Like clockwork, the larger discussion of "fiscal responsibility" and "deficit spending" comes around specifically when the GOP loses power, and the discussion dies the moment they gain power. I...
Like clockwork, the larger discussion of "fiscal responsibility" and "deficit spending" comes around specifically when the GOP loses power, and the discussion dies the moment they gain power. I certainly don't blame the OP or even the writer of the article since this does appear to be a larger discussion (on time as always,) but the timing of the larger social discussion has the effect of causing the voter to view social programs and green initiatives as costly, while giving unimaginable trillions in tax cuts and military spending a lesser degree of scrutiny.
It would be interesting to find out what specific catalysts exist for this cycle. This is only my own personal observation; it's possible the sources I follow may be skewed. I've seen more blogs and think pieces on deficit spending in the past month than I have seen the past two years.
It sounds like you missed the debate over “modern monetary theory” that’s been going on for at least a couple of years now. Advocates say the government could be spending a lot more without ill...
It sounds like you missed the debate over “modern monetary theory” that’s been going on for at least a couple of years now. Advocates say the government could be spending a lot more without ill effects. (Andrew Yang says that too.) So, I don’t think the timing really matches up, or at least it goes back to when things like UBI and the Green New Deal started to be discussed, and not when the GOP actually lost power.
Not quite. MMT doesn’t say you can spend a “lot” more without ill effects. It reconceptualizes what government spending actually means, with taxes as a way to draining money out of the economy and...
Advocates say the government could be spending a lot more without ill effects.
Not quite. MMT doesn’t say you can spend a “lot” more without ill effects. It reconceptualizes what government spending actually means, with taxes as a way to draining money out of the economy and spending as a way of pouring money in. The upshot of this is that the problem with excessive spending is not, as people think, anything about having to owe creditors or continue servicing debt. It’s that spending creates inflation, and sustainable budgeting isn’t about keeping the ledger balanced, but about being careful about balancing the value addition of your spending to counteract the dilution of your currency.
In practice, it means the United States can get away with spending a ton more. This is because the US dollar’s status as a reserve currency means we have a ton of space to flood the economy with cash before it starts to lose value. This is not generalizable to other countries. The Eurozone and China may be able to do it too to some extent. But countries like Brazil or India are large economies with currencies that aren’t all that stable so it’s tougher for them.
It also means that not all government spending is created equally. Spending on things that constitute durable, long-term investments in productive capacity are basically always going to be worth it in MMT land. This would be things like worthwhile infrastructure spending, education, a jobs guarantee, and healthcare since they all basically enable people to continue working. Spending on things that would count more as consumption than investment, though, would be problematic. This would be things like bureaucratic administration costs or cash transfers that end up going to consumption, etc. anything that increases the ratio of money to value of goods and services would need to be deprioritized.
Sure, I know conceptually how it’s supposed to work and I largely agree that the main thing to worry about is inflation. And that’s the question. How much more? How do we know when we’re...
Sure, I know conceptually how it’s supposed to work and I largely agree that the main thing to worry about is inflation.
In practice, it means the United States can get away with spending a ton more.
And that’s the question. How much more? How do we know when we’re approaching a limit?
We aren’t going to settle this ourselves, but it would be very useful if some economists came up with a way of understanding this, quantitively.
Yeah these articles never pop up talking about military waste spending (cutting the waste doesn’t cut the effectiveness) or other egregious expenditures (Like ridiculous Congress personal...
Yeah these articles never pop up talking about military waste spending (cutting the waste doesn’t cut the effectiveness) or other egregious expenditures (Like ridiculous Congress personal expenses). It’s always social programs and environmental/public benefit departments that get called out.
It seems like wasteful military spending is being called out all the time? But the people doing the calling-out usually aren't in a position to do anything about it.
It seems like wasteful military spending is being called out all the time? But the people doing the calling-out usually aren't in a position to do anything about it.
I get what the piece is getting at. But I also think it's subtly dishonest in a few small ways that change the overall message, or at least the tone of it. First, this just bugged me as a I read...
