Cross Post: Richard Holden Printing more money isn’t the answer to all economic ills

Economists did not predict the financial crisis of 2007, nor did we predict that advent of secular stagnation that has followed. Those events have shaken the economic and political world. Our theories need work. Maybe a lot of work.

But those events, and the failings of economists, have given a bunch of cranks the chutzpah to claim that they do know the answers – and that they knew them all along.

These folks sometimes refer to themselves as “heterodox economists”, “neo-chartalists”, or proponents of “modern monetary theory”.

Support has even made it to the UK Labour Party, with Jeremy Corbyn’s proposal for “people’s quantitative easing”. This would see the Bank of England simply “print” the money that would be used “to invest in new large-scale housing, energy, transport and digital projects”.

But, alas, some supporters are peddling falsehoods that warrant a blanket response.

Modern monetary theory, a term coined by Australian economist Bill Mitchell, says the following: (1) Countries that control their own currency cannot default on sovereign obligations because they can always print more money. (2) Thus, said countries can provide unlimited resources, pay for whatever they want, and create full employment. Nirvana, here we come!

There are many ways to critique this notion. For starters, it is not formal, it is made in prose and is subject to all the pitfalls that come with attempts to make precise statements with imprecise tools.

But it also begs an obvious question: if it is so easy to fix a nation’s economic ills – just run the printing presses round the clock – then why doesn’t everyone do it?

The modern monetary theory crowd argues economists have misunderstood how the government interacts with the economy. The rest of us just don’t get it! It’s all a big conspiracy, it would seem.

But here’s the essential substantive problem. Suppose a government wants to pay for some “stuff”. If the government prints money and doesn’t back that by issuing bonds then there is inflation. That inflation leads to the government needing to print more money to pay for the stuff. Which leads to more inflation. And pretty soon that leads to wheelbarrows of cash being pushed around, hyperinflation, the destruction of all savings in the economy, and (in some notable cases) world war.

Just think about it. If you expect there to be inflation do you want to hold cash, or spend it. Hint: spend it. You can wait until tomorrow and have something much less valuable, or spend it today. But that spending drives up prices, which drives up the desire for everyone to spend today, and on and on…

For a recent example, just take Zimbabwe: in late July 2008 a Zimbabwean (second, or “ZWN”) dollar was worth 688 trillion times less than it was in August 2006.

When one issues bonds to back a deficit one has to convince investors that, at some point, revenues will be raised or spending will be cut. Otherwise investors won’t buy the bonds at the prevailing price. And a higher price means that less deficit spending can be financed.

It is the discipline of market expectations. And it is a fact.

I won’t go through the math here, but the problem with modern monetary theory is that, in short, there is only a finite amount of real economic resources that can be extracted through seigniorage (the difference between the face value of physical money and its production costs). Or, to quote the late, great Zvi Griliches: “one can only get so much lemon juice out of a lemon.”

So here’s my challenge to the modern monetary theory crowd. Please state a formal, precise, economic model in which a monetary authority can extract an infinite amount of real resources through seigniorage. Or be quiet.

I understand that “mainstream” economists have some work to do. That’s how science moves forward. Einstein didn’t say Newton was a knucklehead, he came up with a better theory.

What modern economics has going for it is that it is a formal, falsifiable theory. People can understand exactly the assumptions, the chain of logic, and the predictions.

One can’t say that about modern monetary theory. Or is it “neo-chartalism”? Perhaps it’s really just neo-charlatanism.

The ConversationRichard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW Australia

This article was originally published on The Conversation. Read the original article.

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11 Responses to Cross Post: Richard Holden Printing more money isn’t the answer to all economic ills

  1. Sinclair Davidson

    Be sure to read the comments.

    I don’t want to detract from an otherwise excellent article but I can think of at least three economists who warned that the stimulus spending would result in economic dislocation and poor growth.

  2. .

    Modern monetary theory, a term coined by Australian economist Bill Mitchell, says the following: (1) Countries that control their own currency cannot default on sovereign obligations because they can always print more money. (2) Thus, said countries can provide unlimited resources, pay for whatever they want, and create full employment. Nirvana, here we come!

    There are many ways to critique this notion. For starters, it is not formal, it is made in prose and is subject to all the pitfalls that come with attempts to make precise statements with imprecise tools.

    Let’s look at the tape.

    The US Continental Dollar collapsed. The Argentinian peso collapsed.

    Currency collapses also precipitate banking crises and government in solvency.

    This is a complete and utter disaster area. Only madmen play games like this. Furthermore, Mitchell’s presumption is demonstrably false.

  3. .

    How could I forget – the German Papiermark, collapsing in 1923 and replaced with the Rentenmark – Hitler’s secret & illegal MEFO bills were not innovative or original for a German government!

  4. stackja

    Weimar Republic printing led to wheelbarrow shopping.

  5. RobK

    Hopefully some of the console operators on ABC RN manage to digest this article from their beloved Conversation.

  6. H B Bear

    Be sure to read the comments

    .

    Commenters at Teh Conversation should be given a complimentary course of Infowar’s supplements.

  7. RobK

    I’ve plowed through the comments. I’m not an economist. What most seem to trip up on is where bonds are issued there is an expectation of repayment on agreed terms. If money is created without that, then there is a dilution but in some cases, and to a limited extent, this might not register as inflationary, if there is spare capacity that is targeted.
    Much of it is semantics. A promisary note has risks and obligations, an expectation that the future economy can cover it and the rent. They all seem to agree there’s a limit in each case.

  8. Tel

    Countries that control their own currency cannot default on sovereign obligations because they can always print more money

    Strictly speaking true, but it hides the problem that in an environment of high price-inflation, bondholders will feel like they have been ripped off, even if it wasn’t a strict default. The MMTers typically think they can pull the wool indefinitely on matters of prices.

    That said, the USA has both run a big deficit and printed money (in the sense of reserves) and yet their price-inflation has been reasonable (not zero, but not huge either) and the US dollar has stayed strong. As ever, Peter Schiff says the US dollar is about to crash, but if that starts to happen the Fed could raise rates.

  9. Waz

    Normal human beings know that money is only a means to an end as it were. We instinctively know that to accumulate wealth one amasses hard assets such as property, shares or commodities; indeed anything that has a scarcity value (and may or may not be able to accrue a rent). We have known since Bretton Woods that money only has value by government fiat and while useful for day to day transactions, few people aspire to hold vast quantities of the stuff in bank accounts or bundles of notes; we prefer to own tangible assets. It always amazes me that there is twenty trillion dollars available to buy US gov bonds.
    Probably dumb observations but I’m a geologist not an economist.

  10. .

    Real money emerges through “evolutionary” market processes of discovery. Typically it is the most sought after commodity.

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