Inflation always seems to start with a manufactured oil price increase... It looks like OPEC wanted to recoup their costs after the pandemic, so artificially raised the price too high, and held it high for too long... Oil doubled in price... With transportation cost bring so important this itself raised prices on almost everything... transportation accounts for about 7.5% of food price, and when oil increased by 100% in 2021, food prices increased by around 7%... Almost entirely explained by the 100% increase in oil price... After that, as with the two major oil/inflation spikes in the 70s... Everyone piles in... People demand higher wages, and as Dougald so eloquently shows, the "good" people of the business world made sure to capitalize on people's new found acceptance of inflation, and sadly found that they could "get away with it"... And with so little competition in so many areas, they have continued to...
I absolutely agree inflation wasn't driven by government spending... I believe this was in part to shut the door on future "government handouts" to the poor... So there has been a revisionist history written, that sadly even the great Robert Reich has been sucked into... "They" (whoever they is), can now say "just look at what happened last time we gave peanuts to the poor, they spent their peanuts and caused a global inflation event! Never again"... Giving people the means to survive during the pandemic, to keep them paying bills and with a roof over their head did not cause the inflation we've seen...
I commend Dougald for again calling a spade a spade, and seeing through the spin and corruption... His ability to understand what is truly important, and what information can be retained, and what can be tossed aside, shows the mark of a gifted critical thinker, of which we need more of, and to raise their voice as Dugald is doing.
Another great article. There is no question that the economic theories I learned in university are pretty much without merit with respect to the macroeconomic models in particular.
What I appreciate about MMT is that it does a much better job explaining (and predicting) the real world as we experience it. The description of government debt as actually private sector surplus lines up as well and explains why neoconservatives actually like government deficits quite a lot while claiming the contrary. They want private sector surpluses directed towards owners of assets.
I don’t know why Reich and almost the entire political establishment really have not questioned their understanding of classical economics in the face of such obvious failures to explain anything.
That is simply not the case and it is misunderstanding of MMT.
The problem with the economy is that the accrued private debt in developed countries is crushing growth, and it's collapsing the private economy.
An actual MMT response might be to run temporary monetized deficits to support government investments. That is not happening. Most governments are engaged in monetary austerity, which is undercutting and undemining fiscal efforts, where they exist.
MMT is not a policy recommendation. It is descriptive, not prescriptive. It describes the economic and money system as working differently than neoclassical or Austrian economics. It is a theoretical framework for understanding the economy that can be used to analyze communist states or Thatcher's Britain.
It is not something that sits on top of, or operates according to the rules of neoclassical or Austrian economics. It replaces them.
As a different theory, MMT suggests that different policies are available to governments.
However, the point about MMT and government is that government does not need taxes to issue currency, because fiat money is a creation of government, and always has been.
When Jesus demanded that moneychangers in the temple forgive the debts of the poor, he is asked why he isn't asking for a tax break from Rome as well. He holds up a coin and asks whose picture is on it. It says "render unto Caesar that which is Caesar's". That money with a government face on it is legal tender, and it came from governemnt.
A recent empirical study in the UK showed that the government does not wait to receive taxes to spend. The government always has the capacity to create money. That is one of the central purposes and functions of government - to act as a legal and financial institution, including one in which investors put their money to keep it safe and get a return.
The other is that most modern money creation is not government, at all. It is created by private banks through the extension of credit. Banks do not have the power to create fiat money, or print banknotes or coins, but they do extend credit. This lasts as long as the credit is attached to something in the real world. But they do not have the authority to convert it into fiat currency, and it is speculative. They are extending credit in the form of loans on a promissory note that it will be repaid steadily over many years, but that money has to be collected by the borrower - and it is all virtual. As the Bank of England put it, this money is created in the act of lending.
These are completely different models, and have completely different consequences for policy.
However, it means that supply-side economics is totally unjustified and unsupported. The idea that money has to be saved first ignores that governments can and do create fiat money - so that neither borrowing nor taxes are necessary, especially in a crisis. A government with its own currency can no more run out of money than we can run out of words.
The same is true of private banks. They are extending credit - creating credit-money, not lending existing money that has been saved up. They do not lend from reserves.
This is been demonstrated by QE. QE invalidates neoclassical / trickle-down / supply-side economics because credit can be extended based on a promise, without savings.
What MMT'ers overlook (purposefully or otherwise) is that modern governments create money via debt, and interest has to be paid on that debt. Currently, the interest paid on the US debt is more than the country's military spending. The interest payment is paid using tax dollars earned by actual people. What would private debt look like if the public didn't have this tax burden?