I get what the piece is getting at. But I also think it's subtly dishonest in a few small ways that change the overall message, or at least the tone of it. First, this just bugged me as a I read it
Many people will tell you, very confidently, that they know the answer to this question, but don’t believe them.
Are you not doing the same?
Secondly, are more important, the idea of
An infinite corridor with an invisible pit
In the article, the author illustrates out the (fairly basic, I'd add) ways that the issuance of more and more debt can effect various figures in the economy. First, the normal buyers of debt will "eventually" demand higher interest rates or cease to be active buyers as the supply of bonds increase. Secondly, that having the Fed buy those bonds instead will "eventually" cause inflation.
But the characterization of this as a "pit" is just out of the blue. And it's done in such a way that it assumes it is correct. But is there any reason to think that it is a pit, and not a slope? A slope wherein indicators like, y'know, the interest rate and the CPI, the two things you just talked about, would indicate where you are on the slope?
And this matters, because the article has this super urgent tone. We gotta get more research (which is perfectly fine), maybe stop spending until we get that research (not so fine imo). And we gotta do that NOW because we're about to fall in that damn pit!
But that's centered on the idea that it's a PIT, we keep issuing bonds, fed keeps buying them, BAM, suddenly we're Venezuela.
Ok, but first wouldn't you see a drop in demand for bonds (and thus either a higher interest rate or a greater need for the Fed to buy them)? Wouldn't you then also have to see the CPI increase? Is there no continuality between "0.61% inflation (2020) -> 200% inflation (???)"?
Currently, the interest rates are almost 0, the CPI is at all time low (naturally, we're in a recession), and the Fed is spending time buying corporate bonds to maintain liquidity in the private sector. I have a hard time believing that there is a pit, and I have a hard time believing we're far down enough on the slope that we should think about balancing the budget.
Also, he does admit later that many countries do see high inflation for years before seeing hyperinflation. But on the other hand, there is a greater need for the Fed to buy treasuries. Fed...
Also, he does admit later that many countries do see high inflation for years before seeing hyperinflation.
But on the other hand, there is a greater need for the Fed to buy treasuries. Fed ownership of treasuries basically doubled in 2020. (See graph.) That seems bad? And relatively sudden panics and crashes do happen sometimes, not completely without warning, but often the significance of warnings is debated. Consider 2008.
I don’t know enough about economics to confirm his confident assertion that nobody knows, but I’m sympathetic since I think ignorance is a good default. I think it actually is urgent for economists to work on (or point out work that’s already been done) because, if it’s okay to be spending a lot more money, resolving the uncertainty about this is really important and could result in a lot less unnecessary suffering.
To talk about my favorite cause, a major reason for skepticism about UBI is the vague feeling that there’s no free lunch and it has to be paid for somehow. Our arguments that it’s really okay are too hand-wavy. Relying on gut feelings about whether it’s okay or not is part of the problem he’s pointing out.
There are many reasons the Fed has for buying bonds. In this case, they're buying them to inject liquid money into the economy. Banks and organizations hold bonds as assets that generate revenue,...
But on the other hand, there is a greater need for the Fed to buy treasuries.
There are many reasons the Fed has for buying bonds. In this case, they're buying them to inject liquid money into the economy. Banks and organizations hold bonds as assets that generate revenue, but what the Fed wants in a recession is more liquid money that flows through the economy, so they purchase bonds.
In the scenario he lays out, note that it's high interest rates, or rather no demand for treasury bonds at an acceptable interest rates to the government, but this is far from the current reality. Just look at the current yield rates. Not only are they insanely low, but you can clearly see they're getting lower, not higher.
People are MORE than happy to buy US bonds at pathetic interest rates.
What I dislike about the assertion is that the whole point of the article is about bad priors - that the prior belief shouldn't be "well, it's probably fine", and you should require research and evidence to prove that it's okay, and then he just casually assumes as a prior that there's this weird nonlinear cliff we're about to hit.
