Big Price Smoothies

Internet friend Derek McDaniel posted some interesting stuff on Medium worth writing about. I’ll use it as an entry into some wider issues of a continued massive need for MMT awareness. Right?… as if we don’t all know this need! What am I doing here? Trying to activate activated activists?

If “You” are the Government

… or a monopoly currency issuer, driving demand for your currency with coercive tax liabilities or similar means.

Given this, one way Derek points out for limiting inflation is to pull cash out of circulation by issuing bonds (Treasury securities). MMT helps simplify by noting a Tsy bond is simply a very secure savings account or term deposit (government guaranteed).

If you wish to get bogged down in legal niceties, hey, be my guest, but what I do is write from an MMT lens for the generic nation, so I am not considering the insanity of US Treasury needing a nominal positive balance in Its account at the FED to make legal payments — with all the subsequent repo and reverse repo fidgeting.

We can instead assume Treasury and Central Bank are consolidated, so if the CB payments guys demand money from the Treasury gals, they can just use an over-draft. It’s Left Pocket of government owing the Right Pocket of government.

This MMT consolidation followed by a latter apparent separation (left-pocket/right-pocket) is important because the records need to be kept track of, to prevent fraud, and to allow public oversight.

Then You can do many things to limit inflation

The particular case I am going to imagine (only in my imagination) Derek was perhaps considering is when the inflation is being driven by a supply shock event, like a pandemic, or a war, famine, asteroid strike, hurricane, oligopoly price gouging, oil monopoly, fresh drinking water monopolist (who could that nest lé be?), or whatever.

In this case a supply contraction means existing purchasing power (effective demand) is going to cause a market problem in some relative price adjustment upwards. If severe enough this can bleed into other sectors and cause a general increase in the price level, or at least blips in the CPI that become sustained and do not drop back down too fast.

Add to this the problem that when consumers get accustomed to higher prices, the firms tend to stay at the current level. Although no firms like losing out, they also do not want to lose customers. But if the consumer sentiment is for permanent upward price adjustment no firm will loose too many customers if they stay at the upwards adjusted price. Only a few firms tend t drop back down to previous prices when the supply shock ends. In this way price inflation is a bit of a ratchet. Mainstream economists call it “sticky prices” with is a dopey metaphor, bu it makes the same point, if you like some obscurity as a cost for getting fewer words.

Why not invest to boost supply?

Why not indeed. This would be an MMT “preferred” option. In a supply shock event, first seek to bring back supply.

It is after-all the standard of living that most people desire to be elevated, not inflation.

I guess the psychological order or preferences for public sentiment in a supply shock event are:

1. Get supply back first.
2. Failing supply getting back fast enough, limit demand (cause unemployment).
3. Failing limiting demand let the inflation run its course and support the real wage.

That’s the dumb-dumb normie public. An MMT informed public would reverse 2 and 3. In fact option 2 would never occur. In a supply shock the very worst thing to do is cause more unemployment. You want more employment, not less. Workers make stuff. It’s fascinating mainstream economists never seem to admit this to themselves, or out loud, but they must know it?

In fact, under MMT analysis unemployment is never a policy option.

What about bods for cahs withdrawal?

But ok, hiking interest rates does not directly cause unemployment, and is in fact a stimulus via trickle down effects, provided the government debt-to-GDP ratio is high enough. The question then is whether trickle-down is a good and fair way to smooth out a supply shock inflation era?

I would argue no, it is not.

Why do we want the people who already have savings to earn more, when the problem is a supply shortage? It makes no sense.

“Rewarding savers” is one thing, but savers do not need rewarding, they are a curse — in the macro. Paradox of Thrift.

The public purpose is best served when currency circulates. So government has no purpose in rewarding savers. Savers know how to reward themselves, and that will always be in relative terms. There is no need on Earth for a government that issues Its own currency to incentivise more savers. Even in a supply shortage crisis.

But if governments have no clue and can see no other way, then issuing bonds to withdraw cash out of circulation is a viable option for smoothing the supply-shock inflation out over time.

