Ep 73 [2/2]: John Harvey: The nitty gritty of exchange Rate Determination
People Conversations by Citizens' Media TV
Welcome to episode 73 of Activist #MMT. Today is part two of my two-part conversation with Texas Christian University PhD. economics professor and , John Harvey. The topic of our conversation is exchange rate determination, and we continue to work through my question list, which can be found in the show notes for . Much more information and resources can also be found in the show notes for part one, but for now, let’s get right back to my conversation with John Harvey.
Ep 73 [2/2]: John Harvey: The nitty gritty of exchange Rate Determination
Activist #MMT - podcast
Welcome to episode 73 of Activist #MMT. Today is part two of my two-part conversation with Texas Christian University PhD. economics professor and Cowboy Economist, John Harvey. The topic of our conversation is exchange rate determination, and we continue to work through my question list, which can be found in the show notes for part one. Much more information and resources can also be found in the show notes for part one, but for now, let’s get right back to my conversation with John Harvey.
Ep 72 [1/2]: John Harvey: The Battle of the Bulge (and the nitty gritty of Exchange Rate Determination)
People Conversations by Citizens' Media TV
Welcome to episode 72 of Activist #MMT. Today I talk with Texas Christian University PhD. economics professor and , John Harvey. The topic of our conversation is exchange rate determination. However, be forewarned that this episode is not an introduction but a deep dive into the weeds of John’s 2009 textbook, . For a proper introduction, you’ll find links in the show notes to several good recommendations, including two MMT Podcast episodes (, and ), John’s with Modern Money Australia, a on the economics blog Naked Capitalism, and a layperson-friendly . This interview took three months of preparation. When I first read John‘s book, I only made it halfway through and, in all honesty, aside from the introduction, I got very little out of it. John’s writing has nothing to do with it, it’s simply an intense and completely (if you’ll forgive the pun) foreign topic. Chapter two, especially, was impenetrable. It’s a summary of the major exchange rate models in neoclassical economics and frankly made zero sense. I took a nap after every few paragraphs and watched videos on each type of model, but none of it felt relevant. (John briefly goes over this chapter in his August 2020 lecture.) I started the book over again and grew fascinated by a five page section in chapter one called Post Keynesian Economics. You’ll find it on pages five to nine. The section is an introduction to post Keynesianism and specifically how it contrasts with neoclassicism (the latter of which is currently mainstream economics). Without exaggeration, I read the section around twenty times and wrote pages of notes and questions, several of which I posted on the Facebook group, Intro to MMT (which, I wasn’t then, but am now, a moderator of… and I recommend you join it). I spent the next two months diving into the basics of mainstream economics, starting with a 2019 paper expressing the common concern for the long-term fiscal sustainability of government spending, and its corresponding debt and interest. I then read and interviewed the authors of the 2020 paper responding to it, by German MMT economist Dirk Ehnts and Danish PhD. candidate Asker Voldsgaard. I also read a paper on historical time as recommended by Asker, and a 2006 paper by Scott Fullwiler. The interview inspired a post where I break down the topic in detail: I then read Steve Keen’s 2011 book, . I didn’t understand much more than I did understand, but it was fascinating and enlightening nonetheless. It also provided excellent background for my next interview with UMKC PhD economics candidate Sam Levey, with whom I discussed the core assumptions of mainstream economics. Links to all of these papers, posts, and interviews can be found in the show notes. [The interviews with Ehnts, Voldsgaard, and Levey will be released to the public in February. Patrons of Activist #MMT can hear them right now.] Before returning to John’s book, I read several papers by John and Ilene Grabel, plus the 2004 book by Oberlechner, called . I especially recommend Oberlechner’s book as a layperson introduction to exchange rate determination. It’s particularly easy-to-read and also comes highly recommended by John. As is made clear in Oberlechner’s book, one of, if not the, most important determinant in the reality of exchange rates is group psychology. Finally, I read John‘s book straight through, beginning to end. This time, I was better prepared to distinguish between what to discard and what to focus on. Re-reading chapter two, I now realize that it’s less that I didn’t understand it and more that it’s just not understandable. You would not lose much from skipping the chapter entirely. Its primary benefit is not to learn about foreign exchange but to provide a benchmark for just how far off mainstream is from reality. The other major lesson I take from John‘s book is that people do not want only to trade – meaning purchase physical goods and services from a company in...