A hyperinflation event is very different from a economic bubble bursting, and he provides zero evidence why it would be the case that the movement towards the theoretical limit of US borrowing would not be gradual and have indicators.
This is arguing over priors and it’s kind of tricky. My interpretation of this metaphor isn’t that he’s asserting that we definitely won’t get any warning, but rather making it vivid that we might...
This is arguing over priors and it’s kind of tricky. My interpretation of this metaphor isn’t that he’s asserting that we definitely won’t get any warning, but rather making it vivid that we might not get any warning, and that’s why it’s important to think about. There are a lot of disasters you don’t get much warning about (like earthquakes) but we should still prepare for them.
Saying that nonlinear effects are “weird” is an assumption and I don’t think that’s warranted? In finance, nonlinear things happen all the time. There are also external shocks to the system (like the pandemic) that you’re not going to predict by looking at macroeconomic trends.
The author makes an assertion that economic knowledge is poor in this area and basically dares people to prove him wrong. He seems to have looked, though I don’t know how thoroughly.
No, it is weird. Specifically the "pit" aspect. If you were a (correct) doomer in 2006-7, for instance, you had a theory of the case as to why there was be a sudden downward spiral. MBSs were...
Saying that nonlinear effects are “weird” is an assumption and I don’t think that’s warranted? In finance, nonlinear things happen all the time.
No, it is weird. Specifically the "pit" aspect. If you were a (correct) doomer in 2006-7, for instance, you had a theory of the case as to why there was be a sudden downward spiral. MBSs were incorrectly rated to a fantastic level, and the realization of that would cause a chain reaction with the secondary market of CDOs on MBSs.
What is the theory here? Increasing debt issuance drops demand, forcing the Fed to purchase bonds and causing inflation, no? What part of that is sudden and unexpected? Wouldn't you first have a stagflation style economic malaise first? I think that'd be a pretty good sign of "bad shit happening in the future".
Of course I have no issue with the idea of more research on the subject - it's pretty hard to take the stance of "don't study" anything. But what I do take issue with is the casual FUD he throws on the stimulus packages. And the "pit" is a key part of that.
Is 1.9 trillion a lot of money? Sure. Is it that big of a nudge? Not really. It would be a 7% increase in the national debt. It would still be under the Debt-to-GDP ratio that the US had post WW2, a notable time where babies boomed and idealized dreams were made.
Is that any actual evidence that the 1.9 trillion is going to nudge us to Venezuela? No! And there's no time to wait - that money will save lives in both the current and future.
I'm surprised that there's little mention of the velocity or general use of money. In a simple example, if a very corrupt government secretly prints a ton of money and gives it to a crony, that...
I'm surprised that there's little mention of the velocity or general use of money. In a simple example, if a very corrupt government secretly prints a ton of money and gives it to a crony, that won't lead to inflation if the crony is smart enough to not spend the money suddenly and all at once. If the exchange is entirely in secret there might not be any inflation at all.
We saw hyperinflation in Zimbabwe because the new funds were being used to pay for the military. I suspect in that case, Mugabe (or whoever else) knew that the loyalty of the military was paramount, and as inflation started to get out of control prioritized the relative wealth of the military.
The US is a highly centralized economy, by which I mean, controlled by a relatively small elite, so a large output of currency into the economy is going to be absorbed by people who likely have the sense not to cause runaway inflation.
I think that’s because the article is focused on summarizing the state of economic literature rather than explaining it all. We could go into more detail about particular episodes of...
I think that’s because the article is focused on summarizing the state of economic literature rather than explaining it all.
We could go into more detail about particular episodes of hyperinflation. For example, I think Zimbabwe also had a supply collapse, which would cause prices to rise due to shortages, even without more money in circulation? This combination, people really needing to buy things, having money, and little being available to buy, seems especially likely to cause inflation.
But I don’t think we’re going to settle this by talking about what we remember about whatever economic theory and history we learned. At best maybe we could find other interesting reading?
It’s an exaggerated opening as is too common these days, but if you read on, he does talk about some papers that economists have written, and has encouraged people to send him more. The...