Another premise of MMT is that a sovereign state issues debt in its own fiat (treasuries). Purchasers of that debt use preference of one fiat over another based on economic outlook for the preferred state, all other things being equal. In the modern context, economic outlook is overruled by political pressure, but when things go sideways in the world (as they are) new rules are made.
MMT policy recommendations move towards more fiscal policy interventions to directly address market inefficiencies like supply bottlenecks that CAN cause inflation.
Whilst monopoly power may well be a strong factor in American consumer inflation, the rest of the western world has inflation too, and that is from 13 years of the experiment of QE printing money in excess of the needs of each economy. That excess printing of money increases public debt and devalues each and every €,$,$ and ¥ in each monetary region.
The easy way to recognise it is to compare the currency to the international price of gold (as an example, but not perfect), but turn around the equation: Try pricing everything in the buying power a unit of gold (say 1,000the of an ounce) and it becomes obvious that the 'gold price' of energy, raw materials, and all those consumer items, have been relatively stable, and mostly constant with each other, but that each currency has devalued.
Which leads to the simple statement that broad inflation is always the devaluation of currency money.
It is, btw, deliberate government policy to keep inflation devaluing money because it reduced debt and allows governments and banks to borrow more cheaply. In their ideal world, the bond interest rate matches the real inflation (devaluation of money) rate, so a government can borrow long term money for free. Note that current American 'inflation' is around 5% and the bond rate is also 5%.
This post is right on the money (boom tish). Let’s not forget that the “centre” is a neoliberal invention - a ruse designed to have parties of the left and right all compete to implement their own flavour of neoliberalism. As a result, they take turns polishing the turd of austerity in alternating shades of red and blue, and the people are bereft. The far-right is just a fake alternative, funded by capitalists to divide and conquer. Capitalists will do *anything* to keep the real left out of power, including installing fascists and authoritarians, so long as they retain their exploitative property rights. That is the basis of US foreign policy.
It is important to recognize that when people are ideologically driven, they are true believers in this stuff. There were people talking about centrism in the 1930s.
The far left and the far right have always opposed liberalism (which has many forms) because they oppose democracy and the rule of law. Communists and Marx predicted the state would wither away just as libertarians do. Their basic economics are both the same. Marx is not that different than Ricardo. So Communist states like the USSR and China both had "trickle-down" policies that resulted in colossal famines with millions of dead, like the Irish famine.
The division of powers and the capacity to peacefully self-regulate through negotiation is part of shared prosperty and order. That includes the rule of law, division of powers, and division of public and private, which ensures greater freedoms by placing limits on the most powerful. Those do not exist in at all in Russia, China, Saudi Arabia.
The problem we have now is beyond ideology, it's about corruption and criminality. Not all the fake accusations that get thrown around all the time, but people who are convicted criminals, and who are surrounded by convicted criminals in positions of power.
The people who are behind these schemes are some of the richest people on earth. They have enjoyed impunity. They can buy their way out of just about any crime, and gag anyone into silence, as they conduct business - some of which may be legitimate. And the same lack of enforcement that protects the ultrawealthy also protects the the corrupt and the full-time criminals. So what we need to do is recognize this as the corruption it is, because the actual number of criminals involved is incredibly small. There are billionaires who want nothing to do with it. And we should recognize as well, that some of the people who have expanded their business and their wealth as part of growing inequality, are criminals. Kleptocrats as well as organized criminals who use cryptocurrency. This is a small number of people who have incredible, ill-gotten wealth, and there are also people who have made a lot of money through hard work, innovation, ingenuity. We always need to recognize that corruption can be reduced, but we have to recognize it for what it is, first.
The reality based measures of economics require breaking up the monopolies and severely punishing price-fixers as consumers are crushed by corporate greed.
We need to redefine corporate law to introduce a wider responsibility than mere profitability, adding constraints that include the greater good and protecting the environment.
No economy is successful if a handful are enriched at the cost of misery to those who actually create the profits the rich enjoy.
In Sept 2019 the US repo market failed. A few months later, under the cover of CV19, the fed suspended all reserve requirements for commercial banks. In two years, something like 40% of the total US money supply was created. I realize that economists like to consider the causes of inflation to be "complicated," and not necessarily caused by monetary events, but what an event! No one doubts that this was the cause of asset inflation during the pandemic.
The other main cause of inflation that mainstream people are ignoring is the decline of the petrodollar. The Saudis have abandoned it, and other countries are finding convenient excuses for holding less US reserves.
