Sunday, May 01, 2011

Internet Sites For Discussing Economics

I find dispiriting the inability of most mainstream economists to discuss economics. Here are some emerging sites:Off topic: Matt Rognlie, who strikes me on first perusal as unjustifiably arrogant, casually dismisses Modern Monetary Theory.


Matt Rognlie said...

Thanks for the link (even if it's coupled with the claim that I'm unjustifiably arrogant).

One of the problems with discussing a body of work like MMT is that he definition is extremely diffuse: I'll criticize some claim that seems to be made by most supporters of MMT, and then someone else will pop up and say that the claim isn't really central to MMT, and that I'm just attacking a strawman.

Let me, then, be very precise: my gripe is with the claim that since the US is a sovereign currency issuer, it will be able to finance any deficit. Maybe not everyone who believes in MMT thinks this, but the vast majority certainly seem to. And I do feel justified in dismissing this claim as "nonsense", as I explained at length in the post.

The problem is one of magnitudes. Pre-IOR, there were roughly $10 billion in electronic bank reserves. Meanwhile, debt held by the public is pushing $10 trillion. That's an awfully big gap, and I haven't seen anyone explain, ever, how any substantial fraction of that $10 trillion can be held in the form of bank reserves instead without interest rates being pushed down to zero (or whatever rate is currently being paid for IOR).

Suppose, then, that the nominal interest rate permanently goes down to zero. Will this make the US's fiscal position any better? Not really: even on sovereign debt, the long-term real interest rate is pinned down by fundamentals like investors' intertemporal substitution, and can't be manipulated through monetary policy. The real interest rate is usually positive. So a long-term nominal interest rate of zero simply means (assuming that you avoid hyperinflation) steady long-term deflation, so that the government pays interest on its debt implicitly (as the real value of the debt increases) rather than explicitly.

I would very much like someone to explain to me how MMT gets around this. Somehow, you have to argue that one of the following two statements is wrong: (1) shifting an appreciable amount of that $10 trillion into bank reserves will result in 0% nominal interest rates (or whatever floor is given by IOR) or (2) the long-term real interest rate is set by fundamentals, not monetary policy.

Which one of these is wrong, and why? I've literally never gotten a straight answer, which perhaps is what's made me "unjustifiably arrogant".

Tomboktu said...

I couldn't make sense of the Stack Overflow links.

Robert Vienneau said...

Comments on Matt Rognlie's blog now include comments from Scott Fullwiler and Warren Mosler. I assume that conversation there is of more interest than anything I would say about MMT.

A couple of the ... Overflow links are to proposed topic areas, with votes on whether questions are of the sort one would like to see. Some of the other ... Overflow links are to areas with questions, answers, and comments on the questions and answers. I guess members can vote on which is the best answer.

Matías Vernengo said...

your point hinges on "the claim that since the US is a sovereign currency issuer, it will be able to finance any deficit." If you admit that monetization of debt (in domestic currency) is possible, the quote is incontrovertibly true. The question you may want to ask is what are the consequences of monetizing debt. But that is a different issue. I posted a reply to that in my blog (