I always wondered if there was a way to effectively "burn" one's entire wealth, creating a small deflationary event that would increase the value of existing dollars. How could one do this? Donate to the Federal Reserve? Or would you literally have to cash everything out and burn it?
According to my understanding, burning US dollar bills, donating to the Fed (if such a thing is possible) and donating to the Treasury are approximately equivalent in their effects.
What puts a lid on how much money the Fed creates is the desire to keep inflation to reasonable levels, preferably 2% per year. Your burning your cash allows the Fed to create more while adhering to their inflation target. Someone please correct me if I am wrong, but my understanding is that although the Fed decides how much money is created, the Fed is not allowed to keep or to spend newly-created money, but rather must give it to the Treasury (perhaps through some complicated or non-obvious mechanism) which makes it available for the government to spend.
In fact, dragons are important stabilizing influences in dungeon economics. The hoard of gold isn't inflationary until the adventurers liberate it and start buying wands and stuff.
Reminds me of something I read years ago about how Ultima Online would create "gold sinks", super expensive items that served no purpose other than help remove gold from the economy and prevent inflation.
This is a problem with all kinds of virtual world economies. Players accumulate so much gold that some substitute becomes more useful. Diablo II had the Stone of Jordan, for example.
Couldn't you just not spend or invest the money? I think putting it in a chest and burying it in an unmarked location would be equivalent to burning it.
That does not feel like burning the money, more like propping up the private sector (naively, government's deficit is going to be private sector's surplus if you don't actually reduce the amount of money in circulation).
How does that burn the money? If the government is spending the money, it's going to federal employees and purchasing good and services from the general economy.
If the taxed dollars ended up with say hurricane victims or other struggling Americans, those dollars would chase goods and services domestically driving up the price of those goods.
Now consider if instead you helped fund Israels socialized medicine program or paid off some of Ukraines debt or paid interest to Chinese creditors. Those dollars wouldn't have much effect when it comes to increasing the price of eggs in the US as they are being spent far away in another economy.
A similar effect could occur if the money ended with the wealthy folks, say wealthy owners of private defence contracting firms, as those dollars might chase building a super yacht (inadvertently employing some people but also consuming foreign made materials and labor) instead of trying to rent an apartment in Iowa. Less dollars chasing Iowa apartments, considering supply and demand, lower prices, lower CPI.
Take dollars from the middle class who will drive up the cost of the American dream and instead give them to people who will drive up the price of luxury goods.
It's never explained this clearly beacuse people would riot, but with this framework the choices of government in the last few decades or so suddenly makes more sense.
I'm yet to meet anyone that actually understands MMT and doesn't endorse it. You might be the first, but I doubt it. Which bit of MMT do you have trouble with?
"implemented"? What does that mean? MMT accurately describes the monetary operations and fiscal constraints of a sovereign government (i.e. with their own currency) and from which you can predict outcomes with a high degree of reliability.
Insomuch as "implemented" means using the policy prescriptions (specifically, the job guarantee), there are no countries doing that, but various real world experiments have touched on it.
Japan had done things differently (albeit from a different perspective of mainstream economics) and is a good test case for the MMT model, especially given how many bet against the yen (and lose), implying the mainstream models are struggling there.
I said the political will does not exist (in several different ways) now you say:
> Insomuch as "implemented" means using the policy prescriptions (specifically, the job guarantee), there are no countries doing that, but various real world experiments have touched on it.
Something that you can't implement, doesn't work. In practice MMT is a smokescreen for politicians to print money for their friends.
The point is, you don't "implement" MMT. It's a useful framework for analysis regardless of what policies you choose. If we could get to the point of discussing monetary and fiscal operations from a sound basis, then we can start debating policies, but we're so far from that at the moment.
I'd argue a less correct framework that you could actually sell to voters and politicians would be more successful by the virtue of its policy actually being implemented (not just the fun bits).
I can find you far more people who wish to abolish the fed and return to the gold standard than people who are willing to have the levels of taxation required to limit the inflation caused by funding the government with unsound money.
MMT's advocates policies would work if it wasn't for that pesky democracy and realities around campaign finance.
It helps to conceptualize the circuit of money as it flows from government(G) to the private sector(P) back to the government as G-P-G. The outlays(G-P) and receipts(P-G) can both be increased or decreased to affect aggregate demand. MMT's view is that inflation can be a result of aggregate demand outstripping economic capacity, though not the only one. Supply-side constraints, resource shortages, or structural bottlenecks can also lead to inflation.
MMT emphasizes that taxation (P-G) is not necessary to "fund" government spending. Instead, taxation primarily serves to control inflation and create a demand for the currency. Taxation creates a value for the currency since taxes are payable only in the government's currency.
When we hold the P-G-P view of government spending, we assume it operates like a household - that a government has to collect taxes before spending and this is viewed by MMTheorists as an antiquated perspective. The misconceptions of "The government as a household" were based on the gold standard or fixed exchange rate systems, which since 1971 no longer apply.
Please everyone read this comment. Any disagreements should come with relevant references showing how it's wrong.