"That is then attached to the rise of Nazism in Germany. This entire story is inaccurate, as I wrote in this earlier blog post. "
Right now there is no hyperlink to that blog post.
i'll add it, thanks
Inflation always seems to start with a manufactured oil price increase... It looks like OPEC wanted to recoup their costs after the pandemic, so artificially raised the price too high, and held it high for too long... Oil doubled in price... With transportation cost bring so important this itself raised prices on almost everything... transportation accounts for about 7.5% of food price, and when oil increased by 100% in 2021, food prices increased by around 7%... Almost entirely explained by the 100% increase in oil price... After that, as with the two major oil/inflation spikes in the 70s... Everyone piles in... People demand higher wages, and as Dougald so eloquently shows, the "good" people of the business world made sure to capitalize on people's new found acceptance of inflation, and sadly found that they could "get away with it"... And with so little competition in so many areas, they have continued to...
I absolutely agree inflation wasn't driven by government spending... I believe this was in part to shut the door on future "government handouts" to the poor... So there has been a revisionist history written, that sadly even the great Robert Reich has been sucked into... "They" (whoever they is), can now say "just look at what happened last time we gave peanuts to the poor, they spent their peanuts and caused a global inflation event! Never again"... Giving people the means to survive during the pandemic, to keep them paying bills and with a roof over their head did not cause the inflation we've seen...
I commend Dougald for again calling a spade a spade, and seeing through the spin and corruption... His ability to understand what is truly important, and what information can be retained, and what can be tossed aside, shows the mark of a gifted critical thinker, of which we need more of, and to raise their voice as Dugald is doing.
A few less typos would be appreciated... 😊
Thank you, and keep up the fantastic work!
thank you for the lesson in Economcs the inexact scxience.
Another great article. There is no question that the economic theories I learned in university are pretty much without merit with respect to the macroeconomic models in particular.
What I appreciate about MMT is that it does a much better job explaining (and predicting) the real world as we experience it. The description of government debt as actually private sector surplus lines up as well and explains why neoconservatives actually like government deficits quite a lot while claiming the contrary. They want private sector surpluses directed towards owners of assets.
I don’t know why Reich and almost the entire political establishment really have not questioned their understanding of classical economics in the face of such obvious failures to explain anything.
Modern governments (G7, G20) spend money MMT style already. Do you think they are doing a good job of "managing" the economy?
That is simply not the case and it is misunderstanding of MMT.
The problem with the economy is that the accrued private debt in developed countries is crushing growth, and it's collapsing the private economy.
An actual MMT response might be to run temporary monetized deficits to support government investments. That is not happening. Most governments are engaged in monetary austerity, which is undercutting and undemining fiscal efforts, where they exist.
MMT is not a policy recommendation. It is descriptive, not prescriptive. It describes the economic and money system as working differently than neoclassical or Austrian economics. It is a theoretical framework for understanding the economy that can be used to analyze communist states or Thatcher's Britain.
It is not something that sits on top of, or operates according to the rules of neoclassical or Austrian economics. It replaces them.
As a different theory, MMT suggests that different policies are available to governments.
However, the point about MMT and government is that government does not need taxes to issue currency, because fiat money is a creation of government, and always has been.
When Jesus demanded that moneychangers in the temple forgive the debts of the poor, he is asked why he isn't asking for a tax break from Rome as well. He holds up a coin and asks whose picture is on it. It says "render unto Caesar that which is Caesar's". That money with a government face on it is legal tender, and it came from governemnt.
A recent empirical study in the UK showed that the government does not wait to receive taxes to spend. The government always has the capacity to create money. That is one of the central purposes and functions of government - to act as a legal and financial institution, including one in which investors put their money to keep it safe and get a return.
The other is that most modern money creation is not government, at all. It is created by private banks through the extension of credit. Banks do not have the power to create fiat money, or print banknotes or coins, but they do extend credit. This lasts as long as the credit is attached to something in the real world. But they do not have the authority to convert it into fiat currency, and it is speculative. They are extending credit in the form of loans on a promissory note that it will be repaid steadily over many years, but that money has to be collected by the borrower - and it is all virtual. As the Bank of England put it, this money is created in the act of lending.
These are completely different models, and have completely different consequences for policy.
However, it means that supply-side economics is totally unjustified and unsupported. The idea that money has to be saved first ignores that governments can and do create fiat money - so that neither borrowing nor taxes are necessary, especially in a crisis. A government with its own currency can no more run out of money than we can run out of words.
The same is true of private banks. They are extending credit - creating credit-money, not lending existing money that has been saved up. They do not lend from reserves.
This is been demonstrated by QE. QE invalidates neoclassical / trickle-down / supply-side economics because credit can be extended based on a promise, without savings.
What MMT'ers overlook (purposefully or otherwise) is that modern governments create money via debt, and interest has to be paid on that debt. Currently, the interest paid on the US debt is more than the country's military spending. The interest payment is paid using tax dollars earned by actual people. What would private debt look like if the public didn't have this tax burden?
