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Promoting this video and sending it back into the queue for one more try; last queued Wednesday, February 17th, 2016 6:46am PST - promote requested by enoch.

Who is this woman and why did I give her an hour of my time?

I listened to the whole thing.

I don't disagree with everything she said. She's right that supply side tricklenomics doesn't really work that well, and she does a good job outlining problems. But the narrative she weaves is all over the place when she starts talking about solutions. "Let's address inequality by taking on debt to increase spending to help transfer money to large private corporations." (I'm paraphrasing.) Increasing debt transfers power to the lender. Will they borrow from big banks? The Rothschilds? China? What's that quote? "Permit me to issue and control the money of a nation, and I care not who makes its laws."

And "lets pay our debts by just printing more money." What kind of solution is that? The Weimar Republic called. They'd like to have a word with you about hyper-inflation.

And her "angry birds" analogy was insufferable.

So just perpetual expansion for ever and ever? I don't know why having a balanced budget is such a bad thing. Increasing the money supply simply devalues all the existing money, essentially a property tax.

I wish she had used some real numbers, say it's 2030 and the debt is 26 trillion, and you are starting to get some huge deficits to pay for social security. Keep borrowing and by 2050 pay 50% of your budget in interest payments? Start printing money and by 2050 have an inflation rate of 8%? If the gov't needs to run continual deficits, why not just keep a balanced budget then drop cash out of helicopters on the 4th of July? Same money added to the system.

Really disappointed she didn't mention the Federal Reserve. Why is the US paying interest to a private entity that creates money out of thin air? Are they more credit worthy than a government that can also create money out of thin air?

Well, cheers for sticking with it anyway, I really appreciate it.

It's a one hour talk on the deficit in particular, and most of what she says is based on MMT principles that would add another 5 hours to her talk if she were to explain them. With neoclassical economics, you can sort of jump right in, given how they are taught at schools and regurgitated by talking heads and politicians, day in and day out. MMT runs contrary to many pieces of "common sense" and since you can't really give 10 hour talks everytime, this is what you end up with – bits and pieces that require previous knowledge.

I'd offer talks by other MMT proponents such as William Mitchell (UNSW), Randy Wray (UMKC) or Michael Hudson (UMKC), but they are even less comprehensible. Sorry. Eric Tymoigne provided a wonderful primer on banking over at NEP, but it's long and dry.

Since I'm significantly worse at explaining the basics of MMT, I'm not even going to try to "weave a narrative" and instead I'll just work my way through it, point by point.

@notarobot

"Let's address inequality by taking on debt to increase spending to help transfer money to large private corporations."

You don't have to take on debt. The US as the sole legal issuer of the Dollar can always "print more". That's what the short Greenspan clip was all about. Of course, you don't actually print Federal Reserve Notes to pay for federal expenses. It's the digital age, after all.

If the federal government were to acquire, say, ten more KC-46 from Boeing, some minion at the Treasury would give some minion at the Fed a call and say "We need $2 billion, could you arrange the transfer?" The Fed minion then proceeds to debit $2B from the Treasury's account at the Fed (Treasury General Account, TGA) and credits $2B to Boeing's account at Bank X. Plain accounting.

If TGA runs negative, there are two options. The Treasury could sell bonds, take on new debt. Or it could monetise debt by selling those bonds straight to the Fed – think Overt Monetary Financing.

The second option is the interesting one: a swap of public debt for account credits. Any interest on this debt would be transfered straight back in the TGA. It's all left pocket, right pocket, really. Both the Fed and the Treasury are part of the consolidated government.

However, running a deficit amounts to a new injection of reserves. This puts a downward pressure on the overnight interest rate (Fed Funds Rate in the US, FFR) unless it is offset by an increase in outstanding debt by the Treasury (or a draw-down of the TT&Ls, but that's minor in this case). So the sale of t-bonds is not a neccessity, it's how the Treasury supports the Fed's monetary policy by raising the FFR. If the target FFR is 0%, there's no need for the Treasury to drain reserves by selling bonds.

Additionally, you might want to sell t-bonds to provide the private sector with the ability to earn interest on a safe asset (pension funds, etc). Treasury bonds are as solid as it gets, unlike municipal bonds of Detroit or stocks of Deutsche Bank.

To quote Randy Wray: "And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed."

Point is: for a government that uses its own sovereign, free-floating currency, it is a political decision to take on debt to finance its deficit, not an economic neccessity.

"Weimar Republic"

I'm rather glad that you went with Weimar Germany and not Zimbabwe, because I know a lot more about the former than the latter. The very, very short version: the economy of 1920's Germany was in ruins and its vastly reduced supply capacity couldn't match the increase in nominal spending. In an economy at maximum capacity, spending increases are a bad idea, especially if meant to pay reparations.

Let's try a longer version. Your point, I assume, is that an increase in the money supply leads to (hyper-)inflation. That's Quantity Theory of Monetary 101, MV=PY. Amount of money in circulation times velocity of circulation equals average prices times real output. However, QTM works on two assumptions that are quite... questionable.

First, it assumes full employment (max output, Y is constant). Or in other terms, an economy running at full capacity. Does anyone know any economy today that is running at full capacity? I don't. In fact, I was born in '83 and in my lifetime, we haven't had full employment in any major country. Some people refer to 3% unemployment as "full employment", even though 3% unemployment in the '60s would have been referred to as "mass unemployment".