It’s an exaggerated opening as is too common these days, but if you read on, he does talk about some papers that economists have written, and has encouraged people to send him more. The non-exaggerated claim here is that it should be studied a lot more than it is.
He’s done a bit of searching (I don’t know how much) and said he didn’t find anything. The best response would be for someone to point out some good research to learn from. Asserting that research...
He’s done a bit of searching (I don’t know how much) and said he didn’t find anything. The best response would be for someone to point out some good research to learn from. Asserting that research exists without pointing it out doesn’t seem helpful since we’re left still not knowing anything?
I’m certainly no expert, but the author of this article is an assistant professor of finance with a PhD in economics, so it seems like he has enough credentials to listen to? What really matters is familiarity with the literature, though.
Yeah, I'm not saying any of us need to do more work. A call for more research is inherently a call for specialists to do more work, though. Even if I were to decide to follow up, getting a handle...
Yeah, I'm not saying any of us need to do more work. A call for more research is inherently a call for specialists to do more work, though.
Even if I were to decide to follow up, getting a handle on current research means understanding it pretty well, and I'm not sure I can spot errors in an economics paper or tell a good one from a bad one without help from experts. The lazy way is to see how other economists respond to this blog post (if they do).
Like clockwork, the larger discussion of "fiscal responsibility" and "deficit spending" comes around specifically when the GOP loses power, and the discussion dies the moment they gain power. I certainly don't blame the OP or even the writer of the article since this does appear to be a larger discussion (on time as always,) but the timing of the larger social discussion has the effect of causing the voter to view social programs and green initiatives as costly, while giving unimaginable trillions in tax cuts and military spending a lesser degree of scrutiny.
It would be interesting to find out what specific catalysts exist for this cycle. This is only my own personal observation; it's possible the sources I follow may be skewed. I've seen more blogs and think pieces on deficit spending in the past month than I have seen the past two years.
It sounds like you missed the debate over “modern monetary theory” that’s been going on for at least a couple of years now. Advocates say the government could be spending a lot more without ill effects. (Andrew Yang says that too.) So, I don’t think the timing really matches up, or at least it goes back to when things like UBI and the Green New Deal started to be discussed, and not when the GOP actually lost power.
Not quite. MMT doesn’t say you can spend a “lot” more without ill effects. It reconceptualizes what government spending actually means, with taxes as a way to draining money out of the economy and spending as a way of pouring money in. The upshot of this is that the problem with excessive spending is not, as people think, anything about having to owe creditors or continue servicing debt. It’s that spending creates inflation, and sustainable budgeting isn’t about keeping the ledger balanced, but about being careful about balancing the value addition of your spending to counteract the dilution of your currency.
In practice, it means the United States can get away with spending a ton more. This is because the US dollar’s status as a reserve currency means we have a ton of space to flood the economy with cash before it starts to lose value. This is not generalizable to other countries. The Eurozone and China may be able to do it too to some extent. But countries like Brazil or India are large economies with currencies that aren’t all that stable so it’s tougher for them.
It also means that not all government spending is created equally. Spending on things that constitute durable, long-term investments in productive capacity are basically always going to be worth it in MMT land. This would be things like worthwhile infrastructure spending, education, a jobs guarantee, and healthcare since they all basically enable people to continue working. Spending on things that would count more as consumption than investment, though, would be problematic. This would be things like bureaucratic administration costs or cash transfers that end up going to consumption, etc. anything that increases the ratio of money to value of goods and services would need to be deprioritized.
Sure, I know conceptually how it’s supposed to work and I largely agree that the main thing to worry about is inflation.
And that’s the question. How much more? How do we know when we’re approaching a limit?
We aren’t going to settle this ourselves, but it would be very useful if some economists came up with a way of understanding this, quantitively.
Yeah these articles never pop up talking about military waste spending (cutting the waste doesn’t cut the effectiveness) or other egregious expenditures (Like ridiculous Congress personal expenses). It’s always social programs and environmental/public benefit departments that get called out.