Ep 72 [1/2]: John Harvey: The Battle of the Bulge (and the nitty gritty of Exchange Rate Determination)
Activist #MMT - podcast
Welcome to episode 72 of Activist #MMT. Today I talk with Texas Christian University PhD. economics professor and Cowboy Economist, John Harvey. The topic of our conversation is exchange rate determination. However, be forewarned that this episode is not an introduction but a deep dive into the weeds of John’s 2009 textbook, Currencies, Capital Flows, and Crises. For a proper introduction, you’ll find links in the show notes to several good recommendations, including two MMT Podcast episodes (December 2020 with John, and October with Steven Hail), John’s August 2020 lecture with Modern Money Australia, a 2012 interview on the economics blog Naked Capitalism, and a layperson-friendly 2004 book by psychologist Thomas Oberlechner. (Here is a link to part two of my interview with John.) This interview took three months of preparation. When I first read John‘s book, I only made it halfway through and, in all honesty, aside from the introduction, I got very little out of it. John’s writing has nothing to do with it, it’s simply an intense and completely (if you’ll forgive the pun) foreign topic. Chapter two, especially, was impenetrable. It’s a summary of the major exchange rate models in neoclassical economics and frankly made zero sense. I took a nap after every few paragraphs and watched videos on each type of model, but none of it felt relevant. (John briefly goes over this chapter in his August 2020 lecture.) I started the book over again and grew fascinated by a five page section in chapter one called Post Keynesian Economics. You’ll find it on pages five to nine. The section is an introduction to post Keynesianism and specifically how it contrasts with neoclassicism (the latter of which is currently mainstream economics). Without exaggeration, I read the section around twenty times and wrote pages of notes and questions, several of which I posted on the Facebook group, Intro to MMT (which, I wasn’t then, but am now, a moderator of… and I recommend you join it). I spent the next two months diving into the basics of mainstream economics, starting with a 2019 paper expressing the common concern for the long-term fiscal sustainability of government spending, and its corresponding debt and interest. I then read and interviewed the authors of the 2020 paper responding to it, by German MMT economist Dirk Ehnts and Danish PhD. candidate Asker Voldsgaard. I also read a paper on historical time as recommended by Asker, and a 2006 paper by Scott Fullwiler. The interview inspired a post where I break down the topic in detail: The long-term fiscal sustainability of government spending (is a non-issue) I then read Steve Keen’s 2011 book, Debunking Economics, second edition. I didn’t understand much more than I did understand, but it was fascinating and enlightening nonetheless. It also provided excellent background for my next interview with UMKC PhD economics candidate Sam Levey, with whom I discussed the core assumptions of mainstream economics [parts one and two]. Links to all of these papers, posts, and interviews can be found in the show notes. [The interviews with Ehnts, Voldsgaard, and Levey will be released to the public in February. Patrons of Activist #MMT can hear them right now.] Before returning to John’s book, I read several papers by John and Ilene Grabel, plus the 2004 book by Oberlechner, called The Psychology of the Foreign Exchange Market. I especially recommend Oberlechner’s book as a layperson introduction to exchange rate determination. It’s particularly easy-to-read and also comes highly recommended by John. As is made clear in Oberlechner’s book, one of, if not the, most important determinant in the reality of exchange rates is group psychology. Finally, I read John‘s book straight through, beginning to end. This time, I was better prepared to distinguish between what to discard and what to focus on. Re-reading chapter two, I now realize that it’s less that I didn’t understand it and more that it’s just not understandable. You would not lose much from skipping the chapter entirely. Its primary benefit is not to learn about foreign exchange but to provide a benchmark for just how far off mainstream is from reality. The other major lesson I take from John‘s book is that people do not want only to trade – meaning purchase physical goods and services from a company in another country – actual human beings want to accumulate financial assets, and especially, to profit in the short term. Neoclassical economics assumes people only want to purchase stuff (meaning trade), and the only reason they need and want to use money is in order to purchase that stuff. But in the world in which we actually live, only between 1.5 to 8% of all international transactions are for trade. The rest, well over 90%, is for purely-financial assets. Despite this obvious contradiction by the facts, minstream economics assumes barter for every person, in every country, at all times. In fact, the assumption of barter is required in order for their assumption of balanced trade (either right now or soon to be) to also be true. And that assumption, of balanced trade, is required in order for the assumption of full employment in a single country (any country!) to also be true. In other words, if the myth of barter is indeed a myth (and it is indeed a myth), then mainstream economics falls apart. John and I discuss this in part one, and it inspired me to write a post where I elaborate on the concept, a link to which can be found in the show notes: The neoclassical assumption of full employment requires balanced trade. If we are to be a civilized society, then we must do what it takes to achieve full employment. Mainstream economics falsely assumes that doing nothing is the only possible avenue to achieving it. MMT demonstrates that full employment can only be attained and maintained, in both good times and bad, by a federally-funded jobs guarantee; one paid for by a currency issuer with a freely-floating currency and little to no debt and other currencies. Despite mainstream’s protestations, full employment doesn’t and can’t happen "naturally." It can only happen with the deliberate and ongoing intervention by the central government – and this will only happen when we stand up and make them do it. Two notes before we get started: first, a minor correction: I say that "today’s" exchange rates are determined by the forecast for next week’s exchange rates. I should have said tomorrow. Second, my full question list can be found in the show notes. And now, onto my conversation with John Harvey. More resources By John: Lecture notes: Exchange Rates and Trade Flows:A Post Keynesian Analysis 1996 paper, Orthodox Approaches to Exchange Rate Determination: A Survey 2001 paper, Exchange Rate Theory and "the Fundamentals" By Ilene Grabel (her website): 2016 paper, CAPITAL CONTROLS IN A TIME OF CRISIS 2011 paper, Not