Second, it assumes a constant velocity of circulation (V is constant). That's how many times a Dollar has been "used" over a year. However, velocity was proven to be rather volatile by countless studies.

If both Y and V are constant, any increase in the money supply M would mean an increase in prices P. The only way for an economy at full capacity to compensate for increased spending would be a rationing of said spending through higher prices. Inflation goes up when demand outpaces supply, right?

But like I said, neither Y nor V are constant, so the application of this theory in this form is misleading to say the least. There's a lot of slack in every economy in the world, especially the US economy. Any increase in purchases will be met by corporations with excess capacity. They will, generally speaking, increase their market share rather than hike prices. Monopolies might not, but that's a different issue altogether.

Again, the short version: additional spending leads to increased inflation only if it cannot be met with unused capacity. Only in an economy at or near full capacity will it lead to significant inflation. And even then, excess private demand can easily be curbed: taxation.

As for the Angry Birds analogy: yeah, I'm not a fan either. But all the other talks on this topic are even worse, unfortunatly. There's only a handful of MMT economists doing these kinds of public talks and I haven't yet spotted a Neil deGrasse Tyson among them, if you know what I mean.

@greatgooglymoogly

Thanks for taking the time to watch it.

Like I said in my previous comment, this talk needs to take a lot of shortcuts, otherwise its length would surpass anyone's attention span.

So, point by point.

By "balanced budget", I suppose you refer to the federal budget. A balanced budget is not neccessarily a bad thing, but it is undesirable in most case. The key reason is sectoral balances. The economy can divided into three sectors: public, private, foreign. Since one person's spending is another person's income, the sum of all spending and income of these three sectors is zero by definition.

More precisely: if the public sector runs a surplus and the private sector runs a surplus, the foreign sector needs to run a deficit of a corresponding size.

Two examples:
- the government runs a balanced budget, no surplus, no deficit
- the private sector runs a surplus (savings) of 2% of GDP
- the foreign sector must, by definition, run a deficit of 2% of GDP (your country runs a current account surplus of 2% of GDP)

- the government runs a deficit of 2% of GDP
- the foreign sector runs a surplus of 3% (your current account deficit of 3%)
- your private sector must, by definition, run a deficit of 1% of GDP, aka burn through savings or run up debt

If you intend to allow the private sector to net save, you need to run either a current account surplus or a public sector deficit, or both. Since we don't export goods to Mars just yet, not all countries can run current account surpluses, so you need to run a public sector deficit if you want your private sector to net save. No two ways about it.

Germany runs a balanced public budget, sort of, and its private sector net saves. But that comes at the cost of a current account surplus to the tune of €250B. That's 250 billion Euros worth of debt other countries have to accumulate so that both the private and public sector in Germany can avoid deficits. Parasitic is what I'd call this behaviour, and I'm German.

If you feel ambitious, you could try to have both surplus and deficit within the private sector by allowing households to net save while "forcing" corporations to run the corresponding deficits. But to any politician trying that, I'd advise to avoid air travel.

As for the "devaluation of the currency", see my previous comment.

Also, she didn't use real numbers, because a) the talk is short and numbers kill people's attention rather quickly, and b) it's a policy decision to use debt to finance a deficit. One might just as well monetise it, like I explained in my previous comment.

Helicopter money would be quite helpful these days, actually. Even monetarists like AEP say so. If fiscal policy is off the table (deficit hawkery), what else are you left with...

As for your question related to the Fed, let me quote Eric Tymoigne on why MMT views both central bank and Treasury as part of the consolidated government:

"MMT authors tend to like to work with a consolidated government because they see it as an effective strategy for policy purpose (see next section), but also because the unconsolidated case just hides under layers of institutional complexity the main point: one way or another the Fed finances the Treasury, always. This monetary financing is not an option and is not by itself inflationary."

MMT principle: the central bank needs to be under democratic control, aka be part of government. The Fed in particular can pride itself on its independance all it wants, it still cannot fulfill any of its goals without the Treasury's help. It cannot diverge from government policies too long. Unlike the ECB, which is a nightmare in its construction.

Anyway, what does he mean by "one way or another the Fed finances the Treasury, always"? Well, the simple case is debt monetisation, direct financing. However, the Fed also participates by ensuring that Primary Dealers have enough reserves to make a reasonable bid on treasuries. The Fed makes sure that auctions of treasuries will always succeed. Always. Either by providing reserves to ensure buyers can afford the treasuries, by replacing maturing treasuries or buying them outright. No chance whatsoever for bond vigilantes. Betting against treasuries is pointless, you will always lose.

But what about taxation as a means to finance the Treasury? Well, the video's Monopoly example illustrated quite nicely, you cannot collect taxes until you have spent currency into circulation. Spending comes before taxation, it does not depend on it. Until reserves are injected into the banking system, either by the Fed through asset purchases or the Treasury through spending, taxes cannot be paid. Again, monetary financing is not optional. If the Treasury borrows money from the public, it borrows back money it previously spent.

Yes, I ignored the distribution of wealth, taxation, the fixation on growth and a million other things. That's a different discussion.

Moving this video to radx's personal queue. It failed to receive enough votes to get sifted up to the front page within 2 days.