It seems like wasteful military spending is being called out all the time? But the people doing the calling-out usually aren't in a position to do anything about it.
I get what the piece is getting at. But I also think it's subtly dishonest in a few small ways that change the overall message, or at least the tone of it. First, this just bugged me as a I read it
Are you not doing the same?
Secondly, are more important, the idea of
In the article, the author illustrates out the (fairly basic, I'd add) ways that the issuance of more and more debt can effect various figures in the economy. First, the normal buyers of debt will "eventually" demand higher interest rates or cease to be active buyers as the supply of bonds increase. Secondly, that having the Fed buy those bonds instead will "eventually" cause inflation.
But the characterization of this as a "pit" is just out of the blue. And it's done in such a way that it assumes it is correct. But is there any reason to think that it is a pit, and not a slope? A slope wherein indicators like, y'know, the interest rate and the CPI, the two things you just talked about, would indicate where you are on the slope?
And this matters, because the article has this super urgent tone. We gotta get more research (which is perfectly fine), maybe stop spending until we get that research (not so fine imo). And we gotta do that NOW because we're about to fall in that damn pit!
But that's centered on the idea that it's a PIT, we keep issuing bonds, fed keeps buying them, BAM, suddenly we're Venezuela.
Ok, but first wouldn't you see a drop in demand for bonds (and thus either a higher interest rate or a greater need for the Fed to buy them)? Wouldn't you then also have to see the CPI increase? Is there no continuality between "0.61% inflation (2020) -> 200% inflation (???)"?
Currently, the interest rates are almost 0, the CPI is at all time low (naturally, we're in a recession), and the Fed is spending time buying corporate bonds to maintain liquidity in the private sector. I have a hard time believing that there is a pit, and I have a hard time believing we're far down enough on the slope that we should think about balancing the budget.
Also, he does admit later that many countries do see high inflation for years before seeing hyperinflation.
But on the other hand, there is a greater need for the Fed to buy treasuries. Fed ownership of treasuries basically doubled in 2020. (See graph.) That seems bad? And relatively sudden panics and crashes do happen sometimes, not completely without warning, but often the significance of warnings is debated. Consider 2008.
I don’t know enough about economics to confirm his confident assertion that nobody knows, but I’m sympathetic since I think ignorance is a good default. I think it actually is urgent for economists to work on (or point out work that’s already been done) because, if it’s okay to be spending a lot more money, resolving the uncertainty about this is really important and could result in a lot less unnecessary suffering.
To talk about my favorite cause, a major reason for skepticism about UBI is the vague feeling that there’s no free lunch and it has to be paid for somehow. Our arguments that it’s really okay are too hand-wavy. Relying on gut feelings about whether it’s okay or not is part of the problem he’s pointing out.
There are many reasons the Fed has for buying bonds. In this case, they're buying them to inject liquid money into the economy. Banks and organizations hold bonds as assets that generate revenue, but what the Fed wants in a recession is more liquid money that flows through the economy, so they purchase bonds.
In the scenario he lays out, note that it's high interest rates, or rather no demand for treasury bonds at an acceptable interest rates to the government, but this is far from the current reality. Just look at the current yield rates. Not only are they insanely low, but you can clearly see they're getting lower, not higher.
People are MORE than happy to buy US bonds at pathetic interest rates.
What I dislike about the assertion is that the whole point of the article is about bad priors - that the prior belief shouldn't be "well, it's probably fine", and you should require research and evidence to prove that it's okay, and then he just casually assumes as a prior that there's this weird nonlinear cliff we're about to hit.
A hyperinflation event is very different from a economic bubble bursting, and he provides zero evidence why it would be the case that the movement towards the theoretical limit of US borrowing would not be gradual and have indicators.
This is arguing over priors and it’s kind of tricky. My interpretation of this metaphor isn’t that he’s asserting that we definitely won’t get any warning, but rather making it vivid that we might not get any warning, and that’s why it’s important to think about. There are a lot of disasters you don’t get much warning about (like earthquakes) but we should still prepare for them.