your grandfather's IMF: global crisis, ‘productive incoherence’ and developmental policy space 2003 paper by Grabel, Gerald Epstein, and Jomo Kwame Sundaram, Capital management techniques in developing countries: An assessment of experiences from the 1990's and lessons for the future Other academics recommended by John to learn more about exchange rate determination: Anina Kaltenbrunner, Rogerio Andrade, and Daniela Prates Full question list First things first! Today is a red letter day in the history of exchange rate determination. (brief Battle of the Bulge summary) Before discovering MMT, I never followed or read about economics. Before discovering your work, I never followed or read about foreign exchange. In my ignorance, coupled with how simplistically it seems to be portrayed in the media (such as "China and the United States trade lots of stuff"), I thought that foreign exchange was only trade (which is the exchange of physical goods and services). I also thought that this trade was mostly done directly between two central governments. But the very existence of exchange rates and currency exchange at all, suggests that exchange actually happens, at least substantially, between companies within two different countries. Governments don’t need their own currency! Companies do. So a company in country M (M for import) wants to purchase something from a company in country X (X for export). So company M needs currency from country X, before it can do business with company X. This is not really a question, but I found the opening pages of your book to be pretty eye-opening, and I suspect my ignorance is not unique among the general public. The trading of goods and services is only about 1.5 to 8% of all International transactions. The rest is the trade of financial assets. On page 2 in your book you quote a 2005 BIS survey that says the average daily currency transactions worldwide was about $1.5 trillion. This is around 40 times the value of daily trade. In the show notes, I put a link to a 2019 tweet from Scott Fullwiler that refers to an interview, where it’s stated that $5 trillion of settlements are made each day in the Federal Reserve system in the United States. I don’t remember which one, unfortunately, but Scott also states in a paper that it may be actually between five and $20 trillion per day. Obviously the data quoted in your book is from 15 years earlier, but I’m shocked that the whole planet is only $1.5 trillion when the US alone is $5 trillion. Are these numbers comparable? Regarding a single nation: A major assumption of mainstream economics is that full employment is here now or soon will be. A critical assumption underlying that is that people (households) are insatiable and will spend every dollar of their income on consumer goods and services. This maximizes aggregate demand, which means companies always need to hire more, hence full employment. A critical assumption underlying this is that all of the spending stays within that country. If even one dollar more leaves the country than comes back in, then total demand is lowered and full employment is put in jeopardy. This is why the assumption of balanced trade, either right now or soon will be, is what you call "one of the legs by which the full employment assumption is maintained." Each country must be a perfectly self-contained, hermetically-sealed bubble, or mainstream theory falls apart. Can you elaborate on this connection, and also briefly describe the other legs that undergirds mainstream’s assumption of full employment? One of the most important determinants of exchange rates is group psychology. There’s a great moment in your book discussing how the most important determinant of today’s exchange rate is today’s forecast for next week’s rate (or however far into the future). So the idea that your forecast of next week affects next week’s actual rate is mostly an illusion. And by the time next week rolls around, you don’t care about those actual results anymore! In other words, the expectations are self-fulfilling prophecies. Expectations create the future. Mainstream or neoclassical economics primarily evaluates this situation by comparing those expectations about future values to the actual future values. This is not useful because (A) it pretends the result is unaffected by the expectations (which is called logical time where PK has historical time) (B) Conversely, it suggests that next time maybe we could predict the future. (C) It pretends (I’m not sure how to elegantly say this) that, as if flipping heads five times in a row then makes flipping tails five times in a row more likely and (D) it distracts you from trading and forming expectations in the now! Post Keynesian focuses exclusively on the process of forming those expectations. Can you elaborate on this difference? (I read Oberlechner‘s book. It was very good and in my opinion very layperson friendly. I don’t know why it only addressed foreign exchange since it seems to me that almost all its findings apply just as much to traders at any geographic level.) Mainstream acknowledges that it has nothing to say about exchange rate determination in the short run, and only models for the long run. All of those models are wrong, but let’s pretend that they’re right. So mainstream can predict what will happen, say, 10 years from now, but nothing sooner. So what at all is useful about mainstream economics? 10 years off is always 10 years off. 10 years from now, 10 years from a year from now, 10 years from six years from now. So how is it not just an every-man-for-himself rat race at all times? If I’m correct, then how is mainstream anything more than propaganda for the status quo, which by definition only benefits those already in power. Does that make sense? So much time and energy in foreign exchange is spent on nonsense. Analyzing meaningless charts (chartism) or random economic rules (the fundamentals), pretending that we can somehow predict the future, that we don’t affect the future, that we aren’t affected by others or the past. So on one hand, because we can’t predict the future, what alternative is there? How can it be anything but a big gigantic game? On the other hand, it seems that the vast majority of traders think that neoclassical fantasy world is indeed real. Perhaps a select few that know the reality, deliberately use that knowledge to manipulate and dominate the masses. That seems like a reasonable speculation. Aside from the elite being less elite and neoclassical economists being thrown to the street, what if every trader read your and Oberlechner’s books, and Ilene Grabel‘s work, and really got it? What would this alternate foreign exchange universe be like? Trading wouldn’t stop! How would it be different? Two meta questions: I’m pretty sure these things are not related, but I’m going to ask them together: (one) I’ve heard you say that you disagreed with some aspect of MMT but that it’s something in the weeds, nothing major. What is your