Another premise of MMT is that a sovereign state issues debt in its own fiat (treasuries). Purchasers of that debt use preference of one fiat over another based on economic outlook for the preferred state, all other things being equal. In the modern context, economic outlook is overruled by political pressure, but when things go sideways in the world (as they are) new rules are made.
Very nicely said, Dougald.
MMT policy recommendations move towards more fiscal policy interventions to directly address market inefficiencies like supply bottlenecks that CAN cause inflation.
That's a hell of a long post!
Whilst monopoly power may well be a strong factor in American consumer inflation, the rest of the western world has inflation too, and that is from 13 years of the experiment of QE printing money in excess of the needs of each economy. That excess printing of money increases public debt and devalues each and every €,$,$ and ¥ in each monetary region.
The easy way to recognise it is to compare the currency to the international price of gold (as an example, but not perfect), but turn around the equation: Try pricing everything in the buying power a unit of gold (say 1,000the of an ounce) and it becomes obvious that the 'gold price' of energy, raw materials, and all those consumer items, have been relatively stable, and mostly constant with each other, but that each currency has devalued.
Which leads to the simple statement that broad inflation is always the devaluation of currency money.
It is, btw, deliberate government policy to keep inflation devaluing money because it reduced debt and allows governments and banks to borrow more cheaply. In their ideal world, the bond interest rate matches the real inflation (devaluation of money) rate, so a government can borrow long term money for free. Note that current American 'inflation' is around 5% and the bond rate is also 5%.
This post is right on the money (boom tish). Let’s not forget that the “centre” is a neoliberal invention - a ruse designed to have parties of the left and right all compete to implement their own flavour of neoliberalism. As a result, they take turns polishing the turd of austerity in alternating shades of red and blue, and the people are bereft. The far-right is just a fake alternative, funded by capitalists to divide and conquer. Capitalists will do *anything* to keep the real left out of power, including installing fascists and authoritarians, so long as they retain their exploitative property rights. That is the basis of US foreign policy.
It is important to recognize that when people are ideologically driven, they are true believers in this stuff. There were people talking about centrism in the 1930s.
The far left and the far right have always opposed liberalism (which has many forms) because they oppose democracy and the rule of law. Communists and Marx predicted the state would wither away just as libertarians do. Their basic economics are both the same. Marx is not that different than Ricardo. So Communist states like the USSR and China both had "trickle-down" policies that resulted in colossal famines with millions of dead, like the Irish famine.
The division of powers and the capacity to peacefully self-regulate through negotiation is part of shared prosperty and order. That includes the rule of law, division of powers, and division of public and private, which ensures greater freedoms by placing limits on the most powerful. Those do not exist in at all in Russia, China, Saudi Arabia.
The problem we have now is beyond ideology, it's about corruption and criminality. Not all the fake accusations that get thrown around all the time, but people who are convicted criminals, and who are surrounded by convicted criminals in positions of power.
The people who are behind these schemes are some of the richest people on earth. They have enjoyed impunity. They can buy their way out of just about any crime, and gag anyone into silence, as they conduct business - some of which may be legitimate. And the same lack of enforcement that protects the ultrawealthy also protects the the corrupt and the full-time criminals. So what we need to do is recognize this as the corruption it is, because the actual number of criminals involved is incredibly small. There are billionaires who want nothing to do with it. And we should recognize as well, that some of the people who have expanded their business and their wealth as part of growing inequality, are criminals. Kleptocrats as well as organized criminals who use cryptocurrency. This is a small number of people who have incredible, ill-gotten wealth, and there are also people who have made a lot of money through hard work, innovation, ingenuity. We always need to recognize that corruption can be reduced, but we have to recognize it for what it is, first.
The reality based measures of economics require breaking up the monopolies and severely punishing price-fixers as consumers are crushed by corporate greed.
We need to redefine corporate law to introduce a wider responsibility than mere profitability, adding constraints that include the greater good and protecting the environment.
No economy is successful if a handful are enriched at the cost of misery to those who actually create the profits the rich enjoy.
In Sept 2019 the US repo market failed. A few months later, under the cover of CV19, the fed suspended all reserve requirements for commercial banks. In two years, something like 40% of the total US money supply was created. I realize that economists like to consider the causes of inflation to be "complicated," and not necessarily caused by monetary events, but what an event! No one doubts that this was the cause of asset inflation during the pandemic.
The other main cause of inflation that mainstream people are ignoring is the decline of the petrodollar. The Saudis have abandoned it, and other countries are finding convenient excuses for holding less US reserves.