Response to Ben Hunt’s MMT Criticism

Here are my quick responses to the key points Hunt makes in this post:

This is the power of theory in the service of political expediency, the power of post hoc rationalizations gussied up as “theory”.

Scott Fullwiler addresses this point here:

“MMT is the sovereign-friendly justification for deficit spending without end.”

MMT advocates generally say the sovereign should deficit spend until it reaches full employment domestically while maintaining price stability, not that it should spend endlessly for the sake of spending. The real limit here is inflation. The burden is on Hunt to prove otherwise.

“Historically, this argument has been used by sovereigns to support wars without end.”

Ah, can you imagine the United States participating in wars without end?

If anything, MMT advocates say the US should deficit spend to reach full employment domestically instead of employing its people to fight in wars without end.

“MMT is the theoretical justification for QE without end.”

Actually, MMT argues that QE was essentially a worthless/ineffective policy maneuver.

MMT is the theoretical justification for the economic policies of Trump and his Wall Street fellow travelers alike, who want nothing more than to keep the market punchbowl in place and well-spiked with pure grain ZIRP alcohol forever and ever, amen.

Wall Street behaving irresponsibly is almost as hard to imagine as the US fighting in endless wars.

MMT believes in permanent ZIRP, correct. However, permanent ZIRP eliminates an interest income channel for the private sector. One of the goals of permanent ZIRP is ultimately to shrink the financial sector. Currently, interest paid on government securities is “free money” for bondholders, which are mostly wealthy individuals, corporations, funds, etc.

Warren Mosler (one of MMT’s “founders”) addresses this in my podcast around the 33:00 minute mark here.

So don’t tell me that the crowding-out effect of sovereign debt on the real economy isn’t a bad thing. Because it is. This is how entire economies are turned into zombies. Don’t tell me that the monetization of sovereign debt, explicitly or implicitly, isn’t a bad thing. Because it is. This is how a middle class is destroyed.

Deficit spending is how entire economies are turned into zombies and the middle class is destroyed? I suppose we should file the financial crisis and a withering middle class away with endless war and Wall Street behaving irresponsibly as things that are impossible to imagine happening in the real world.

MMT argues that it was the budget surpluses under the Clinton Administration that led to a drain of the private sector’s savings & expansion of private debt. This bubble burst in 2001 then really burst in 2008. Notunderstanding MMT is how you destroy a middle class and turn entire economies into zombies. Notice what happened to the private sector’s financial balances after instances of the government running budget surpluses:

The example to look at here is Japan, which has a 250% debt-to-GDP ratio, low unemployment, low inflation, and negative interest rates on government debt.

“Crowding out” is a textbook theory that doesn’t reflect how government spending actually works, at least in the case of the US. “Crowding out” also assumes that interest rates must rise as the government spends/“borrows” more money. This is not necessarily true, as the interest rate on government debt is always a policy choice and is not set by market forces.

This is addressed at length here.

When the private sector “buys a bond,” it is essentially trading a non-interest-bearing government asset (a dollar) for an interest-bearing-bearing one (a treasury security). Selling bonds is a policy choice; the government is providing highly liquid, safe, interest-bearing assets to the private sector while draining reserves from the interbank payment system in order to defend a target interest rate. Deficit spending is expansionary as it adds net financial assets to the economy.

This post was originally published on 1/19/2019 on Medium.

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