disagreement? (Two) knowing that the book was written well over a decade ago, on page 72 you state, "we [the US] have a fractional reserve banking system…." I can only guess that you would agree that that’s no longer the case. So to ask this more broadly: if you were to rewrite the book again today, or update it for a second edition, what would change? How much would each of those changes impact your conclusions, diagrams, and mental models? My ultimate goal, which is clearly impossible to achieve today, is to make a clear connection between your work and that of Fadhel Kaboub. My instinct is that there’s something important there. In your late-Mexican-delivery, margarita-fueled, yet very entertaining "horrifically boring" lecture (which was organized by the fine folks at Modern Money Australia and a MMT Podcast), you said the following: "What if I’m a small African nation. Can I follow MMT policies? I don’t know. I have always wondered about that." You then clarified that your area of expertise is not developing nations. I believe I understand your specific concern and I’d like to clarify your thinking. First, speaking of MMT in general. We as MMTers know, with total certainty, that the central government’s of at least the US, UK, Canada, Australia, and so on, have the capacity to provide dramatically more for public purpose. The challenge is to inform the people and take back control of our government and our money. This may turn out to be unlikely or even impossible, but that’s a purely political and social obstacle, not financial. This is analogous to developing nations: although clearly with less bells and whistles than in developed countries, all nations, no matter how developing they are, have the financial capacity to float their currencies and, given enough time, to provide full employment. At that point, they can indeed provide much more for public purpose. The challenge is therefore not financial, but rather to escape out from under the thumb of their colonizing overlords. This may prove unlikely or even impossible, but that’s mostly a political and social problem. So when you say "I wonder" and "I don’t know," I can only guess (and honestly, hope) that you’re referring to those political obstacles, not the financial ones. Is that a fair characterization? A major cause of currency crises is the discrepancy or tension between groupthink (bandwagons and herd behavior) and the underlying conditions in the real world. As the difference grows larger, the tension is more susceptible to smaller and smaller final straws. But often it seems that the final straw is blamed for the years, and sometimes decades, of problems that the final straw merely exposed. An example is the December Surprise which is blamed for the Mexican Currency crisis in 1994, even though it had been building for at least a decade. This is quite analogous it seems, to the false idea that "creating too much money was the cause" of famous historical hyperinflations. As if the war never happened in Weimar, or the decades of terrible circumstances and decisions never happened in Zimbabwe. It even seems appropriate on a personal level, of people spending years in denial, sometimes unknowingly, and then some point years later, the consequences come out all at once – or at least it feels that way. Can you elaborate on this and bring it back to these exchange rate crises? How much does a country need to be concerned about (groups of) individual traders sitting at computer screens on the other side of the planet? Or are problems generally centered around large actors? How did the internet and computer-based trading change things? Were these problems dramatically different before internet/computer based trading? As I understand your book and Ilene Grabel’s work, the primary problem regarding exchange rate is, essentially, we’ve let the mob take over, and their loan sharks have been put in charge of our economies and finances. The mob definitely does not care about public purpose, they care about nothing more than in-and-out, short-term profit. They also push all financial and real costs on to everybody else, who happens to be more vulnerable and farther from the levers of power. And it’s all done with little to no consequences. So a country or a company makes a deal with the mob devil (neoliberal devil), and eventually takes out a predatory loan: a cash injection in exchange for control. The country is put into an impossible position and eventually fails to meet that impossible condition. In order to bail themselves out, they must often do something that contradicts with their long-term survival, and give up even more control in the process. It inevitably leads to financial ruin. I believe this analogy is in the ballpark, but you’ll correct it as necessary. The major solution according to you and Grabel is to disincentivize short-term profit in order to protect vulnerable countries and companies from predatory loans. But since the mob is in charge of the planet, this is no small task. Can you elaborate on this? Is there anything else you think should be said? Can you recommend related work listeners can look into for more on these topics?
Podcast 21 Unmasking The Matrix Special Edition with John Harvey Grant
Shay Ryan Douglas Grow Evolve Change
A conversation about unleashing human potential & Spiritual discernment. Join Dr E & Shay as they explore Energy and Spirit with John Harvey Grant. *** Dr Espen *** https://drespen.com/ https://www.facebook.com/drespenhjalmby https://www.instagram.com/dr_espen/ *** Like & Follow Shay on Social Media *** www.shayryandouglas.com https://www.facebook.com/shayryandouglas https://www.instagram.com/_shayman_/ https://www.youtube.com/watch?v=58UY5TqhQIM https://twitter.com/shaydouglas1 *** Like & Follow us on Social Media Earth Heroes TV *** http://www.earthheroestv.com/ https://www.instagram.com/earth_heroes/ https://www.facebook.com/earthheroesmovie/ https://twitter.com/EarthHeroes1 https://www.youtube.com/channel/UCMWdmUg6eOMcLef54rDCG8w
13 Guest: John Harvey Ret. LEO & I discuss Presidential race, race issues, law enforcement, crime
My dad joins me today to discuss the Presidential Debate, Law and Order, and more --- This episode is sponsored by · Anchor: The easiest way to make a podcast. https://anchor.fm/app--- Send in a voice message: https://anchor.fm/hifiveash/messageSupport this podcast: https://anchor.fm/hifiveash/support
Ep46 [3/3]: John Harvey on inflation: mainstream versus Post Keynesian (and the MMT job guarantee)
Activist #MMT - podcast
Welcome to episode 46 of Activist #MMT. Today is the final part of my three part conversation with Texas Christian University economics professor, author, and Cowboy Economist, John Harvey. We continue our conversation about inflation from both the mainstream and Post-Keynesian points of view, and also discuss the MMT-designed job guarantee. A full introduction can be found before part two, but for now, let’s get right back to our conversation. (Here's a link to part 1.)
