment/over-consumption indebtedness gets large enough and reaches a tipping point you get systemic debt deflation (Irving Fisher) by way of liquidation of assets to pay debt (yes, the Fed short-circuited this in 2008…at the expense of creating a still larger debt pile and bigger problem later on). If memory serves, every hyper-inflation has been preceded by collapse via systemic debt deflation. My point is that we should not be surprised to see a deflationary bust first before we get a highly/hyper-inflationary bust after. Soooo…Crack-up boom (now), deflationary bust (later), hyper-inflation thereafter. Wash, rinse, repeat.
You’re saying it (and understanding the economics and history of it) better than I do, but it’s clear the establishment looked into the abyss of a debt-deflation spiral in '08 (literally when it revoted to pass TARP) and has, as Ben has noted, decided to NEVER let that happen again.
Hence, everything the political establishment does is to generate inflation (despite an official stance of, and the occasional publicity feign toward, preventing inflation), but my guess, the massive debt buildup is too deflationary for even the government marshaling* all its forces to overcome - delay, yes, but not overcome.
So, the next stop - when is anyone’s guess - is a deflationary bust and, as you note, an inflationary phoenix to follow - when no one is left who owns a single inflation-oriented investment anymore. All that said and believed, based on Japan, we could be in this low-rate, low-growth, massive-debt-overhang environment for years to come.
Of course…inflation is the ally of the debtor, enemy of the lender. The Bernank short-circuited the Fisher debt deflation thesis/process. I’m not advocating that they should have allowed “full market price clearance/liquidation” of a 70 year debt super-cycle a la Great Depression. Instead, I’m arguing that they should have let there be more pain and liquidation…instead of encouraging still more debt, mal-investment, etc…with a much bigger price to be paid later. The economy and markets are complex, dynamic, self-organizing systems. You try to “manage” them at your peril, creating all manner of unintended consequences…often in greater proportion to your input/effort to distort in the first place. Riddle me this. What happens when market forces win, forcing rates higher…not bc of Fed policy or economic growth prospects but bc of credit quality concerns in say…a slowing/recessionary economy? Game, set, match.
Not a perfect analogy, but the way the government handled the S&L crisis of the late '80s - it managed the crisis (bad banks, good banks, mergers, etc.) while letting there be “pain and liquidation,” as you said - worked. And, I hear ya, a global-economy-wide Minsky moment could be the endgame.
My use of Crack-up Boom may not have been precise. I mean that the fix for 2008 resulted in what I suspect will be judged ex post to be a crack-up boom. https://www.investopedia.com/terms/c/crackup-boom.asp
Primary source material… on MMT? Do you have any specific recommendations? I’m always happy to read more history, particlarly economic history.
I’ve done a decent amount of related reading: “Fiat money inflation in France”, “Navigating Big Debt Crises”, a few others. I’m sympathetic to the Pessimistic Weimar view, since the Optimistic Socialist can point to 0 historical cases where unbridled printing was sustainable, but I’ve also noticed that most of the pessimists have no ability to explain the non-barking dogs, and are actually proven right about as often as the proverbial broken clock. They generally predict about 1000 out of every 2 significant inflationary periods.
But that still beats the Optimistic Socialist track record…
This is Randall Wray’s compilation of 52 MMT blogs. Each blog has comments, Wray’s answers to comments, and then comments to Wray’s answers. (A few of the links are 404s.) I found it very helpful.
On a side note, there is so much talk about ‘printing’. My understanding of the UST and FED is that the FED generally is not allowed to buy directly from the UST and instead buys ‘Treasuries’ on the open market (banks). The banks paid the UST for these ‘Treasuries’ and the FED holds the account of the UST. BUT when the FED buys ‘Treasuries’ on the open market (from banks), those same banks’ FED accounts are credited (here is where ‘keystroke’ comes in). So now both the UST account and the bank’s account at the FED holds the amount paid for the ‘Treasurie’, and new ‘money’ is created in the private sector when the FED pays private sector bills from the UST’s account. I could have it all wrong so please correct as needed!!!
I know it sounds odd, but I’m actually NOT concerned about inflation in the real economy as the most pernicious outcome. Monetary policy has created a bifurcation between goods prices and asset market prices. In my opinion, aggressive monetary policy, including QE, creates overcapacity and over-investment in goods production (especially in emerging economies). This overcapacity (led by EM over-investment) makes it difficult for goods inflation to manifest. As central banks boost asset prices but fail to stimulate real economies, the widening disconnect creates an increasingly fragile situation.
Primary source work is in fact a lost art in this copy in paste world, so I share your sentiment. While Mosler’s “Seven Deadly Innocent Frauds” is interesting and makes some good points with which I agree, it does not consider the associated unintended consequences I addressed. I would also suggest a reading of Mises’ “Human Action” as the logical counterpoint. (I must admit, it is a struggle to plow through.)
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