Comment Economic theory (Score 1) 904
I know. Who knows, two years ago I might have reacted in the same way that you do. Telling apart the fringe theories that have merit from those that don't is a difficult problem. I appreciate you checking out the Wikipedia Criticism section. You'll note that the points mentioned there have been addressed by MMT academics. I'm really not trying to sound paternalistic or something, but try putting yourself in my shoes. What if MMT really had some merits? What could possibly convince you?
Posting convincing answers in that section would be one thing; convincing a significant number of the experts in the field would be another.
No, it doesn't, at least not in the way that you think. Here's why: in regular goods markets, both demand and supply are essentially flows. Producers produce a certain amount of goods per time unit, whence the supply. Consumers demand a certain amount of good per time unit, whence the demand - both can be functions of price or whatever, but the point about flows is important. Prices change on the margin.
Of course the price as measured in goods doesn't change because you change the amount of money available: That is why it is inflation rather than an increase in the value of the goods.
The "money supply" is a stock. It is something like the sum of all deposits, depending on the definition. How could that possibly affect inflation directly? Inflation is a measure of average price increases, so e.g. increase of prices set by supermarket bureaucrats.
Ah, argument from personal incredulity.. Anyway, here it is how it works: If the total amount of deposits increase, some people would have more money. Those someone would then use those more money to buy more goods. This will increase demand, thus increasing prices. As those who sell the goods now also have more money, this effect will propagate until we reach a new equilibrium (in theory anyway). At this point, everyone will be paying more for all goods, in effect making the money worth less.
But the people who make decisions about how to set prices in supermarkets only see the flow of customer demand. They do not see the size of the stock of money. So how can their decision possibly depend on the latter?
That is nonsense. They don't really care about demand, at least directly. They want to set the price exactly where they earn the most. And people who have more money (nominally) can pay more, which is the case if the stock increases. So they will increase the price (possibly with some delay due to competition; supermarket price-setters are not exactly first movers in this game).
You could argue that there is some relationship between the stock of money and the flows of money, i.e. that increasing the stock of money will also increase the flow of money. In terms of Quantity Theory of Money, this is the claim that V (the "velocity" of money) is constant.
That is mathematically false. You cannot conclude that V is constant from "there is some relationship between stock and flow". (Trust me on this, I am actually a mathematician). Since the rest of the argument rests on this falsehood, I have deleted it
Which interest rate, exactly? And once you tell me this, could you outline why the (market) interest rate would increase?
The interbank interest rate is most directly affected. When the government issues more bonds than it deficit spends, this means that the total amount of reserves held by banks shrinks.
Assuming that (private) buyers can be found. This would require that the effective interest on those bonds are greater than the interest rate that banks can offer, otherwise the private buyers would deposit their money in the banks instead. This effect happens whether the state actually spends the money, so the rest of the argument is rather moot from this point on. (Again, I have deleted from the first logical flaw).
Yes. It tells me that the Greek government is not a monetary sovereign government. But that's about it.
Yes, and what does that take away from the government? The ability to *deflated the currency*, which would enable them to pay back their bonds by printing more money. See how it works?
You conveniently ignore the part where I wrote that inflation can also be different actors in the economy fighting for shares of real income by raising their prices.
Also, your mention of the 1970s makes it likely that there was imported inflation via rising energy prices. I don't know what country you're talking about, so that's just an educated guess.
Well, I overlooked that part. That part is exactly what I wrote about somewhere above in other words. This is how an increased supply of money (or stock as you like to call it) increases prices/inflation. I cannot disagree with that. And no, it was well after the oil crisis (though that started it), it was caused by the government devaluing the currency repeatedly. It was Denmark, if you care.
And there is your strawman. Nowhere has I assumed the size of the real economy is constant.. on the contrary, I claim the wealth of the world is increasing, and has been increase for a long time. Nor does anything I have said depend on a constant size of the economy. From skimming the theory you mention on Wikipedia, i cannot see anything in that that assumes any of the terms are constant --- au contraire, the Q is called an "index" which usually means it is a function of time.
I'm sorry, but you are simply contradicting yourself here. Earlier you write something like "$X causes inflation", and since you have yet to really spell out what your X is, I assume you mean X = "increase of the money supply, i.e. M in the equation MV = PQ". If this assumption is wrong, I gladly stand corrected and we can discuss what you really mean. But given the assumption, the claim that "increase of M implies increase of P" denies the possibility that the adjustment in the equation happens via a change in V or Q.
No it does not. For instance, assume that M=V=P=Q=1. That us assume that M is increased to 2, then the equation would still be satisfied by V=P=Q=2. Note how nothing is constant with that solution.
Another note: You have always been talking about a causality from M to P. How do you know there isn't actually a causality from P to M?
After all, when the price level rises, businesses and people both apply for, and can justify, larger loans. That in turn increases the money supply M1 (remember that M1 is essentially sum of deposits, and an increase in the volume of loans implies an increase in the volume of deposits). Just more food for thought...
This is quite possible, and probably happens all the time.
I know this is hard to stomach, but the fact that the central bank will always lend to banks that have their balance sheet in order according to capital regulations is not a contested claim in economics. In fact, this "lender of last resort" purpose was historically a big reason for why central banks were created in the first place. Yes, you can read about it on Wikipedia.
The motivation for that setup is to draw a clearer distinction between insolvency and illiquidity. For non-financial firms, those two are usually quite closely related, but financial firms can easily become illiquid even while being solvent, because solvency of financial firms is very hard to judge for market participants - in the end, that's what bank runs are all about. So the original idea was that regulators make sure banks stay solvent, and then supply all the liquidity that may be needed. Of course, this theory is kind of subverted by regulatory capture, but that's a different topic.
Except the over-simplification "having their balance sheet in order", that is exactly how I understand it works. It doesn't contradict anything I said. But if you think banks can *always* use the central bank as an owner of last resort, even if they have no deposits at all, you would have a hard to explaining why banks crash at all.
Most importantly, they can always borrow from the Fed, and this view also applies to the entire banking system as a whole.
If this was true, no bank would ever crash (but the state would, eventually). I have tried to find the exact requirement, but other than the bank has to be "systemic", I haven't found anything. In this country, it works like this: every so often, a bank is inspected. If it does not satisfy the requirements, it will have a period to raise the extra money. If it fails, it will be absorbed a state-owned institution, which attempts to sell off what it can to other parties and wind off the rest.
I sincerely doubt they can always borrow from the Fed without some pretty stiff penalties, prices and/or sacrifices.
They have to pay the discount window interest rate which is higher than the usual interbank interest rate. Whether you consider that "pretty stiff" is up to you, the setting of those interest rates is public data, you can take a look for yourself.
They probably also have to satisfy some criterias. Anyway, so they are paying a penalty, which other banks are not. Everything else being equal, that would make that bank unable to compete, and kill it off as per normal market forces.