Ep 45[2/3]: John Harvey on inflation: mainstream versus Post Keynesian (and the MMT job guarantee)
Activist #MMT - podcast
Welcome to episode 45 of Activist #MMT. Today is part two of my three-part conversation with Texas Christian University economics professor, author, and Cowboy Economist, John Harvey. In part one, John talked about John himself, institutionalism, and discrimination. In the final two parts, John and I talk about inflation as seen through the lenses of both mainstream and Post-Keynesian economics. As people who challenge the overwhelmingly dominant school of economic thought, we must learn both schools. Another reason is because we want to efficiently communicate with and convince the masses who have been influenced by the dominant school – and the nearly infinite power that backs it. I was inspired to talk with John after having an unpleasant debate with a local lawyer and history-buff. He was perfectly pleasant and respectful, but his views I found to be highly cynical and disappointing. (With his permission, the entire dialogue can be found in the show notes.) As I understand it, his view is that it is essentially impossible for the central government, the one and only issuer of the currency, to safely do anything bold, without offsetting that spending one-to-one with taxation or bond sales, in advance. In his own words: I simply believe the government has to pay for those programs through taxes or serious consequences will result. Often, the tradeoff is worth it - I'd gladly pay more taxes for universal healthcare for example. This is because, regardless how desperate the program may be needed, creating the money to do it would increase the money supply, which would cause inflation, which would cause the people to rise up and literally bring down the entire government. In other words, the quantity theory of money is so volatile that even the state’s monopoly on violence is no match for the unbridled rage that would result from the inflation caused by the new money necessary to implement that bold policy. So, for example, take the Green New Deal, which is required to prevent organized human civilization from devolving into literal worldwide chaos. Daring to create the money necessary to implement this program would cause revolution and bring down the government anyway. As Randy Wray and Yeva Nersisian say in a recent article, "it is irrational to fear deficits more than we fear the annihilation of human civilization." The objection reminds me of the resistance I have received regarding the job guarantee: for example, if the job guarantee jobs are not "valuable," it would potentially demoralize workers, lead to corruption, and undermine the entire program. Another is that corruption in general would make it essentially impossible for the job guarantee to be properly managed. [I’ve included some screenshots of this criticism in the show notes] (See screenshots at the bottom for examples from a recent conversation.) The idea that these micro concerns would somehow so-dramatically undermine the entire macro purpose of these programs is, of course, absurd. For example: how valuable are the jobs we have today? Right now? Even if a job guarantee job weren’t as valuable as the jobs we currently have, would they be so bad that it would completely outweigh the horrors of involuntary unemployment? What kind of corruption do we have right now in the for-profit private sector? Even if there was some corruption in the administration of the job guarantee, again, would it be so detrimental that it would outweigh the horrors of involuntary unemployment? How much has corruption undermined other federal program such as the police, libraries, and public schools? (And of course, those who vehemently express these concerns are almost always not desperate for a job, or a better job.) As John says, the job guarantee is "elegant in its simplicity" and "just so obviously simple and straightforward." The job guarantee is as beneficial to society as seatbelts are in cars. While padded dashboards and more flexible and stronger windshields may be a good idea, it is no replacement for the most important safety feature of all, which is seatbelts. In these final two parts, John and I talk about the reality of inflation, and describe and refute several mainstream concepts related to it. The concepts include the quantity theory of money, the money illusion, rational expectations, and the never before seen NAIRU boogeyman of runaway inflation – the latter of which, in reality, is hyperinflation. A couple of notes before we get started: First: John talks about an interesting and revealing debate he had in the comment section of one of his Forbes articles. That full dialogue can be found in the show notes. Second, you’ll hear me say that "runaway inflation is not possible unless government is complicit." What I mean to express is the following sentence from page 257 in chapter 17 (Unemployment and Inflation) from the MMT textbook, which applies less to a genuinely-hyperinflationary episode: The role of government is also implicated. While it is the distributional conflict which initiates the inflationary spiral, government policy has to be compliant for the nascent inflation to persist. Tweets critical of the MMT-designed job guarantee Link to tweet Link to tweet Link to tweet Link to tweet Dialogue with Monetarist in response to John’s Forbes article, Money growth does not cause inflation!: JTH: The problem is that none of that addresses the fundamental fact that one cannot increase the money supply above money demand (Friedman’s key causal factor). Monetary policy can accommodate inflation, but it cannot cause it. In a modern, capitalist economy, inflation is never a monetary phenomenon. MARCUS THE MONETARIST: If you cannot increase the money supply above money demand, you would never have inflation! Check the first 2 graphs on this post: http://thefaintofheart.wordpress.com/2011/04/04/delong%c2%b4s-%e2%80%9canatomy-of-a-slo w-recovery%e2%80%9d/ Why did you have the “great inflation” in the seventies? Why did inflation “dissapear” after the early 80 ́s? Who, if not the Central Bank, controls nominal quantities – like NGDP? The analogy I make of the monetary nature of inflation to freshman students is: Can you keep the fire in the fireplace burning without adding wood? No, if you stop “stocking”, the fire will peter out. The same with inflation (defined as a sustained rise in the “overall price level”. JTH: Explain how this happens in the real world–how does the Fed increase the supply of money in the absence of demand? Specifically. MARCUS THE MONETARIST: So why during inflation money becomes a “hot patato” and during hiperinflations a “boiling patato”, something no one is eager to hold? JTH: You see, Marcus, you cannot answer the question without invoking a fireplace or helicopter. If it is true that the Fed can raise the money supply in the absence of demand, then this should be a very simple, even fundamental, question to answer. How does it do it? What is the mechanism? Where is the line of causation? MARCUS THE MONETARIST: Our postions are so diametrically opposed that I don ́t think this conversation will lead “somewhre”. In any case, for what it ́s worth below my answer: By your reasoning “apple growth” would not cause “apple inflation” unless the apples were dropped out of a helicopter. Think about a big harvest of apples. The apples are sold for other assets, and the value of apples drops in the marketplace. Now think about a big harvest