An additional point to add is the mechanism by which taxation controls inflation. Tax serves to suppress demand in the private sector, freeing up resources that can then be bought at non-inflated prices. This is why super wealthy people are irrelevant to a sovereign government's ability to spend; their marginal propensity to consume is too low to be seriously impacted by normal levels of taxation. It's also why tax has to be broad base to be useful.
> MMT alone may not provide sufficient guidance on how to adjust outlays and receipts to manage employment and inflation.
The primary policy prescription of MMT is the job guarantee, which explicitly addresses the question of how to manage employment and inflation. The job guarantee defines the value of the currency, with other spend floating relative to that, whilst simultaneously providing full employment. In any case, the current model is pretty broken in which fiddling with interest rates is assumed to have a direct casual link to both (and depressingly in opposite directions).
> MMT may not be politically feasible. Politicians may not be navigate politically unpopular but economical necessary.
Insomuch as descriptive MMT is what happens in most sovereign currency areas, this is just a problem of communication. You are right that getting the politics correct is both hard and important. I'm not sure the policies will in aggregate be very unpopular though once a non-made-up description of what limits spending is understood better by the population.
> MMT may be domestically sound, but challenging to implement regarding international trade. It may result in devaluing compared to other currencies.
A floating exchange rate is a feature not a bug. Current attempts to maintain a soft peg are deeply damaging domestically for many countries. In any case, countries that are confident in their monetary and fiscal policies and that have a sound economy seem to be more robust than those that try to maintain a soft peg (see Japan).
> MMT may suggest that interest rates can be kept low indefinitely. It's unclear if this would result in excessive risk taking.
Excessive risk taking needs dealing with at the political level with actual laws and regulations. Interest rate policy is a crap tool to deal with such problems.
> MMT may not be applicable to developing economies.
Why not? It explains what their actual constraints are and the risks of taking on foreign debt or pursuing an export led growth strategy etc.
> MMT may work in the short term to manage employment and demand but fail to cultivate long term economic development.
I'm not sure what this has to do with MMT. The post war period with much higher employment and stronger government intervention had much higher growth than the following monetarist/neoliberal era, so perhaps the status quo is the problematic position.
> MMT's implication as having a larger governmental impact on investment may crowd out private sector investment.
Again, the historical evidence shows when governments stop spending, private investment collapses.
> MMT if implemented could be constrained by international investors. If international investors dislike a policy, it may have domestic implications.
What domestic implications? If you're thinking about direct foreign investment, this is problematic in its own right. It might increase domestic employment and potentially increase local skills, but it is also extractive and drains the nations' equity. This possibly has stronger implications for low income nations that don't have a good education base and well developed industries, but MMT at least makes clear where the trade-offs lie.
> MMT depends on having a government effective enough to implement it. If a government is too dysfunctional, MMT may fail in practice.
True, but then so do all political systems. MMT "failing" is also a strange concept given MMT describes the system since the fall of Bretton Woods. What's remarkable is how stable (notwithstanding the obvious "shocks") the system has been despite most governments operating as though they were still inside the Bretton Woods system.
Government spending being deflationary is not a claim MMT makes.
> and putting it towards (wasteful) government programs to "burn it" in a sense.
This claim isn't congruent with the idea of MMT.
One way to look at MMT is asking, does our government have to operate like it has a checking account, or can our economy act like an MMORPG economy?
For example, Blizzard has no obligation to collect coin before distributing coin. Blizzard thinks in terms of coin sources and coin sinks and adjusts source and sink policy in response to aggregate demand and player engagement goals.
Friedman was a charlatan and monetarism was trivially debunked when he came up with it. The 60 years since have not been any more kind to it. Don't confuse stocks with flows. The whole idea of money supply as a useful metric needs to be put to bed; one would have thought the 13 years post GFC would have made that apparent.
(Of course, the Austrians have a peculiar notion that inflation can by definition only be considered as such if it's associated with increased money supply. Another reason to ignore them completely)
Between 2008 and 2020 M2 pretty much doubled and prices barely moved anywhere. This was intentional policy for the purpose of increasing inflation which stayed doggedly around zero. What does this tell us? Pretty much nothing because money supply is a useless measure.
What would happen if we halved it? Dunno, but to achieve that, stuff has to happen, and depending on that stuff, you might get price changes. I expect if the gov engaged in QT to achieve it, very little would happen.
And yet the price of a cabbage stayed exactly the same. Oh, we also had close to zero interest rates, might that have something to do with peoples' appetite for higher mortgages and shares over bonds?
But that doesn't suggest that the critical variable is money supply. It just suggests there's a correlation. There are plenty of ways of increasing the money supply that does nothing at all. Pursuade the fed to give me a trillion trillion dollars and I'll show you by not spending it (though I might spend a few mil for keeping it safe, but that's not going to do much).
The point is that lots of monetary operations are consumption neutral, including buying bonds. The only thing that actually matters from a price perspective is when a real resource gets consumed. People having more money can push the price of real goods up for sure, but the marginal propensity to consume by individuals goes down with higher relative wealth.
There's another very important effect which is the spending on things that matter induces taxation (employment taxes to deliver the thing, sales taxes etc). This is a geometric series reducing the money supply on every transaction of real goods. What matters is the flow, not the stock.