Saying that nonlinear effects are “weird” is an assumption and I don’t think that’s warranted? In finance, nonlinear things happen all the time. There are also external shocks to the system (like the pandemic) that you’re not going to predict by looking at macroeconomic trends.
The author makes an assertion that economic knowledge is poor in this area and basically dares people to prove him wrong. He seems to have looked, though I don’t know how thoroughly.
No, it is weird. Specifically the "pit" aspect. If you were a (correct) doomer in 2006-7, for instance, you had a theory of the case as to why there was be a sudden downward spiral. MBSs were incorrectly rated to a fantastic level, and the realization of that would cause a chain reaction with the secondary market of CDOs on MBSs.
What is the theory here? Increasing debt issuance drops demand, forcing the Fed to purchase bonds and causing inflation, no? What part of that is sudden and unexpected? Wouldn't you first have a stagflation style economic malaise first? I think that'd be a pretty good sign of "bad shit happening in the future".
Of course I have no issue with the idea of more research on the subject - it's pretty hard to take the stance of "don't study" anything. But what I do take issue with is the casual FUD he throws on the stimulus packages. And the "pit" is a key part of that.
Is 1.9 trillion a lot of money? Sure. Is it that big of a nudge? Not really. It would be a 7% increase in the national debt. It would still be under the Debt-to-GDP ratio that the US had post WW2, a notable time where babies boomed and idealized dreams were made.
Is that any actual evidence that the 1.9 trillion is going to nudge us to Venezuela? No! And there's no time to wait - that money will save lives in both the current and future.
Yes, the article isn’t an argument in favor of any specific theory; it’s asserting ignorance.
I'm surprised that there's little mention of the velocity or general use of money. In a simple example, if a very corrupt government secretly prints a ton of money and gives it to a crony, that won't lead to inflation if the crony is smart enough to not spend the money suddenly and all at once. If the exchange is entirely in secret there might not be any inflation at all.
We saw hyperinflation in Zimbabwe because the new funds were being used to pay for the military. I suspect in that case, Mugabe (or whoever else) knew that the loyalty of the military was paramount, and as inflation started to get out of control prioritized the relative wealth of the military.
The US is a highly centralized economy, by which I mean, controlled by a relatively small elite, so a large output of currency into the economy is going to be absorbed by people who likely have the sense not to cause runaway inflation.
I think that’s because the article is focused on summarizing the state of economic literature rather than explaining it all.
We could go into more detail about particular episodes of hyperinflation. For example, I think Zimbabwe also had a supply collapse, which would cause prices to rise due to shortages, even without more money in circulation? This combination, people really needing to buy things, having money, and little being available to buy, seems especially likely to cause inflation.
But I don’t think we’re going to settle this by talking about what we remember about whatever economic theory and history we learned. At best maybe we could find other interesting reading?
But is that related to the expansion, or are they both related to a third thing like the pandemic?
Totally.
Reduced spending seems like an effect of the pandemic. The recovery period could be different.
I apologize for the off-topic, but can anyone add a tag to a post? This one is missing the USA tag and it's slipping by filters
Done!
It’s an exaggerated opening as is too common these days, but if you read on, he does talk about some papers that economists have written, and has encouraged people to send him more. The non-exaggerated claim here is that it should be studied a lot more than it is.
I’m wondering what you’ve read on the subject?
He’s done a bit of searching (I don’t know how much) and said he didn’t find anything. The best response would be for someone to point out some good research to learn from. Asserting that research exists without pointing it out doesn’t seem helpful since we’re left still not knowing anything?
I’m certainly no expert, but the author of this article is an assistant professor of finance with a PhD in economics, so it seems like he has enough credentials to listen to? What really matters is familiarity with the literature, though.
Yeah, I'm not saying any of us need to do more work. A call for more research is inherently a call for specialists to do more work, though.
Even if I were to decide to follow up, getting a handle on current research means understanding it pretty well, and I'm not sure I can spot errors in an economics paper or tell a good one from a bad one without help from experts. The lazy way is to see how other economists respond to this blog post (if they do).