of money. The Fed sells the money in the marketplace for other assets, and the value of money falls. When the value of apples falls, the nominal price of apples falls. When the value of money falls, the nominal price remains unchanged. Instead, a falling value of money can only occur via inflation. Nick Rowe has some great posts on this topic. JTH: Thank you for posting a reply, Marcus. Again, however, I’m afraid I don’t see a direct answer to my question. I asked what mechanism in the real world the Fed has available to raise money supply above money demand (something that you said above is necessary if inflation is to occur). Money supply can rise if the Fed buys assets or if loans are made from available reserves. To my way of thinking, neither of these can occur without the full and conscious participation of the other side of the transaction. Hence, the supply of money cannot be increased in the absence of demand. Yet you say (above) that inflation only occurs when money supply is in excess of money demand. You have defended this with analogies, but not with real-world examples of the underlying process. I am a huge fan of using analogies to get the essential idea across; however, unless these mirror something that is going on in the real world (and in a very real and tangible sense), then recommending policies based on such stories is dangerous to say the least. I hope you don’t think I’m being rude, but I think this is a key question and one that I have never found a monetarist able to answer: how is it in the real world that the central bank raises money supply above money demand? Can you please tell me this and in the context of actual Federal reserve policy tools? This is not a trivial question. The entire monetarist superstructure rests on it. If the answer is that in reality this cannot happen, then I’m not sure how the rest of the monetarist analysis survives. MARCUS THE MONETARIST: crickets Debate with history-lawyer: full dialogue [NOTE: My hypothetical Pony For All Act example would literally give everyone a pony who wanted one. It is admittedly a highly resource intensive [and possibly impossible?] project, only meant to make it clear that resources, not money, is important regarding the implementation of a federal program. It’s a chapter in my old MMT-101 presentation. See here: https://youtu.be/mTvgG1Y9GKQ. It was inspired by this 2017 article by Stephanie Kelton.] Below is the text of a Facebook post, containing the full text of my debate, shared with his blessing, and a bit of background. I had a pretty upsetting conversation with a lawyer and history-buff. Not because he was disrespectful or anything, but rather how darkly cynical and suffocating (and confident) the point of view is. He, in so many words (roughly) said that "printing money causes inflation/devaluation" is such a sure and harmful thing (specifically, the issuance of currency increases the money supply which devalues the dollar) that it renders chartalism, the state theory of money, pointless. In other words, if the government dared to use it’s power of money creation for an ambitious project, it would cause severe inflation, which would cause people to no longer accept the dollar (despite taxation!), which would cause revolution, which would end the state. I got his permission to share the conversation. I did my best but I’m clearly not educated enough to compete against such confidence that MMT and the foundations it’s built upon, are wrong. I’m not interested in bashing him (he’s a nice guy I know personally), but rather to get a few steps closer to being able to handle this kind of deep skepticism properly. Perhaps a small set of academic papers or lectures that best address these concerns. 🙏 [DIALOGUE STARTS HERE] [He saw one of my old presentations and I started by defining and distinguishing between currency creation and bank credit creation.] HIM: Question to challenge your view of money. Regarding a bank loan at the beginning of the nation: Obviously the new American bank in 1789 would love to charge Citizen Farmer as much as possible and Citizen Farmer would like the loan to essentially be free. So yes, they negotiate and the answer is somewhere in the middle. But this still begs the question. In this new country with the new money system, what determines how many of the new dollars the farmer will be willing to accept for his farm? I'll direct you even further: people in this new America know that a farm is worth more than a single chicken and less than 10 farms. But what is everything worth in terms of these new dollars if nothing has ever been priced before? What is the formula to determine how many dollars the marketplace will on average pay for and accept for a farm if everyone is negotiating out of self interest and is rational? You don't need a degree in microeconomics to answer the question; you just have to think about it. The government in my story isn't hiring anyone or setting the price of anything. The bank is holding the dollars and can loan them as it sees fit. So what determines the price of the farm in our new country with these new dollar bills? Hint: A pizza in bitcoin might cost. .0000001, 20,000 yen, or $20. ME: There is a tax obligation. People must accumulate enough tax credits in order to extinguish their taxes when they come due. That’s part of the equation. But I’m not sure what you’re getting at. Another hint? HIM: Another hint: you're on an island. There is only one good on the entire island that you don't ever want and you have. The only other person on the entire island has $5. What is the cost of the item? Answer: $5. Now the same problem but the other person has $10. What is the cost of the item? The answer to the above is the same formula as what determines the price of the farm the farmer will be willing to accept in this new currency we've created. ME: You say the central government isn’t in your story. Since that’s the case, then there is no such thing as the government’s money. So the money being held by the banks in your story has nothing to do with “society’s money.“ (There’s no evidence that any major society in the past 5,000 years ran on barter [which was then “taken over” by a government and its money to make the barter more efficient]. There is plenty of evidence to suggest that the major money of all major economies was state based money: The government imposed a tax obligation and then spent its money – the only thing that could extinguish that tax – into existence. This is called chartalism or the state theory of money.) So, as best as I’m understanding you, the money in each bank in your story is that bank’s money and no more. Each bank is essentially its own little government. This is like wildcat banking before the Federal Reserve existed. No one could be sure that their dollar would be accepted in any other state or bank (at a 100% exchange rate), because there was no centralized entity to ensure it. I don’t know where you’re going with this. I’m obviously missing something. You’re welcome to keep going if you like, but I have a strange feeling that our foundations of reality are not compatible. Whatever the answer is, it’s only applicable to that bank’s dollar. There’s no way to tell what that value will be compared to any other bank’s. HIM: The central government exists in my story - it was just created and we are a new country. A private bank is holding some of the money. It's not a wildcat bank and it deals in dollars. The bank, not the government, wants to loan money to a private