However, there is a progressive way to do this: rather than issuing bonds, the government can give wage earners an income partially in bonds, so the savers are those who might not otherwise save. Basically the policy adopted in war time footings: war bonds, but in peace times it’s just a social impact bond of a sort. This prevents the regressive trickle-down of indiscriminate bond issuance to only people who already have money (so who would not be restricted in purchasing power anyway).

It is more trickle-up this progressive way. A low wage earner can choose later to sell their bond to get cash if needed, but can likely command more than the coupon price, or at least not much lower.

TODO: go over Derek's analysis, but for normies?

Conclusion

All right. But at the end of the day why choose to force the central bank to smooth inflation in this fashion? There really is no need. It is simply one policy option, not the best.

Note for another day:

Had a few ideas about Minksy “Stability is destabilizing.” MMT gives us insights into how to avoid instability, to have stability that is not unstable. Minksy was of course following Keynes. But we have to understand their assumptions. What drives euphoric behaviour?

Ultimately it is greed, but “greed” can also be low level anxiety and simply a desire to “get ahead” under a competitive system. That, I think, is the real problem. If I am right then this points to some fairly clear solutions.

1. Eliminate economic anxiety.
2. Eliminate needless speculation.

Those are at least key goals. Then the question is how? I think MMT gives us plenty of policy options. I can’t even list them all, but I’ll mention a few.

• Expand pensions. No one needs to be forced to save for retirement.
• At the same time reduce all support for savers. Government does not need, and has no role, in incentivising saving. Let that be a private sector concern, with sensible regulations.
• Run currency inflation hot, but energy cool. (q.v. Sam Levey.)
• Hot currency inflation can create anxiety or FOMO though, so the way to run inflation hot is to do it only at the base, target the real wage floor.
• Make such pro-inflation policy clear and transparent. Much like a Gesell currency, everyone should know what the upwards wage adjustment (only at the base) will be and when.
• Eliminate as much speculation as possible: allow trade only in real goods. The last policy might be tricky. How to avoid people speculating on financial derivatives and whatnot without creating a black market.

I think in finance a black market here is a fair price to pay for outlawing pure speculative finance. It is a moral position. If you get caught you know the consequences. The question is only what policy can be easily enforce with limited fraud investigation and prosecution resources.

For the latter, maybe it is regrettable, but I think digital payments have to be on record for seller. Anonymity for buyers I think is sufficient public protection. Even in MMT circles people debate this, I favour a civil society that is non-anarchic, but also as liberal as we can make it without financial instability.

The stability of a financial system is a greater freedom from anxiety for all so is in many ways a gaol that is somewhat self-justified. This is always the way: by allowing one freedom we almost always necessarily curtail others. The question for a democracy is one of preferences for possible freedoms.

I think using the state currency is not a freedom that should come without reciprocal obligations when conducting commerce. But maybe that’s just my taste. My taste is that I do not want government playing too heavy a hand, nor do I want so feeble a government that the public, especially lower income groups, suffer needless anxiety.

Why other systems cannot prevent instability

Investors can also hedge their risk using various financial instruments like credit default swaps, interest rate swaps and so forth. But in a world governed by stock–flow consistent accounting rules these instrument cannot be guaranteed 100% safe. If agent B buys instruments to offload their risk some other agent C is no bearing the risk.

Let’s say financial fragility is broadly speaking any systemic risk of a credit crisis.

The only way as a whole “The System” can avoid financial fragility is if credit and income grow in proportion to real output. The Keynes–Minsky euphoric psychology always gets ahead of the real output curve, or so history seems to tell us. Thus no amount of hedging risk can protect The System as a whole, it can only protect some but at the cost of exposing others. (Usually exposing those who can least afford it, or who have played no hand in creating the fragility in the fist place.)

So the problem is to get rid of the greed that fuels the euphoria.

I have always believed an economy based on morality, not markets, is the best framework for achieving the desired stability. Unfortunately this probably awaits a spiritual transformation of the human species in-the-large. Fortunately, whether nature’s circumstances or ordinary decent working people push us there, I think the wait need not be too long. Because purely darwinistic “natural forces” cannot well regulate markets or policy, the choice of whether this stability and peaceful economics transform society within our lifetimes is indeed a choice humanity has available.