farmer. The farmer will put the deed to his farm up for collateral. What determines the result of the negotiation between the bank and the farmer to determine the size of the loan? The answer is the amount of money in circulation. If there is only 1 dollar infinitely divisible into fractions, the farmer might take $.0000001. If there is $10 million in circulation, the farmer of going to require much more money to risk his farm. If there is $1 quintillion in circulation, the farmer would be reasonable to ask for $10 million. This is why for example things cost so much more yen in Japan than dollars in America - there is more yen in circulation. The formula for the price of goods is the amount of dollars chasing the amount of goods. Thus, for example, if you have a lot of high value earners in an area with a limited number of houses, home prices will be high and vice versa. So, yes, the government can print let's say $2 trillion to finance your Pony For All Act out of thin air. But what government cannot do is control the resulting price increases that those additional dollars will command for the same limited number of goods elsewhere in the economy. Government also cannot mandate that the original horse owners will sell their horses or labor to the government for the listed price in the first place or continue to do later on. Why would I sell my limited number of horses, for example, to the government for $X dollars if the government is going to print more money and reduce its value relative to the number of other goods in society? More dollars chasing the same number of goods means higher prices. If government keeps printing money, yes, it can pay for its own obligations indefinitely. But what it can not do is force its citizens to keep accepting the money, even if it has a law and the force behind it as a mandate. This is what happened in America during the Articles of Confederation - America simply refused to accept these dollars in exchange for their goods or labor. I'm not putting my farm up for collateral in exchange for $X if the amount of dollars in existence will double tomorrow - other people will have double the money for their goods and my money will only be worth half. Yes, government printing money can have a stimulative effect of creating more resources, but many goods are quite limited. For example, there is a completely limited amount of land. When government doubles the money supply, the price I will be willing to sell my land for doubles. Do this enough and no one will accept the money at all. ME: Okay. You said “The government in my story isn't hiring anyone or setting the price of anything..” Not “The government doesn’t exist.” But it’s not that much of a difference given your scenario of the country just beginning. You say, in so many words, that “printing money causes inflation” or devalues the dollar. This is incorrect. Unfortunately, I am not educated enough to speak deeply on it. Especially given your apparent confidence, not to mention being a lawyer. You also seem to be suggesting that once issuer-created money enters the economy that the issuer loses control of the situation. That is incorrect. Money is a human created concept. Humans have literally infinite control over human created concepts. Issuing currency causes inflation only if we let it. The issuer has literally infinite power over its own money. They can redefine prices, tax any amount, implement better laws and regulations, enforce existing laws and regulations, eliminate bad laws and regulations. Put CEOs in jail, provide better for the people to prevent major problems, empower workers and disempower capital, etc. Our corrupt government CHOOSES to do little, but that’s an arbitrary human choice. That political reality does not change the inherent legal reality. Sure, things happen in the real world that we can’t control and that could cause inflationary pressures, but money and economic policy (both fiscal and monetary) can always be managed in order to minimize them. Not just reactively but preventatively, such as through automatic stabilizers like a federal job guarantee. There will always be real world problems that cause financial problems but we can always manage and minimize the financial problems. Real problems being created by financial problems however, is always due to ignorance, incompetence, or corruption. Here’s a good article elaborating on this concept: https://medium.com/@slevey087/where-does-the-economic-buck-stop-cc2c1ad66652 Two more points: Printing money barely even exists as a concept since physical money creation is not involved in the issuance of currency at any point. Physical money creation does not occur until bank customers explicitly request it from a teller or ATM machine, at which point the same amount of reserves is removed. “But what it can not do is force its citizens to keep accepting the money, even if it has a law and the force behind it as a mandate.” This is plainly incorrect. Federal taxation drives demand for the dollar. They will accept the dollar or they will go to jail (when they don’t have enough to pay taxes). There’s no law, per se, that requires usage of the dollar beyond taxation. Like I said, our assumptions of reality are simply incompatible. HIM: How does the American government have the power to set price controls? If Congress and Donald Trump sign a law that requires you to work for less money per hour to fight inflation, do you have to listen to them? If Congress and Donald Trump say you cannot sell your home for more than X to fight inflation, do you have to listen to them? Is that constitutional, and even if it is, is the US government revolution proof if the people choose not to listen? [My emphasis:] The only way the federal government currently has the power to set prices is the very thing you don't want it to do - by destroying the money supply or by spending less. Otherwise, the pony owners who just got a $2 trillion dollar raise in their salary to sell horses to the government are free to spend that income in the economy. That $2 trillion chasing the same number of homes will result in increased home prices. ME: One of the foundations of MMT is chartalism (the state theory of money). It requires a sovereign that has a monopoly on projecting violence within its borders. If it wants to retain that monopoly then it’s going to treat its people well ENOUGH in order to prevent revolution (or it will successfully prevent or crush that revolution). Chartalism requires a sovereign. If it treats them so badly that a revolution is caused, such that the sovereign itself is eliminated or its constitution fundamentally rewritten, then all bets are off. HIM: Right, and one of the conditions of, "treating the citizens fairly" is not inflating the money supply. If I worked my whole life and saved up $X and then overnight the government puts $2 trillion into the hands of pony owners, my savings is worth much less as those pony owners are free to drive up prices of consumer goods and I am not. I have the same number of dollars as before and the pony workers have much more; they can buy much more than me. This government control isn't a matter of will, it's physics. Raise the money supply in real or electronic form and prices go up. [[[[[[[At the suggestion of a commenter on Facebook, I passed him John Harvey’s Money growth does not cause inflation article, at the suggestion of Facebook commenters.]]]]]]] HIM: Harvey's article doesn't address what is happening in your pony law [from my MMT-101 video lesson, which is admittedly a highly resource-intensive example]. Harvey says that supplying money is like supplying haircuts - someone has to be willing to accept one in order for more haircuts to happen. Right, but in your pony law the people who sell their ponies to the government in exchange for the higher amount of money the government has borrowed and given them very much accept those dollars. And they very much have the freedom to spend those dollars in other places in the economy. So say I'm selling my home. On one hand is a retiree who wants to buy it. He has $200k, which I thought was a fair price. Now the pony sellers have far more money because of the new government program and also want my house. They can and do offer me more. What happens to the value of my home? It goes up. What happens to the relative purchasing power of the retiree's savings? It goes down. ME [integrating the feedback in this post]: (This is mostly not responding to your thoughts on the Harvey article. My hypothetical Pony Act example, which would literally give everyone a pony who wanted one, is admittedly a highly resource intensive project, affecting much of the economy.) Most of the dollars in the economy are hoarded by the super-wealthy in investments (interest bearing US treasuries). They’re not being spent on, or chasing, anything. Only the dollars people are currently attempting to spend can contribute to inflation. If you believe that spending new dollars devalues the dollars already in the economy, then the dollars already in the economy must be redistributed. This means they must be ripped from the hands of the super-wealthy and given to the poor like Robin Hood. This is a pointless battle when the issuer has the power to create more. The super-wealthy may want more yachts and homes, but they certainly are not purchasing massive amounts of food, clothing, or healthcare – not to such an extent that it makes food, clothing, or healthcare inflationary for the entire economy. So the issuer spending new money to provide more food or healthcare for those desperate for it, for example, would clearly not be inflationary. Also, paying off debts is also not inflationary since debt is essentially negative money – a vacuum. People are forced to not earn income during this quarantine but still have to pay rent and bills. Landlords depend on rent to pay their own vendors. The vendors depend on that income to pay their own vendors. And so on. Filling this vacuum would not cause (unmanageable) inflation. NOT filling this vacuum definitely will cause lots of real world suffering. Only the issuer has the power to fill this vacuum in such a way that all parties are made whole. A final example: Spending new money to prevent, stop, and rectify horrible things (such as cleaning up from and reversing pollution) is also clearly not inflationary because no dollars are currently attempting to purchase that negative externality. New spending to help the desperate and suffering, from whom wealth is being sucked away from (or never given to in the first place), does not cause (unmanageable) inflationary pressures. The idea that the super-wealthy, because they happen to hoard well over 90% of the nation’s wealth in investments, just sitting there, holds the vast majority of us hostage like this, is a pretty terrible one. Finally, around six trillion dollars was keystroked into existence in the past month or two in response to coronavirus. At the same time, inflation has plummeted. That pretty clearly contradicts you. Sure there may be some examples that demonstrate the idea, such as the hypothetical, simplistic, and highly resource intensive Pony Act, but to say it’s a steadfast rule that “increasing the money supply devalues the dollar”, for the entire economy, every time, is incorrect. The concept serves to withhold even more from the millions upon millions who are desperate. You can have the last word if you like, but I think I’m going to stop. I’m not going to pretend this wasn’t very disappointing in a way but it was also quite interesting. So thanks. HIM: It was a pleasure debating with you.
Ep44[1/3]: John Harvey on John Harvey, discrimination, and aliens
Activist #MMT - podcast
Welcome to episode 44 of Activist #MMT. Today I talk with Texas Christian University economics professor, author, and Cowboy Economist, John Harvey. In this first of a three-part episode, John talks about how he decided on economics as a profession, despite mainstream thought doing its best to discourage him. He then elaborates on the concept of institutionalism, which he recently discussed on MMT Podcast [parts one and two], and specifically how MMT integrates its ideas. This part one with John is the first inspired by Fred Lee’s book, The History Of Heterodox Economics. As the book makes clear, heterodox economics, which includes MMTers, Institutionalist, Marxists, and all Post-Keynesians; is resisted by mainstream economists with every fiber of their being – and the nearly infinite power that backs them. John talks about how John Galbraith told him – importantly over drinks – that mainstream economics is "dead" and "hopeless." So instead of changing the minds of people whose paychecks depend on their minds not changing, the decision was made to communicate directly with candidates, policymakers, and importantly, laypeople via interviews, blogs, and social media. In parts two and three, John and I discuss inflation as seen through the lenses of both mainstream and Post-Keynesian economics, and of course we touch on the MMT-designed job guarantee which directly addresses much of it. Resources John’s book Contending Perspectives in Economics: A Guide to Contemporary Schools of Thought, original edition. New version coming out August 2020. A Guide to Post-Keynesian Economics, by Alfred Eichner. My Naked Capitalism article on the sham that is the Paycheck Protection Program. #LearnMMT For an overview of Modern Monetary Theory (MMT) with many reliable sources to learn more, here is a good place to start: My large set of resources containing many expert sources, layperson tutorials, and people and places to follow. On Facebook, the pinned post on Modern Monetary for Real Progressives contains a wealth of information. Please become a monthly patron of Activist #MMT We shouldn't have to beg, but we do have to beg. So it's not *that* we beg, but *who* we beg. I am choosing to beg you, my listeners, to financially support this show. For even a dollar a month, you'll get exclusive patron-only content and updates, highlighted by around four-days access to every episode, before they're released to the public. However, you'll also get super-early access to several episodes, weeks, and sometimes even months in advance. To be clear, however, all episodes of Activist #MMT are free, for all, forever. Patrons only get the opportunity to hear them before the public. Take a listen. If you like what you hear, please consider becoming a monthly patron of Activist #MMT. You can start here: https://www.patreon.com/activistmmt. ✌️, ❤️, and #MMT 🦉
22: Right is Right, Wrong is Wrong (Part 1) | John Harvey, CEO, Wincline
Connect with John: https://www.linkedin.com/in/johnsharvey/Connect with Steve: https://www.linkedin.com/in/steve-watson-cpa/*************************Are your employees okay with another year of insurance rate increases?Visit Trendbreakers.com to find out more on how I was able to lower the cost of benefits by 1k/employee which allow us to invest those savings back into the company and the employees.